1. ROMEO P. BUSUEGO, CATALINO F. BANEZ and RENATO F.

LIM, petitioners,
vs. THE HONORABLE COURT OF APPEALS and THE MONETARY BOARD OF THE CENTRAL BANK OF THE
PHILIPPINES, respondents.
[G.R. No. 95326. March 11, 1999]

Supervision and examination of banks.

Capital structure of banks and quasi-banks.

Facts:

The 16th regular examination of the books and records of the PAL Employees Savings and Loan Association,
Inc. ("PESALA") was conducted by a team of CB. Following the said examination, several anomalies and irregularities
committed by the herein petitioners; PESALA's directors and officers, were uncovered, among which are:

1. Questionable investment in a multi-million peso real estate project (Pesalaville);

2. Conflict of interest in the conduct of business;
3. Unwarranted declaration and payment of dividends;
4. Commission of unsound and unsafe business practices.

Later the Central Bank ("CB") Supervision and Examination Section ("SES") Department Director sent a
letter to the Board of Directors of PESALA inviting them to a conference to discuss subject findings noted in the said
16th regular examination, but petitioners did not attend such conference.

Petitioner then (Renato Lim) wrote the PESALA's Board of Directors explaining his side on the said
examination of PESALA's records and requesting that a copy of his letter be furnished the CB, which was forthwith
made by the Board.[2]

PESALA's Board of Directors sent to the CB SES Department Director a letter concerning the 16th regular
examination of PESALA's records.

The Monetary Board adopted and issued MB Resolution No. 805 wherein one of the pertinent provisions is
that: “5. To include the names of Mr. Catalino Banez, Mr. Romeo Busuego and Mr. Renato Lim in the Sector's
watchlist to prevent them from holding responsible positions in any institution under Central Bank supervision; ×××.”

Petitioners opine that with the issuance of Monetary Board Resolution No. 805, “they are now barred from
being elected or designated as officers again of PESALA, and are likewise prevented from future engagements or
employments in all institutions under the supervision of the Central Bank thereby virtually depriving them of the
opportunity to seek employments in the field which they can excel and are best fitted.” According to them, the
Monetary Board is not vested with “the authority to disqualify persons from occupying positions in institutions
under the supervision of the Central Bank without proper notice and hearing” nor is it vested with authority “to file
civil and criminal cases against its officers/directors for suspected fraudulent acts.”

Petitioners filed a Petition for Injunction with Prayer for the Immediate Issuance of a Temporary Restraining
Order[4]  before the Regional Trial Court. Said petition was granted.

The trial court ruled that “WHEREFORE, judgment is hereby rendered declaring Monetary Board
Resolution No. 805 as void and inexistent. The writ of preliminary prohibitory injunctions issued ××× is deemed
permanent. Costs against respondent.”

The Monetary Board appeal with the CA. CA ruled that “WHEREFORE, the decision appealed from is hereby
reversed and another one entered dismissing the petition for injunction.”

Dissatisfied with the said Decision of the Court of Appeals, petitioners have come to this Court via the
present petition for review on certiorari.

1
Issue: Whether or not the Monetary Board Resolution No. 805 is valid.

Ruling: YES.

Petitioners' contentions are untenable. It must be remembered that the Central Bank of the. Philippines
(now Bangko Sentral ng Pilipinas), through the Monetary Board, is the government agency charged with the
responsibility of administering the monetary, banking and credit system of the country [19] and is granted the power
of supervision and examination over banks and non-bank financial institutions performing quasi-banking functions,
of which savings and loan associations, such as PESALA, form part of[20].

The special law governing savings and loan association is Republic Act No. 3779, as amended, otherwise
known as the “Savings and Loan Association Act.” Said law authorizes the Monetary Board to conduct regular yearly
examinations of the books and records of savings and loan associations, to suspend, a savings and loan association
for violation of law, to decide any controversy over the obligations and duties of directors and officers, and to take
remedial measures, among others. Section 28 of Rep. Act No. 3779, reads:

“SEC. 28. Supervisory powers over savings and loan associations. - In addition to whatever powers have been
conferred by the foregoing provisions, the Monetary Board shall have the power to exercise the following:
×××
(c) To conduct at least once every year, and whenever- necessary, any inspection, examination or investigation
of the books and records, business affairs, administration, and financial condition of any savings and loan association
with or without prior notice but always with fairness and reasonable opportunity for the association or any of its
officials to give their side of the case. Whenever an inspection, examination or investigation is conducted under this
grant of power, the person authorized to do so may seize books and records and keep them under his custody after
giving proper receipts therefor; may make any marking or notation on any paper, record, document or book to show
that it has been examined and verified and may padlock or seal shelves, vaults, safes, receptacles or similar
containers and prohibit the opening thereof without first securing authority therefor, for as long as may be
necessary in connection with the investigation or examination being conducted. The official of the Central Bank in
charge of savings and loan associations and his deputies are hereby authorized to administer oaths to any director,
officer or employee of any association under the supervision of the Monetary Board;
×××
(d) After proper notice and hearing, to suspend a savings and loan association for violation of law, for unsafe
and unsound practices or for reason of insolvency. The Monetary Board may likewise, upon the proof that a savings
and loan association or its board or directors or officers are conducting and managing its affairs in a manner contrary
to laws, orders, instructions, rules and regulations promulgated by the Monetary Board or in a manner substantially
prejudicial to the interest of the government, depositors or creditor, take over the management of the savings and
loan association after due hearing, until a new board of directors and officers are elected and qualified without
prejudice to the prosecution of the persons responsible for such violations. The management by the Monetary Board
shall be without expense to the savings and loan association, except such as is actually necessary for its operation,
pending the election and qualification of a new board of directors and officers to take the place of those responsible
for the violation or acts contrary to the interest of the government, depositors or creditors;
×××
(f) To decide, after appropriate notice and hearings any controversy as to the rights or obligations of the
savings and loan association, its directors, officers, stockholders and members under its charter, and, by order, to
enforce the same;
×××
(l) To conduct such investigations, take such remedial measures, exercise all powers which are now or may
hereafter be conferred upon it by Republic Act Numbered Two Hundred sixty-five in the enforcement of this
legislation, and impose upon associations, whether stock or non-stock their directors and/or officers administrative
sanctions under Sections 34-A or 34-B of Republic Act Two Hundred sixty-five, as amended.”

From the foregoing, it is gleanable that the Central Bank, through the Monetary Board, is empowered to
conduct investigations and examine the records of savings and loan associations.  If any irregularity is discovered in
the process, the Monetary Board may impose appropriate sanctions, such as suspending the offender from holding
office or from being employed with the Central Bank, or placing the names of the offenders in a watchlist.

2
 The requirement of prior notice is also relaxed under Section 28 (c) of RA 3779 as investigations or
examinations may be conducted with or without prior notice “but always with fairness and reasonable opportunity
for the association or any of its officials to give their side.” As may be gathered from the records, the said
requirement was properly complied with by the respondent Monetary Board.

We sustain the ruling of the Court of Appeals that petitioners' suspension was only preventive in nature and
therefore, no notice or, hearing was necessary. Until such time that the petitioners have proved their innocence,
they may be preventively suspended from holding office so as not to influence the conduct of investigation, and to
prevent the commission of further irregularities.

Neither were petitioners deprived of their lawful calling as they are free to look for another employment so
long as the agency or company involved is not subject to Central Bank control and supervision. Petitioners can still
practice their profession or engage in business as long as these are not within the ambit of Monetary Board
Resolution No. 805.

All things studiedly considered, the court upholds the validity of Monetary Board Resolution No. 805 and
affirms the decision of the respondent court.

3
2. FIRST PHILIPPINE INTERNATIONAL BANK (Formerly Producers Bank of the Philippines) and MERCURIO
RIVERA, petitioners, 
vs. COURT OF APPEALS, CARLOS EJERCITO, in substitution of DEMETRIO DEMETRIA, and JOSE
JANOLO, respondents.

[G.R. No. 115849 January 24, 1996]

Appointment of Conservator.

Facts:
In the course of its banking operations, the defendant Producer Bank of the Philippines acquired six parcels
of land. The property used to be owned by BYME Investment and Development Corporation which had them
mortgaged with the bank as collateral for a loan. The original plaintiffs, Demetrio Demetria and Jose O. Janolo,
wanted to purchase the property and thus initiated negotiations for that purpose.

Said plaintiffs, upon the suggestion of BYME Investments legal counsel, Jose Fajardo, met with
defendant Mercurio Rivera, Manager of the Property Management Department of the defendant bank. The meeting
was held pursuant to plaintiffs plan to buy the property After the meeting, plaintiff Janolo, following the advice of
defendant Rivera, made a formal purchase offer to the bank through a letter dated August 30, 1987.

It is not disputed that the petitioner Bank was under a conservator placed by the Central Bank of the
Philippines during the time that the negotiation and perfection of the contract of sale took place. Petitioners
energetically contended that the conservator has the power to revoke or overrule actions of the management or the
board of directors of a bank, under Section 28-A of Republic Act No. 265 (otherwise known as the Central Bank Act)
as follows:

Whenever, on the basis of a report submitted by the appropriate supervising or examining

department, the Monetary Board finds that a bank or a non-bank financial intermediary performing quasi - banking
functions is in a state of continuing inability or unwillingness to maintain a state of liquidity deemed adequate to
protect the interest of depositors and creditors, the Monetary Board may appoint a conservator to take charge of
the assets, liabilities, and the management of that institution, collect all monies and debts due said institution and
exercise all powers necessary to preserve the assets of the institution, reorganize the management thereof, and
restore its viability. He shall have the power to overrule or revoke the actions of the previous management and
board of directors of the bank or non-bank financial intermediary performing quasi-banking functions, any provision
of law to the contrary notwithstanding, and such other powers as the Monetary Board shall deem necessary.

In the first place, this issue of the Conservators alleged authority to revoke or repudiate the
perfected contract of sale was raised for the first time in this Petition - as this was not litigated in the trial court or
Court of Appeals. As already stated earlier, issues not raised and/or ventilated in the trial court, let alone in the Court
of Appeals, cannot be raised for the first time on appeal as it would be offensive to the basic rules of fair play, justice
and due process.[43]

In the second place, there is absolutely no evidence that the Conservator, at the time the contract
was perfected, actually repudiated or overruled said contract of sale. The Banks acting conservator at the time,
Rodolfo Romey, never objected to the sale of the property to Demetria and Janolo. What petitioners are really
referring to is the letter of Conservator Encarnacion, who took over from Romey after the sale was perfected on
September 30, 1987 (Annex V, petition) which unilaterally repudiated - not the contract - but the authority of Rivera
to make a binding offer - and which unarguably came months after the perfection of the contract.

In the third place, while admittedly, the Central Bank law gives vast and far-reaching powers to the
conservator of a bank, it must be pointed out that such powers must be related to the (preservation of) the assets of
the bank, (the reorganization of) the management thereof and (the restoration of) its viability. Such powers,
enormous and extensive as they are, cannot extend to the post-facto repudiation of perfected transactions,
otherwise they would infringe against the non-impairment clause of the Constitution. [44] If the legislature itself

4
cannot revoke an existing valid contract, how can it delegate such non-existent powers to the conservator under
Section 28-A of said law?

Obviously, therefore, Section 28-A merely gives the conservator power to revoke contracts that
are, under existing law, deemed to be defective - i.e., void, voidable, unenforceable or rescissible. Hence, the
conservator merely takes the place of a banks board of directors. What the said board cannot do - such as
repudiating a contract validly entered into under the doctrine of implied authority - the conservator cannot do either.
Ineluctably, his power is not unilateral and he cannot simply repudiate valid obligations of the Bank. His authority
would be only to bring court actions to assail such contracts - as he has already done so in the instant case. A
contrary understanding of the law would simply not be permitted by the Constitution. Neither by common sense. To
rule otherwise would be to enable a failing bank to become solvent, at the expense of third parties, by simply getting
the conservator to unilaterally revoke all previous dealings which had one way or another come to be considered
unfavorable to the Bank, yielding nothing to perfected contractual rights nor vested interests of the third parties
who had dealt with the Bank.

5
3. THE CENTRAL BANK OF THE PHILIPPINES and RAMON V. TIAOQUI, petitioners, 
vs. COURT OF APPEALS and TRIUMPH SAVINGS BANK, respondents.
G.R. No. 76118 March 30, 1993

Facts:

Based on examination reports submitted by the Supervision and Examination Sector (SES),
Department II, of the Central Bank (CB) “that the financial condition of Triumph Savings Bank (TSB) is one of
insolvency and its continuance in business would involve probable loss to its depositors and creditors,” 3 the
Monetary Board (MB) issued Resolution No. 596 ordering the closure of TSB, forbidding it from doing business in the
Philippines, placing it under receivership, and appointing Ramon V. Tiaoqui as receiver. Tiaoqui assumed office on 3
June 1985. 4

TSB then filed a complaint with the Regional Trial Court of Quezon City against Central Bank and Ramon V.
Tiaoqui to annul MB Resolution No. 596, with prayer for injunction, challenging in the process the constitutionality of
Sec. 29 of R.A. 269, otherwise known as “The Central Bank Act,” as amended, insofar as it authorizes the Central
Bank to take over a banking institution even if it is not charged with violation of any law or regulation, much less
found guilty thereof. 5

×××

Petitioners claim that it is the essence of Sec. 29 of R.A. 265 that prior notice and hearing in cases
involving bank closures should not be required since in all probability a hearing would not only cause unnecessary
delay but also provide bank "insiders" and stockholders the opportunity to further dissipate the bank's resources,
create liabilities for the bank up to the insured amount of P40,000. , and even destroy evidence of fraud or
irregularity in the bank's operations to the prejudice of its depositors and creditors. 14 Petitioners further argue that
the legislative intent of Sec. 29 is to repose in the Monetary Board exclusive power to determine the existence of
statutory grounds for the closure and liquidation of banks, having the required expertise and specialized
competence to do so.

Issue: May a Monetary Board resolution placing a private bank under receivership be annulled on the ground of
lack of prior notice and hearing?

Ruling: (GR:) NO.

Under Sec. 29 of R.A. 265,  15 the Central Bank, through the Monetary Board, is vested with exclusive
authority to assess, evaluate and determine the condition of any bank, and finding such condition to be one of
insolvency, or that its continuance in business would involve probable loss to its depositors or creditors, forbid the
bank or non-bank financial institution to do business in the Philippines; and shall designate an official of the CB or
other competent person as receiver to immediately take charge of its assets and liabilities. The fourth
paragraph, 16 which was then in effect at the time the action was commenced, allows the filing of a case to set aside
the actions of the Monetary Board which are tainted with arbitrariness and bad faith.

Contrary to the notion of private respondent, Sec. 29 does not contemplate prior notice and
hearing before a bank may be directed to stop operations and placed under receivership. When par. 4 (now par. 5, as
amended by E.O. 289) provides for the filing of a case within ten (10) days after the receiver takes charge of the
assets of the bank, it is unmistakable that the assailed actions should precede the filing of the case. Plainly, the
legislature could not have intended to authorize “no prior notice and hearing” in the closure of the bank and at the
same time allow a suit to annul it on the basis of absence thereof.

In the early case of Rural Bank of Lucena, Inc. v. Arca [1965],  17 We held that a previous hearing is
nowhere required in Sec. 29 nor does the constitutional requirement of due process demand that the correctness

6
of the Monetary Board's resolution to stop operation and proceed to liquidation be first adjudged before making
the resolution effective. It is enough that a subsequent judicial review be provided.

Even in Banco Filipino, 18 We reiterated that Sec. 29 of R.A. 265 does not require a previous hearing before
the Monetary Board can implement its resolution closing a bank, since its action is subject to judicial scrutiny as
provided by law.

It may be emphasized that Sec. 29 does not altogether divest a bank or a non-bank financial
institution placed under receivership of the opportunity to be heard and present evidence on arbitrariness and bad
faith because within ten (10) days from the date the receiver takes charge of the assets of the bank, resort to judicial
review may be had by filing an appropriate pleading with the court. Respondent TSB did in fact avail of this remedy
by filing a complaint with the RTC of Quezon City on the 8th day following the takeover by the receiver of the bank's
assets on 3 June 1985.

This “close now and hear later” scheme is grounded on practical and legal considerations to prevent
unwarranted dissipation of the bank's assets and as a valid exercise of police power to protect the depositors,
creditors, stockholders and the general public.

In Rural Bank of Buhi, Inc. v. Court of Appeals, 19 We stated that —

. . . due process does not necessarily require a prior hearing; a hearing or an opportunity to be
heard may be subsequent to the closure. One can just imagine the dire consequences of a prior
hearing: bank runs would be the order of the day, resulting in panic and hysteria. In the process,
fortunes may be wiped out and disillusionment will run the gamut of the entire banking
community.

We stressed in Central Bank of the Philippines v. Court of Appeals  20 that —

. . . the banking business is properly subject to reasonable regulation under the police power of the
state because of its nature and relation to the fiscal affairs of the people and the revenues of the
state (9 CJS 32). Banks are affected with public interest because they receive funds from the
general public in the form of deposits. Due to the nature of their transactions and functions, a
fiduciary relationship is created between the banking institutions and their depositors. Therefore,
banks are under the obligation to treat with meticulous care and utmost fidelity the accounts of
those who have reposed their trust and confidence in them (Simex International [Manila], Inc., v.
Court of Appeals, 183 SCRA 360 [1990]).

It is then the Government's responsibility to see to it that the financial interests of those who deal
with the banks and banking institutions, as depositors or otherwise, are protected. In this country,
that task is delegated to the Central Bank which, pursuant to its Charter (R.A. 265, as amended), is
authorized to administer the monetary, banking and credit system of the Philippines. Under both
the 1973 and 1987 Constitutions, the Central Bank is tasked with providing policy direction in the
areas of money, banking and credit; corollarily, it shall have supervision over the operations of
banks (Sec. 14, Art. XV, 1973 Constitution, and Sec. 20, Art. XII, 1987 Constitution). Under its charter,
the CB is further authorized to take the necessary steps against any banking institution if its
continued operation would cause prejudice to its depositors, creditors and the general public as
well. This power has been expressly recognized by this Court. In Philippine Veterans Bank
Employees Union-NUBE v. Philippine Veterans Banks (189 SCRA 14 [1990], this Court held that:

. . . [u]nless adequate and determined efforts are taken by the government

against distressed and mismanaged banks, public faith in the banking system is
certain to deteriorate to the prejudice of the national economy itself, not to
mention the losses suffered by the bank depositors, creditors, and stockholders,
who all deserve the protection of the government. The government cannot

7
 simply cross its arms while the assets of a bank are being depleted through
mismanagement or irregularities. It is the duty of the Central Bank in such an
event to step in and salvage the remaining resources of the bank so that they
may not continue to be dissipated or plundered by those entrusted with their
management.

Section 29 of R.A. 265 should be viewed in this light; otherwise, We would be subscribing to a situation where the
procedural rights invoked by private respondent would take precedence over the substantive interests of
depositors, creditors and stockholders over the assets of the bank.

Admittedly, the mere filing of a case for receivership by the Central Bank can trigger a bank run and
drain its assets in days or even hours leading to insolvency even if the bank be actually solvent. The procedure
prescribed in Sec. 29 is truly designed to protect the interest of all concerned, i.e., the depositors, creditors and
stockholders, the bank itself, and the general public, and the summary closure pales in comparison to the protection
afforded public interest. At any rate, the bank is given full opportunity to prove arbitrariness and bad faith in placing
the bank under receivership, in which event, the resolution may be properly nullified and the receivership lifted as
the trial court may determine.

The heavy reliance of respondents on the Banco Filipino case is misplaced in view of factual

circumstances therein which are not attendant in the present case. We ruled in Banco Filipino that the closure of the
bank was arbitrary and attendant with grave abuse of discretion, not because of the absence of prior notice and
hearing, but that the Monetary Board had no sufficient basis to arrive at a sound conclusion of insolvency to justify
the closure. In other words, the arbitrariness, bad faith and abuse of discretion were determined only after the bank
was placed under conservatorship and evidence thereon was received by the trial court. As this Court found in that
case, the Valenzuela, Aurellano and Tiaoqui Reports contained unfounded assumptions and deductions which did
not reflect the true financial condition of the bank. For instance, the subtraction of an uncertain amount as valuation
reserve from the assets of the bank would merely result in its net worth or the unimpaired capital and surplus; it did
not reflect the total financial condition of Banco Filipino.

Furthermore, the same reports showed that the total assets of Banco Filipino far exceeded its total
liabilities. Consequently, on the basis thereof, the Monetary Board had no valid reason to liquidate the bank; perhaps
it could have merely ordered its reorganization or rehabilitation, if need be. Clearly, there was in that case a manifest
arbitrariness, abuse of discretion and bad faith in the closure of Banco Filipino by the Monetary Board. But, this is not
the case before Us. For here, what is being raised as arbitrary by private respondent is the denial of prior notice and
hearing by the Monetary Board, a matter long settled in this jurisdiction, and not the arbitrariness which the
conclusions of the Supervision and Examination Sector (SES), Department II, of the Central Bank were reached.

Once again We refer to Rural Bank of Buhi, Inc. v. Court of Appeals, 21 and reiterate Our pronouncement therein that —

. . . the law is explicit as to the conditions prerequisite to the action of the Monetary Board to
forbid the institution to do business in the Philippines and to appoint a receiver to immediately
take charge of the bank's assets and liabilities. They are: (a) an examination made by the
examining department of the Central Bank; (b) report by said department to the Monetary Board;
and (c) prima facie showing that its continuance in business would involve probable loss to its
depositors or creditors.

In sum, appeal to procedural due process cannot just outweigh the evil sought to be prevented;
hence, We rule that Sec. 29 of R.A. 265 is a sound legislation promulgated in accordance with the Constitution in the
exercise of police power of the state. Consequently, the absence of notice and hearing is not a valid ground to annul
a Monetary Board resolution placing a bank under receivership. The absence of prior notice and hearing cannot be
deemed acts of arbitrariness and bad faith. Thus, an MB resolution placing a bank under receivership, or
conservatorship for that matter, may only be annulled after a determination has been made by the trial court that
its issuance was tainted with arbitrariness and bad faith. Until such determination is made, the status quo shall be
maintained, i.e., the bank shall continue to be under receivership.

8
As regards the second ground, to rule that only the receiver may bring suit in behalf of the bank is, to echo the
respondent appellate court, "asking for the impossible, for it cannot be expected that the master, the CB, will allow
the receiver it has appointed to question that very appointment." Consequently, only stockholders of a bank could
file an action for annulment of a Monetary Board resolution placing the bank under receivership and prohibiting it
from continuing operations. 22 In Central Bank v. Court of Appeals, 23 We explained the purpose of the law —

. . . in requiring that only the stockholders of record representing the majority of the capital stock
may bring the action to set aside a resolution to place a bank under conservatorship is to ensure
that it be not frustrated or defeated by the incumbent Board of Directors or officers who may
immediately resort to court action to prevent its implementation or enforcement. It is presumed
that such a resolution is directed principally against acts of said Directors and officers which place
the bank in a state of continuing inability to maintain a condition of liquidity adequate to protect
the interest of depositors and creditors. Indirectly, it is likewise intended to protect and safeguard
the rights and interests of the stockholders. Common sense and public policy dictate then that the
authority to decide on whether to contest the resolution should be lodged with the stockholders
owning a majority of the shares for they are expected to be more objective in determining
whether the resolution is plainly arbitrary and issued in bad faith.

PREMISES considered, the Decision of the Court of Appeals in CA-G.R. SP No. 07867 is  AFFIRMED, except insofar as it
upholds the Order of the trial court of 11 November 1985 directing petitioner RAMON V. TIAOQUI to restore the
management of TRIUMPH SAVINGS BANK to its elected Board of Directors and Officers, which is hereby SET ASIDE.

Let this case be remanded to the Regional Trial Court of Quezon City for further proceedings to determine whether
the issuance of Resolution No. 596 of the Monetary Board was tainted with arbitrariness and bad faith and to decide
the case accordingly.

9
4. ANTHONY S. YU, ROSITA G. YU and JASON G. YU, Petitioners, 

v. JOSEPH S. YUKAYGUAN, NANCY L. YUKAYGUAN, JERALD NERWIN L. YUKAYGUAN, and JILL NESLIE L.
YUKAYGUAN, [on their own behalf and on behalf of] WINCHESTER INDUSTRIAL SUPPLY, INC., Respondents.

G.R. No. 177549               June 18, 2009

Liquidation.

Facts:

Petitioners are members of the Yu Family, particularly, the father, Anthony S. Yu (Anthony); the wife, Rosita
G. Yu (Rosita); and their son, Jason G. Yu (Jason).

Respondents composed the Yukayguan Family, namely, the father, Joseph S. Yukayguan (Joseph); the wife,
Nancy L. Yukayguan (Nancy); and their children Jerald Nerwin L. Yukayguan (Jerald) and Jill Neslie Yukayguan (Jill).

Petitioner Anthony is the older half-brother of respondent Joseph.

Petitioners and the respondents were all stockholders of Winchester Industrial Supply, Inc. (Winchester,
Inc.), a domestic corporation engaged in the operation of a general hardware and industrial supply and equipment
business.

×××

The case was initiated before the RTC by respondents as a derivative suit, on their own behalf and on behalf
of Winchester, Inc., primarily in order to compel petitioners to account for and reimburse to the said corporation the
corporate assets and funds which the latter allegedly misappropriated for their personal benefit. During the
pendency of the proceedings before the court a quo, the parties were able to reach an amicable settlement wherein
they agreed to divide the assets of Winchester, Inc. among themselves. This amicable settlement was already
partially implemented by the parties, when respondents repudiated the same, for which reason the RTC proceeded
with the case on its merits. On 10 November 2004, the RTC promulgated its Decision dismissing respondents’
Complaint for failure to comply with essential pre-requisites before they could avail themselves of the remedies
under the Interim Rules of Procedure Governing Intra-Corporate Controversies; and for inadequate substantiation of
respondents’ allegations in said Complaint after consideration of the pleadings and evidence on record.

In its Decision dated 15 February 2006, the Court of Appeals affirmed, on appeal, the findings of the
RTC that respondents did not abide by the requirements for a derivative suit, nor were they able to prove their case
by a preponderance of evidence. Respondents filed a Motion for Reconsideration of said judgment of the appellate
court, insisting that they were able to meet all the conditions for filing a derivative suit. Pending resolution of
respondents’ Motion for Reconsideration, the Court of Appeals urged the parties to again strive to reach an amicable
settlement of their dispute, but the parties were unable to do so. The parties were not able to submit to the
appellate court, within the given period, any amicable settlement; and filed, instead, their Position Papers. This
effectively meant that the parties opted to submit respondents’ Motion for Reconsideration of the 15 February 2006
Decision of the Court of Appeals, and petitioners’ opposition to the same, for resolution by the appellate court on
the merits.

It was at this point that the case took an unexpected turn.

10
 The crux of petitioners’ contention is that the Court of Appeals committed grievous error in
reconsidering its Decision dated 15 February 2006 on the basis of extraneous matters, which had not been previously
raised in respondents’ Complaint before the RTC, or in their Petition for Review and Motion for Reconsideration
before the appellate court; i.e., the adjudication, disposition, conveyance, and distribution of the properties and
assets of Winchester, Inc. among its stockholders, allegedly pursuant to the amicable settlement of the parties. The
fact that the parties were able to agree before the Court of Appeals to submit for resolution respondents’ Motion for
Reconsideration of the 15 February 2006 Decision of the same court, independently of any intended settlement
between the parties as regards the dissolution of the corporation and distribution of its assets, only proves the
distinction and independence of these matters from one another. Petitioners also contend that the assailed
Resolution dated 18 July 2006 of the Court of Appeals, granting respondents’ Motion for Reconsideration, failed to
clearly and distinctly state the facts and the law on which it was based. Remanding the case to the RTC, petitioners
maintain, will violate the very essence of the summary nature of the Interim Rules of Procedure Governing Intra-
Corporate Controversies, as this will just entail delay, protract litigation, and revert the case to square one.

Issue: Whether or not the petitioners’ contention is correct.

Ruling: The Court finds the instant Petition meritorious.

In accordance with respondents’ allegation in their Position Paper that the parties subsequently
filed with the SEC, and the SEC already approved, a petition for dissolution of Winchester, Inc., the Court of Appeals
remanded the case to the RTC so that all the corporate concerns between the parties regarding Winchester, Inc.
could be resolved towards final settlement.

In one stroke, with the use of sweeping language, which utterly lacked support, the Court of
Appeals converted the derivative suit between the parties into liquidation proceedings.

The general rule is that where a corporation is an injured party, its power to sue is lodged with its board of
directors or trustees. Nonetheless, an individual stockholder is permitted to institute a derivative suit on behalf of
the corporation wherein he holds stocks in order to protect or vindicate corporate rights, whenever the officials of
the corporation refuse to sue, or are the ones to be sued, or hold the control of the corporation. In such actions, the
suing stockholder is regarded as a nominal party, with the corporation as the real party in interest. A derivative
action is a suit by a shareholder to enforce a corporate cause of action. The corporation is a necessary party to the
suit. And the relief which is granted is a judgment against a third person in favor of the corporation. Similarly, if a
corporation has a defense to an action against it and is not asserting it, a stockholder may intervene and defend on
behalf of the corporation.43 By virtue of Republic Act No. 8799, otherwise known as the Securities Regulation Code,
jurisdiction over intra-corporate disputes, including derivative suits, is now vested in the Regional Trial Courts
designated by this Court pursuant to A.M. No. 00-11-03-SC promulgated on 21 November 2000.

In contrast, liquidation is a necessary consequence of the dissolution of a corporation. It is

specifically governed by Section 122 of the Corporation Code, which reads:

SEC. 122. Corporate liquidation. – Every corporation whose charter expires by its own limitation or is annulled by
forfeiture or otherwise, or whose corporate existence for other purposes is terminated in any other manner, shall
nevertheless be continued as a body corporate for three (3) years after the time when it would have been so
dissolved, for the purpose of prosecuting and defending suits by or against it and enabling it to settle and close its
affairs, to dispose of and convey its property and to distribute its assets, but not for the purpose of continuing the
business for which it was established.

At any time during said three (3) years, said corporation is authorized and empowered to convey
all of its property to trustees for the benefit of stockholders, members, creditors, and other persons in interest. From
and after any such conveyance by the corporation of its property in trust for the benefit of its stockholders,
members, creditors and others in interest, all interest which the corporation had in the property terminates, the legal

11
interest vests in the trustees, and the beneficial interest in the stockholders, members, creditors or other persons in
interest.

Upon winding up of the corporate affairs, any asset distributable to any creditor or stockholder or
member who is unknown or cannot be found shall be escheated to the city or municipality where such assets are
located.

Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall
distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities.

Following the voluntary or involuntary dissolution of a corporation, liquidation is the process of

settling the affairs of said corporation, which consists of adjusting the debts and claims, that is, of collecting all that is
due the corporation, the settlement and adjustment of claims against it and the payment of its just debts. 44 More
particularly, it entails the following:

Winding up the affairs of the corporation means the collection of all assets, the payment of all its
creditors, and the distribution of the remaining assets, if any among the stockholders thereof in accordance with
their contracts, or if there be no special contract, on the basis of their respective interests. The manner of liquidation
or winding up may be provided for in the corporate by-laws and this would prevail unless it is inconsistent with law. 45

It may be undertaken by the corporation itself, through its Board of Directors; or by trustees to
whom all corporate assets are conveyed for liquidation; or by a receiver appointed by the SEC upon its decree
dissolving the corporation.46

Glaringly, a derivative suit is fundamentally distinct and independent from liquidation

proceedings. They are neither part of each other nor the necessary consequence of the other. There is totally no
justification for the Court of Appeals to convert what was supposedly a derivative suit instituted by respondents,
on their own behalf and on behalf of Winchester, Inc. against petitioners, to a proceeding for the liquidation of
Winchester, Inc.

While it may be true that the parties earlier reached an amicable settlement, in which they agreed
to already distribute the assets of Winchester, Inc., and in effect liquidate said corporation, it must be pointed out
that respondents themselves repudiated said amicable settlement before the RTC, even after the same had been
partially implemented; and moved that their case be set for pre-trial. Attempts to again amicably settle the dispute
between the parties before the Court of Appeals were unsuccessful.

Moreover, the decree of the Court of Appeals to remand the case to the RTC for the “final settlement of
corporate concerns” was solely grounded on respondents’ allegation in its Position Paper that the parties had
already filed before the SEC, and the SEC approved, the petition to dissolve Winchester, Inc. The Court notes,
however, that there is absolute lack of evidence on record to prove said allegation. Respondents failed to submit
copies of such petition for dissolution of Winchester, Inc. and the SEC Certification approving the same. It is a basic
rule in evidence that each party must prove his affirmative allegation. Since it was respondents who alleged the
voluntary dissolution of Winchester, Inc., respondents must, therefore, prove it. 47 This respondents failed to do.

Even assuming arguendo that the parties did submit a petition for the dissolution of Winchester,
Inc. and the same was approved by the SEC, the Court of Appeals was still without jurisdiction to order the final
settlement by the RTC of the remaining corporate concerns. It must be remembered that the Complaint filed by
respondents before the RTC essentially prayed for the accounting and reimbursement by petitioners of the
corporate funds and assets which they purportedly misappropriated for their personal use; surrender by the
petitioners of the corporate books for the inspection of respondents; and payment by petitioners to respondents
of damages. There was nothing in respondents’ Complaint which sought the dissolution and liquidation of
Winchester, Inc. Hence, the supposed dissolution of Winchester, Inc. could not have resulted in the conversion of
respondents’ derivative suit to a proceeding for the liquidation of said corporation, but only in the dismissal of the
derivative suit based on either compromise agreement or mootness of the issues.

12
 Clearly, in issuing its assailed Resolutions dated 18 July 2006 and 19 April 2007, the Court of Appeals already
went beyond the issues raised in respondents’ Motion for Reconsideration. Instead of focusing on whether it erred
in affirming, in its 15 February 2006 Decision, the dismissal by the RTC of respondents’ Complaint due to respondents’
failure to comply with the requirements for a derivative suit and submit evidence to support their allegations, the
Court of Appeals unduly concentrated on respondents’ unsubstantiated allegation that Winchester, Inc. was already
dissolved and speciously ordered the remand of the case to the RTC for proceedings so vitally different from that
originally instituted by respondents.

---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Despite the foregoing, the Court still deems it appropriate to already look into the merits of
respondents’ Motion for Reconsideration of the 15 February 2006 Decision of the Court of Appeals, for the sake of
finally putting an end to the case at bar.

In their said Motion for Reconsideration, respondents argued that: (1) they had sufficiently
exhausted all remedies before filing the derivative suit; and (2) respondent Joseph’s Supplemental Affidavit and its
annexes should have been taken into consideration, since the submission thereof was allowed by the rules of
procedure, as well as by the RTC in its Order dated 26 August 2004.

As regards the first ground of sufficient exhaustion by respondents of all remedies before filing a
derivative suit, the Court subscribes to the ruling to the contrary of the Court of Appeals in its Decision dated 16
February 2006.

The Court has recognized that a stockholder’s right to institute a derivative suit is not based on
any express provision of the Corporation Code, or even the Securities Regulation Code, but is impliedly recognized
when the said laws make corporate directors or officers liable for damages suffered by the corporation and its
stockholders for violation of their fiduciary duties. Hence, a stockholder may sue for mismanagement, waste or
dissipation of corporate assets because of a special injury to him for which he is otherwise without redress. In
effect, the suit is an action for specific performance of an obligation owed by the corporation to the stockholders
to assist its rights of action when the corporation has been put in default by the wrongful refusal of the directors
or management to make suitable measures for its protection. The basis of a stockholder’s suit is always one in
equity. However, it cannot prosper without first complying with the legal requisites for its institution. 48

Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies lays
down the following requirements which a stockholder must comply with in filing a derivative suit:

Sec. 1. Derivative action. – A stockholder or member may bring an action in the name of a corporation or association,
as the case may be, provided, that:

(1) He was a stockholder or member at the time the acts or transactions subject of the action
occurred and at the time the action was filed;

(2) He exerted all reasonable efforts, and alleges the same with particularity in the complaint, to
exhaust all remedies available under the articles of incorporation, by-laws, laws or rules governing the
corporation or partnership to obtain the relief he desires;

(3) No appraisal rights are available for the act or acts complained of; and

(4) The suit is not a nuisance or harassment suit.

A perusal of respondents’ Complaint before the RTC would reveal that the same did not allege with
particularity that respondents exerted all reasonable efforts to exhaust all remedies available under the articles of
incorporation, by-laws, laws or rules governing Winchester, Inc. to obtain the relief they desire.

13
 Respondents assert that their compliance with said requirement was contained in respondent
Joseph’s Affidavit, which was attached to respondents’ Complaint. Respondent Joseph averred in his Affidavit that
he tried for a number of times to talk to petitioner Anthony to settle their differences, but the latter would not listen.
Respondents additionally claimed that taking further remedies within the corporation would have been idle
ceremony, considering that Winchester, Inc. was a family corporation and it was impossible to expect petitioners to
take action against themselves who were the ones accused of wrongdoing.

The Court is not persuaded.

The wordings of Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate
Controversies are simple and do not leave room for statutory construction. The second paragraph thereof requires
that the stockholder filing a derivative suit should have exerted all reasonable efforts to exhaust all remedies
available under the articles of incorporation, by-laws, laws or rules governing the corporation or partnership to
obtain the relief he desires; and to allege such fact with particularity in the complaint. The obvious intent behind the
rule is to make the derivative suit the final recourse of the stockholder, after all other remedies to obtain the relief
sought had failed.

The allegation of respondent Joseph in his Affidavit of his repeated attempts to talk to petitioner
Anthony regarding their dispute hardly constitutes "all reasonable efforts to exhaust all remedies available."
Respondents did not refer to or mention at all any other remedy under the articles of incorporation or by-laws of
Winchester, Inc., available for dispute resolution among stockholders, which respondents unsuccessfully availed
themselves of. And the Court is not prepared to conclude that the articles of incorporation and by-laws of
Winchester, Inc. absolutely failed to provide for such remedies.

Neither can this Court accept the reasons proffered by respondents to excuse themselves from
complying with the second requirement under Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-
Corporate Controversies. They are flimsy and insufficient, compared to the seriousness of respondents’ accusations
of fraud, misappropriation, and falsification of corporate records against the petitioners. The fact that Winchester,
Inc. is a family corporation should not in any way exempt respondents from complying with the clear requirements
and formalities of the rules for filing a derivative suit. There is nothing in the pertinent laws or rules supporting the
distinction between, and the difference in the requirements for, family corporations vis-à-vis other types of
corporations, in the institution by a stockholder of a derivative suit.

The Court further notes that, with respect to the third and fourth requirements of Section 1, Rule 8
of the Interim Rules of Procedure Governing Intra-Corporate Controversies, the respondents’ Complaint failed to
allege, explicitly or otherwise, the fact that there were no appraisal rights available for the acts of petitioners
complained of, as well as a categorical statement that the suit was not a nuisance or a harassment suit.

As to respondents’ second ground in their Motion for Reconsideration, the Court agrees with the
ruling of the Court of Appeals, in its 15 February 2006 Decision, that respondent Joseph’s Supplemental Affidavit and
additional evidence were inadmissible since they were only appended by respondents to their Memorandum before
the RTC. Section 8, Rule 2 of the Interim Rules of Procedure Governing Intra-Corporate Controversies is crystal clear
that:

Sec. 8. Affidavits, documentary and other evidence. – Affidavits shall be based on personal knowledge, shall set
forth such facts as would be admissible in evidence, and shall show affirmatively that the affiant is competent to
testify on the matters stated therein. The affidavits shall be in question and answer form, and shall comply with the
rules on admissibility of evidence.

Affidavits of witnesses as well as documentary and other evidence shall be attached to the appropriate pleading,
Provided, however, that affidavits, documentary and other evidence not so submitted may be attached to the pre-
trial brief required under these Rules. Affidavits and other evidence not so submitted shall not be admitted in
evidence, except in the following cases:

14
 (1) Testimony of unwilling, hostile, or adverse party witnesses. A witness is presumed prima
facie hostile if he fails or refuses to execute an affidavit after a written request therefor;

(2) If the failure to submit the evidence is for meritorious and compelling reasons; and

(3) Newly discovered evidence.

In case of (2) and (3) above, the affidavit and evidence must be submitted not later than five (5)
days prior to its introduction in evidence. (Emphasis ours.)

According to the afore-quoted provision, the parties should attach the affidavits of witnesses and
other documentary evidence to the appropriate pleading, which generally should mean the complaint for the
plaintiff and the answer for the respondent. Affidavits and documentary evidence not so submitted must already be
attached to the respective pre-trial briefs of the parties. That the parties should have already identified and
submitted to the trial court the affidavits of their witnesses and documentary evidence by the time of pre-trial is
strengthened by the fact that Section 1, Rule 4 of the Interim Rules of Procedure Governing Intra-Corporate
Controversies require that the following matters should already be set forth in the parties’ pre-trial briefs:

Section 1. Pre-trial conference, mandatory nature. – Within five (5) days after the period for availment of, and
compliance with, the modes of discovery prescribed in Rule 3 hereof, whichever comes later, the court shall issue
and serve an order immediately setting the case for pre-trial conference, and directing the parties to submit their
respective pre-trial briefs. The parties shall file with the court and furnish each other copies of their respective pre-
trial brief in such manner as to ensure its receipt by the court and the other party at least five (5) days before the
date set for the pre-trial.

The parties shall set forth in their pre-trial briefs, among other matters, the following:

×××

(4) Documents not specifically denied under oath by either or both parties;

×××

(7) Names of witnesses to be presented and the summary of their testimony as contained in their affidavits
supporting their positions on each of the issues;

(8) All other pieces of evidence, whether documentary or otherwise and their respective purposes.

Also, according to Section 2, Rule 4 of the Interim Rules of Procedure Governing Intra-Corporate
Controversies,49 it is the duty of the court to ensure during the pre-trial conference that the parties consider in detail,
among other things, objections to the admissibility of testimonial, documentary, and other evidence, as well as
objections to the form or substance of any affidavit, or part thereof.

Obviously, affidavits of witnesses and other documentary evidence are required to be attached to
a party’s pre-trial brief, at the very last instance, so that the opposite party is given the opportunity to object to the
form and substance, or the admissibility thereof. This is, of course, to prevent unfair surprises and/or to avoid the
granting of any undue advantage to the other party to the case.

True, the parties in the present case agreed to submit the case for judgment by the RTC, even
before pre-trial, in accordance with Section 4, Rule 4 of the Interim Rules of Procedure Governing Intra-Corporate
Controversies:

15
Sec. 4. Judgment before pre-trial. – If after submission of the pre-trial briefs, the court determines that, upon
consideration of the pleadings, the affidavits and other evidence submitted by the parties, a judgment may be
rendered, the court may order the parties to file simultaneously their respective memoranda within a non-extendible
period of twenty (20) days from receipt of the order. Thereafter, the court shall render judgment, either full or
otherwise, not later than ninety (90) days from the expiration of the period to file the memoranda.

Even then, the afore-quoted provision still requires, before the court makes a determination that it
can render judgment before pre-trial, that the parties had submitted their pre-trial briefs and the court took into
consideration the pleadings, affidavits and other evidence submitted by the parties. Hence, cases wherein the court
can render judgment prior to pre-trial, do not depart from or constitute an exception to the requisite that affidavits
of witnesses and documentary evidence should be submitted, at the latest, with the parties’ pre-trial briefs. Taking
further into account that under Section 4, Rule 4 of the Interim Rules of Procedure Governing Intra-Corporate
Controversies parties are required to file their memoranda simultaneously, the same would mean that a party would
no longer have any opportunity to dispute or rebut any new affidavit or evidence attached by the other party to its
memorandum. To violate the above-quoted provision would, thus, irrefragably run afoul the former party’s
constitutional right to due process.

In the instant case, therefore, respondent Joseph’s Supplemental Affidavit and the additional
documentary evidence, appended by respondents only to their Memorandum submitted to the RTC, were correctly
adjudged as inadmissible by the Court of Appeals in its 15 February 2006 Decision for having been belatedly
submitted. Respondents neither alleged nor proved that the documents in question fall under any of the three
exceptions to the requirement that affidavits and documentary evidence should be attached to the appropriate
pleading or pre-trial brief of the party, which is particularly recognized under Section 8, Rule 2 of the Interim Rules of
Procedure Governing Intra-Corporate Controversies.

WHEREFORE, premises considered, the Petition for Review under Rule 45 of the Rules of Court is
hereby GRANTED. The assailed Resolutions dated 18 July 2006 and 19 April 2007 of the Court of Appeals in CA-G.R. SP
No. 00185 are hereby REVERSED AND SET ASIDE. The Decision dated 15 February 2006 of the Court of Appeals is
hereby AFFIRMED. No costs.

16
5. PACIFIC BANKING CORPORATION EMPLOYEES ORGANIZATION, PAULA S. PAUG, and its officers and
members, petitioners, 
vs. THE HONORABLE COURT OF APPEALS and VITALIANO N. NAÑAGAS II, as Liquidator of Pacific Banking
Corporation, respondents.

G.R. No. 109373 March 20, 1995

THE PRESIDENT OF THE PHILIPPINE DEPOSIT INSURANCE CORPORATION, as Liquidator of the Pacific Banking
Corporation, petitioner, 

vs. COURT OF APPEALS, HON. JUDGE REGINO T. VERIDIANO II, DEPUTY SHERIFF RAMON ENRIQUEZ and ANG
ENG JOO, ANG KEONG LAN and E.J ANG INT'L. LTD., represented by their Attorney-in-fact, GONZALO C. SY,
respondents.

 G.R. No. 112991 March 20, 1995

Liquidation.

Facts:

Proceedings in the CB and the RTC

Petitioners Pacific Banking Corporation (PaBC) was placed under receivership by the Central Bank of the
Philippines pursuant to Resolution No. 699 of its Monetary Board. A few months later, it was placed under
liquidation 1 and a Liquidator was appointed. 2

The Central Bank filed with the Regional Trial Court of Manila Branch 31, a petition entitled “Petition for
Assistance in the Liquidation of Pacific Banking Corporation.” 3 The petition was approved, after which creditors filed
their claims with the court.

Later a new Liquidator, Vitaliano N. Nañagas,  4 President of the Philippine Deposit Insurance
Corporation (PDIC), was appointed by the Central Bank.

The Pacific Banking Corporation Employees Organization (Union for short), petitioner in G.R. No.
109373, filed a complaint-in-intervention seeking payment of holiday pay, 13th month pay differential, salary increase
differential, Christmas bonus, and cash equivalent of Sick Leave Benefit due its members as employees of PaBC. The
trial court ordered payment of the principal claims of the Union. 5

The Liquidator received a copy of the order on September 16, 1991. On October 16, 1991, he filed a
Motion for Reconsideration and Clarification of the order. In his order of December 6, 1991, the judge modified his
September 13, 1991 6 but in effect denied the Liquidator's motion for reconsideration. This order was received by the
Liquidator on December 9, 1991. The following day, December 10, 1991, he filed a Notice of Appeal and a Motion for
Additional Time to Submit Record on Appeal. On December 23, 1991, another Notice of Appeal was filed by the Office
of the Solicitor General in behalf of Nañagas.

In his order of February 10, 1992, respondent judge disallowed the Liquidator's Notice of Appeal on
the ground that it was late, i.e., more than 15 days after receipt of the decision. The judge declared his September 13,

17
1991 order and subsequent orders to be final and executory and denied reconsideration. On March 27, 1992, he
granted the Union's Motion for issuance of a writ of Execution.

Ang Keong Lan and E.J. Ang Int'l., private respondents in G.R. No. 112991, likewise filed claims for the
payment of investment in the PaBC allegedly in the form of shares of stocks amounting to US$2,531,632.18. The
shares of stocks, consisting of 154,462 common shares, constituted 11% of the total subscribed capital stock of the
PaBC. They alleged that their claim constituted foreign exchange capital investment entitled to preference in
payment under the Foreign Investments Law.

In his order dated September 11, 1992, respondent judge of the RTC directed the Liquidator to pay
private respondents the total amount of their claim as preferred creditors.  7

The Liquidator received the order on September 16, 1992. On September 30, 1992 he moved for
reconsideration, but his motion was denied by the court on October 2, 1992. He received the order denying his
Motion for Reconsideration on October 5, 1992. On October 14, 1992 he filed a Notice of Appeal from the orders of
September 16, 1992 and October 2, 1992. As in the case of the Union, however, the judge ordered the Notice of
Appeal stricken off the record on the ground that it had been filed without authority of the Central Bank and beyond
15 days. In his order of October 28, 1992, the judge directed the execution of his September 11, 1992 order granting
the Stockholders/ Investors' claim.

Proceedings in the Court of Appeals

The Liquidator filed separate Petitions for Certiorari, Prohibition and Mandamus in the Court of
Appeals to set aside the orders of the trial court denying his appeal from the orders granting the claims of Union and
of the Stockholders/Investors. The two Divisions of the Court of Appeals, to which the cases were separately raffled,
rendered conflicting rulings.

In its decision of November 17, 1992 in CA-G.R. SP No. 27751 (now G.R. No. 09373) the Fifth
Division 8 held in the case of the Union that the proceeding before the trial court was a special proceeding and,
therefore, the period for appealing from any decision or final order rendered therein is 30 days. Since the notice of
appeal of the Liquidator was filed on the 30th day of his receipt of the decision granting the Union's claims, the
appeal was brought on time. The Fifth Division, therefore, set aside the orders of the lower court and directed the
latter to give due course to the appeal of the Liquidator and set the Record on Appeal he had filed for hearing.

On the other hand, on December 16, 1993, the Fourteenth Division  9 ruled in CA-G.R. SP No. 29351
(now G.R. No. 112991) in the case of the Stockholders/Investors that a liquidation proceeding is an ordinary action.
Therefore, the period for appealing from any decision or final order rendered therein is 15 days and that since the
Liquidator's appeal notice was filed on the 23rd day of his receipt of the order appealed from, deducting the period
during which his motion for reconsideration was pending, the notice of appeal was filed late. Accordingly, the
Fourteenth Division dismissed the Liquidator's petition.

Present Proceedings

The Union and the Liquidator then separately filed petitions before this Court.

Issue: Whether a petition for liquidation under §29 of Rep. Act No. 265, otherwise known as the Central Bank Act,
is a special proceeding or an ordinary civil action.

Ruling:

As stated in the beginning, the principal question in these cases is whether a petition for liquidation under §29 of
Rep. Act No. 265 is in the nature of a special proceeding. If it is, then the period of appeal is 30 days and the party
appealing must, in addition to a notice of appeal, file with the trial court a record on appeal in order to perfect his

18
appeal. Otherwise, if a liquidation proceeding is an ordinary action, the period of appeal is 15 days from notice of the
decision or final order appealed from.

BP Blg. 129 provides:

§39. Appeals. — The period for appeal from final orders, resolutions, awards, judgments, or
decisions of any court in all cases shall be fifteen (15) days counted from the notice of the final
order, resolution, award, judgment or decision appealed from: Provided, however, that in habeas
corpus cases the period for appeal shall be forty-eight (48) hours from the notice of the judgment
appealed from.

No record on appeal shall be required to take an appeal. In lieu thereof, the entire record shall be
transmitted with all the pages prominently numbered consecutively, together with an index of the
contents thereof.

This section shall not apply in appeals in special proceedings and in other cases wherein multiple
appeals are allowed under applicable provisions of the Rules of Court.

The Interim Rules and Guidelines to implement BP Blg. 129 provides:

19. Period of Appeals. —

(a) All appeals, except in habeas corpus cases and in the cases referred to in
paragraph (b) hereof, must be taken within fifteen (15) days from notice of the
judgment, order, resolution or award appealed from.

(b) In appeals in special proceedings in accordance with Rule 109 of the Rules of
Court and other cases wherein multiple appeals are allowed, the period of
appeals shall be thirty (30) days, a record on appeal being required.

The Fourteenth Division of the Court of Appeals held that the proceeding is an ordinary action similar to an action for
interpleader under Rule 63. 10 The Fourteenth Division stated:

The petition filed is akin to an interpleader under Rule 63 of the Rules of Court where there are
conflicting claimants or several claims upon the same subject matter, a person who claims no
interest thereon may file an action for interpleader to compel the claimants to “interplead” and
litigate their several claims among themselves. (Section I Rule 63).

An interpleader is in the category of a special civil action under Rule 62 which, like an ordinary
action, may be appealed only within fifteen (15) days from notice of the judgment or order
appealed from. Under Rule 62, the preceding rules covering ordinary civil actions which are not
inconsistent with or may serve to supplement the provisions of the rule relating to such civil
actions are applicable to special civil actions. This embraces Rule 41 covering appeals from the
regional trial court to the Court of Appeals.

×××

Thus, under Section 1 Rule 2 of the Rules of Court, an action is defined as “an ordinary suit in a
court of justice by which one party prosecutes another for the enforcement or protection of a
right or the prevention or redress of a wrong.” On the other hand, Section 2 of the same Rule
states that “every other remedy including one to establish the status or right of a party or a
particular fact shall be by special proceeding.”

19
 To our mind, from the aforequoted definitions of an action and a special proceeding, the petition
for assistance of the court in the liquidation of an asset of a bank is not “one to establish the status
or right of a party or a particular fact.” Contrary to the submission of the petitioner, the petition is
not intended to establish the fact of insolvency of the bank. The insolvency of the bank had already
been previously determined by the Central Bank in accordance with Section 9 of the CB Act before
the petition was filed. All that needs to be done is to liquidate the assets of the bank and thus the
assistance of the respondent court is sought for that purpose.

It should be pointed out that this petition filed is not among the cases categorized as a special
proceeding under Section 1, Rule 72 of the Rules of Court, nor among the special proceedings that
may be appealed under Section 1, Rule 109 of the Rules.

We disagree with the foregoing view of the Fourteenth Division. Rule 2 of the Rules of Court provide:

§1. Action defined. — Action means an ordinary suit in a court of justice, by which the party
prosecutes another for the enforcement or protection of a right, or the prevention or redress of a
wrong.

§2. Special Proceeding Distinguished. — Every other remedy, including one to establish the status or
right of a party or a particular fact, shall be by special proceeding.

Elucidating the crucial distinction between an ordinary action and a special proceeding, Chief Justice Moran states: 11

Action is the act by which one sues another in a court of justice for the enforcement or protection
of a right, or the prevention or redress of a wrong while special proceeding is the act by which one
seeks to establish the status or right of a party, or a particular fact. Hence, action is distinguished
from special proceeding in that the former is a formal demand of a right by one against another,
while the latter is but a petition for a declaration of a status, right or fact. Where a party litigant
seeks to recover property from another, his remedy is to file an action. Where his purpose is to
seek the appointment of a guardian for an insane, his remedy is a special proceeding to establish
the fact or status of insanity calling for an appointment of guardianship.

Considering this distinction, a petition for liquidation of an insolvent corporation should be classified a special
proceeding and not an ordinary action. Such petition does not seek the enforcement or protection of a right nor the
prevention or redress of a wrong against a party. It does not pray for affirmative relief for injury arising from a party's
wrongful act or omission nor state a cause of action that can be enforced against any person.

What it seeks is merely a declaration by the trial court of the corporation's insolvency so that its creditors may be
able to file their claims in the settlement of the corporation's debts and obligations. Put in another way, the petition
only seeks a declaration of the corporation's debts and obligations. Put in another way, the petition only seeks a
declaration of the corporation's state of insolvency and the concomitant right of creditors and the order of payment
of their claims in the disposition of the corporation's assets.

Contrary to the rulings of the Fourteenth Division, liquidation proceedings do not resemble petitions for
interpleader. For one, an action for interpleader involves claims on a subject matter against a person who has no
interest therein. 12 This is not the case in a liquidation proceeding where the Liquidator, as representative of the
corporation, takes charge of its assets and liabilities for the benefit of the creditors.  13 He is thus charged with insuring
that the assets of the corporation are paid only to rightful claimants and in the order of payment provided by law.

Rather, a liquidation proceeding resembles the proceeding for the settlement of state of deceased persons under
Rules 73 to 91 of the Rules of Court. The two have a common purpose: the determination of all the assets and the
payment of all the debts and liabilities of the insolvent corporation or the estate. The Liquidator and the
administrator or executor are both charged with the assets for the benefit of the claimants. In both instances, the

20
liability of the corporation and the estate is not disputed. The court's concern is with the declaration of creditors and
their rights and the determination of their order of payment.

Furthermore, as in the settlement of estates, multiple appeals are allowed in proceedings for liquidation of an
insolvent corporation. As the Fifth Division of the Court of Appeals, quoting the Liquidator, correctly noted:

A liquidation proceeding is a single proceeding which consists of a number of cases properly

classified as “claims.” It is basically a two-phased proceeding. The first phase is concerned with the
approval and disapproval of claims. Upon the approval of the petition seeking the assistance of the
proper court in the liquidation of a close entity, all money claims against the bank are required to
be filed with the liquidation court. This phase may end with the declaration by the liquidation court
that the claim is not proper or without basis. On the other hand, it may also end with the
liquidation court allowing the claim. In the latter case, the claim shall be classified whether it is
ordinary or preferred, and thereafter included Liquidator. In either case, the order allowing or
disallowing a particular claim is final order, and may be appealed by the party aggrieved thereby.

The second phase involves the approval by the Court of the distribution plan prepared by the duly
appointed liquidator. The distribution plan specifies in detail the total amount available for
distribution to creditors whose claim were earlier allowed. The Order finally disposes of the issue
of how much property is available for disposal. Moreover, it ushers in the final phase of the
liquidation proceeding — payment of all allowed claims in accordance with the order of legal
priority and the approved distribution plan.

Verily, the import of the final character of an Order of allowance or disallowance of a particular
claim cannot be overemphasized. It is the operative fact that constitutes a liquidation proceeding a
“case where multiple appeals are allowed by law.” The issuance of an Order which, by its nature,
affects only the particular claims involved, and which may assume finality if no appeal is made
therefrom, ipso facto creates a situation where multiple appeals are allowed.

A liquidation proceeding is commenced by the filing of a single petition by the Solicitor General
with a court of competent jurisdiction entitled, “Petition for Assistance in the Liquidation of  e.g.,
Pacific Banking Corporation. All claims against the insolvent are required to be filed with the
liquidation court. Although the claims are litigated in the same proceeding, the treatment is
individual. Each claim is heard separately. And the Order issued relative to a particular claim applies
only to said claim, leaving the other claims unaffected, as each claim is considered separate and
distinct from the others. Obviously, in the event that an appeal from an Order allowing or
disallowing a particular claim is made, only said claim is affected, leaving the others to proceed
with their ordinary course. In such case, the original records of the proceeding are not elevated to
the appellate court. They remain with the liquidation court. In lieu of the original record, a record
of appeal is instead required to be prepared and transmitted to the appellate court.

Inevitably, multiple appeals are allowed in liquidation proceedings. Consequently, a record on

appeal is necessary in each and every appeal made. Hence, the period to appeal therefrom should
be thirty (30) days, a record on appeal being required. (Record pp. 162-164).

In G.R. No. 112991 (the case of the Stockholders/Investors), the Liquidator's notice of appeal was
filed on time, having been filed on the 23rd day of receipt of the order granting the claims of the
Stockholders/Investors. However, the Liquidator did not file a record on appeal with the result that he failed to
perfect his appeal. As already stated a record on appeal is required under the Interim Rules and Guidelines in special
proceedings and for cases where multiple appeals are allowed. The reason for this is that the several claims are
actually separate ones and a decision or final order with respect to any claim can be appealed. Necessarily the
original record on appeal must remain in the trial court where other claims may still be pending.

21
 Because of the Liquidator's failure to perfect his appeal, the order granting the claims of the
Stockholders/Investors became final. Consequently, the Fourteenth Division's decision dismissing the Liquidator's
Petition for Certiorari, Prohibition and Mandamus must be affirmed albeit for a different reason.

On the other hand, in G.R. No. 109373 (case of the Labor Union), we find that the Fifth Division
correctly granted the Liquidator's Petition for Certiorari, Prohibition and Mandamus. As already noted, the Liquidator
filed a notice of appeal and a motion for extension to file a record on appeal on December 10, 1991,  i.e., within 30
days of his receipt of the order granting the Union's claim. Without waiting for the resolution of his motion for
extension, he filed on December 20, 1991 within the extension sought a record on appeal. Respondent judge thus
erred in disallowing the notice on appeal and denying the Liquidator's motion for extension to file a record on
appeal.

The Fifth Division of the Court of Appeals correctly granted the Liquidator's Petition for Certiorari,
Prohibition and Mandamus and its decision should, therefore, be affirmed.

Second. In G.R. No. 109373, The Union claims that under §29 of Rep. Act No. 265, the court
merely assists in adjudicating the claims of creditors, preserves the assets of the institution, and implements the
liquidation plan approved by the Monetary Board and that, therefore, as representative of the Monetary Board, the
Liquidator cannot question the order of the court or appeal from it. It contends that since the Monetary Board had
previously admitted PaBC's liability to the laborers by in fact setting aside the amount of P112,234,292.44 for the
payment of their claims, there was nothing else for the Liquidator to do except to comply with the order of the
court.

The Union's contention is untenable. In liquidation proceedings, the function of the trial court is
not limited to assisting in the implementation of the orders of the Monetary Board. Under the same section (§29)
of the law invoked by the Union, the court has authority to set aside the decision of the Monetary Board “if there is a
convincing proof that the action is plainly arbitrary and made in bad faith.” 14  As this Court held in Rural Bank of Buhi,
Inc. v. Court of Appeals: 15

There is no question, that the action of the monetary Board in this regard may be subject to judicial
review. Thus, it has been held that the Court's may interfere with the Central Bank's exercise of
discretion in determining whether or not a distressed bank shall be supported or liquidated.
Discretion has its limits and has never been held to include arbitrariness, discrimination or bad faith
(Ramos v. Central Bank of the Philippines, 41 SCRA 567 [1971]).

In truth, the Liquidator is the representative not only of the Central Bank but also of the insolvent bank. Under §§28A-
29 of Rep. Act No. 265 he acts in behalf of the bank “personally or through counsel as he may retain, in all actions or
proceedings or against the corporation” and he has authority “to do whatever may be necessary for these
purposes.” This authority includes the power to appeal from the decisions or final orders of the court which he
believes to be contrary to the interest of the bank.

Finally the Union contends that the notice of appeal and motion for extension of time to file the record on appeal
filed in behalf of the Central Bank was not filed by the office of the Solicitor General as counsel for the Central Bank.
This contention has no merit. On October 22, 1992, as Assistant Solicitor General Cecilio O. Estoesta informed the trial
court in March 27, 1992, the OSG had previously authorized lawyers of the PDIC to prepare and sign pleadings in the
case. 16 Conformably thereto the Notice of Appeal and the Motion for Additional Time to submit Record on Appeal
filed were jointly signed by Solicitor Reynaldo I. Saludares in behalf of the OSG and by lawyers of the PDIC. 17

WHEREFORE, in G.R. No. 109373 and G.R. No 112991, the decisions appealed from are AFFIRMED.

22
6. JERRY ONG, petitioner,

vs. COURT OF APPEALS and RURAL BANK OF OLONGAPO, INC., represented by its Liquidator, GUILLERMO G.
REYES, JR. and Deputy Liquidator ABEL ALLANIGUE, respondents.

G.R. No. 112830             February 1, 1996

Liquidation.

Facts:

The jurisdiction of a regular court over a bank undergoing liquidation is the issue in this petition for review of the
decision of the Court of Appeals.1

On 5 February 1991 Jerry Ong filed with the Regional Trial Court of Quezon City a petition for the surrender of TCT
Nos. 13769 and 13770 pursuant to the provisions of Secs. 63(b) and 107 of P.D. 1529 2 against Rural Bank of Olongapo,
Inc. (RBO), represented by its liquidator Guillermo G. Reyes, Jr. and deputy liquidator Abel Allanigue. 3 The petition
averred inter alia that

2. The RBO was the owner in fee simple of two parcels of land including the improvements thereon situated
in Tagaytay City . . . particularly described in TCT Nos. 13769 and 13770 . . . .

3. Said parcels of land were duly mortgaged by RBO in favor of petitioner on December 29, 1983 to
guarantee the payment of Omnibus Finance, Inc., which is likewise now undergoing liquidation proceedings
of its money market obligations to petitioner in the principal amount of P863,517.02 . . . .

4. Omnibus Finance, Inc., not having seasonably settled its obligations to petitioner, the latter proceeded to
effect the extrajudicial foreclosure of said mortgages, such that on March 23, 1984, the City Sheriff of
Tagaytay City issued a Certificate of Sale in favor of petitioner . . . .

5. Said Certificate of Sale . . . was duly registered with the Registry of Deeds of Tagaytay City on July 16,
1985, as shown in the certified true copies of the aforementioned titles . . . .

23
 6. Respondents failed to seasonably redeem said parcels of land, for which reason, petitioner has executed
an Affidavit of Consolidation of Ownership which, to date, has not been submitted to the Registry of Deeds
of Tagaytay City, in view of the fact that possession of the aforesaid titles or owner's duplicate certificates
of title remains with the RBO.

7. To date, petitioner has not been able to effect the registration of said parcels of land in his name in view
of the persistent refusal of respondents, despite demand, to surrender RBO's copies of its owner's
certificates of title for the parcels of land covered by TCT Nos. 13769 and 13770. 4

Respondent RBO filed a motion to dismiss on the ground of res judicata alleging that petitioner had earlier sought a
similar relief from Br. 18 of the Regional Trial Court of Tagaytay City, which case was dismissed with finality on appeal
before the Court of Appeals.

In a supplemental motion to dismiss, respondent RBO contended that it was undergoing liquidation and, pursuant to
prevailing jurisprudence, it is the liquidation court which has exclusive jurisdiction to take cognizance of petitioner's
claim.

On 7 May 1991 the trial court denied the motion to dismiss because it found that the causes of action in the previous
and present cases were different although it was silent on the jurisdictional issue. Accordingly, respondent RBO filed
a motion for reconsideration but the same was similarly rejected in the order of June 11 1991 holding that: (a) subject
parcels of land were sold to petitioner through public bidding on 23 March 1984 and, consequently, said pieces of
realty were no longer part of the assets of respondent RBO; and, (b) in the same token, subject lots were no longer
considered assets of respondent RBO when its liquidation was commenced by the Central Bank on 9 November 1984
and when the petition for assistance in its liquidation was approved by the Regional Trial Court of Olongapo City on
30 May 1985.

On 5 July 1991 respondent RBO filed a manifestation and urgent motion for reconsideration arguing that the validity
of the certificate of sale issued to petitioner was still at issue in another case between them and therefore the
properties covered by said certificate were still part and parcel of its assets.

Still unpersuaded by respondent RBO's arguments, the trial court denied reconsideration in its order of 18
September 1991 prompting the bank to elevate the case to respondent Court of Appeals by way of a petition
forcertiorari and prohibition. On 12 February 1992 respondent court rendered a decision annulling the challenged
order of the court a quo dated 19 June 1991 which sustained the jurisdiction of the trial court as well as the order of
18 September 1991 denying reconsideration thereof. Moreover, the trial judge was ordered to dismiss Civil Case No.
Q-91-8019 without prejudice to the right of petitioner to file his claim in the liquidation proceedings (Sp. Proc. No.
170-0-85) pending before Br. 73 of the Regional Trial Court of Olongapo City. 5

In reversing the trial court the appellate court noted that Sec. 29, par. 3, of R.A. 265 as amended by P.D. 1827 6does
not limit the jurisdiction of the liquidation court to claims against the assets of the insolvent bank. The provision is
general in that it clearly and unqualifiedly states that the liquidation court shall have jurisdiction to adjudicate
disputed claims against the bank. "Disputed claims" refer to all claims, whether they be against the assets of the
insolvent bank, for specific performance, breach of contract, damages, or whatever. To limit the jurisdiction of the
liquidation court to those claims against the asset's of the bank is to remove significantly and without basis the cases
that may be brought against a bank in case of insolvency.

Respondent court also noted that the certificates of title are still in the name of respondent RBO. As far as third
persons are concerned (and these include claimants in the liquidation court), registration is the operative act which
would convey title to the property.

Petitioner submits that Civil Case No. Q-91-8019 may proceed independently of Sp. Proc. No. 170-0-85. He argues that
the disputed parcels of land have been extrajudicially foreclosed and the corresponding certificate of sale issued in
his favor; that considering that respondent RBO failed to redeem said properties he should now be allowed to
consolidate his title thereto; that respondent RBO's mortgage of TCT Nos. 13769 and 13770 in favor of petitioner and

24
its subsequent foreclosure are presumed valid and regular; and, that the liquidation court has no jurisdiction over
subject parcels of land since they are no longer assets of respondent RBO.

We find no merit in the petition. Section 29, par. 3, of R.A. 265 as amended by P. D. 1827 provides

If the Monetary Board shall determine and confirm within (sixty days) that the bank . . . is insolvent or
cannot resume business with safety to its depositors, creditors and the general public, it shall, if the public
interest requires, order its liquidation, indicate the manner of its liquidation and approve a liquidation plan.
The Central Bank shall, by the Solicitor General, file a petition in the Court of First Instance 7 reciting the
proceedings which have been taken and praying the assistance of the court in the liquidation of such
institution. The court shall have jurisdiction in the same proceedings to adjudicate disputed claims against the
bank . . . . and enforce individual liabilities of the stockholders and do all that is necessary to preserve the
assets of such institution and to implement the liquidation plan approved by the Monetary Board (emphasis
supplied).

Applying the aforequoted provision in Hernandez v. Rural Bank of Lucena, Inc., 8 this Court ruled

The fact that the insolvent bank is forbidden to do business, that its assets are turned over to the
Superintendent of Banks, as a receiver, for conversion into cash, and that its liquidation is undertaken with
judicial intervention means that, as far as lawful and practicable, all claims against the insolvent bank should
be filed in the liquidation proceeding (emphasis supplied).

We explained therein the rationale behind the provision, i.e., the judicial liquidation is intended to prevent multiplicity
of actions against the insolvent bank. It is a pragmatic arrangement designed to establish due process and orderliness
in the liquidation of the bank, to obviate the proliferation of litigations and to avoid injustice and arbitrariness. The
lawmaking body contemplated that for convenience only one court, if possible, should pass upon the claims against
the insolvent bank and that the liquidation court should assist the Superintendent of Banks and regulate his
operations.

The phrase "(T)he court shall have jurisdiction in the same proceedings to adjudicate disputed claims against the
bank" appears to have misled petitioner. He argues that to the best of his personal knowledge there is no pending
action filed before any court or agency which contests his right over subject properties. Thus his petition before the
Regional Trial Court of Quezon City cannot be considered a "disputed claim" as contemplated by law.

It is not necessary that a claim be initially disputed in a court or agency before it is filed with the liquidation court. As
may be gleaned in the Hernandez case, the term "disputed claim" in the provision simply connotes that

[i]n the course of the liquidation, contentious cases might arise wherein a full-dress hearing would be
required and legal issues would have to be resolved. Hence, it would be necessary in justice to all concerned
that a Court of First Instance (now Regional Trial Court) . . . assist and supervise the liquidation and . . . . act
as umpire or arbitrator in the allowance and disallowance of claims.

Petitioner must have overlooked the fact that since respondent RBO is insolvent other claimants not privy to their
transaction may be involved. As far as those claimants are concerned, in the absence of certificates of title in the
name of petitioner, subject lots still form part of the assets of the insolvent bank.

On the basis of the Hernandez case as well as Sec. 29, par. 3, of R.A. 265 as amended by P.D. 1827, respondent Court
of Appeals was correct in holding that the Regional Trial Court of Quezon City, Br. 79, did not have jurisdiction over
the petition, much less in ordering the dismissal of Civil Case No. Q-91-8019, without prejudice to petitioner's right to
file his claim in Sp. Proc. No. 170-0-85 before the Regional Trial Court of Olongapo City, Br. 73.

WHEREFORE, the petition is DENIED. The decision of respondent Court of Appeals dated 12 February 1992 is
AFFIRMED. Costs against petitioner.

25
BANGKO SENTRAL NG PILIPINAS MONETARY BOARD and CHUCHI FONACIER, Petitioners, 
vs. HON. NINA G. ANTONIO-VALENZUELA, in her capacity as Regional Trial Court Judge of Manila, Branch 28; RURAL
BANK OF PARAÑAQUE, INC.; RURAL BANK OF SAN JOSE (BATANGAS), INC.; RURAL BANK OF CARMEN (CEBU), INC.;
PILIPINO RURAL BANK, INC.; PHILIPPINE COUNTRYSIDE RURAL BANK, INC.; RURAL BANK OF CALATAGAN
(BATANGAS), INC. (now DYNAMIC RURAL BANK); RURAL BANK OF DARBCI, INC.; RURAL BANK OF KANANGA
(LEYTE), INC. (now FIRST INTERSTATE RURAL BANK); RURAL BANK OF BISAYAS MINGLANILLA (now BANK OF EAST
ASIA); and SAN PABLO CITY DEVELOPMENT BANK, INC., Respondents.

G.R. No. 184778               October 2, 2009

Facts:

This is a Petition for Review on Certiorari under Rule 45 with Prayer for Issuance of a Temporary
Restraining Order (TRO)/Writ of Preliminary Injunction, questioning the Decision dated September 30, 2008 1 of the
Court of Appeals (CA) in CA-G.R. SP No. 103935. The CA Decision upheld the Order 2 dated June 4, 2008 of the
Regional Trial Court (RTC), Branch 28 in Manila, issuing writs of preliminary injunction in Civil Case Nos. 08-119243, 08-
119244, 08-119245, 08-119246, 08-119247, 08-119248, 08-119249, 08-119250, 08-119251, and 08-119273, and the Order
dated May 21, 2008 that consolidated the civil cases.

The Facts

In September of 2007, the Supervision and Examination Department (SED) of the Bangko Sentral ng
Pilipinas (BSP) conducted examinations of the books of the following banks: Rural Bank of Parañaque, Inc. (RBPI),
Rural Bank of San Jose (Batangas), Inc., Rural Bank of Carmen (Cebu), Inc., Pilipino Rural Bank, Inc., Philippine
Countryside Rural Bank, Inc., Rural Bank of Calatagan (Batangas), Inc. (now Dynamic Rural Bank), Rural Bank of
Darbci, Inc., Rural Bank of Kananga (Leyte), Inc. (now First Interstate Rural Bank), Rural Bank de Bisayas Minglanilla
(now Bank of East Asia), and San Pablo City Development Bank, Inc.

After the examinations, exit conferences were held with the officers or representatives of the
banks wherein the SED examiners provided them with copies of Lists of Findings/Exceptions containing the
deficiencies discovered during the examinations. These banks were then required to comment and to undertake the
remedial measures stated in these lists within 30 days from their receipt of the lists, which remedial measures
included the infusion of additional capital. Though the banks claimed that they made the additional capital infusions,
petitioner Chuchi Fonacier, officer-in-charge of the SED, sent separate letters to the Board of Directors of each bank,

26
informing them that the SED found that the banks failed to carry out the required remedial measures. In response,
the banks requested that they be given time to obtain BSP approval to amend their Articles of Incorporation, that
they have an opportunity to seek investors. They requested as well that the basis for the capital infusion figures be
disclosed, and noted that none of them had received the Report of Examination (ROE) which finalizes the audit
findings. They also requested meetings with the BSP audit teams to reconcile audit figures. In response, Fonacier
reiterated the banks’ failure to comply with the directive for additional capital infusions.

On May 12, 2008, the RBPI filed a complaint for nullification of the BSP ROE with application for a
TRO and writ of preliminary injunction before the RTC docketed as Civil Case No. 08-119243 against Fonacier, the BSP,
Amado M. Tetangco, Jr., Romulo L. Neri, Vicente B. Valdepenas, Jr., Raul A. Boncan, Juanita D. Amatong, Alfredo C.
Antonio, and Nelly F. Villafuerte. RBPI prayed that Fonacier, her subordinates, agents, or any other person acting in
her behalf be enjoined from submitting the ROE or any similar report to the Monetary Board (MB), or if the ROE had
already been submitted, the MB be enjoined from acting on the basis of said ROE, on the allegation that the failure
to furnish the bank with a copy of the ROE violated its right to due process.

The Rural Bank of San Jose (Batangas), Inc., Rural Bank of Carmen (Cebu), Inc., Pilipino Rural Bank,
Inc., Philippine Countryside Rural Bank, Inc., Rural Bank of Calatagan (Batangas), Inc., Rural Bank of Darbci, Inc., Rural
Bank of Kananga (Leyte), Inc., and Rural Bank de Bisayas Minglanilla followed suit, filing complaints with the RTC
substantially similar to that of RBPI, including the reliefs prayed for, which were raffled to different branches and
docketed as Civil Cases Nos. 08-119244, 08-119245, 08-119246, 08-119247, 08-119248, 08-119249, 08-119250, and 08-
119251, respectively.

On May 13, 2008, the RTC denied the prayer for a TRO of Pilipino Rural Bank, Inc. The bank filed a
motion for reconsideration the next day.

On May 14, 2008, Fonacier and the BSP filed their opposition to the application for a TRO and writ
of preliminary injunction in Civil Case No. 08-119243 with the RTC. Respondent Judge Nina Antonio-Valenzuela of
Branch 28 granted RBPI’s prayer for the issuance of a TRO.

The other banks separately filed motions for consolidation of their cases in Branch 28, which
motions were granted. Judge Valenzuela set the complaint of Rural Bank of San Jose (Batangas), Inc. for hearing on
May 15, 2008. Petitioners assailed the validity of the consolidation of the nine cases before the RTC, alleging that the
court had already prejudged the case by the earlier issuance of a TRO in Civil Case No. 08-119243, and moved for the
inhibition of respondent judge. Petitioners filed a motion for reconsideration regarding the consolidation of the
subject cases.

On May 16, 2008, San Pablo City Development Bank, Inc. filed a similar complaint against the same
defendants with the RTC, and this was docketed as Civil Case No. 08-119273 that was later on consolidated with Civil
Case No. 08-119243. Petitioners filed an Urgent Motion to Lift/Dissolve the TRO and an Opposition to the earlier
motion for reconsideration of Pilipino Rural Bank, Inc.

On May 19, 2008, Judge Valenzuela issued an Order granting the prayer for the issuance of TROs
for the other seven cases consolidated with Civil Case No. 08-119243. On May 21, 2008, Judge Valenzuela issued an
Order denying petitioners’ motion for reconsideration regarding the consolidation of cases in Branch 28. On May 22,
2008, Judge Valenzuela granted the urgent motion for reconsideration of Pilipino Rural Bank, Inc. and issued a TRO
similar to the ones earlier issued.

On May 26, 2008, petitioners filed a Motion to Dismiss against all the complaints (except that of
the San Pablo City Development Bank, Inc.), on the grounds that the complaints stated no cause of action and that a
condition precedent for filing the cases had not been complied with. On May 29, 2008, a hearing was conducted on
the application for a TRO and for a writ of preliminary injunction of San Pablo City Development Bank, Inc.

The Ruling of the RTC

27
After the parties filed their respective memoranda, the RTC, on June 4, 2008, ruled that the banks were entitled to
the writs of preliminary injunction prayed for. It held that it had been the practice of the SED to provide the ROEs to
the banks before submission to the MB. It further held that as the banks are the subjects of examinations, they are
entitled to copies of the ROEs. The denial by petitioners of the banks’ requests for copies of the ROEs was held to be
a denial of the banks’ right to due process.

The dispositive portion of the RTC’s order reads:

WHEREFORE, the Court rules as follows:

1) Re: Civil Case No. 08-119243. Pursuant to Rule 58, Section 4(b) of the Revised Rules of Court, plaintiff Rural
Bank of Paranaque Inc. is directed to post a bond executed to the defendants, in the amount of
P500,000.00 to the effect that the plaintiff will pay to the defendants all damages which they may sustain
by reason of the injunction if the Court should finally decide that the plaintiff was not entitled thereto. After
posting of the bond and approval thereof, let a writ of preliminary injunction be issued to enjoin and
restrain the defendants from submitting the Report of Examination or any other similar report prepared in
connection with the examination conducted on the plaintiff, to the Monetary Board. In case such a Report
on Examination [sic] or any other similar report prepared in connection with the examination conducted on
the plaintiff has been submitted to the Monetary Board, the latter and its members (i.e. defendants
Tetangco, Neri, Valdepenas, Boncan, Amatong, Antonio, and Villafuerte) are enjoined and restrained from
acting on the basis of said report.

2) Re: Civil Case No. 08-119244. Pursuant to Rule 58, Section 4(b) of the Revised Rules of Court, plaintiff
Rural Bank of San Jose (Batangas), Inc. is directed to post a bond executed to the defendants, in the
amount of P500,000.00 to the effect that the plaintiff will pay to the defendants all damages which they
may sustain by reason of the injunction if the Court should finally decide that the plaintiff was not entitled
thereto. After posting of the bond and approval thereof, let a writ of preliminary injunction be issued to
enjoin and restrain the defendants from submitting the Report of Examination or any other similar report
prepared in connection with the examination conducted on the plaintiff, to the Monetary Board. In case
such a Report on Examination [sic] or any other similar report prepared in connection with the examination
conducted on the plaintiff has been submitted to the Monetary Board, the latter and its members (i.e.
defendants Tetangco, Neri, Valdepenas, Boncan, Amatong, Antonio, and Villafuerte) are enjoined and
restrained from acting on the basis of said report.

3) Re: Civil Case No. 08-119245. Pursuant to Rule 58, Section 4(b) of the Revised Rules of Court, plaintiff
Rural Bank of Carmen (Cebu), Inc. is directed to post a bond executed to the defendants, in the amount of
P500,000.00 to the effect that the plaintiff will pay to the defendants all damages which they may sustain
by reason of the injunction if the Court should finally decide that the plaintiff was not entitled thereto. After
posting of the bond and approval thereof, let a writ of preliminary injunction be issued to enjoin and
restrain the defendants from submitting the Report of Examination or any other similar report prepared in
connection with the examination conducted on the plaintiff, to the Monetary Board. In case such a Report
on Examination [sic] or any other similar report prepared in connection with the examination conducted on
the plaintiff has been submitted to the Monetary Board, the latter and its members (i.e. defendants
Tetangco, Neri, Valdepenas, Boncan, Amatong, Antonio, and Villafuerte) are enjoined and restrained from
acting on the basis of said report.

4) Re: Civil Case No. 08-119246. Pursuant to Rule 58, Section 4(b) of the Revised Rules of Court, plaintiff
Pilipino Rural Bank Inc. is directed to post a bond executed to the defendants, in the amount of
P500,000.00 to the effect that the plaintiff will pay to the defendants all damages which they may sustain
by reason of the injunction if the Court should finally decide that the plaintiff was not entitled thereto. After
posting of the bond and approval thereof, let a writ of preliminary injunction be issued to enjoin and
restrain the defendants from submitting the Report of Examination or any other similar report prepared in
connection with the examination conducted on the plaintiff, to the Monetary Board. In case such a Report
on Examination [sic] or any other similar report prepared in connection with the examination conducted on

28
the plaintiff has been submitted to the Monetary Board, the latter and its members (i.e. defendants
Tetangco, Neri, Valdepenas, Boncan, Amatong, Antonio, and Villafuerte) are enjoined and restrained from
acting on the basis of said report.

5) Re: Civil Case No. 08-119247. Pursuant to Rule 58, Section 4(b) of the Revised Rules of Court, plaintiff
Philippine Countryside Rural Bank Inc. is directed to post a bond executed to the defendants, in the amount
of P500,000.00 to the effect that the plaintiff will pay to the defendants all damages which they may sustain
by reason of the injunction if the Court should finally decide that the plaintiff was not entitled thereto. After
posting of the bond and approval thereof, let a writ of preliminary injunction be issued to enjoin and
restrain the defendants from submitting the Report of Examination or any other similar report prepared in
connection with the examination conducted on the plaintiff, to the Monetary Board. In case such a Report
on Examination [sic] or any other similar report prepared in connection with the examination conducted on
the plaintiff has been submitted to the Monetary Board, the latter and its members (i.e. defendants
Tetangco, Neri, Valdepenas, Boncan, Amatong, Antonio, and Villafuerte) are enjoined and restrained from
acting on the basis of said report.

6) Re: Civil Case No. 08-119248. Pursuant to Rule 58, Section 4(b) of the Revised Rules of Court, plaintiff
Dynamic Bank Inc. (Rural Bank of Calatagan) is directed to post a bond executed to the defendants, in the
amount of P500,000.00 to the effect that the plaintiff will pay to the defendants all damages which they
may sustain by reason of the injunction if the Court should finally decide that the plaintiff was not entitled
thereto. After posting of the bond and approval thereof, let a writ of preliminary injunction be issued to
enjoin and restrain the defendants from submitting the Report of Examination or any other similar report
prepared in connection with the examination conducted on the plaintiff, to the Monetary Board. In case
such a Report on Examination [sic] or any other similar report prepared in connection with the examination
conducted on the plaintiff has been submitted to the Monetary Board, the latter and its members (i.e.
defendants Tetangco, Neri, Valdepenas, Boncan, Amatong, Antonio, and Villafuerte) are enjoined and
restrained from acting on the basis of said report.

7) Re: Civil Case No. 08-119249. Pursuant to Rule 58, Section 4(b) of the Revised Rules of Court, plaintiff
Rural Bank of DARBCI, Inc. is directed to post a bond executed to the defendants, in the amount of
P500,000.00 to the effect that the plaintiff will pay to the defendants all damages which they may sustain
by reason of the injunction if the Court should finally decide that the plaintiff was not entitled thereto. After
posting of the bond and approval thereof, let a writ of preliminary injunction be issued to enjoin and
restrain the defendants from submitting the Report of Examination or any other similar report prepared in
connection with the examination conducted on the plaintiff, to the Monetary Board. In case such a Report
on Examination [sic] or any other similar report prepared in connection with the examination conducted on
the plaintiff has been submitted to the Monetary Board, the latter and its members (i.e. defendants
Tetangco, Neri, Valdepenas, Boncan, Amatong, Antonio, and Villafuerte) are enjoined and restrained from
acting on the basis of said report.

8) Re: Civil Case No. 08-119250. Pursuant to Rule 58, Section 4(b) of the Revised Rules of Court, plaintiff
Rural Bank of Kananga Inc. (First Intestate Bank), is directed to post a bond executed to the defendants, in
the amount of P500,000.00 to the effect that the plaintiff will pay to the defendants all damages which they
may sustain by reason of the injunction if the Court should finally decide that the plaintiff was not entitled
thereto. After posting of the bond and approval thereof, let a writ of preliminary injunction be issued to
enjoin and restrain the defendants from submitting the Report of Examination or any other similar report
prepared in connection with the examination conducted on the plaintiff, to the Monetary Board. In case
such a Report on Examination [sic] or any other similar report prepared in connection with the examination
conducted on the plaintiff has been submitted to the Monetary Board, the latter and its members (i.e.
defendants Tetangco, Neri, Valdepenas, Boncan, Amatong, Antonio, and Villafuerte) are enjoined and
restrained from acting on the basis of said report.

9) Re: Civil Case No. 08-119251. Pursuant to Rule 58, Section 4(b) of the Revised Rules of Court, plaintiff
Banco Rural De Bisayas Minglanilla (Cebu) Inc. (Bank of East Asia) is directed to post a bond executed to the

29
 defendants, in the amount of P500,000.00 to the effect that the plaintiff will pay to the defendants all
damages which they may sustain by reason of the injunction if the Court should finally decide that the
plaintiff was not entitled thereto. After posting of the bond and approval thereof, let a writ of preliminary
injunction be issued to enjoin and restrain the defendants from submitting the Report of Examination or
any other similar report prepared in connection with the examination conducted on the plaintiff, to the
Monetary Board. In case such a Report on Examination [sic] or any other similar report prepared in
connection with the examination conducted on the plaintiff has been submitted to the Monetary Board, the
latter and its members (i.e. defendants Tetangco, Neri, Valdepenas, Boncan, Amatong, Antonio, and
Villafuerte) are enjoined and restrained from acting on the basis of said report.

10) Re: Civil Case No. 08-119273. Pursuant to Rule 58, Section 4(b) of the Revised Rules of Court, plaintiff San
Pablo City Development Bank, Inc. is directed to post a bond executed to the defendants, in the amount of
P500,000.00 to the effect that the plaintiff will pay to the defendants all damages which they may sustain
by reason of the injunction if the Court should finally decide that the plaintiff was not entitled thereto. After
posting of the bond and approval thereof, let a writ of preliminary injunction be issued to enjoin and
restrain the defendants from submitting the Report of Examination or any other similar report prepared in
connection with the examination conducted on the plaintiff, to the Monetary Board. In case such a Report
on Examination [sic] or any other similar report prepared in connection with the examination conducted on
the plaintiff has been submitted to the Monetary Board, the latter and its members (i.e. defendants
Tetangco, Neri, Valdepenas, Boncan, Amatong, Antonio, and Villafuerte) are enjoined and restrained from
acting on the basis of said report.3

The Ruling of the CA

Petitioners then brought the matter to the CA via a petition for certiorari under Rule 65 claiming grave abuse of
discretion on the part of Judge Valenzuela when she issued the orders dated May 21, 2008 and June 4, 2008.

The CA ruled that the RTC committed no grave abuse of discretion when it ordered the issuance of a writ of
preliminary injunction and when it ordered the consolidation of the 10 cases.

It held that petitioners should have first filed a motion for reconsideration of the assailed orders, and failed to justify
why they resorted to a special civil action of certiorari instead.

The CA also found that aside from the technical aspect, there was no grave abuse of discretion on the part of the
RTC, and if there was a mistake in the assessment of evidence by the trial court, that should be characterized as an
error of judgment, and should be correctable via appeal.

The CA held that the principles of fairness and transparency dictate that the respondent banks are entitled to copies
of the ROE.

Regarding the consolidation of the 10 cases, the CA found that there was a similarity of facts, reliefs sought, issues
raised, defendants, and that plaintiffs and defendants were represented by the same sets of counsels. It found that
the joint trial of these cases would prejudice any substantial right of petitioners.

Finding that no grave abuse of discretion attended the issuance of the orders by the RTC, the CA denied the petition.

On November 24, 2008, a TRO was issued by this Court, restraining the CA, RTC, and respondents from implementing
and enforcing the CA Decision dated September 30, 2008 in CA-G.R. SP No. 103935. 4

By reason of the TRO issued by this Court, the SED was able to submit their ROEs to the MB. The MB then prohibited
the respondent banks from transacting business and placed them under receivership under Section 53 of Republic
Act No. (RA) 87915 and Sec. 30 of RA

30
76536 through MB Resolution No. 1616 dated December 9, 2008; Resolution Nos. 1637 and 1638 dated December 11,
2008; Resolution Nos. 1647, 1648, and 1649 dated December 12, 2008; Resolution Nos. 1652 and 1653 dated
December 16, 2008; and Resolution Nos. 1692 and 1695 dated December 19, 2008, with the Philippine Deposit
Insurance Corporation as the appointed receiver.

Now we resolve the main petition.

Grounds in Support of Petition

I. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN NOT FINDING THAT THE INJUNCTION ISSUED BY THE
REGIONAL TRIAL COURT VIOLATED SECTION 25 OF THE NEW CENTRAL BANK ACT AND EFFECTIVELY HANDCUFFED
THE BANGKO SENTRAL FROM DISCHARGING ITS FUNCTIONS TO THE GREAT AND IRREPARABLE DAMAGE OF THE
COUNTRY’S BANKING SYSTEM;

II. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN FINDING THAT RESPONDENTS ARE ENTITLED TO BE
FURNISHED COPIES OF THEIR RESPECTIVE ROEs BEFORE THE SAME IS SUBMITTED TO THE MONETARY BOARD IN
VIEW OF THE PRINCIPLES OF FAIRNESS AND TRANSPARENCY DESPITE LACK OF EXPRESS PROVISION IN THE NEW
CENTRAL BANK ACT REQUIRING BSP TO DO THE SAME

III. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN DEPARTING FROM WELL-ESTABLISHED PRECEPTS OF
LAW AND JURISPRUDENCE

A. THE EXCEPTIONS CITED BY PETITIONER JUSTIFIED RESORT TO PETITION FOR CERTIORARI

UNDER RULE 65 INSTEAD OF FIRST FILING A MOTION FOR RECONSIDERATION

B. RESPONDENT BANKS’ ACT OF RESORTING IMMEDIATELY TO THE COURT WAS PREMATURE

SINCE IT WAS MADE IN UTTER DISREGARD OF THE PRINCIPLE OF PRIMARY JURISDICTION AND
EXHAUSTION OF ADMINISTRATIVE REMEDY

C. THE ISSUANCE OF A WRIT OF PRELIMINARY INJUNCTION BY THE REGIONAL TRIAL COURT WAS
NOT ONLY IMPROPER BUT AMOUNTED TO GRAVE ABUSE OF DISCRETION 7

Our Ruling

The petition is meritorious.

In Lim v. Court of Appeals it was stated:

The requisites for preliminary injunctive relief are: (a) the invasion of right sought to be protected is material and
substantial; (b) the right of the complainant is clear and unmistakable; and (c) there is an urgent and paramount
necessity for the writ to prevent serious damage.

As such, a writ of preliminary injunction may be issued only upon clear showing of an actual existing right to be
protected during the pendency of the principal action. The twin requirements of a valid injunction are the existence
of a right and its actual or threatened violations. Thus, to be entitled to an injunctive writ, the right to be protected
and the violation against that right must be shown. 8

These requirements are absent in the present case.

In granting the writs of preliminary injunction, the trial court held that the submission of the ROEs to the MB before
the respondent banks would violate the right to due process of said banks.

31
This is erroneous.

The respondent banks have failed to show that they are entitled to copies of the ROEs. They can point to no
provision of law, no section in the procedures of the BSP that shows that the BSP is required to give them copies of
the ROEs. Sec. 28 of RA 7653, or the New Central Bank Act, which governs examinations of banking institutions,
provides that the ROE shall be submitted to the MB; the bank examined is not mentioned as a recipient of the ROE.

The respondent banks cannot claim a violation of their right to due process if they are not provided with copies of
the ROEs. The same ROEs are based on the lists of findings/exceptions containing the deficiencies found by the SED
examiners when they examined the books of the respondent banks. As found by the RTC, these lists of
findings/exceptions were furnished to the officers or representatives of the respondent banks, and the respondent
banks were required to comment and to undertake remedial measures stated in said lists. Despite these instructions,
respondent banks failed to comply with the SED’s directive.

Respondent banks are already aware of what is required of them by the BSP, and cannot claim violation of their right
to due process simply because they are not furnished with copies of the ROEs. Respondent banks were held by the
CA to be entitled to copies of the ROEs prior to or simultaneously with their submission to the MB, on the principles
of fairness and transparency. Further, the CA held that if the contents of the ROEs are essentially the same as those
of the lists of findings/exceptions provided to said banks, there is no reason not to give copies of the ROEs to the
banks. This is a flawed conclusion, since if the banks are already aware of the contents of the ROEs, they cannot say
that fairness and transparency are not present. If sanctions are to be imposed upon the respondent banks, they are
already well aware of the reasons for the sanctions, having been informed via the lists of findings/exceptions,
demolishing that particular argument. The ROEs would then be superfluities to the respondent banks, and should
not be the basis for a writ of preliminary injunction. Also, the reliance of the RTC on Banco Filipino v. Monetary
Board9 is misplaced. The petitioner in that case was held to be entitled to annexes of the Supervision and
Examination Sector’s reports, as it already had a copy of the reports themselves. It was not the subject of the case
whether or not the petitioner was entitled to a copy of the reports. And the ruling was made after the petitioner
bank was ordered closed, and it was allowed to be supplied with annexes of the reports in order to better prepare its
defense. In this instance, at the time the respondent banks requested copies of the ROEs, no action had yet been
taken by the MB with regard to imposing sanctions upon said banks.

The issuance by the RTC of writs of preliminary injunction is an unwarranted interference with the powers of the MB.
Secs. 29 and 30 of RA 765310 refer to the appointment of a conservator or a receiver for a bank, which is a power of
the MB for which they need the ROEs done by the supervising or examining department. The writs of preliminary
injunction issued by the trial court hinder the MB from fulfilling its function under the law. The actions of the MB
under Secs. 29 and 30 of RA 7653 "may not be restrained or set aside by the court except on petition for  certiorari on
the ground that the action taken was in excess of jurisdiction or with such grave abuse of discretion as to amount to
lack or excess of jurisdiction." The writs of preliminary injunction order are precisely what cannot be done under the
law by preventing the MB from taking action under either Sec. 29 or Sec. 30 of RA 7653.

As to the third requirement, the respondent banks have shown no necessity for the writ of preliminary injunction to
prevent serious damage. The serious damage contemplated by the trial court was the possibility of the imposition of
sanctions upon respondent banks, even the sanction of closure. Under the law, the sanction of closure could be
imposed upon a bank by the BSP even without notice and hearing. The apparent lack of procedural due process
would not result in the invalidity of action by the MB. This was the ruling in Central Bank of the Philippines v. Court of
Appeals.11 This "close now, hear later" scheme is grounded on practical and legal considerations to prevent
unwarranted dissipation of the bank’s assets and as a valid exercise of police power to protect the depositors,
creditors, stockholders, and the general public. The writ of preliminary injunction cannot, thus, prevent the MB from
taking action, by preventing the submission of the ROEs and worse, by preventing the MB from acting on such ROEs.

The trial court required the MB to respect the respondent banks’ right to due process by allowing the respondent
banks to view the ROEs and act upon them to forestall any sanctions the MB might impose. Such procedure has no
basis in law and does in fact violate the "close now, hear later" doctrine. We held in Rural Bank of San Miguel, Inc. v.
Monetary Board, Bangko Sentral ng Pilipinas:

32
It is well-settled that the closure of a bank may be considered as an exercise of police power. The action of the MB
on this matter is final and executory. Such exercise may nonetheless be subject to judicial inquiry and can be set
aside if found to be in excess of jurisdiction or with such grave abuse of discretion as to amount to lack or excess of
jurisdiction.12

The respondent banks cannot—through seeking a writ of preliminary injunction by appealing to lack of due process,
in a roundabout manner— prevent their closure by the MB. Their remedy, as stated, is a subsequent one, which will
determine whether the closure of the bank was attended by grave abuse of discretion. Judicial review enters the
picture only after the MB has taken action; it cannot prevent such action by the MB. The threat of the imposition of
sanctions, even that of closure, does not violate their right to due process, and cannot be the basis for a writ of
preliminary injunction.

The "close now, hear later" doctrine has already been justified as a measure for the protection of the public interest.
Swift action is called for on the part of the BSP when it finds that a bank is in dire straits. Unless adequate and
determined efforts are taken by the government against distressed and mismanaged banks, public faith in the
banking system is certain to deteriorate to the prejudice of the national economy itself, not to mention the losses
suffered by the bank depositors, creditors, and stockholders, who all deserve the protection of the government. 13

The respondent banks have failed to show their entitlement to the writ of preliminary injunction. It must be
emphasized that an application for injunctive relief is construed strictly against the pleader. 14 The respondent banks
cannot rely on a simple appeal to procedural due process to prove entitlement. The requirements for the issuance of
the writ have not been proved. No invasion of the rights of respondent banks has been shown, nor is their right to
copies of the ROEs clear and unmistakable. There is also no necessity for the writ to prevent serious damage. Indeed
the issuance of the writ of preliminary injunction tramples upon the powers of the MB and prevents it from fulfilling
its functions. There is no right that the writ of preliminary injunction would protect in this particular case. In the
absence of a clear legal right, the issuance of the injunctive writ constitutes grave abuse of discretion. 15 In the
absence of proof of a legal right and the injury sustained by the plaintiff, an order for the issuance of a writ of
preliminary injunction will be nullified.16

Courts are hereby reminded to take greater care in issuing injunctive relief to litigants, that it would not violate any
law. The grant of a preliminary injunction in a case rests on the sound discretion of the court with the caveat that it
should be made with great caution.17 Thus, the issuance of the writ of preliminary injunction must have basis in and
be in accordance with law. All told, while the grant or denial of an injunction generally rests on the sound discretion
of the lower court, this Court may and should intervene in a clear case of abuse. 18

WHEREFORE, the petition is hereby GRANTED. The assailed CA Decision dated September 30, 2008 in CA-G.R. SP No.
103935 is hereby REVERSED. The assailed order and writ of preliminary injunction of respondent Judge Valenzuela in
Civil Case Nos. 08-119243, 08-119244, 08-119245, 08-119246, 08-119247, 08-119248, 08-119249, 08-119250, 08-119251, and
08-119273 are hereby declared NULL and VOID.

33
G.R. No. 94723 August 21, 1997

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

TORRES, JR., J.:

In our predisposition to discover the "original intent" of a statute, courts become the unfeeling pillars of the  status
quo. Ligle do we realize that statutes or even constitutions are bundles of compromises thrown our way by their
framers. Unless we exercise vigilance, the statute may already be out of tune and irrelevant to our day.

The petition is for declaratory relief. It prays for the following reliefs:

a.) Immediately upon the filing of this petition, an Order be issued restraining the respondents
from applying and enforcing Section 113 of Central Bank Circular No. 960;

b.) After hearing, judgment be rendered:

1.) Declaring the respective rights and duties of petitioners and respondents;

2.) Adjudging Section 113 of Central Bank Circular No. 960 as contrary to the provisions of the
Constitution, hence void; because its provision that "Foreign currency deposits shall be exempt
from attachment, garnishment, or any other order or process of any court, legislative body,
government agency or any administrative body whatsoever

i.) has taken away the right of petitioners to have the bank deposit of defendant
Greg Bartelli y Northcott garnished to satisfy the judgment rendered in
petitioners' favor in violation of substantive due process guaranteed by the
Constitution;

ii.) has given foreign currency depositors an undue favor or a class privilege in
violation of the equal protection clause of the Constitution;

iii.) has provided a safe haven for criminals like the herein respondent Greg
Bartelli y Northcott since criminals could escape civil liability for their wrongful
acts by merely converting their money to a foreign currency and depositing it in
a foreign currency deposit account with an authorized bank.

The antecedent facts:

34
On February 4, 1989, Greg Bartelli y Northcott, an American tourist, coaxed and lured petitioner Karen Salvacion,
then 12 years old to go with him to his apartment. Therein, Greg Bartelli detained Karen Salvacion for four days, or up
to February 7, 1989 and was able to rape the child once on February 4, and three times each day on February 5, 6, and
7, 1989. On February 7, 1989, after policemen and people living nearby, rescued Karen, Greg Bartelli was arrested and
detained at the Makati Municipal Jail. The policemen recovered from Bartelli the following items: 1.) Dollar Check No.
368, Control No. 021000678-1166111303, US 3,903.20; 2.) COCOBANK Bank Book No. 104-108758-8 (Peso Acct.); 3.)
Dollar Account — China Banking Corp., US$/A#54105028-2; 4.) ID-122-30-8877; 5.) Philippine Money (P234.00) cash;
6.) Door Keys 6 pieces; 7.) Stuffed Doll (Teddy Bear) used in seducing the complainant.

On February 16, 1989, Makati Investigating Fiscal Edwin G. Condaya filed against Greg Bartelli, Criminal Case No. 801
for Serious Illegal Detention and Criminal Cases Nos. 802, 803, 804, and 805 for four (4) counts of Rape. On the same
day, petitioners filed with the Regional Trial Court of Makati Civil Case No. 89-3214 for damages with preliminary
attachment against Greg Bartelli. On February 24, 1989, the day there was a scheduled hearing for Bartelli's petition
for bail the latter escaped from jail.

On February 28, 1989, the court granted the fiscal's Urgent Ex-Parte Motion for the Issuance of Warrant of Arrest and
Hold Departure Order. Pending the arrest of the accused Greg Bartelli y Northcott, the criminal cases were archived
in an Order dated February 28, 1989.

Meanwhile, in Civil Case No. 89-3214, the Judge issued an Order dated February 22, 1989 granting the application of
herein petitioners, for the issuance of the writ of preliminary attachment. After petitioners gave Bond No. JCL (4)
1981 by FGU Insurance Corporation in the amount of P100,000.00, a Writ of Preliminary Attachment was issued by
the trial court on February 28, 1989.

On March 1, 1989, the Deputy Sheriff of Makati served a Notice of Garnishment on China Banking Corporation. In a
letter dated March 13, 1989 to the Deputy Sheriff of Makati, China Banking Corporation invoked Republic Act No.
1405 as its answer to the notice of garnishment served on it. On March 15, 1989, Deputy Sheriff of Makati Armando
de Guzman sent his reply to China Banking Corporation saying that the garnishment did not violate the secrecy of
bank deposits since the disclosure is merely incidental to a garnishment properly and legally made by virtue of a
court order which has placed the subject deposits in custodia legis. In answer to this letter of the Deputy Sheriff of
Makati, China Banking Corporation, in a letter dated March 20, 1989, invoked Section 113 of Central Bank Circular No.
960 to the effect that the dollar deposits or defendant Greg Bartelli are exempt from attachment, garnishment, or
any other order or process of any court, legislative body, government agency or any administrative body,
whatsoever.

This prompted the counsel for petitioners to make an inquiry with the Central Bank in a letter dated April 25, 1989 on
whether Section 113 of CB Circular No. 960 has any exception or whether said section has been repealed or amended
since said section has rendered nugatory the substantive right of the plaintiff to have the claim sought to be
enforced by the civil action secured by way of the writ of preliminary attachment as granted to the plaintiff under
Rule 57 of the Revised Rules of Court. The Central Bank responded as follows:

May 26, 1989

Ms. Erlinda S. Carolino

12 Pres. Osmena Avenue
South Admiral Village
Paranaque, Metro Manila

Dear Ms. Carolino:

This is in reply to your letter dated April 25, 1989 regarding your inquiry on Section 113, CB Circular
No. 960 (1983).

35
 The cited provision is absolute in application. It does not admit of any exception, nor has the same
been repealed nor amended.

The purpose of the law is to encourage dollar accounts within the country's banking system which
would help in the development of the economy. There is no intention to render futile the basic
rights of a person as was suggested in your subject letter. The law may be harsh as some perceive
it, but it is still the law. Compliance is, therefore, enjoined.

Very truly yours,

(SGD) AGAPITO S. FAJARDO

Director 1

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

WHEREFORE, judgment is hereby rendered in favor of plaintiffs and against defendant, ordering
the latter:

1. To pay plaintiff Karen E. Salvacion the amount of P500,000.00 as moral damages;

2. To pay her parents, plaintiffs spouses Federico N. Salvacion, Jr., and Evelina E. Salvacion the
amount of P150,000.00 each or a total of P300,000.00 for both of them;

3. To pay plaintiffs exemplary damages of P100,000.00; and

4. To pay attorney's fees in an amount equivalent to 25% of the total amount of damages herein
awarded;

5. To pay litigation expenses of P10,000.00; plus

6. Costs of the suit.

SO ORDERED.

The heinous acts of respondent Greg Bartelli which gave rise to the award were related in graphic detail by the trial
court in its decision as follows:

The defendant in this case was originally detained in the municipal jail of Makati but was able to
escape therefrom on February 24, 1989 as per report of the Jail Warden of Makati to the Presiding
Judge, Honorable Manuel M. Cosico of the Regional Trial Court of Makati, Branch 136, where he
was charged with four counts of Rape and Serious Illegal Detention (Crim. Cases Nos. 802 to 805).
Accordingly, upon motion of plaintiffs, through counsel, summons was served upon defendant by
publication in the Manila Times, a newspaper of general circulation as attested by the Advertising
Manager of the Metro Media Times, Inc., the publisher of the said newspaper. Defendant,
however, failed to file his answer to the complaint despite the lapse of the period of sixty (60) days
from the last publication; hence, upon motion of the plaintiffs, through counsel, defendant was
declared in default and plaintiffs were authorized to present their evidence ex parte.

36
In support of the complaint, plaintiffs presented as witnesses the minor Karen E. Salvacion, her
father, Federico N. Salvacion, Jr., a certain Joseph Aguilar and a certain Liberato Madulio, who
gave the following testimony:

Karen took her first year high school in St. Mary's Academy in Pasay City but has recently
transferred to Arellano University for her second year.

In the afternoon of February 4, 1989, Karen was at the Plaza Fair Makati Cinema Square, with her
friend Edna Tangile whiling away her free time. At about 3:30 p.m. while she was finishing her
snack on a concrete bench in front of Plaza Fair, an American approached her. She was then alone
because Edna Tangile had already left, and she was about to go home. (TSN, Aug. 15, 1989, pp. 2 to
5)

The American asked her name and introduced himself as Greg Bartelli. He sat beside her when he
talked to her. He said he was a Math teacher and told her that he has a sister who is a nurse in New
York. His sister allegedly has a daughter who is about Karen's age and who was with him in his
house along Kalayaan Avenue. (TSN, Aug. 15, 1989, pp. 4-5)

The American asked Karen what was her favorite subject and she told him it's Pilipino. He then
invited her to go with him to his house where she could teach Pilipino to his niece. He even gave
her a stuffed toy to persuade her to teach his niece. (Id., pp. 5-6)

They walked from Plaza Fair along Pasong Tamo, turning right to reach the defendant's house
along Kalayaan Avenue. (Id., p. 6)

When they reached the apartment house, Karen noticed that defendant's alleged niece was not
outside the house but defendant told her maybe his niece was inside. When Karen did not see the
alleged niece inside the house, defendant told her maybe his niece was upstairs, and invited Karen
to go upstairs. (Id., p. 7)

Upon entering the bedroom defendant suddenly locked the door. Karen became nervous because
his niece was not there. Defendant got a piece of cotton cord and tied Karen's hands with it, and
then he undressed her. Karen cried for help but defendant strangled her. He took a packing tape
and he covered her mouth with it and he circled it around her head. (Id., p. 7)

Then, defendant suddenly pushed Karen towards the bed which was just near the door. He tied her
feet and hands spread apart to the bed posts. He knelt in front of her and inserted his finger in her
sex organ. She felt severe pain. She tried to shout but no sound could come out because there
were tapes on her mouth. When defendant withdrew his finger it was full of blood and Karen felt
more pain after the withdrawal of the finger. (Id., p. 8)

He then got a Johnson's Baby Oil and he applied it to his sex organ as well as to her sex organ.
After that he forced his sex organ into her but he was not able to do so. While he was doing it,
Karen found it difficult to breathe and she perspired a lot while feeling severe pain. She merely
presumed that he was able to insert his sex organ a little, because she could not see. Karen could
not recall how long the defendant was in that position. (Id. pp. 8-9)

After that, he stood up and went to the bathroom to wash. He also told Karen to take a shower
and he untied her hands. Karen could only hear the sound of the water while the defendant, she
presumed, was in the bathroom washing his sex organ. When she took a shower more blood came
out from her. In the meantime, defendant changed the mattress because it was full of blood. After
the shower, Karen was allowed by defendant to sleep. She fell asleep because she got tired crying.
The incident happened at about 4:00 p.m. Karen had no way of determining the exact time

37
because defendant removed her watch. Defendant did not care to give her food before she went
to sleep. Karen woke up at about 8:00 o'clock the following morning. (Id., pp. 9-10)

The following day, February 5, 1989, a Sunday, after a breakfast of biscuit and coke at about 8:30
to 9:00 a.m. defendant raped Karen while she was still bleeding. For lunch, they also took biscuit
and coke. She was raped for the second time at about 12:00 to 2:00 p.m. In the evening, they had
rice for dinner which defendant had stored downstairs; it was he who cooked the rice that is why it
looks like "lugaw". For the third time, Karen was raped again during the night. During those three
times defendant succeeded in inserting his sex organ but she could not say whether the organ was
inserted wholly.

Karen did not see any firearm or any bladed weapon. The defendant did not tie her hands and feet
nor put a tape on her mouth anymore but she did not cry for help for fear that she might be killed;
besides, all the windows and doors were closed. And even if she shouted for help, nobody would
hear her. She was so afraid that if somebody would hear her and would be able to call the police, it
was still possible that as she was still inside the house, defendant might kill her. Besides, the
defendant did not leave that Sunday, ruling out her chance to call for help. At nighttime he slept
with her again. (TSN, Aug. 15, 1989, pp. 12-14)

On February 6, 1989, Monday, Karen was raped three times, once in the morning for thirty minutes
after a breakfast of biscuits; again in the afternoon; and again in the evening. At first, Karen did not
know that there was a window because everything was covered by a carpet, until defendant
opened the window for around fifteen minutes or less to let some air in, and she found that the
window was covered by styrofoam and plywood. After that, he again closed the window with a
hammer and he put the styrofoam, plywood, and carpet back. (Id., pp. 14-15)

That Monday evening, Karen had a chance to call for help, although defendant left but kept the
door closed. She went to the bathroom and saw a small window covered by styrofoam and she
also spotted a small hole. She stepped on the bowl and she cried for help through the hole. She
cried: "Maawa no po kayo so akin. Tulungan n'yo akong makalabas dito. Kinidnap ako!" Somebody
heard her. It was a woman, probably a neighbor, but she got angry and said she was " istorbo".
Karen pleaded for help and the woman told her to sleep and she will call the police. She finally fell
asleep but no policeman came. (TSN, Aug. 15, 1989, pp. 15-16)

She woke up at 6:00 o'clock the following morning, and she saw defendant in bed, this time
sleeping. She waited for him to wake up. When he woke up, he again got some food but he always
kept the door locked. As usual, she was merely fed with biscuit and coke. On that day, February 7,
1989, she was again raped three times. The first at about 6:30 to 7:00 a.m., the second at about
8:30 — 9:00, and the third was after lunch at 12:00 noon. After he had raped her for the second
time he left but only for a short while. Upon his return, he caught her shouting for help but he did
not understand what she was shouting about. After she was raped the third time, he left the
house. (TSN, Aug. 15, 1989, pp. 16-17) She again went to the bathroom and shouted for help. After
shouting for about five minutes, she heard many voices. The voices were asking for her name and
she gave her name as Karen Salvacion. After a while, she heard a voice of a woman saying they will
just call the police. They were also telling her to change her clothes. She went from the bathroom
to the room but she did not change her clothes being afraid that should the neighbors call for the
police and the defendant see her in different clothes, he might kill her. At that time she was
wearing a T-shirt of the American because the latter washed her dress. (Id., p. 16)

Afterwards, defendant arrived and he opened the door. He asked her if she had asked for help
because there were many policemen outside and she denied it. He told her to change her clothes,
and she did change to the one she was wearing on Saturday. He instructed her to tell the police
that she left home and willingly; then he went downstairs but he locked the door. She could hear
people conversing but she could not understand what they were saying. (Id., p. 19)

38
 When she heard the voices of many people who were conversing downstairs, she knocked
repeatedly at the door as hard as she could. She heard somebody going upstairs and when the
door was opened, she saw a policeman. The policeman asked her name and the reason why she
was there. She told him she was kidnapped. Downstairs, he saw about five policemen in uniform
and the defendant was talking to them. "Nakikipag-areglo po sa mga pulis," Karen added. "The
policeman told him to just explain at the precinct. (Id., p. 20)

They went out of the house and she saw some of her neighbors in front of the house. They rode
the car of a certain person she called Kuya Boy together with defendant, the policeman, and two
of her neighbors whom she called Kuya Bong Lacson and one Ate Nita. They were brought to Sub-
Station I and there she was investigated by a policeman. At about 2:00 a.m., her father arrived,
followed by her mother together with some of their neighbors. Then they were brought to the
second floor of the police headquarters. (Id., p. 21)

At the headquarters, she was asked several questions by the investigator. The written statement
she gave to the police was marked as Exhibit A. Then they proceeded to the National Bureau of
Investigation together with the investigator and her parents. At the NBI, a doctor, a medico-legal
officer, examined her private parts. It was already 3:00 in the early morning of the following day
when they reached the NBI. (TSN, Aug. 15, 1989, p. 22) The findings of the medico-legal officer has
been marked as Exhibit B.

She was studying at the St. Mary's Academy in Pasay City at the time of the incident but she
subsequently transferred to Apolinario Mabini, Arellano University, situated along Taft Avenue,
because she was ashamed to be the subject of conversation in the school. She first applied for
transfer to Jose Abad Santos, Arellano University along Taft Avenue near the Light Rail Transit
Station but she was denied admission after she told the school the true reason for her transfer.
The reason for their denial was that they might be implicated in the case. (TSN, Aug. 15, 1989, p.
46)

xxx xxx xxx

After the incident, Karen has changed a lot. She does not play with her brother and sister anymore,
and she is always in a state of shock; she has been absent-minded and is ashamed even to go out
of the house. (TSN, Sept. 12, 1989, p. 10) She appears to be restless or sad, (Id., p. 11) The father
prays for P500,000.00 moral damages for Karen for this shocking experience which probably, she
would always recall until she reaches old age, and he is not sure if she could ever recover from this
experience. (TSN, Sept. 24, 1989, pp. 10-11)

Pursuant to an Order granting leave to publish notice of decision, said notice was published in the Manila Bulletin
once a week for three consecutive weeks. After the lapse of fifteen (15) days from the date of the last publication of
the notice of judgment and the decision of the trial court had become final, petitioners tried to execute on Bartelli's
dollar deposit with China Banking Corporation. Likewise, the bank invoked Section 113 of Central Bank Circular No.
960.

Thus, petitioners decided to seek relief from this Court.

The issues raised and the arguments articulated by the parties boil down to two:

May this Court entertain the instant petition despite the fact that original jurisdiction in petitions for declaratory
relief rests with the lower court? Should Section 113 of Central Bank Circular No. 960 and Section 8 of R.A. 6426, as
amended by P.D. 1246, otherwise known as the Foreign Currency Deposit Act be made applicable to a foreign
transient?

39
Petitioners aver as heretofore stated that Section 113 of Central Bank Circular No. 960 providing that "Foreign
currency deposits shall be exempt from attachment, garnishment, or any other order or process of any court,
legislative body, government agency or any administrative body whatsoever." should be adjudged as
unconstitutional on the grounds that: 1.) it has taken away the right of petitioners to have the bank deposit of
defendant Greg Bartelli y Northcott garnished to satisfy the judgment rendered in petitioners' favor in violation of
substantive due process guaranteed by the Constitution; 2.) it has given foreign currency depositors an undue favor
or a class privilege in violation of the equal protection clause of the Constitution; 3.) it has provided a safe haven for
criminals like the herein respondent Greg Bartelli y Northcott since criminals could escape civil liability for their
wrongful acts by merely converting their money to a foreign currency and depositing it in a foreign currency deposit
account with an authorized bank; and 4.) The Monetary Board, in issuing Section 113 of Central Bank Circular No. 960
has exceeded its delegated quasi-legislative power when it took away: a.) the plaintiffs substantive right to have the
claim sought to be enforced by the civil action secured by way of the writ of preliminary attachment as granted by
Rule 57 of the Revised Rules of Court; b.) the plaintiffs substantive right to have the judgment credit satisfied by way
of the writ of execution out of the bank deposit of the judgment debtor as granted to the judgment creditor by Rule
39 of the Revised Rules of Court, which is beyond its power to do so.

On the other hand, respondent Central Bank, in its Comment alleges that the Monetary Board in issuing Section 113
of CB Circular No. 960 did not exceed its power or authority because the subject Section is copied verbatim from a
portion of R.A. No. 6426 as amended by P.D. 1246. Hence, it was not the Monetary Board that grants exemption from
attachment or garnishment to foreign currency deposits, but the law (R.A. 6426 as amended) itself; that it does not
violate the substantive due process guaranteed by the Constitution because a.) it was based on a law; b.) the law
seems to be reasonable; c.) it is enforced according to regular methods of procedure; and d.) it applies to all
members of a class.

Expanding, the Central Bank said; that one reason for exempting the foreign currency deposits from attachment,
garnishment or any other order or process of any court, is to assure the development and speedy growth of the
Foreign Currency Deposit System and the Offshore Banking System in the Philippines; that another reason is to
encourage the inflow of foreign currency deposits into the banking institutions thereby placing such institutions
more in a position to properly channel the same to loans and investments in the Philippines, thus directly
contributing to the economic development of the country; that the subject section is being enforced according to
the regular methods of procedure; and that it applies to all foreign currency deposits made by any person and
therefore does not violate the equal protection clause of the Constitution.

Respondent Central Bank further avers that the questioned provision is needed to promote the public interest and
the general welfare; that the State cannot just stand idly by while a considerable segment of the society suffers from
economic distress; that the State had to take some measures to encourage economic development; and that in so
doing persons and property may be subjected to some kinds of restraints or burdens to secure the general welfare
or public interest. Respondent Central Bank also alleges that Rule 39 and Rule 57 of the Revised Rules of Court
provide that some properties are exempted from execution/attachment especially provided by law and R.A. No.
6426 as amended is such a law, in that it specifically provides, among others, that foreign currency deposits shall be
exempted from attachment, garnishment, or any other order or process of any court, legislative body, government
agency or any administrative body whatsoever.

For its part, respondent China Banking Corporation, aside from giving reasons similar to that of respondent Central
Bank, also stated that respondent China Bank is not unmindful of the inhuman sufferings experienced by the minor
Karen E. Salvacion from the beastly hands of Greg Bartelli; that it is only too willing to release the dollar deposit of
Bartelli which may perhaps partly mitigate the sufferings petitioner has undergone; but it is restrained from doing so
in view of R.A. No. 6426 and Section 113 of Central Bank Circular No. 960; and that despite the harsh effect of these
laws on petitioners, CBC has no other alternative but to follow the same.

This Court finds the petition to be partly meritorious.

40
Petitioner deserves to receive the damages awarded to her by the court. But this petition for declaratory relief can
only be entertained and treated as a petition for mandamus to require respondents to honor and comply with the
writ of execution in Civil Case No. 89-3214.

This Court has no original and exclusive jurisdiction over a petition for declaratory relief.  2 However, exceptions to
this rule have been recognized. Thus, where the petition has far-reaching implications and raises questions that
should be resolved, it may be treated as one for mandamus. 3

Here is a child, a 12-year old girl, who in her belief that all Americans are good and in her gesture of kindness by
teaching his alleged niece the Filipino language as requested by the American, trustingly went with said stranger to
his apartment, and there she was raped by said American tourist Greg Bartelli. Not once, but ten times. She was
detained therein for four (4) days. This American tourist was able to escape from the jail and avoid punishment. On
the other hand, the child, having received a favorable judgment in the Civil Case for damages in the amount of more
than P1,000,000.00, which amount could alleviate the humiliation, anxiety, and besmirched reputation she had
suffered and may continue to suffer for a long, long time; and knowing that this person who had wronged her has
the money, could not, however get the award of damages because of this unreasonable law. This questioned law,
therefore makes futile the favorable judgment and award of damages that she and her parents fully deserve. As
stated by the trial court in its decision,

Indeed, after hearing the testimony of Karen, the Court believes that it was undoubtedly a
shocking and traumatic experience she had undergone which could haunt her mind for a long, long
time, the mere recall of which could make her feel so humiliated, as in fact she had been actually
humiliated once when she was refused admission at the Abad Santos High School, Arellano
University, where she sought to transfer from another school, simply because the school
authorities of the said High School learned about what happened to her and allegedly feared that
they might be implicated in the case.

xxx xxx xxx

The reason for imposing exemplary or corrective damages is due to the wanton and bestial
manner defendant had committed the acts of rape during a period of serious illegal detention of
his hapless victim, the minor Karen Salvacion whose only fault was in her being so naive and
credulous to believe easily that defendant, an American national, could not have such a bestial
desire on her nor capable of committing such a heinous crime. Being only 12 years old when that
unfortunate incident happened, she has never heard of an old Filipino adage that in every forest
there is a
snake, . . . . 4

If Karen's sad fate had happened to anybody's own kin, it would be difficult for him to fathom how the incentive for
foreign currency deposit could be more important than his child's rights to said award of damages; in this case, the
victim's claim for damages from this alien who had the gall to wrong a child of tender years of a country where he is
a mere visitor. This further illustrates the flaw in the questioned provisions.

It is worth mentioning that R.A. No. 6426 was enacted in 1983 or at a time when the country's economy was in a
shambles; when foreign investments were minimal and presumably, this was the reason why said statute was
enacted. But the realities of the present times show that the country has recovered economically; and even if not,
the questioned law still denies those entitled to due process of law for being unreasonable and oppressive. The
intention of the questioned law may be good when enacted. The law failed to anticipate the iniquitous effects
producing outright injustice and inequality such as the case before us.

It has thus been said that —

But I also know, 5 that laws and institutions must go hand in hand with the progress of the human
mind. As that becomes more developed, more enlightened, as new discoveries are made, new

41
 truths are disclosed and manners and opinions change with the change of circumstances,
institutions must advance also, and keep pace with the times. . . We might as well require a man to
wear still the coat which fitted him when a boy, as civilized society to remain ever under the
regimen of their barbarous ancestors.

In his Comment, the Solicitor General correctly opined, thus:

The present petition has far-reaching implications on the right of a national to obtain redress for a
wrong committed by an alien who takes refuge under a law and regulation promulgated for a
purpose which does not contemplate the application thereof envisaged by the alien. More
specifically, the petition raises the question whether the protection against attachment,
garnishment or other court process accorded to foreign currency deposits by PD No. 1246 and CB
Circular No. 960 applies when the deposit does not come from a lender or investor but from a
mere transient or tourist who is not expected to maintain the deposit in the bank for long.

The resolution of this question is important for the protection of nationals who are victimized in
the forum by foreigners who are merely passing through.

xxx xxx xxx

. . . Respondents China Banking Corporation and Central Bank of the Philippines refused to honor
the writ of execution issued in Civil Case No. 89-3214 on the strength of the following provision of
Central Bank Circular No. 960:

Sec. 113. Exemption from attachment. — Foreign currency deposits shall be

exempt from attachment, garnishment, or any other order or process of any
court, legislative body, government agency or any administrative body
whatsoever.

Central Bank Circular No. 960 was issued pursuant to Section 7 of Republic Act No. 6426:

Sec. 7. Rules and Regulations. The Monetary Board of the Central Bank shall
promulgate such rules and regulations as may be necessary to carry out the
provisions of this Act which shall take effect after the publication of such rules
and regulations in the Official Gazette and in a newspaper of national circulation
for at least once a week for three consecutive weeks. In case the Central Bank
promulgates new rules and regulations decreasing the rights of depositors, the
rules and regulations at the time the deposit was made shall govern.

The aforecited Section 113 was copied from Section 8 of Republic Act NO. 6426, as amended by
P.D. 1246, thus:

Sec. 8. Secrecy of Foreign Currency Deposits. — All foreign currency deposits

authorized under this Act, as amended by Presidential Decree No. 1035, as well
as foreign currency deposits authorized under Presidential Decree No. 1034, are
hereby declared as and considered of an absolutely confidential nature and,
except upon the written permission of the depositor, in no instance shall such
foreign currency deposits be examined, inquired or looked into by any person,
government official, bureau or office whether judicial or administrative or
legislative or any other entity whether public or private: Provided, however, that
said foreign currency deposits shall be exempt from attachment, garnishment, or
any other order or process of any court, legislative body, government agency or
any administrative body whatsoever.

42
The purpose of PD 1246 in according protection against attachment, garnishment and other court
process to foreign currency deposits is stated in its whereases, viz.:

WHEREAS, under Republic Act No. 6426, as amended by Presidential Decree No.
1035, certain Philippine banking institutions and branches of foreign banks are
authorized to accept deposits in foreign currency;

WHEREAS, under the provisions of Presidential Decree No. 1034 authorizing the
establishment of an offshore banking system in the Philippines, offshore banking
units are also authorized to receive foreign currency deposits in certain cases;

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

Foreign Currency Deposit System and the Offshore Banking System in the
Philippines, certain incentives were provided for under the two Systems such as
confidentiality of deposits subject to certain exceptions and tax exemptions on
the interest income of depositors who are nonresidents and are not engaged in
trade or business in the Philippines;

WHEREAS, making absolute the protective cloak of confidentiality over such

foreign currency deposits, exempting such deposits from tax, and guaranteeing
the vested rights of depositors would better encourage the inflow of foreign
currency deposits into the banking institutions authorized to accept such
deposits in the Philippines thereby placing such institutions more in a position to
properly channel the same to loans and investments in the Philippines, thus
directly contributing to the economic development of the country;

Thus, one of the principal purposes of the protection accorded to foreign currency deposits is "to
assure the development and speedy growth of the Foreign Currency Deposit system and the
Offshore Banking in the Philippines" (3rd Whereas).

The Offshore Banking System was established by PD No. 1034. In turn, the purposes of PD No. 1034
are as follows:

WHEREAS, conditions conducive to the establishment of an offshore banking

system, such as political stability, a growing economy and adequate
communication facilities, among others, exist in the Philippines;

WHEREAS, it is in the interest of developing countries to have as wide access as

possible to the sources of capital funds for economic development;

WHEREAS, an offshore banking system based in the Philippines will be

advantageous and beneficial to the country by increasing our links with foreign
lenders, facilitating the flow of desired investments into the Philippines, creating
employment opportunities and expertise in international finance, and
contributing to the national development effort.

WHEREAS, the geographical location, physical and human resources, and other
positive factors provide the Philippines with the clear potential to develop as
another financial center in Asia;

On the other hand, the Foreign Currency Deposit system was created by PD. No. 1035. Its purposes
are as follows:

43
 WHEREAS, the establishment of an offshore banking system in the Philippines
has been authorized under a separate decree;

WHEREAS, a number of local commercial banks, as depository bank under the

Foreign Currency Deposit Act (RA No. 6426), have the resources and managerial
competence to more actively engage in foreign exchange transactions and
participate in the grant of foreign currency loans to resident corporations and
firms;

WHEREAS, it is timely to expand the foreign currency lending authority of the

said depository banks under RA 6426 and apply to their transactions the same
taxes as would be applicable to transaction of the proposed offshore banking
units;

It is evident from the above [Whereas clauses] that the Offshore Banking System and the Foreign
Currency Deposit System were designed to draw deposits from foreign lenders and investors (Vide
second Whereas of PD No. 1034; third Whereas of PD No. 1035). It is these deposits that are
induced by the two laws and given protection and incentives by them.

Obviously, the foreign currency deposit made by a transient or a tourist is not the kind of deposit
encouraged by PD Nos. 1034 and 1035 and given incentives and protection by said laws because
such depositor stays only for a few days in the country and, therefore, will maintain his deposit in
the bank only for a short time.

Respondent Greg Bartelli, as stated, is just a tourist or a transient. He deposited his dollars with
respondent China Banking Corporation only for safekeeping during his temporary stay in the
Philippines.

For the reasons stated above, the Solicitor General thus submits that the dollar deposit of
respondent Greg Bartelli is not entitled to the protection of Section 113 of Central Bank Circular No.
960 and PD No. 1246 against attachment, garnishment or other court processes.  6

In fine, the application of the law depends on the extent of its justice. Eventually, if we rule that the questioned
Section 113 of Central Bank Circular No. 960 which exempts from attachment, garnishment, or any other order or
process of any court, legislative body, government agency or any administrative body whatsoever, is applicable to a
foreign transient, injustice would result especially to a citizen aggrieved by a foreign guest like accused Greg Bartelli.
This would negate Article 10 of the New Civil Code which provides that "in case of doubt in the interpretation or
application of laws, it is presumed that the lawmaking body intended right and justice to prevail. " Ninguno non deue
enriquecerse tortizeramente con dano de otro." Simply stated, when the statute is silent or ambiguous, this is one of
those fundamental solutions that would respond to the vehement urge of conscience. (Padilla vs. Padilla, 74 Phil.
377).

It would be unthinkable, that the questioned Section 113 of Central Bank No. 960 would be used as a device by
accused Greg Bartelli for wrongdoing, and in so doing, acquitting the guilty at the expense of the innocent.

Call it what it may — but is there no conflict of legal policy here? Dollar against Peso? Upholding the final and
executory judgment of the lower court against the Central Bank Circular protecting the foreign depositor? Shielding
or protecting the dollar deposit of a transient alien depositor against injustice to a national and victim of a crime? This
situation calls for fairness against legal tyranny.

We definitely cannot have both ways and rest in the belief that we have served the ends of justice.

44
IN VIEW WHEREOF, the provisions of Section 113 of CB Circular No. 960 and PD No. 1246, insofar as it amends Section
8 of R.A. No. 6426 are hereby held to be INAPPLICABLE to this case because of its peculiar circumstances.
Respondents are hereby REQUIRED to COMPLY with the writ of execution issued in Civil Case No. 89-3214, "Karen
Salvacion, et al. vs. Greg Bartelli y Northcott, by Branch CXLIV, RTC Makati and to RELEASE to petitioners the dollar
deposit of respondent Greg Bartelli y Northcott in such amount as would satisfy the judgment.

G.R. No. 168332               June 19, 2009

ANA MARIA A. KORUGA, Petitioner, 

vs.
TEODORO O. ARCENAS, JR., ALBERT C. AGUIRRE, CESAR S. PAGUIO, FRANCISCO A. RIVERA, and THE HONORABLE
COURT OF APPEALS, THIRD DIVISION, Respondents.

x - - - - - - - - - - - - - - - - - - - - - - -x

G.R. No. 169053               June 19, 2009

TEODORO O. ARCENAS, JR., ALBERT C. AGUIRRE, CESAR S. PAGUIO, and FRANCISCO A. RIVERA,Petitioners, 
vs.
HON. SIXTO MARELLA, JR., Presiding Judge, Branch 138, Regional Trial Court of Makati City, and ANA MARIA A.
KORUGA, Respondents.

DECISION

NACHURA, J.:

Before this Court are two petitions that originated from a Complaint filed by Ana Maria A. Koruga (Koruga) before
the Regional Trial Court (RTC) of Makati City against the Board of Directors of Banco Filipino and the Members of the
Monetary Board of the Bangko Sentral ng Pilipinas (BSP) for violation of the Corporation Code, for inspection of
records of a corporation by a stockholder, for receivership, and for the creation of a management committee.

G.R. No. 168332

The first is a Petition for Certiorari under Rule 65 of the Rules of Court, docketed as G.R. No. 168332, praying for the
annulment of the Court of Appeals (CA) Resolution 1 in CA-G.R. SP No. 88422 dated April 18, 2005 granting the prayer
for a Writ of Preliminary Injunction of therein petitioners Teodoro O. Arcenas, Jr., Albert C. Aguirre, Cesar S. Paguio,
and Francisco A. Rivera (Arcenas, et al.).

Koruga is a minority stockholder of Banco Filipino Savings and Mortgage Bank. On August 20, 2003, she filed a
complaint before the Makati RTC which was raffled to Branch 138, presided over by Judge Sixto Marella, Jr. 2Koruga’s
complaint alleged:

10. 1 Violation of Sections 31 to 34 of the Corporation Code ("Code") which prohibit self-dealing and conflicts of
interest of directors and officers, thus:

45
 (a) For engaging in unsafe, unsound, and fraudulent banking practices that have jeopardized the welfare of
the Bank, its shareholders, who includes among others, the Petitioner, and depositors. (sic)

(b) For granting and approving loans and/or "loaned" sums of money to six (6) "dummy" borrower
corporations ("Borrower Corporations") which, at the time of loan approval, had no financial capacity to
justify the loans. (sic)

(c) For approving and accepting a dacion en pago, or payment of loans with property instead of cash,
resulting to a diminished future cumulative interest income by the Bank and a decline in its liquidity position.
(sic)

(d) For knowingly giving "favorable treatment" to the Borrower Corporations in which some or most of
them have interests, i.e. interlocking directors/officers thereof, interlocking ownerships. (sic)

(e) For employing their respective offices and functions as the Bank’s officers and directors, or omitting to
perform their functions and duties, with negligence, unfaithfulness or abuse of confidence of fiduciary duty,
misappropriated or misapplied or ratified by inaction the misappropriation or misappropriations, of (sic)
almost P1.6 Billion Pesos (sic) constituting the Bank’s funds placed under their trust and administration, by
unlawfully releasing loans to the Borrower Corporations or refusing or failing to impugn these, knowing
before the loans were released or thereafter that the Bank’s cash resources would be dissipated thereby, to
the prejudice of the Petitioner, other Banco Filipino depositors, and the public.

10.2 Right of a stockholder to inspect the records of a corporation (including financial statements) under Sections 74
and 75 of the Code, as implemented by the Interim Rules;

(a) Unlawful refusal to allow the Petitioner from inspecting or otherwise accessing the corporate records of the bank
despite repeated demand in writing, where she is a stockholder. (sic)

10.3 Receivership and Creation of a Management Committee pursuant to:

(a) Rule 59 of the 1997 Rules of Civil Procedure ("Rules");

(b) Section 5.2 of R.A. No. 8799;

(c) Rule 1, Section 1(a)(1) of the Interim Rules;

(d) Rule 1, Section 1(a)(2) of the Interim Rules;

(e) Rule 7 of the Interim Rules;

(f) Rule 9 of the Interim Rules; and

(g) The General Banking Law of 2000 and the New Central Bank Act. 3

On September 12, 2003, Arcenas, et al. filed their Answer raising, among others, the trial court’s lack of jurisdiction to
take cognizance of the case. They also filed a Manifestation and Motion seeking the dismissal of the case on the
following grounds: (a) lack of jurisdiction over the subject matter; (b) lack of jurisdiction over the persons of the
defendants; (c) forum-shopping; and (d) for being a nuisance/harassment suit. They then moved that the trial court
rule on their affirmative defenses, dismiss the intra-corporate case, and set the case for preliminary hearing.

In an Order dated October 18, 2004, the trial court denied the Manifestation and Motion, ruling thus:

46
The result of the procedure sought by defendants Arcenas, et al. (sic) is for the Court to conduct a preliminary
hearing on the affirmative defenses raised by them in their Answer. This [is] proscribed by the Interim Rules of
Procedure on Intracorporate (sic) Controversies because when a preliminary hearing is conducted it is "as if a Motion
to Dismiss was filed" (Rule 16, Section 6, 1997 Rules of Civil Procedure). A Motion to Dismiss is a prohibited pleading
under the Interim Rules, for which reason, no favorable consideration can be given to the Manifestation and Motion
of defendants, Arcenas, et al.

The Court finds no merit to (sic) the claim that the instant case is a nuisance or harassment suit.

WHEREFORE, the Court defers resolution of the affirmative defenses raised by the defendants Arcenas, et al. 4

Arcenas, et al. moved for reconsideration 5 but, on January 18, 2005, the RTC denied the motion. 6 This prompted
Arcenas, et al. to file before the CA a Petition for Certiorari and Prohibition under Rule 65 of the Rules of Court with a
prayer for the issuance of a writ of preliminary injunction and a temporary retraining order (TRO). 7

On February 9, 2005, the CA issued a 60-day TRO enjoining Judge Marella from conducting further proceedings in the
case.8

On February 22, 2005, the RTC issued a Notice of Pre-trial 9 setting the case for pre-trial on June 2 and 9, 2005.
Arcenas, et al. filed a Manifestation and Motion 10 before the CA, reiterating their application for a writ of preliminary
injunction. Thus, on April 18, 2005, the CA issued the assailed Resolution, which reads in part:

(C)onsidering that the Temporary Restraining Order issued by this Court on February 9, 2005 expired on April 10,
2005, it is necessary that a writ of preliminary injunction be issued in order not to render ineffectual whatever final
resolution this Court may render in this case, after the petitioners shall have posted a bond in the amount of FIVE
HUNDRED THOUSAND (P500,000.00) PESOS.

SO ORDERED.11

Dissatisfied, Koruga filed this Petition for Certiorari under Rule 65 of the Rules of Court. Koruga alleged that the CA
effectively gave due course to Arcenas, et al.’s petition when it issued a writ of preliminary injunction without factual
or legal basis, either in the April 18, 2005 Resolution itself or in the records of the case. She prayed that this Court
restrain the CA from implementing the writ of preliminary injunction and, after due proceedings, make the injunction
against the assailed CA Resolution permanent.12

In their Comment, Arcenas, et al. raised several procedural and substantive issues. They alleged that the Verification
and Certification against Forum-Shopping attached to the Petition was not executed in the manner prescribed by
Philippine law since, as admitted by Koruga’s counsel himself, the same was only a facsimile.

They also averred that Koruga had admitted in the Petition that she never asked for reconsideration of the CA’s April
18, 2005 Resolution, contending that the Petition did not raise pure questions of law as to constitute an exception to
the requirement of filing a Motion for Reconsideration before a Petition for Certiorari is filed.

They, likewise, alleged that the Petition may have already been rendered moot and academic by the July 20, 2005 CA
Decision,13 which denied their Petition, and held that the RTC did not commit grave abuse of discretion in issuing the
assailed orders, and thus ordered the RTC to proceed with the trial of the case.

Meanwhile, on March 13, 2006, this Court issued a Resolution granting the prayer for a TRO and enjoining the
Presiding Judge of Makati RTC, Branch 138, from proceeding with the hearing of the case upon the filing by Arcenas,
et al. of a P50,000.00 bond. Koruga filed a motion to lift the TRO, which this Court denied on July 5, 2006.

On the other hand, respondents Dr. Conrado P. Banzon and Gen. Ramon Montaño also filed their Comment on
Koruga’s Petition, raising substantially the same arguments as Arcenas, et al.

47
G.R. No. 169053

G.R. No. 169053 is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, with prayer for the issuance
of a TRO and a writ of preliminary injunction filed by Arcenas, et al.

In their Petition, Arcenas, et al. asked the Court to set aside the Decision 14 dated July 20, 2005 of the CA in CA-G.R. SP
No. 88422, which denied their petition, having found no grave abuse of discretion on the part of the Makati RTC. The
CA said that the RTC Orders were interlocutory in nature and, thus, may be assailed by certiorari or prohibition only
when it is shown that the court acted without or in excess of jurisdiction or with grave abuse of discretion. It added
that the Supreme Court frowns upon resort to remedial measures against interlocutory orders.

Arcenas, et al. anchored their prayer on the following grounds: that, in their Answer before the RTC, they had raised
the issue of failure of the court to acquire jurisdiction over them due to improper service of summons; that the
Koruga action is a nuisance or harassment suit; that there is another case involving the same parties for the same
cause pending before the Monetary Board of the BSP, and this constituted forum-shopping; and that jurisdiction
over the subject matter of the case is vested by law in the BSP. 15

Arcenas, et al. assign the following errors:

I. THE COURT OF APPEALS, IN "FINDING NO GRAVE ABUSE OF DISCRETION COMMITTED BY PUBLIC RESPONDENT
REGIONAL TRIAL COURT OF MAKATI, BRANCH 138, IN ISSUING THE ASSAILED ORDERS," FAILED TO CONSIDER AND
MERELY GLOSSED OVER THE MORE TRANSCENDENT ISSUES OF THE LACK OF JURISDICTION ON THE PART OF SAID
PUBLIC RESPONDENT OVER THE SUBJECT MATTER OF THE CASE BEFORE IT, LITIS PENDENTIA AND FORUM
SHOPPING, AND THE CASE BELOW BEING A NUISANCE OR HARASSMENT SUIT, EITHER ONE AND ALL OF WHICH
GOES/GO TO RENDER THE ISSUANCE BY PUBLIC RESPONDENT OF THE ASSAILED ORDERS A GRAVE ABUSE OF
DISCRETION.

II. THE FINDING OF THE COURT OF APPEALS OF "NO GRAVE ABUSE OF DISCRETION COMMITTED BY PUBLIC
RESPONDENT REGIONAL TRIAL COURT OF MAKATI, BRANCH 138, IN ISSUING THE ASSAILED ORDERS," IS NOT IN
ACCORD WITH LAW OR WITH THE APPLICABLE DECISIONS OF THIS HONORABLE COURT. 16

Meanwhile, in a Manifestation and Motion filed on August 31, 2005, Koruga prayed for, among others, the
consolidation of her Petition with the Petition for Review on Certiorari under Rule 45 filed by Arcenas, et al.,
docketed as G.R. No. 169053. The motion was granted by this Court in a Resolution dated September 26, 2005.

Our Ruling

Initially, we will discuss the procedural issue.

Arcenas, et al. argue that Koruga’s petition should be dismissed for its defective Verification and Certification Against
Forum-Shopping, since only a facsimile of the same was attached to the Petition. They also claim that the Verification
and Certification Against Forum-Shopping, allegedly executed in Seattle, Washington, was not authenticated in the
manner prescribed by Philippine law and not certified by the Philippine Consulate in the United States.

This contention deserves scant consideration.

On the last page of the Petition in G.R. No. 168332, Koruga’s counsel executed an Undertaking, which reads as
follows:

In view of that fact that the Petitioner is currently in the United States, undersigned counsel is attaching a facsimile
copy of the Verification and Certification Against Forum-Shopping duly signed by the Petitioner and notarized by
Stephanie N. Goggin, a Notary Public for the Sate (sic) of Washington. Upon arrival of the original copy of the

48
Verification and Certification as certified by the Office of the Philippine Consul, the undersigned counsel shall
immediately provide duplicate copies thereof to the Honorable Court. 17

Thus, in a Compliance18 filed with the Court on September 5, 2005, petitioner submitted the original copy of the duly
notarized and authenticated Verification and Certification Against Forum-Shopping she had executed. 19 This Court
noted and considered the Compliance satisfactory in its Resolution dated November 16, 2005. There is, therefore, no
need to further belabor this issue.

We now discuss the substantive issues in this case.

First, we resolve the prayer to nullify the CA’s April 18, 2005 Resolution.

We hold that the Petition in G.R. No. 168332 has become moot and academic. The writ of preliminary injunction being
questioned had effectively been dissolved by the CA’s July 20, 2005 Decision. The dispositive portion of the Decision
reads in part:

The case is REMANDED to the court a quo for further proceedings and to resolve with deliberate dispatch the intra-
corporate controversies and determine whether there was actually a valid service of summons. If, after hearing, such
service is found to have been improper, then new summons should be served forthwith. 20

Accordingly, there is no necessity to restrain the implementation of the writ of preliminary injunction issued by the
CA on April 18, 2005, since it no longer exists.

However, this Court finds that the CA erred in upholding the jurisdiction of, and remanding the case to, the RTC.

The resolution of these petitions rests mainly on the determination of one fundamental issue: Which body has
jurisdiction over the Koruga Complaint, the RTC or the BSP?

We hold that it is the BSP that has jurisdiction over the case.

A reexamination of the Complaint is in order.

Koruga’s Complaint charged defendants with violation of Sections 31 to 34 of the Corporation Code, prohibiting self-
dealing and conflict of interest of directors and officers; invoked her right to inspect the corporation’s records under
Sections 74 and 75 of the Corporation Code; and prayed for Receivership and Creation of a Management Committee,
pursuant to Rule 59 of the Rules of Civil Procedure, the Securities Regulation Code, the Interim Rules of Procedure
Governing Intra-Corporate Controversies, the General Banking Law of 2000, and the New Central Bank Act. She
accused the directors and officers of Banco Filipino of engaging in unsafe, unsound, and fraudulent banking
practices, more particularly, acts that violate the prohibition on self-dealing.

It is clear that the acts complained of pertain to the conduct of Banco Filipino’s banking business. A bank, as defined
in the General Banking Law,21 refers to an entity engaged in the lending of funds obtained in the form of
deposits.22 The banking business is properly subject to reasonable regulation under the police power of the state
because of its nature and relation to the fiscal affairs of the people and the revenues of the state. Banks are affected
with public interest because they receive funds from the general public in the form of deposits. It is the
Government’s responsibility to see to it that the financial interests of those who deal with banks and banking
institutions, as depositors or otherwise, are protected. In this country, that task is delegated to the BSP, which
pursuant to its Charter, is authorized to administer the monetary, banking, and credit system of the Philippines. It is
further authorized to take the necessary steps against any banking institution if its continued operation would cause
prejudice to its depositors, creditors and the general public as well. 23

The law vests in the BSP the supervision over operations and activities of banks. The New Central Bank Act provides:

49
Section 25. Supervision and Examination. - The Bangko Sentral shall have supervision over, and conduct periodic or
special examinations of, banking institutions and quasi-banks, including their subsidiaries and affiliates engaged in
allied activities.24

Specifically, the BSP’s supervisory and regulatory powers include:

4.1 The issuance of rules of conduct or the establishment of standards of operation for uniform application
to all institutions or functions covered, taking into consideration the distinctive character of the operations
of institutions and the substantive similarities of specific functions to which such rules, modes or standards
are to be applied;

4.2 The conduct of examination to determine compliance with laws and regulations if the circumstances
so warrant as determined by the Monetary Board;

4.3 Overseeing to ascertain that laws and Regulations are complied with;

4.4 Regular investigation which shall not be oftener than once a year from the last date of examination to
determine whether an institution is conducting its business on a safe or sound basis: Provided, That the
deficiencies/irregularities found by or discovered by an audit shall be immediately addressed;

4.5 Inquiring into the solvency and liquidity of the institution (2-D); or

4.6 Enforcing prompt corrective action.25

Koruga alleges that "the dispute in the trial court involves the manner with which the Directors’ (sic) have handled
the Bank’s affairs, specifically the fraudulent loans and dacion en pago authorized by the Directors in favor of several
dummy corporations known to have close ties and are indirectly controlled by the Directors." 26 Her allegations, then,
call for the examination of the allegedly questionable loans. Whether these loans are covered by the prohibition on
self-dealing is a matter for the BSP to determine. These are not ordinary intra-corporate matters; rather, they involve
banking activities which are, by law, regulated and supervised by the BSP. As the Court has previously held:

It is well-settled in both law and jurisprudence that the Central Monetary Authority, through the Monetary Board, is
vested with exclusive authority to assess, evaluate and determine the condition of any bank, and finding such
condition to be one of insolvency, or that its continuance in business would involve a probable loss to its depositors
or creditors, forbid bank or non-bank financial institution to do business in the Philippines; and shall designate an
official of the BSP or other competent person as receiver to immediately take charge of its assets and liabilities. 27

Correlatively, the General Banking Law of 2000 specifically deals with loans contracted by bank directors or officers,
thus:

SECTION 36. Restriction on Bank Exposure to Directors, Officers, Stockholders and Their Related Interests. — No
director or officer of any bank shall, directly or indirectly, for himself or as the representative or agent of others,
borrow from such bank nor shall he become a guarantor, indorser or surety for loans from such bank to others, or in
any manner be an obligor or incur any contractual liability to the bank except with the written approval of the
majority of all the directors of the bank, excluding the director concerned: Provided, That such written approval shall
not be required for loans, other credit accommodations and advances granted to officers under a fringe benefit plan
approved by the Bangko Sentral. The required approval shall be entered upon the records of the bank and a copy of
such entry shall be transmitted forthwith to the appropriate supervising and examining department of the Bangko
Sentral.

Dealings of a bank with any of its directors, officers or stockholders and their related interests shall be upon terms
not less favorable to the bank than those offered to others.

50
After due notice to the board of directors of the bank, the office of any bank director or officer who violates the
provisions of this Section may be declared vacant and the director or officer shall be subject to the penal provisions
of the New Central Bank Act.

The Monetary Board may regulate the amount of loans, credit accommodations and guarantees that may be
extended, directly or indirectly, by a bank to its directors, officers, stockholders and their related interests, as well as
investments of such bank in enterprises owned or controlled by said directors, officers, stockholders and their
related interests. However, the outstanding loans, credit accommodations and guarantees which a bank may extend
to each of its stockholders, directors, or officers and their related interests, shall be limited to an amount equivalent
to their respective unencumbered deposits and book value of their paid-in capital contribution in the bank: Provided,
however, That loans, credit accommodations and guarantees secured by assets considered as non-risk by the
Monetary Board shall be excluded from such limit: Provided, further, That loans, credit accommodations and
advances to officers in the form of fringe benefits granted in accordance with rules as may be prescribed by the
Monetary Board shall not be subject to the individual limit.

The Monetary Board shall define the term "related interests."

The limit on loans, credit accommodations and guarantees prescribed herein shall not apply to loans, credit
accommodations and guarantees extended by a cooperative bank to its cooperative shareholders. 28

Furthermore, the authority to determine whether a bank is conducting business in an unsafe or unsound manner is
also vested in the Monetary Board. The General Banking Law of 2000 provides:

SECTION 56. Conducting Business in an Unsafe or Unsound Manner. — In determining whether a particular act or
omission, which is not otherwise prohibited by any law, rule or regulation affecting banks, quasi-banks or trust
entities, may be deemed as conducting business in an unsafe or unsound manner for purposes of this Section, the
Monetary Board shall consider any of the following circumstances:

56.1. The act or omission has resulted or may result in material loss or damage, or abnormal risk or danger to the
safety, stability, liquidity or solvency of the institution;

56.2. The act or omission has resulted or may result in material loss or damage or abnormal risk to the institution's
depositors, creditors, investors, stockholders or to the Bangko Sentral or to the public in general;

56.3. The act or omission has caused any undue injury, or has given any unwarranted benefits, advantage or
preference to the bank or any party in the discharge by the director or officer of his duties and responsibilities
through manifest partiality, evident bad faith or gross inexcusable negligence; or

56.4. The act or omission involves entering into any contract or transaction manifestly and grossly disadvantageous
to the bank, quasi-bank or trust entity, whether or not the director or officer profited or will profit thereby.

Whenever a bank, quasi-bank or trust entity persists in conducting its business in an unsafe or unsound manner, the
Monetary Board may, without prejudice to the administrative sanctions provided in Section 37 of the New Central
Bank Act, take action under Section 30 of the same Act and/or immediately exclude the erring bank from clearing,
the provisions of law to the contrary notwithstanding.

Finally, the New Central Bank Act grants the Monetary Board the power to impose administrative sanctions on the
erring bank:

Section 37. Administrative Sanctions on Banks and Quasi-banks. - Without prejudice to the criminal sanctions against
the culpable persons provided in Sections 34, 35, and 36 of this Act, the Monetary Board may, at its discretion,
impose upon any bank or quasi-bank, their directors and/or officers, for any willful violation of its charter or by-laws,
willful delay in the submission of reports or publications thereof as required by law, rules and regulations; any refusal

51
to permit examination into the affairs of the institution; any willful making of a false or misleading statement to the
Board or the appropriate supervising and examining department or its examiners; any willful failure or refusal to
comply with, or violation of, any banking law or any order, instruction or regulation issued by the Monetary Board, or
any order, instruction or ruling by the Governor; or any commission of irregularities, and/or conducting business in an
unsafe or unsound manner as may be determined by the Monetary Board, the following administrative sanctions,
whenever applicable:

(a) fines in amounts as may be determined by the Monetary Board to be appropriate, but in no case to
exceed Thirty thousand pesos (P30,000) a day for each violation, taking into consideration the attendant
circumstances, such as the nature and gravity of the violation or irregularity and the size of the bank or
quasi-bank;

(b) suspension of rediscounting privileges or access to Bangko Sentral credit facilities;

(c) suspension of lending or foreign exchange operations or authority to accept new deposits or make new
investments;

(d) suspension of interbank clearing privileges; and/or

(e) revocation of quasi-banking license.

Resignation or termination from office shall not exempt such director or officer from administrative or criminal
sanctions.

The Monetary Board may, whenever warranted by circumstances, preventively suspend any director or officer of a
bank or quasi-bank pending an investigation: Provided, That should the case be not finally decided by the Bangko
Sentral within a period of one hundred twenty (120) days after the date of suspension, said director or officer shall be
reinstated in his position: Provided, further, That when the delay in the disposition of the case is due to the fault,
negligence or petition of the director or officer, the period of delay shall not be counted in computing the period of
suspension herein provided.

The above administrative sanctions need not be applied in the order of their severity.

Whether or not there is an administrative proceeding, if the institution and/or the directors and/or officers concerned
continue with or otherwise persist in the commission of the indicated practice or violation, the Monetary Board may
issue an order requiring the institution and/or the directors and/or officers concerned to cease and desist from the
indicated practice or violation, and may further order that immediate action be taken to correct the conditions
resulting from such practice or violation. The cease and desist order shall be immediately effective upon service on
the respondents.

The respondents shall be afforded an opportunity to defend their action in a hearing before the Monetary Board or
any committee chaired by any Monetary Board member created for the purpose, upon request made by the
respondents within five (5) days from their receipt of the order. If no such hearing is requested within said period,
the order shall be final. If a hearing is conducted, all issues shall be determined on the basis of records, after which
the Monetary Board may either reconsider or make final its order.

The Governor is hereby authorized, at his discretion, to impose upon banking institutions, for any failure to comply
with the requirements of law, Monetary Board regulations and policies, and/or instructions issued by the Monetary
Board or by the Governor, fines not in excess of Ten thousand pesos (P10,000) a day for each violation, the
imposition of which shall be final and executory until reversed, modified or lifted by the Monetary Board on appeal. 29

Koruga also accused Arcenas, et al. of violation of the Corporation Code’s provisions on self-dealing and conflict of
interest. She invoked Section 31 of the Corporation Code, which defines the liability of directors, trustees, or officers

52
of a corporation for, among others, acquiring any personal or pecuniary interest in conflict with their duty as
directors or trustees, and Section 32, which prescribes the conditions under which a contract of the corporation with
one or more of its directors or trustees – the so-called "self-dealing directors" 30 – would be valid. She also alleged
that Banco Filipino’s directors violated Sections 33 and 34 in approving the loans of corporations with interlocking
ownerships, i.e., owned, directed, or managed by close associates of Albert C. Aguirre.

Sections 31 to 34 of the Corporation Code provide:

Section 31. Liability of directors, trustees or officers. - Directors or trustees who wilfully and knowingly vote for or
assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the
affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors or
trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its
stockholders or members and other persons.

When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any interest adverse to
the corporation in respect of any matter which has been reposed in him in confidence, as to which equity imposes a
disability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for
the profits which otherwise would have accrued to the corporation.

Section 32. Dealings of directors, trustees or officers with the corporation. - A contract of the corporation with one or
more of its directors or trustees or officers is voidable, at the option of such corporation, unless all the following
conditions are present:

1. That the presence of such director or trustee in the board meeting in which the contract was approved
was not necessary to constitute a quorum for such meeting;

2. That the vote of such director or trustee was not necessary for the approval of the contract;

3. That the contract is fair and reasonable under the circumstances; and

4. That in case of an officer, the contract has been previously authorized by the board of directors.

Where any of the first two conditions set forth in the preceding paragraph is absent, in the case of a contract with a
director or trustee, such contract may be ratified by the vote of the stockholders representing at least two-thirds
(2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the members in a meeting called for the
purpose: Provided, That full disclosure of the adverse interest of the directors or trustees involved is made at such
meeting: Provided, however, That the contract is fair and reasonable under the circumstances.

Section 33. Contracts between corporations with interlocking directors. - Except in cases of fraud, and provided the
contract is fair and reasonable under the circumstances, a contract between two or more corporations having
interlocking directors shall not be invalidated on that ground alone: Provided, That if the interest of the interlocking
director in one corporation is substantial and his interest in the other corporation or corporations is merely nominal,
he shall be subject to the provisions of the preceding section insofar as the latter corporation or corporations are
concerned.

Stockholdings exceeding twenty (20%) percent of the outstanding capital stock shall be considered substantial for
purposes of interlocking directors.

Section 34. Disloyalty of a director. - Where a director, by virtue of his office, acquires for himself a business
opportunity which should belong to the corporation, thereby obtaining profits to the prejudice of such corporation,
he must account to the latter for all such profits by refunding the same, unless his act has been ratified by a vote of
the stockholders owning or representing at least two-thirds (2/3) of the outstanding capital stock. This provision shall
be applicable, notwithstanding the fact that the director risked his own funds in the venture.

53
Koruga’s invocation of the provisions of the Corporation Code is misplaced. In an earlier case with similar
antecedents, we ruled that:

The Corporation Code, however, is a general law applying to all types of corporations, while the New Central Bank
Act regulates specifically banks and other financial institutions, including the dissolution and liquidation thereof. As
between a general and special law, the latter shall prevail – generalia specialibus non derogant. 31

Consequently, it is not the Interim Rules of Procedure on Intra-Corporate Controversies, 32 or Rule 59 of the Rules of
Civil Procedure on Receivership, that would apply to this case. Instead, Sections 29 and 30 of the New Central Bank
Act should be followed, viz.:

Section 29. Appointment of Conservator. - Whenever, on the basis of a report submitted by the appropriate
supervising or examining department, the Monetary Board finds that a bank or a quasi-bank is in a state of
continuing inability or unwillingness to maintain a condition of liquidity deemed adequate to protect the interest of
depositors and creditors, the Monetary Board may appoint a conservator with such powers as the Monetary Board
shall deem necessary to take charge of the assets, liabilities, and the management thereof, reorganize the
management, collect all monies and debts due said institution, and exercise all powers necessary to restore its
viability. The conservator shall report and be responsible to the Monetary Board and shall have the power to
overrule or revoke the actions of the previous management and board of directors of the bank or quasi-bank.

xxxx

The Monetary Board shall terminate the conservatorship when it is satisfied that the institution can continue to
operate on its own and the conservatorship is no longer necessary. The conservatorship shall likewise be terminated
should the Monetary Board, on the basis of the report of the conservator or of its own findings, determine that the
continuance in business of the institution would involve probable loss to its depositors or creditors, in which case the
provisions of Section 30 shall apply.

Section 30. Proceedings in Receivership and Liquidation. - Whenever, upon report of the head of the supervising or
examining department, the Monetary Board finds that a bank or quasi-bank:

(a) is unable to pay its liabilities as they become due in the ordinary course of business: Provided, That this
shall not include inability to pay caused by extraordinary demands induced by financial panic in the banking
community;

(b) has insufficient realizable assets, as determined by the Bangko Sentral, to meet its liabilities; or

(c) cannot continue in business without involving probable losses to its depositors or creditors; or

(d) has willfully violated a cease and desist order under Section 37 that has become final, involving acts or
transactions which amount to fraud or a dissipation of the assets of the institution; in which cases, the
Monetary Board may summarily and without need for prior hearing forbid the institution from doing
business in the Philippines and designate the Philippine Deposit Insurance Corporation as receiver of the
banking institution.

xxxx

The actions of the Monetary Board taken under this section or under Section 29 of this Act shall be final and
executory, and may not be restrained or set aside by the court except on petition for certiorari on the ground that
the action taken was in excess of jurisdiction or with such grave abuse of discretion as to amount to lack or excess of
jurisdiction. The petition for certiorari may only be filed by the stockholders of record representing the majority of
the capital stock within ten (10) days from receipt by the board of directors of the institution of the order directing
receivership, liquidation or conservatorship.

54
The designation of a conservator under Section 29 of this Act or the appointment of a receiver under this section
shall be vested exclusively with the Monetary Board. Furthermore, the designation of a conservator is not a
precondition to the designation of a receiver.33

On the strength of these provisions, it is the Monetary Board that exercises exclusive jurisdiction over proceedings
for receivership of banks.

Crystal clear in Section 30 is the provision that says the "appointment of a receiver under this section shall be vested
exclusively with the Monetary Board." The term "exclusively" connotes that only the Monetary Board can resolve
the issue of whether a bank is to be placed under receivership and, upon an affirmative finding, it also has authority
to appoint a receiver. This is further affirmed by the fact that the law allows the Monetary Board to take action
"summarily and without need for prior hearing."

And, as a clincher, the law explicitly provides that "actions of the Monetary Board taken under this section or under
Section 29 of this Act shall be final and executory, and may not be restrained or set aside by the court except on a
petition for certiorari on the ground that the action taken was in excess of jurisdiction or with such grave abuse of
discretion as to amount to lack or excess of jurisdiction."1avvphi1

From the foregoing disquisition, there is no doubt that the RTC has no jurisdiction to hear and decide a suit that
seeks to place Banco Filipino under receivership.

Koruga herself recognizes the BSP’s power over the allegedly unlawful acts of Banco Filipino’s directors. The records
of this case bear out that Koruga, through her legal counsel, wrote the Monetary Board 34 on April 21, 2003 to bring to
its attention the acts she had enumerated in her complaint before the RTC. The letter reads in part:

Banco Filipino and the current members of its Board of Directors should be placed under investigation for violations
of banking laws, the commission of irregularities, and for conducting business in an unsafe or unsound manner. They
should likewise be placed under preventive suspension by virtue of the powers granted to the Monetary Board
under Section 37 of the Central Bank Act. These blatant violations of banking laws should not go by without penalty.
They have put Banco Filipino, its depositors and stockholders, and the entire banking system (sic) in jeopardy.

xxxx

We urge you to look into the matter in your capacity as regulators. Our clients, a minority stockholders, (sic) and
many depositors of Banco Filipino are prejudiced by a failure to regulate, and taxpayers are prejudiced by
accommodations granted by the BSP to Banco Filipino35

In a letter dated May 6, 2003, BSP Supervision and Examination Department III Director Candon B. Guerrero referred
Koruga’s letter to Arcenas for comment. 36 On June 6, 2003, Banco Filipino’s then Executive Vice President and
Corporate Secretary Francisco A. Rivera submitted the bank’s comments essentially arguing that Koruga’s
accusations lacked legal and factual bases.37

On the other hand, the BSP, in its Answer before the RTC, said that it had been looking into Banco Filipino’s activities.
An October 2002 Report of Examination (ROE) prepared by the Supervision and Examination Department (SED)
noted certain dacion payments, out-of-the-ordinary expenses, among other dealings. On July 24, 2003, the Monetary
Board passed Resolution No. 1034 furnishing Banco Filipino a copy of the ROE with instructions for the bank to file its
comment or explanation within 30 to 90 days under threat of being fined or of being subjected to other remedial
actions. The ROE, the BSP said, covers substantially the same matters raised in Koruga’s complaint. At the time of the
filing of Koruga’s complaint on August 20, 2003, the period for Banco Filipino to submit its explanation had not yet
expired.38

55
Thus, the court’s jurisdiction could only have been invoked after the Monetary Board had taken action on the matter
and only on the ground that the action taken was in excess of jurisdiction or with such grave abuse of discretion as to
amount to lack or excess of jurisdiction.

Finally, there is one other reason why Koruga’s complaint before the RTC cannot prosper. Given her own admission –
and the same is likewise supported by evidence – that she is merely a minority stockholder of Banco Filipino, she
would not have the standing to question the Monetary Board’s action. Section 30 of the New Central Bank Act
provides:

The petition for certiorari may only be filed by the stockholders of record representing the majority of the capital
stock within ten (10) days from receipt by the board of directors of the institution of the order directing receivership,
liquidation or conservatorship.

All the foregoing discussion yields the inevitable conclusion that the CA erred in upholding the jurisdiction of, and
remanding the case to, the RTC. Given that the RTC does not have jurisdiction over the subject matter of the case, its
refusal to dismiss the case on that ground amounted to grave abuse of discretion.

WHEREFORE, the foregoing premises considered, the Petition in G.R. No. 168332 is DISMISSED, while the Petition in
G.R. No. 169053 is GRANTED. The Decision of the Court of Appeals dated July 20, 2005 in CA-G.R. SP No. 88422 is
hereby SET ASIDE. The Temporary Restraining Order issued by this Court on March 13, 2006 is made PERMANENT.
Consequently, Civil Case No. 03-985, pending before the Regional Trial Court of Makati City, is DISMISSED.

SO ORDERED.

G.R. No. 88013 March 19, 1990

SIMEX INTERNATIONAL (MANILA), INCORPORATED, petitioner, 

vs.
THE HONORABLE COURT OF APPEALS and TRADERS ROYAL BANK, respondents.

Don P. Porcuincula for petitioner.

San Juan, Gonzalez, San Agustin & Sinense for private respondent.

CRUZ, J.:

We are concerned in this case with the question of damages, specifically moral and exemplary damages. The
negligence of the private respondent has already been established. All we have to ascertain is whether the petitioner
is entitled to the said damages and, if so, in what amounts.

The parties agree on the basic facts. The petitioner is a private corporation engaged in the exportation of food
products. It buys these products from various local suppliers and then sells them abroad, particularly in the United
States, Canada and the Middle East. Most of its exports are purchased by the petitioner on credit.

The petitioner was a depositor of the respondent bank and maintained a checking account in its branch at Romulo
Avenue, Cubao, Quezon City. On May 25, 1981, the petitioner deposited to its account in the said bank the amount of

56
P100,000.00, thus increasing its balance as of that date to P190,380.74. 1 Subsequently, the petitioner issued several
checks against its deposit but was suprised to learn later that they had been dishonored for insufficient funds.

The dishonored checks are the following:

1. Check No. 215391 dated May 29, 1981, in favor of California Manufacturing Company, Inc. for
P16,480.00:

2. Check No. 215426 dated May 28, 1981, in favor of the Bureau of Internal Revenue in the amount
of P3,386.73:

3. Check No. 215451 dated June 4, 1981, in favor of Mr. Greg Pedreño in the amount of P7,080.00;

4. Check No. 215441 dated June 5, 1981, in favor of Malabon Longlife Trading Corporation in the
amount of P42,906.00:

5. Check No. 215474 dated June 10, 1981, in favor of Malabon Longlife Trading Corporation in the
amount of P12,953.00:

6. Check No. 215477 dated June 9, 1981, in favor of Sea-Land Services, Inc. in the amount of
P27,024.45:

7. Check No. 215412 dated June 10, 1981, in favor of Baguio Country Club Corporation in the amount
of P4,385.02: and

8. Check No. 215480 dated June 9, 1981, in favor of Enriqueta Bayla in the amount of P6,275.00. 2

As a consequence, the California Manufacturing Corporation sent on June 9, 1981, a letter of demand to the
petitioner, threatening prosecution if the dishonored check issued to it was not made good. It also withheld delivery
of the order made by the petitioner. Similar letters were sent to the petitioner by the Malabon Long Life Trading, on
June 15, 1981, and by the G. and U. Enterprises, on June 10, 1981. Malabon also canceled the petitioner's credit line
and demanded that future payments be made by it in cash or certified check. Meantime, action on the pending
orders of the petitioner with the other suppliers whose checks were dishonored was also deferred.

The petitioner complained to the respondent bank on June 10, 1981. 3 Investigation disclosed that the sum of
P100,000.00 deposited by the petitioner on May 25, 1981, had not been credited to it. The error was rectified on June
17, 1981, and the dishonored checks were paid after they were re-deposited. 4

In its letter dated June 20, 1981, the petitioner demanded reparation from the respondent bank for its "gross and
wanton negligence." This demand was not met. The petitioner then filed a complaint in the then Court of First
Instance of Rizal claiming from the private respondent moral damages in the sum of P1,000,000.00 and exemplary
damages in the sum of P500,000.00, plus 25% attorney's fees, and costs.

After trial, Judge Johnico G. Serquinia rendered judgment holding that moral and exemplary damages were not
called for under the circumstances. However, observing that the plaintiff's right had been violated, he ordered the
defendant to pay nominal damages in the amount of P20,000.00 plus P5,000.00 attorney's fees and costs. 5 This
decision was affirmed in toto by the respondent court. 6

The respondent court found with the trial court that the private respondent was guilty of negligence but agreed that
the petitioner was nevertheless not entitled to moral damages. It said:

57
 The essential ingredient of moral damages is proof of bad faith (De Aparicio vs. Parogurga, 150
SCRA 280). Indeed, there was the omission by the defendant-appellee bank to credit appellant's
deposit of P100,000.00 on May 25, 1981. But the bank rectified its records. It credited the said
amount in favor of plaintiff-appellant in less than a month. The dishonored checks were eventually
paid. These circumstances negate any imputation or insinuation of malicious, fraudulent, wanton
and gross bad faith and negligence on the part of the defendant-appellant.

It is this ruling that is faulted in the petition now before us.

This Court has carefully examined the facts of this case and finds that it cannot share some of the conclusions of the
lower courts. It seems to us that the negligence of the private respondent had been brushed off rather lightly as if it
were a minor infraction requiring no more than a slap on the wrist. We feel it is not enough to say that the private
respondent rectified its records and credited the deposit in less than a month as if this were sufficient repentance.
The error should not have been committed in the first place. The respondent bank has not even explained why it was
committed at all. It is true that the dishonored checks were, as the Court of Appeals put it, "eventually" paid.
However, this took almost a month when, properly, the checks should have been paid immediately upon
presentment.

As the Court sees it, the initial carelessness of the respondent bank, aggravated by the lack of promptitude in
repairing its error, justifies the grant of moral damages. This rather lackadaisical attitude toward the complaining
depositor constituted the gross negligence, if not wanton bad faith, that the respondent court said had not been
established by the petitioner.

We also note that while stressing the rectification made by the respondent bank, the decision practically ignored the
prejudice suffered by the petitioner. This was simply glossed over if not, indeed, disbelieved. The fact is that the
petitioner's credit line was canceled and its orders were not acted upon pending receipt of actual payment by the
suppliers. Its business declined. Its reputation was tarnished. Its standing was reduced in the business community. All
this was due to the fault of the respondent bank which was undeniably remiss in its duty to the petitioner.

Article 2205 of the Civil Code provides that actual or compensatory damages may be received "(2) for injury to the
plaintiff s business standing or commercial credit." There is no question that the petitioner did sustain actual injury as
a result of the dishonored checks and that the existence of the loss having been established "absolute certainty as to
its amount is not required." 7 Such injury should bolster all the more the demand of the petitioner for moral damages
and justifies the examination by this Court of the validity and reasonableness of the said claim.

We agree that moral damages are not awarded to penalize the defendant but to compensate the plaintiff for the
injuries he may have suffered. 8 In the case at bar, the petitioner is seeking such damages for the prejudice sustained
by it as a result of the private respondent's fault. The respondent court said that the claimed losses are purely
speculative and are not supported by substantial evidence, but if failed to consider that the amount of such losses
need not be established with exactitude precisely because of their nature. Moral damages are not susceptible of
pecuniary estimation. Article 2216 of the Civil Code specifically provides that "no proof of pecuniary loss is necessary
in order that moral, nominal, temperate, liquidated or exemplary damages may be adjudicated." That is why the
determination of the amount to be awarded (except liquidated damages) is left to the sound discretion of the court,
according to "the circumstances of each case."

From every viewpoint except that of the petitioner's, its claim of moral damages in the amount of P1,000,000.00 is
nothing short of preposterous. Its business certainly is not that big, or its name that prestigious, to sustain such an
extravagant pretense. Moreover, a corporation is not as a rule entitled to moral damages because, not being a
natural person, it cannot experience physical suffering or such sentiments as wounded feelings, serious anxiety,
mental anguish and moral shock. The only exception to this rule is where the corporation has a good reputation that
is debased, resulting in its social humiliation. 9

We shall recognize that the petitioner did suffer injury because of the private respondent's negligence that caused
the dishonor of the checks issued by it. The immediate consequence was that its prestige was impaired because of

58
the bouncing checks and confidence in it as a reliable debtor was diminished. The private respondent makes much of
the one instance when the petitioner was sued in a collection case, but that did not prove that it did not have a good
reputation that could not be marred, more so since that case was ultimately settled. 10 It does not appear that, as the
private respondent would portray it, the petitioner is an unsavory and disreputable entity that has no good name to
protect.

Considering all this, we feel that the award of nominal damages in the sum of P20,000.00 was not the proper relief
to which the petitioner was entitled. Under Article 2221 of the Civil Code, "nominal damages are adjudicated in order
that a right of the plaintiff, which has been violated or invaded by the defendant, may be vindicated or recognized,
and not for the purpose of indemnifying the plaintiff for any loss suffered by him." As we have found that the
petitioner has indeed incurred loss through the fault of the private respondent, the proper remedy is the award to it
of moral damages, which we impose, in our discretion, in the same amount of P20,000.00.

Now for the exemplary damages.

The pertinent provisions of the Civil Code are the following:

Art. 2229. Exemplary or corrective damages are imposed, by way of example or correction for the
public good, in addition to the moral, temperate, liquidated or compensatory damages.

Art. 2232. In contracts and quasi-contracts, the court may award exemplary damages if the
defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner.

The banking system is an indispensable institution in the modern world and plays a vital role in the economic life of
every civilized nation. Whether as mere passive entities for the safekeeping and saving of money or as active
instruments of business and commerce, banks have become an ubiquitous presence among the people, who have
come to regard them with respect and even gratitude and, most of all, confidence. Thus, even the humble wage-
earner has not hesitated to entrust his life's savings to the bank of his choice, knowing that they will be safe in its
custody and will even earn some interest for him. The ordinary person, with equal faith, usually maintains a modest
checking account for security and convenience in the settling of his monthly bills and the payment of ordinary
expenses. As for business entities like the petitioner, the bank is a trusted and active associate that can help in the
running of their affairs, not only in the form of loans when needed but more often in the conduct of their day-to-day
transactions like the issuance or encashment of checks.

In every case, the depositor expects the bank to treat his account with the utmost fidelity, whether such account
consists only of a few hundred pesos or of millions. The bank must record every single transaction accurately, down
to the last centavo, and as promptly as possible. This has to be done if the account is to reflect at any given time the
amount of money the depositor can dispose of as he sees fit, confident that the bank will deliver it as and to
whomever he directs. A blunder on the part of the bank, such as the dishonor of a check without good reason, can
cause the depositor not a little embarrassment if not also financial loss and perhaps even civil and criminal litigation.

The point is that as a business affected with public interest and because of the nature of its functions, the bank is
under obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary
nature of their relationship. In the case at bar, it is obvious that the respondent bank was remiss in that duty and
violated that relationship. What is especially deplorable is that, having been informed of its error in not crediting the
deposit in question to the petitioner, the respondent bank did not immediately correct it but did so only one week
later or twenty-three days after the deposit was made. It bears repeating that the record does not contain any
satisfactory explanation of why the error was made in the first place and why it was not corrected immediately after
its discovery. Such ineptness comes under the concept of the wanton manner contemplated in the Civil Code that
calls for the imposition of exemplary damages.

After deliberating on this particular matter, the Court, in the exercise of its discretion, hereby imposes upon the
respondent bank exemplary damages in the amount of P50,000.00, "by way of example or correction for the public
good," in the words of the law. It is expected that this ruling will serve as a warning and deterrent against the

59
repetition of the ineptness and indefference that has been displayed here, lest the confidence of the public in the
banking system be further impaired.

ACCORDINGLY, the appealed judgment is hereby MODIFIED and the private respondent is ordered to pay the
petitioner, in lieu of nominal damages, moral damages in the amount of P20,000.00, and exemplary damages in the
amount of P50,000.00 plus the original award of attorney's fees in the amount of P5,000.00, and costs.

G.R. No. 97626 March 14, 1997

PHILIPPINE BANK OF COMMERCE, now absorbed by PHILIPPINE COMMERCIAL INTERNATIONAL BANK, ROGELIO
LACSON, DIGNA DE LEON, MARIA ANGELITA PASCUAL, et al., petitioners, 
vs.
THE COURT OF APPEALS, ROMMEL'S MARKETING CORP., represented by ROMEO LIPANA, its President & General
Manager, respondents.

HERMOSISIMA, JR., J.:

Challenged in this petition for review is the Decision dated February 28, 1991  1 rendered by public respondent Court of
Appeals which affirmed the Decision dated November 15, 1985 of the Regional Trial Court, National Capital Judicial
Region, Branch CLX (160), Pasig City, in Civil Case No. 27288 entitled "Rommel's Marketing Corporation, etc. v.
Philippine Bank of Commerce, now absorbed by Philippine Commercial and Industrial Bank."

60
The case stemmed from a complaint filed by the private respondent Rommel's Marketing Corporation (RMC for
brevity), represented by its President and General Manager Romeo Lipana, to recover from the former Philippine
Bank of Commerce (PBC for brevity), now absorbed by the Philippine Commercial International Bank, the sum of
P304,979.74 representing various deposits it had made in its current account with said bank but which were not
credited to its account, and were instead deposited to the account of one Bienvenido Cotas, allegedly due to the
gross and inexcusable negligence of the petitioner bank.

RMC maintained two (2) separate current accounts, Current Account Nos. 53-01980-3 and 53-01748-7, with the Pasig
Branch of PBC in connection with its business of selling appliances.

In the ordinary and usual course of banking operations, current account deposits are accepted by the bank on the
basis of deposit slips prepared and signed by the depositor, or the latter's agent or representative, who indicates
therein the current account number to which the deposit is to be credited, the name of the depositor or current
account holder, the date of the deposit, and the amount of the deposit either in cash or checks. The deposit slip has
an upper portion or stub, which is detached and given to the depositor or his agent; the lower portion is retained by
the bank. In some instances, however, the deposit slips are prepared in duplicate by the depositor. The original of
the deposit slip is retained by the bank, while the duplicate copy is returned or given to the depositor.

From May 5, 1975 to July 16, 1976, petitioner Romeo Lipana claims to have entrusted RMC funds in the form of cash
totalling P304,979.74 to his secretary, Irene Yabut, for the purpose of depositing said funds in the current accounts
of RMC with PBC. It turned out, however, that these deposits, on all occasions, were not credited to RMC's account
but were instead deposited to Account No. 53-01734-7 of Yabut's husband, Bienvenido Cotas who likewise maintains
an account with the same bank. During this period, petitioner bank had, however, been regularly furnishing private
respondent with monthly statements showing its current accounts balances. Unfortunately, it had never been the
practice of Romeo Lipana to check these monthly statements of account reposing complete trust and confidence on
petitioner bank.

Irene Yabut's modus operandi is far from complicated. She would accomplish two (2) copies of the deposit slip, an
original and a duplicate. The original showed the name of her husband as depositor and his current account number.
On the duplicate copy was written the account number of her husband but the name of the account holder was left
blank. PBC's teller, Azucena Mabayad, would, however, validate and stamp both the original and the duplicate of
these deposit slips retaining only the original copy despite the lack of information on the duplicate slip. The second
copy was kept by Irene Yabut allegedly for record purposes. After validation, Yabut would then fill up the name of
RMC in the space left blank in the duplicate copy and change the account number written thereon, which is that of
her husband's, and make it appear to be RMC's account number, i.e., C.A. No. 53-01980-3. With the daily remittance
records also prepared by Ms. Yabut and submitted to private respondent RMC together with the validated duplicate
slips with the latter's name and account number, she made her company believe that all the while the amounts she
deposited were being credited to its account when, in truth and in fact, they were being deposited by her and
credited by the petitioner bank in the account of Cotas. This went on in a span of more than one (1) year without
private respondent's knowledge.

Upon discovery of the loss of its funds, RMC demanded from petitioner bank the return of its money, but as its
demand went unheeded, it filed a collection suit before the Regional Trial Court of Pasig, Branch 160. The trial court
found petitioner bank negligent and ruled as follows:

WHEREFORE, judgment is hereby rendered sentencing defendant Philippine Bank of Commerce,

now absorbed by defendant Philippine Commercial & Industrial Bank, and defendant Azucena
Mabayad to pay the plaintiff, jointly and severally, and without prejudice to any criminal action
which may be instituted if found warranted:

1. The sum of P304,979.72, representing plaintiffs lost deposit, plus interest thereon at the legal
rate from the filing of the complaint;

2. A sum equivalent to 14% thereof, as exemplary damages;

61
 3. A sum equivalent to 25% of the total amount due, as and for attorney's fees; and

4. Costs.

Defendants' counterclaim is hereby dismissed for lack of merit.  2

On appeal, the appellate court affirmed the foregoing decision with modifications, viz:

WHEREFORE, the decision appealed from herein is MODIFIED in the sense that the awards of
exemplary damages and attorney's fees specified therein are eliminated and instead, appellants
are ordered to pay plaintiff, in addition to the principal sum of P304,979.74 representing plaintiff's
lost deposit plus legal interest thereon from the filing of the complaint, P25,000.00 attorney's fees
and costs in the lower court as well as in this Court. 3

Hence, this petition anchored on the following grounds:

1) The proximate cause of the loss is the negligence of respondent Rommel Marketing Corporation
and Romeo Lipana in entrusting cash to a dishonest employee.

2) The failure of respondent Rommel Marketing Corporation to cross-check the bank's statements
of account with its own records during the entire period of more than one (1) year is the proximate
cause of the commission of subsequent frauds and misappropriation committed by Ms. Irene
Yabut.

3) The duplicate copies of the deposit slips presented by respondent Rommel Marketing
Corporation are falsified and are not proof that the amounts appearing thereon were deposited to
respondent Rommel Marketing Corporation's account with the bank,

4) The duplicate copies of the deposit slips were used by Ms. Irene Yabut to cover up her
fraudulent acts against respondent Rommel Marketing Corporation, and not as records of deposits
she made with the bank. 4

The petition has no merit.

Simply put, the main issue posited before us is: What is the proximate cause of the loss, to the tune of P304,979.74,
suffered by the private respondent RMC — petitioner bank's negligence or that of private respondent's?

Petitioners submit that the proximate cause of the loss is the negligence of respondent RMC and Romeo Lipana in
entrusting cash to a dishonest employee in the person of Ms. Irene Yabut.  5 According to them, it was impossible for
the bank to know that the money deposited by Ms. Irene Yabut belong to RMC; neither was the bank forewarned by
RMC that Yabut will be depositing cash to its account. Thus, it was impossible for the bank to know the fraudulent
design of Yabut considering that her husband, Bienvenido Cotas, also maintained an account with the bank. For the
bank to inquire into the ownership of the cash deposited by Ms. Irene Yabut would be irregular. Otherwise stated, it
was RMC's negligence in entrusting cash to a dishonest employee which provided Ms. Irene Yabut the opportunity
to defraud RMC. 6

Private respondent, on the other hand, maintains that the proximate cause of the loss was the negligent act of the
bank, thru its teller Ms. Azucena Mabayad, in validating the deposit slips, both original and duplicate, presented by
Ms. Yabut to Ms. Mabayad, notwithstanding the fact that one of the deposit slips was not completely accomplished.

We sustain the private respondent.

62
Our law on quasi-delicts states:

Art. 2176. Whoever by act or omission causes damage to another, there being fault or negligence,
is obliged to pay for the damage done. Such fault or negligence, if there is no pre-existing
contractual relation between the parties, is called a quasi-delict and is governed by the provisions
of this Chapter.

There are three elements of a quasi-delict: (a) damages suffered by the plaintiff; (b) fault or negligence of the
defendant, or some other person for whose acts he must respond; and (c) the connection of cause and effect
between the fault or negligence of the defendant and the damages incurred by the plaintiff.  7

In the case at bench, there is no dispute as to the damage suffered by the private respondent (plaintiff in the trial
court) RMC in the amount of P304,979.74. It is in ascribing fault or negligence which caused the damage where the
parties point to each other as the culprit.

Negligence is the omission to do something which a reasonable man, guided by those considerations which
ordinarily regulate the conduct of human affairs, would do, or the doing of something which a prudent and
reasonable man would do. The seventy-eight (78)-year-old, yet still relevant, case of Picart v. Smith, 8 provides the
test by which to determine the existence of negligence in a particular case which may be stated as follows: Did the
defendant in doing the alleged negligent act use that reasonable care and caution which an ordinarily prudent
person would have used in the same situation? If not, then he is guilty of negligence. The law here in effect adopts
the standard supposed to be supplied by the imaginary conduct of the discreet paterfamilias of the Roman law. The
existence of negligence in a given case is not determined by reference to the personal judgment of the actor in the
situation before him. The law considers what would be reckless, blameworthy, or negligent in the man of ordinary
intelligence and prudence and determines liability by that.

Applying the above test, it appears that the bank's teller, Ms. Azucena Mabayad, was negligent in validating, officially
stamping and signing all the deposit slips prepared and presented by Ms. Yabut, despite the glaring fact that the
duplicate copy was not completely accomplished contrary to the self-imposed procedure of the bank with respect to
the proper validation of deposit slips, original or duplicate, as testified to by Ms. Mabayad herself, thus:

Q: Now, as teller of PCIB, Pasig Branch, will you please tell us Mrs. Mabayad your
important duties and functions?

A: I accept current and savings deposits from depositors and encashments.

Q: Now in the handling of current account deposits of bank clients, could you tell
us the procedure you follow?

A: The client or depositor or the authorized representative prepares a deposit slip

by filling up the deposit slip with the name, the account number, the date, the cash
breakdown, if it is deposited for cash, and the check number, the amount and then
he signs the deposit slip.

Q: Now, how many deposit slips do you normally require in accomplishing

current account deposit, Mrs. Mabayad?

A: The bank requires only one copy of the deposit although some of our clients
prepare the deposit slip in duplicate.

Q: Now in accomplishing current account deposits from your clients, what do

you issue to the depositor to evidence the deposit made?

63
 A: We issue or we give to the clients the depositor's stub as a receipt of the
deposit.

Q: And who prepares the deposit slip?

A: The depositor or the authorized representative sir?

Q: Where does the depositor's stub comes (sic) from Mrs. Mabayad, is it with the
deposit slip?

A: The depositor's stub is connected with the deposit slip or the bank's copy. In a
deposit slip, the upper portion is the depositor's stub and the lower portion is
the bank's copy, and you can detach the bank's copy from the depositor's stub
by tearing it sir.

Q: Now what do you do upon presentment of the deposit slip by the depositor
or the depositor's authorized representative?

A: We see to it that the deposit slip   9 is properly accomplished and then we count
the money and then we tally it with the deposit slip sir.

Q: Now is the depositor's stub which you issued to your clients validated?

A: Yes, sir. 10 [Emphasis ours]

Clearly, Ms. Mabayad failed to observe this very important procedure. The fact that the duplicate slip was
not compulsorily required by the bank in accepting deposits should not relieve the petitioner bank of
responsibility. The odd circumstance alone that such duplicate copy lacked one vital information — that of
the name of the account holder — should have already put Ms. Mabayad on guard. Rather than readily
validating the incomplete duplicate copy, she should have proceeded more cautiously by being more
probing as to the true reason why the name of the account holder in the duplicate slip was left blank while
that in the original was filled up. She should not have been so naive in accepting hook, line and sinker the
too shallow excuse of Ms. Irene Yabut to the effect that since the duplicate copy was only for her personal
record, she would simply fill up the blank space later on. 11 A "reasonable man of ordinary
prudence" 12 would not have given credence to such explanation and would have insisted that the space left
blank be filled up as a condition for validation. Unfortunately, this was not how bank teller Mabayad
proceeded thus resulting in huge losses to the private respondent.

Negligence here lies not only on the part of Ms. Mabayad but also on the part of the bank itself in its lackadaisical
selection and supervision of Ms. Mabayad. This was exemplified in the testimony of Mr. Romeo Bonifacio, then
Manager of the Pasig Branch of the petitioner bank and now its Vice-President, to the effect that, while he ordered
the investigation of the incident, he never came to know that blank deposit slips were validated in total disregard of
the bank's validation procedures, viz:

Q: Did he ever tell you that one of your cashiers affixed the stamp mark of the
bank on the deposit slips and they validated the same with the machine, the fact
that those deposit slips were unfilled up, is there any report similar to that?

A: No, it was not the cashier but the teller.

Q: The teller validated the blank deposit slip?

64
 A: No it was not reported.

Q: You did not know that any one in the bank tellers or cashiers validated the blank
deposit slip?

A: I am not aware of that.

Q: It is only now that you are aware of that?

A: Yes, sir. 13

Prescinding from the above, public respondent Court of Appeals aptly observed:

xxx xxx xxx

It was in fact only when he testified in this case in February, 1983, or after the lapse of more than
seven (7) years counted from the period when the funds in question were deposited in plaintiff's
accounts (May, 1975 to July, 1976) that bank manager Bonifacio admittedly became aware of the
practice of his teller Mabayad of validating blank deposit slips. Undoubtedly, this is gross, wanton,
and inexcusable negligence in the appellant bank's supervision of its employees. 14

It was this negligence of Ms. Azucena Mabayad, coupled by the negligence of the petitioner bank in the selection
and supervision of its bank teller, which was the proximate cause of the loss suffered by the private respondent, and
not the latter's act of entrusting cash to a dishonest employee, as insisted by the petitioners.

Proximate cause is determined on the facts of each case upon mixed considerations of logic, common sense, policy
and precedent. 15 Vda. de Bataclan v. Medina, 16 reiterated in the case of Bank of the Phil. Islands v. Court of
Appeals, 17 defines proximate cause as "that cause, which, in natural and continuous sequence, unbroken by any
efficient intervening cause, produces the injury, and without which the result would not have occurred. . . ." In this
case, absent the act of Ms. Mabayad in negligently validating the incomplete duplicate copy of the deposit slip, Ms.
Irene Yabut would not have the facility with which to perpetrate her fraudulent scheme with impunity. Apropos,
once again, is the pronouncement made by the respondent appellate court, to wit:

. . . . Even if Yabut had the fraudulent intention to misappropriate the funds entrusted to her by
plaintiff, she would not have been able to deposit those funds in her husband's current account,
and then make plaintiff believe that it was in the latter's accounts wherein she had deposited
them, had it not been for bank teller Mabayad's aforesaid gross and reckless negligence. The
latter's negligence was thus the proximate, immediate and efficient cause that brought about the
loss claimed by plaintiff in this case, and the failure of plaintiff to discover the same soon enough
by failing to scrutinize the monthly statements of account being sent to it by appellant bank could
not have prevented the fraud and misappropriation which Irene Yabut had already completed
when she deposited plaintiff's money to the account of her husband instead of to the latter's
accounts. 18

Furthermore, under the doctrine of "last clear chance" (also referred to, at times as "supervening negligence" or as
"discovered peril"), petitioner bank was indeed the culpable party. This doctrine, in essence, states that where both
parties are negligent, but the negligent act of one is appreciably later in time than that of the other, or when it is
impossible to determine whose fault or negligence should be attributed to the incident, the one who had the last
clear opportunity to avoid the impending harm and failed to do so is chargeable with the consequences
thereof.19 Stated differently, the rule would also mean that an antecedent negligence of a person does not preclude
the recovery of damages for the supervening negligence of, or bar a defense against liability sought by another, if
the latter, who had thelast fair chance, could have avoided the impending harm by the exercise of due
diligence. 20 Here, assuming that private respondent RMC was negligent in entrusting cash to a dishonest employee,

65
thus providing the latter with the opportunity to defraud the company, as advanced by the petitioner, yet it cannot
be denied that the petitioner bank, thru its teller, had the last clear opportunity to avert the injury incurred by its
client, simply by faithfully observing their self-imposed validation procedure.

At this juncture, it is worth to discuss the degree of diligence ought to be exercised by banks in dealing with their
clients.

The New Civil Code provides:

Art. 1173. The fault or negligence of the obligor consists in the omission of that diligence which is
required by the nature of the obligation and corresponds with the circumstances of the persons, of
the time and of the place. When negligence shows bad faith, the provisions of articles 1171 and
2201, paragraph 2, shall apply.

If the law or contract does not state the diligence which is to be observed in the performance, that
which is expected of a good father of a family shall be required. (1104a)

In the case of banks, however, the degree of diligence required is more than that of a  good father of a family.
Considering the fiduciary nature of their relationship with their depositors, banks are duty bound to treat the
accounts of their clients with the highest degree of care. 21

As elucidated in Simex International (Manila), Inc. v. Court of Appeals, 22 in every case, the depositor expects the bank
to treat his account with the utmost fidelity, whether such account consists only of a few hundred pesos or of
millions. The bank must record every single transaction accurately, down to the last centavo, and as promptly as
possible. This has to be done if the account is to reflect at any given time the amount of money the depositor can
dispose as he sees fit, confident that the bank will deliver it as and to whomever he directs. A blunder on the part of
the bank, such as the failure to duly credit him his deposits as soon as they are made, can cause the depositor not a
little embarrassment if not financial loss and perhaps even civil and criminal litigation.

The point is that as a business affected with public interest and because of the nature of its functions, the bank is
under obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary
nature of their relationship. In the case before us, it is apparent that the petitioner bank was remiss in that duty and
violated that relationship.

Petitioners nevertheless aver that the failure of respondent RMC to cross-check the bank's statements of account
with its own records during the entire period of more than one (1) year is the proximate cause of the commission of
subsequent frauds and misappropriation committed by Ms. Irene Yabut.

We do not agree.

While it is true that had private respondent checked the monthly statements of account sent by the petitioner bank
to RMC, the latter would have discovered the loss early on, such cannot be used by the petitioners to escape liability.
This omission on the part of the private respondent does not change the fact that were it not for the wanton and
reckless negligence of the petitioners' employee in validating the incomplete duplicate deposit slips presented by
Ms. Irene Yabut, the loss would not have occurred. Considering, however, that the fraud was committed in a span of
more than one (1) year covering various deposits, common human experience dictates that the same would not have
been possible without any form of collusion between Ms. Yabut and bank teller Mabayad. Ms. Mabayad was
negligent in the performance of her duties as bank teller nonetheless. Thus, the petitioners are entitled to claim
reimbursement from her for whatever they shall be ordered to pay in this case.

The foregoing notwithstanding, it cannot be denied that, indeed, private respondent was likewise negligent in not
checking its monthly statements of account. Had it done so, the company would have been alerted to the series of
frauds being committed against RMC by its secretary. The damage would definitely not have ballooned to such an

66
amount if only RMC, particularly Romeo Lipana, had exercised even a little vigilance in their financial affairs. This
omission by RMC amounts to contributory negligence which shall mitigate the damages that may be awarded to the
private respondent 23 under Article 2179 of the New Civil Code, to wit:

. . . When the plaintiff's own negligence was the immediate and proximate cause of his injury, he
cannot recover damages. But if his negligence was only contributory, the immediate and
proximate cause of the injury being the defendant's lack of due care, the plaintiff may recover
damages, but the courts shall mitigate the damages to be awarded.

In view of this, we believe that the demands of substantial justice are satisfied by allocating the damage on
a 60-40 ratio. Thus, 40% of the damage awarded by the respondent appellate court, except the award of
P25,000.00 attorney's fees, shall be borne by private respondent RMC; only the balance of 60% needs to be
paid by the petitioners. The award of attorney's fees shall be borne exclusively by the petitioners.

WHEREFORE, the decision of the respondent Court of Appeals is modified by reducing the amount of actual damages
private respondent is entitled to by 40%. Petitioners may recover from Ms. Azucena Mabayad the amount they would
pay the private respondent. Private respondent shall have recourse against Ms. Irene Yabut. In all other respects, the
appellate court's decision is AFFIRMED.

Proportionate costs.

SO ORDERED.

Bellosillo, Vitug and Kapunan, JJ., concur.

Separate Opinions

PADILLA, J.,  dissenting:

I regret that I cannot join the majority in ruling that the proximate cause of the damage suffered by Rommel's
Marketing Corporation (RMC) is mainly "the wanton and reckless negligence of the petitioner's employee in
validating the incomplete duplicate deposit slips presented by Ms. Irene Yabut" (Decision, p. 15). Moreover, I find it
difficult to agree with the ruling that "petitioners are entitled to claim reimbursement from her (the bank teller) for
whatever they shall be ordered to pay in this case."

It seems that an innocent bank teller is being unduly burdened with what should fall on Ms. Irene Yabut, RMC's own
employee, who should have been charged with estafa or estafa through falsification of private document.
Interestingly, the records are silent on whether RMC had ever filed any criminal case against Ms. Irene Yabut, aside
from the fact that she does not appear to have been impleaded even as a party defendant in any civil case for
damages. Why is RMC insulating Ms. Irene Yabut from liability when in fact she orchestrated the entire fraud on
RMC, her employer?

To set the record straight, it is not completely accurate to state that from 5 May 1975 to 16 July 1976, Miss Irene
Yabut had transacted with PCIB (then PBC) through only one teller in the person of Azucena Mabayad. In fact, when

67
RMC filed a complaint for estafa before the Office of the Provincial Fiscal of Rizal, it indicted all the tellers of PCIB in
the branch who were accused of conspiracy to defraud RMC of its current account deposits. (See Annex B, Rollo p. 22
and 47).

Even private respondent RMC, in its Comment, maintains that "when the petitioner's tellers" allowed Irene Yabut to
carry out her modus operandi undetected over a period of one year, "their negligence cannot but be gross." (Rollo, p.
55; see also Rollo pp. 58 to 59). This rules out the possibility that there may have been some form of collusion
between Yabut and bank teller Mabayad. Mabayad was just unfortunate that private respondent's documentary
evidence showed that she was the attending teller in the bulk of Yabut's transactions with the bank.

Going back to Yabut's modus operandi, it is not disputed that each time Yabut would transact business with PBC's
tellers, she would accomplish two (2) copies of the current account deposit slip. PBC's deposit slip, as issued in 1975,
had two parts. The upper part was called the depositor's stub and the lower part was called the bank copy. Both
parts were detachable from each other. The deposit slip was prepared and signed by the depositor or his
representative, who indicated therein the current account number to which the deposit was to be credited, the
name of the depositor or current account holder, the date of the deposit, and the amount of the deposit either in
cash or in checks. (Rollo, p. 137)

Since Yabut deposited money in cash, the usual bank procedure then was for the teller to count whether the cash
deposit tallied with the amount written down by the depositor in the deposit slip. If it did, then the teller proceeded
to verify whether the current account number matched with the current account name as written in the deposit slip.

In the earlier days before the age of full computerization, a bank normally maintained a ledger which served as a
repository of accounts to which debits and credits resulting from transactions with the bank were posted from
books of original entry. Thus, it was only after the transaction was posted in the ledger that the teller proceeded to
machine validate the deposit slip and then affix his signature or initial to serve as proof of the completed transaction.

It should be noted that the teller validated the depositor's stub in the upper portion and the bank copy on the lower
portion on both the original and duplicate copies of the deposit slips presented by Yabut. The teller, however,
detached the validated depositor's stub on the original deposit slip and allowed Yabut to retain the whole validated
duplicate deposit slip that bore the same account number as the original deposit slip, but with the account name
purposely left blank by Yabut, on the assumption that it would serve no other purpose but for a personal record to
complement the original validated depositor's stub.

Thus, when Yabut wrote the name of RMC on the blank account name on the validated duplicate copy of the deposit
slip, tampered with its account number, and superimposed RMC's account number, said act only served to cover-up
the loss already caused by her to RMC, or after the deposit slip was validated by the teller in favor of Yabut's
husband. Stated otherwise, when there is a clear evidence of tampering with any of the material entries in a deposit
slip, the genuineness and due execution of the document become an issue in resolving whether or not the
transaction had been fair and regular and whether the ordinary course of business had been followed by the bank.

It is logical, therefore, to conclude that the legal or proximate cause of RMC's loss was when Yabut, its employee,
deposited the money of RMC in her husband's name and account number instead of that of RMC, the rightful owner
of such deposited funds. Precisely, it was the criminal act of Yabut that directly caused damage to RMC, her
employer, not the validation of the deposit slip by the teller as the deposit slip was made out by Yabut in her
husband's name and to his account.

Even if the bank teller had required Yabut to completely fill up the duplicate deposit slip, the original deposit slip
would nonetheless still be validated under the account of Yabut's husband. In fine, the damage had already been
done to RMC when Yabut deposited its funds in the name and account number of her husband with petitioner bank.
It is then entirely left to speculation what Yabut would have done afterwards — like tampering both the account
number and the account name on the stub of the original deposit slip and on the duplicate copy — in order to cover
up her crime.

68
Under the circumstances in this case, there was no way for PBC's bank tellers to reasonably foresee that Yabut might
or would use the duplicate deposit slip to cover up her crime. In the first place, the bank tellers were absolutely
unaware that a crime had already been consummated by Yabut when her transaction by her sole doing was posted
in the ledger and validated by the teller in favor of her husband's account even if the funds deposited belonged to
RMC.

The teller(s) in this case were not in any way proven to be parties to the crime either as accessories or accomplices.
Nor could it be said that the act of posting and validation was in itself a negligent act because the teller(s) simply had
no choice but to accept and validate the deposit as written in the original deposit slip under the account number and
name of Yabut's husband. Hence, the act of validating the duplicate copy was not the proximate cause of RMC's
injury but merely a remote cause which an independent cause or agency merely took advantage of to accomplish
something which was not the probable or natural effect thereof. That explains why Yabut still had to tamper with
the account number of the duplicate deposit slip after filling in the name of RMC in the blank space.

Coming now to the doctrine of "last clear chance," it is my considered view that the doctrine assumes that the
negligence of the defendant was subsequent to the negligence of the plaintiff and the same must be the proximate
cause of the injury. In short, there must be a last and a clear chance, not a last possible chance, to avoid the accident
or injury. It must have been a chance as would have enabled a reasonably prudent man in like position to have acted
effectively to avoid the injury and the resulting damage to himself.

In the case at bar, the bank was not remiss in its duty of sending monthly bank statements to private respondent
RMC so that any error or discrepancy in the entries therein could be brought to the bank's attention at the earliest
opportunity. Private respondent failed to examine these bank statements not because it was prevented by some
cause in not doing so, but because it was purposely negligent as it admitted that it does not normally check bank
statements given by banks.

It was private respondent who had the last and clear chance to prevent any further misappropriation by Yabut had it
only reviewed the status of its current accounts on the bank statements sent to it monthly or regularly. Since a
sizable amount of cash was entrusted to Yabut, private respondent should, at least, have taken ordinary care of its
concerns, as what the law presumes. Its negligence, therefore, is not contributory but the immediate and proximate
cause of its injury.

I vote to grant the petition.

Separate Opinions

PADILLA, J.,  dissenting:

I regret that I cannot join the majority in ruling that the proximate cause of the damage suffered by Rommel's
Marketing Corporation (RMC) is mainly "the wanton and reckless negligence of the petitioner's employee in
validating the incomplete duplicate deposit slips presented by Ms. Irene Yabut" (Decision, p. 15). Moreover, I find it
difficult to agree with the ruling that "petitioners are entitled to claim reimbursement from her (the bank teller) for
whatever they shall be ordered to pay in this case."

It seems that an innocent bank teller is being unduly burdened with what should fall on Ms. Irene Yabut, RMC's own
employee, who should have been charged with estafa or estafa through falsification of private document.
Interestingly, the records are silent on whether RMC had ever filed any criminal case against Ms. Irene Yabut, aside
from the fact that she does not appear to have been impleaded even as a party defendant in any civil case for
damages. Why is RMC insulating Ms. Irene Yabut from liability when in fact she orchestrated the entire fraud on
RMC, her employer?

69
To set the record straight, it is not completely accurate to state that from 5 May 1975 to 16 July 1976, Miss Irene
Yabut had transacted with PCIB (then PBC) through only one teller in the person of Azucena Mabayad. In fact, when
RMC filed a complaint for estafa before the Office of the Provincial Fiscal of Rizal, it indicted all the tellers of PCIB in
the branch who were accused of conspiracy to defraud RMC of its current account deposits. (See Annex B, Rollo p. 22
and 47).

Even private respondent RMC, in its Comment, maintains that "when the petitioner's tellers" allowed Irene Yabut to
carry out her modus operandi undetected over a period of one year, "their negligence cannot but be gross." (Rollo, p.
55; see also Rollo pp. 58 to 59). This rules out the possibility that there may have been some form of collusion
between Yabut and bank teller Mabayad. Mabayad was just unfortunate that private respondent's documentary
evidence showed that she was the attending teller in the bulk of Yabut's transactions with the bank.

Going back to Yabut's modus operandi, it is not disputed that each time Yabut would transact business with PBC's
tellers, she would accomplish two (2) copies of the current account deposit slip. PBC's deposit slip, as issued in 1975,
had two parts. The upper part was called the depositor's stub and the lower part was called the bank copy. Both
parts were detachable from each other. The deposit slip was prepared and signed by the depositor or his
representative, who indicated therein the current account number to which the deposit was to be credited, the
name of the depositor or current account holder, the date of the deposit, and the amount of the deposit either in
cash or in checks. (Rollo, p. 137)

Since Yabut deposited money in cash, the usual bank procedure then was for the teller to count whether the cash
deposit tallied with the amount written down by the depositor in the deposit slip. If it did, then the teller proceeded
to verify whether the current account number matched with the current account name as written in the deposit slip.

In the earlier days before the age of full computerization, a bank normally maintained a ledger which served as a
repository of accounts to which debits and credits resulting from transactions with the bank were posted from
books of original entry. Thus, it was only after the transaction was posted in the ledger that the teller proceeded to
machine validate the deposit slip and then affix his signature or initial to serve as proof of the completed transaction.

It should be noted that the teller validated the depositor's stub in the upper portion and the bank copy on the lower
portion on both the original and duplicate copies of the deposit slips presented by Yabut. The teller, however,
detached the validated depositor's stub on the original deposit slip and allowed Yabut to retain the whole validated
duplicate deposit slip that bore the same account number as the original deposit slip, but with the account name
purposely left blank by Yabut, on the assumption that it would serve no other purpose but for a personal record to
complement the original validated depositor's stub.

Thus, when Yabut wrote the name of RMC on the blank account name on the validated duplicate copy of the deposit
slip, tampered with its account number, and superimposed RMC's account number, said act only served to cover-up
the loss already caused by her to RMC, or after the deposit slip was validated by the teller in favor of Yabut's
husband. Stated otherwise, when there is a clear evidence of tampering with any of the material entries in a deposit
slip, the genuineness and due execution of the document become an issue in resolving whether or not the
transaction had been fair and regular and whether the ordinary course of business had been followed by the bank.

It is logical, therefore, to conclude that the legal or proximate cause of RMC's loss was when Yabut, its employee,
deposited the money of RMC in her husband's name and account number instead of that of RMC, the rightful owner
of such deposited funds. Precisely, it was the criminal act of Yabut that directly caused damage to RMC, her
employer, not the validation of the deposit slip by the teller as the deposit slip was made out by Yabut in her
husband's name and to his account.

Even if the bank teller had required Yabut to completely fill up the duplicate deposit slip, the original deposit slip
would nonetheless still be validated under the account of Yabut's husband. In fine, the damage had already been
done to RMC when Yabut deposited its funds in the name and account number of her husband with petitioner bank.
It is then entirely left to speculation what Yabut would have done afterwards — like tampering both the account

70
number and the account name on the stub of the original deposit slip and on the duplicate copy — in order to cover
up her crime.

Under the circumstances in this case, there was no way for PBC's bank tellers to reasonably foresee that Yabut might
or would use the duplicate deposit slip to cover up her crime. In the first place, the bank tellers were absolutely
unaware that a crime had already been consummated by Yabut when her transaction by her sole doing was posted
in the ledger and validated by the teller in favor of her husband's account even if the funds deposited belonged to
RMC.

The teller(s) in this case were not in any way proven to be parties to the crime either as accessories or accomplices.
Nor could it be said that the act of posting and validation was in itself a negligent act because the teller(s) simply had
no choice but to accept and validate the deposit as written in the original deposit slip under the account number and
name of Yabut's husband. Hence, the act of validating the duplicate copy was not the proximate cause of RMC's
injury but merely a remote cause which an independent cause or agency merely took advantage of to accomplish
something which was not the probable or natural effect thereof. That explains why Yabut still had to tamper with
the account number of the duplicate deposit slip after filling in the name of RMC in the blank space.

Coming now to the doctrine of "last clear chance," it is my considered view that the doctrine assumes that the
negligence of the defendant was subsequent to the negligence of the plaintiff and the same must be the proximate
cause of the injury. In short, there must be a last and a clear chance, not a last possible chance, to avoid the accident
or injury. It must have been a chance as would have enabled a reasonably prudent man in like position to have acted
effectively to avoid the injury and the resulting damage to himself.

In the case at bar, the bank was not remiss in its duty of sending monthly bank statements to private respondent
RMC so that any error or discrepancy in the entries therein could be brought to the bank's attention at the earliest
opportunity. Private respondent failed to examine these bank statements not because it was prevented by some
cause in not doing so, but because it was purposely negligent as it admitted that it does not normally check bank
statements given by banks.

It was private respondent who had the last and clear chance to prevent any further misappropriation by Yabut had it
only reviewed the status of its current accounts on the bank statements sent to it monthly or regularly. Since a
sizable amount of cash was entrusted to Yabut, private respondent should, at least, have taken ordinary care of its
concerns, as what the law presumes. Its negligence, therefore, is not contributory but the immediate and proximate
cause of its injury.

I vote to grant the petition.

71
G.R. No. 88353 May 8, 1992

CENTRAL BANK OF THE PHILIPPINES and HON. JOSE B. FERNANDEZ, petitioners, 

vs.
HON. COURT OF APPEALS, RTC JUDGE TEOFILO GUADIZ, JR., PRODUCERS BANK OF THE PHILIPPINES and
PRODUCERS PROPERTIES, INC., respondents.

G.R. No. 92943 May 8, 1992

ATTY. LEONIDA G. TANSINSIN-ENCARNACION, as the Acting Conservator of Producers Bank of the Philippines, and
PRODUCERS BANK OF THE PHILIPPINES, petitioners, 
vs.
PRODUCERS BANK OF THE PHILIPPINES, allegedly represented by HENRY L. CO, HON. COURT OF APPEALS, HON.
TEOFILO GUADIZ, JR., and the "LAW FIRM OF QUISUMBING, TORRES AND EVANGELISTA" (RAMON J. QUISUMBING,
VICENTE TORRES,RAFAEL E. EVANGELISTA, JR. and CHRISTOFER L. LIM), respondents.

Agapito S. Fajardo, Jerry P. Rebutoc & Antonio M. Tan for petitioners in G.R. No. 88353.

Leonida G.T. Encarnacion for petitioners in G.R. No. 92943.

Quiason, Makalintal, Barot, Torres, Ibarra Law Office for the respondents in G.R. Nos. 88353 & 92943.

DAVIDE, JR., J.:

The common origin of these cases is Civil Case No. 17692 filed before Branch 147 (Makati) of the Regional trail Court,
National Capital Judicial Region and entitled Producers Bank of the Philippines and Producers Properties, Inc. versus
Central Bank of the Philippines, Jose B. Fernandez. Jr. and the Monetary Board. On 21 January 1991, this Court
ordered the consolidation of G.R. No. 92943 with G.R. No. 88353. 1

The first case, G.R. No. 88353, is a petition for review on certiorari of the decision of 6 October 1988  2 and the
resolution of 17 May 1989 3 of the respondent Court of Appeals in C.A.-G.R. No. SP-13624. The impugned decision
upheld the 21 September 1987 Order of respondent Judge Teofilo Guadiz, Jr. in Civil Case No. 17692 granting the

72
motion for issuance of a writ of preliminary injunction –– enjoining petitioners Central Bank of the Philippines (CB),
Mr. Jose B. Fernandez, Jr. and the Monetary Board, or any of their agencies from implementing Monetary Board
(MB) Resolutions No. 649 and No. 751, or from taking the threatened appropriate alternative action –– and the 27
October 1987 Order in the same case denying petitioners' motion to dismiss and vacate said injunction. The
challenged resolution, on the other hand, denied petitioners' motion for reconsideration of the 6 October 1988
decision.

The second case, G.R. No. 92943, is a petition for review directed principally against the 17 January 1990 decision of
the respondent Court of Appeals in C.A.-G.R. SP No. 16972. The said decision dismissed the petition therein filed and
sustained the various Orders of the respondent Judge in Civil Case No. 17692, but directed the plaintiffs therein to
amend the amended complaint by stating in its prayer the specific amount of damages which Producers Bank of the
Philippines (PBP) claims to have sustained as a result of losses of operation and the conservator's bank frauds and
abuses; the Clerk of Court was also ordered to determine the amount of filing fees which should be paid by the
plaintiffs within the applicable prescriptive or reglementary period. 4

The records of both cases reveal the following factual and procedural antecedents:

Petitioners claim that on 29 April 1983, during the regular examination of the PBP, CB examiners stumbled upon
some highly questionable loans which had been extended by the PBP management to several entities. Upon further
examination, it was discovered that these loans, totalling approximately P300 million, were "fictitious" as they were
extended, without collateral, to certain interests related to PBP owners themselves. Said loans were deemed to be
anomalous particularly because the total paid-in capital of PBP at that time was only P 140.544 million. This means
that the entire paid-in capital of the bank, together with some P160 million of depositors' money, was utilized by PBP
management to fund these unsecured loans.

Sometime in August of the same year, at the height of the controversy surrounding the discovery of the anomalous
loans, several blind items about a family-owned bank in Binondo which granted fictitious loans to its stockholders
appeared in major newspapers. These news items triggered a bank-run in PBP which resulted in continuous over-
drawings on the bank's demand deposit account with the Central Bank; the over-drawings reached P74.109 million
by 29 August 1983. By 17 January 1984, PBP's overdraft with the CB increased to P143.955 million, an indication of
PBP's continuing inability to maintain that condition of solvency and liquidity necessary to protect the interests of its
depositors and creditors. Hence, on 20 January 1984, on the basis of the report submitted by the Supervision and
Examination Sector, Department I of the CB, the Monetary Board (MB), pursuant to its authority under Section 28-A
of R.A. No. 265 and by virtue of MB Board Resolution No. 164, placed PBP under conservatorship. 5

While PBP admits that it had no choice but to submit to the conservatorship,  6 it nonetheless requested that the
same be lifted by the CB. Consequently, the MB issued on 3 February 1984 Resolution No. 169 directing the principal
stockholders of PBP to increase its capital accounts by such an amount that would be necessary for the elimination
of PBP's negative net worth of P424 million. On 10 April 1984, CB senior deputy Governor Gabriel Singson informed
PBP that pursuant to MB Resolution No. 490 of 30 March 1984, the CB would be willing to lift the conservatorship
under the following conditions:

(a) PBP's unsecured overdraft with the Central Bank will be converted into an emergency loan, to
be secured by sufficient collateral, including but not limited to the Following properties offered by
PBP's principal stockholders:

i. 6 floors and other areas of the Producers Bank Bldg., at Paseo de Roxas,
owned by PBP;

ii. 15 floors of the Producers Bank Bldg., at Paseo de Roxas, Makati, owned by
the Producers Properties, Inc.;

iii. Manhattan Bldg. on Nueva Street, Binondo, Manila; and

73
 iv. Producers Bank, Makati Branch Bldg. at Buendia Avenue, Makati;

(b) A comptroller for PBP and any number of bank examiners deemed necessary to oversee PBP's
operations shall be designated by the Central Bank, under terms of reference to be determined by
the Governor;

(c) A letter from the Management of PBP authorizing the Central Bank to automatically return
clearing items that would result in an overdraft in its Central Bank account shall be submitted to
the Central Bank.

On 27 April 1984, the MB adopted Resolution No. 584 approving the consolidation of PBP's other unsecured
obligations to the CB with its overdraft and authorizing the conversion thereof into an emergency loan. The same
resolution authorized the CB Governor to lift the conservatorship and return PBP's management to its principal
stockholders upon completion of the documentation and full collateralization of the emergency loan, but directed
PBP to pay the emergency loan in five (5) equal annual installments, with interest and penalty rates at MRR 180 days
plus 48% per annum, and liquidated damages of 5% for delayed payments.

On 4 June 1984, PBP submitted a rehabilitation plan to the CB which proposed the transfer to PBP of three (3)
buildings owned by Producers Properties, Inc. (PPI), its principal stockholder and the subsequent mortgage of said
properties to the CB as collateral for the bank's overdraft obligation. 7 Although said proposal was explored and
discussed, no program acceptable to both the CB and PPI was arrived at because of disagreements on certain
matters such as interest rates, penalties and liquidated damages.

No other rehabilitation program was submitted by PBP for almost three (3) years; as a result thereof, its overdrafts
with the CB continued to accumulate. By the end of June 1987, the figure swelled to a staggeringP1.023
billion. Consequently, per Resolution No. 649 dated 3 July 1987, the CB Monetary Board decided to approve in
principle what it considered a viable rehabilitation program for PBP. The program had these principal features:

Al. The Central Bank will assign in favor of the Philippine Deposit Insurance Corporation (PDIC) its
claim over the overdraft of PBP net of net peso differential arising from swap transactions and
interest thereon, up to the amount of the par value of the Producers Properties, Inc. (PPI) shares
of stock in PBP presently pledged to the Central Bank, and PDIC will enter into a contract of dacion
en pago with PBP and PPI whereby PDIC will acquire 4,116,100 preferred shares of stock of PBP
with a par value of P100 per share in consideration for which PDIC will convey its rights over the
overdraft assigned to it by the Central Bank, in favor of PPI;

2. The balance of the overdraft of PBP, after the assignment to PDIC of a portion of such overdraft
referred to in Item I above, will also be assigned to PDIC and converted into preferred shares of
stock of PBP;

3. The interest on the overdraft of PBP will be reduced to 11.75% p.a. retroactively to the date when
the overdraft of PBP was incurred;

4. The accrued interest on the overdraft of PBP, at the reduced rate approved in Item 3 above, as
well as the unbooked penalties on legal reserve deficiencies of PBP will be assigned in favor of
PDIC and such amounts will be allowed to be converted into preferred shares of stock of PBP; and

5. The booking of valuation reserves will be allowed as follows:

3rd year — P31 million

4th year — 48 million
5th year — 67 million
6th year — 85 million

74
 7th year — 105 million
8th year — 124.61 million

subject to the following conditions:

a. Fresh capital of P200.0 million shall be put up, provided that a new group of

stockholders shall hold at least 40% of the total outstanding voting shares of
stock of PBP;

b. PBP shall submit additional collaterals to fully collateralize its overdraft with
the Central Bank;

c. PPI shall convey to PBP the remaining floors of the Producers Bank Centre for
a value of P143.54 million partly in payment of DOSRI loans of P27.6 million,
principal plus interest, and the balance of P115.94 million for shares of stock of
PBP, P15.12 million common and P100.89 million preferred, with features as
presently provided under PBP's Articles of Incorporation and By-Laws;

d. PBP's Articles of Incorporation and By-Laws shall be amended so as to

create a special class of preferred, non-voting, cumulative, non-participating shares
of stock with a dividend rate of 12% which shall be issued (i) in exchange for the PPI
shares that will be conveyed to PDIC under the dacion en pago mentioned in Item 1
above, (ii) in consideration of the balance of PBP's overdraft assigned to PDIC
under Item 2 above, (iii) in consideration of the accrued interest on PBP's overdraft
assigned to PDIC and the unbooked penalties on legal reserve deficiencies of PBP
also assigned to PDIC. The said preferred shares of stock shall be convertible into
common voting shares of stock upon the sale of such preferred shares to private
parties at the option of such parties.Proceeds from the sale of these shares of
stock shall be used to liquidate the advances made by the Central Bank to PDIC
by virtue of the various assignments under Items 1, 2, and 4 above. The said
shares of stock shall not share in losses and other capital adjustments
representing reduction of capital accounts as recommended by SES Department
I incurred up to the date of the issuance of such shares of stock;

e. PBP shall execute in favor of a trustee to be approved by the Central Bank of

mortgage trust indenture covering the assets presently mortgaged/pledged to
Central Bank as collateral for the overdraft of PBP as well as additional
collaterals to be submitted to fully collateralize the overdraft of PBP, under
which indenture PDIC as holder of preferred shares of stocks, shall have the first
lien and preference over the assets subject of the indenture in case of
insolvency, to the extent of the overdraft converted into preferred shares of
stock, provided that PBP shall submit an opinion from the Securities and
Exchange Commission that such indenture is legal and valid; and

f. The principal stockholders of both PBP and PPI shall submit in writing their
conformity to the above conditions, with the effect that any previous
agreements to the contrary shall be set aside; and

B. To require PBP to submit to the Monetary Board for approval the identities of the new
stockholdersand the new management which shall not be changed without the prior approval of
the Central Bank, it being understood that final approval of the above rehabilitation plan shall
depend entirely upon the acceptance by the Board of the new stockholders and the new
management; and to give PBP a period of two weeks after such final approval within which to
implement the above rehabilitation plan8 (Emphasis supplied).

75
There being no response from both PBP and PPI on the proposed rehabilitation plan, the MB issued Resolution No.
751 on 7 August 1987 instructing Central Bank management to advise the bank, through Mr. Henry Co, as follows:

a. The Central Bank conservatorship over PBP may be lifted only after PBP shall have identified the
new group of stockholders who will put in new capital in PBP and after the Monetary Board shall
have considered such new stockholders as acceptable; and

b. The stockholders of PBP have to decide whether or not to accept the terms of the rehabilitation
plan as provided under Resolution 
No. 649 dated July 3, 1987 within one week from receipt of notice hereof and if such terms are not
acceptable to them, the Central Bank will take appropriate alternative action on the matter; . . .  9

Additionally, in a letter dated 14 August 1987, the CB called the attention of the PBP directors and officers to Section
107 of R.A. No. 265, as amended by Executive Order No. 289 dated 23 July 1987, which provides, inter alia, that:

. . . any bank which incurs an overdrawing in its deposit account with the Central Bank shall fully cover
said overdraft not later than the next clearing day: Provided, further, That settlement of clearing
balances shall not be effected for any account which continue (sic) to be overdrawn for five
consecutive banking days until such time as the overdrawing is fully covered or otherwise converted
into an emergency loan or advance pursuant to the provisions of Sec. 90 of this Act. Provided,
Finally, That the appropriate clearing office shall be officially notified of banks with overdrawn
balances. Banks with existing overdrafts with the Central Bank as of the effectivity of this amended
section shall within such period as may be prescribed by the Monetary Board, either convert the
overdraft into an emergency loan or advance with a plan of payment, or settle such overdrafts, and
that upon failure to so comply herewith, the Central Bank shall take such action against the bank as
may be warranted under this Act. (Emphasis provided).

A. few days later, or on 27 August 1987, the PBP, without responding to the communications of the CB, filed a
complaint verified by its former board chairman, Henry Co, with the Regional Trial Court of Makati against the CB, the
MB and CB Governor Jose B. Fernandez, Jr. The complaint, docketed as Civil Case No. 17692, 10 devoted several pages
to specific allegations in support of PBP's assertions that the conservatorship was unwarranted, ill-motivated, illegal,
utterly unnecessary and unjustified; that the appointment of the conservator was arbitrary; that herein petitioners
acted in bad faith; that the CB-designated conservators committed bank frauds and abuses; that the CB is guilty of
promissory estoppel; and that by reason of the conservatorship, it suffered losses enumerated in paragraph 27
thereof, the total quantifiable extent of which is P108,479,771.00, exclusive of loss of profits and loss of
goodwill. 11 It concluded with a prayer for:

. . . judicial review of Monetary Board Resolutions No. 649 dated July 3, 1987 and No. 751 dated 14
August, 1987 and that judgment be rendered nullifying the same and ordering defendant Central
Bank's conservator to restore the viability of PBP as mandated by section 28-A of R.A. 265 and to
fully repair the damages inflicted on PBP consisting of losses of operation and the conservators' bank
frauds and abuses, with costs against defendants. (emphasis supplied).

and for:

. . . the issue of a temporary restraining order/preliminary injunction enjoining defendants' coercion

on PBP to accept the rehabilitation plan within one week or their taking "appropriate alternative
action" including exclusion of PBP from settlement of clearing balances at the Central 
Bank clearing house, pending judicial review of Monetary Board Resolutions No. 649 dated July 3,
1987 and No. 751 dated August 14, 
1987 –– defendants not being above the law. 12

Only P102.00 was paid as docket fee.

76
The case was raffled to Branch 147 of said court which was then presided over by respondent Judge.

On 31 August 1987, respondent Judge issued a temporary restraining order and set the hearing of the application for
preliminary injunction on 9 September 1987. 13 On 11 September 1987, petitioner filed an Opposition to the application
for preliminary injunction. 14

Subsequently, on 21 September 1987, respondent Judge issued an Order granting the writ 15 and enjoining defendant-
petitioners or any of their agents from:

. . . implementing Monetary Board Resolutions Nos. 649 and 751 or from taking the threatened
"appropriate alternative action" including exclusion of plaintiff bank from settlement of clearing
balances at the Central Bank clearing house or any other action that will disturb the status quo or
the viability of plaintiff bank during the pendency of this case conditioned upon the posting of a
bond in the amount of P2,000,000.00.

On 25 October 1987, PBP filed the Amended Complaint 16 impleading PPI as an additional plaintiff. No new allegations
or causes of action for said plaintiff were made.

On 5 November 1987, petitioners filed a Motion to Dismiss the Amended Complaint. The motion contained a prayer
to vacate the injunction and raised the following grounds:

1) the amended complaint states no cause of action; MB Resolution Nos. 649 and 751 are merely
advisory, thus, neither effect impairment of plaintiffs' rights nor cause it prejudice, loss or damage;
furthermore, there is no basis for the averments on the legality or illegality of the conservatorship
since the amended complaint does not seek its annulment;

2) the amended complaint is not authorized by the management of PBP; and

3) the lower court did not acquire jurisdiction over the case except to order the amended
complaint expunged from the records because the proper filing fee was not paid. 17

On 27 November 1987, the trial court, through the respondent Judge, handed down an Order denying the motion to
dismiss on the following grounds: (a) the amended complaint alleges ultimate facts showing that plaintiff has a right
and that such a right has been violated by defendant; the questioned MB Resolutions were issued arbitrarily and with
bad faith, "being a part of a scheme to divest plaintiff's present stockholders of their control of PBP and to award the
same to the PDIC or its unknown transferees"; and the averments of legality or illegality of the conservatorship are
relevant to the cause of action since the complaint seeks the lifting of the conservatorship; (b) While it is true that
under Section 28-A of the Central Bank Act the conservator takes over the management of a bank, the Board of
Directors of such bank is not prohibited from filing a suit to lift the conservatorship and from questioning the validity
of both the conservator's fraudulent acts and abuses and its principal's (MB) arbitrary action; besides, PPI is now a
party-plaintiff in the action; and (c) plaintiffs have paid the correct filing fees since "the value of the case cannot be
estimated." 18

G.R. No. 88353

Unable to accept the above Order, herein petitioners CB and Jose B. Fernandez, Jr. filed with respondent Court of
Appeals on 11 January 1988 a petition for certiorari with preliminary injunction 19 to annul the 21 September and 27
November 1987 Orders of the respondent Judge, restrain the implementation of the same and nullify the writ of
preliminary injunction. They contend therein that:

1. The trial court's injunctive order and writ are anomalous and illegal because they are directed
against CB acts and measures which constitute no invasion of plaintiff's rights; and

77
 2. The complaint filed was, on its face, dismissible: (a) for failure to state a cause of action, (b) for
being unauthorized by the party in whose name it purports to have been filed, and (c) for failure of
the purported plaintiff to pay the required filing fees.

Confronted with the "threshold and decisive issue of whether the respondent Judge gravely abused his discretion
when he issued the Writ of Preliminary Injunction to enjoin petitioner from implementing Monetary Board
Resolutions Nos. 649 and 751 for having been issued arbitrarily and with bad faith," the respondent Court
promulgated the challenged decision dismissing the petition for lack of merit. 20 Respondent Court ruled that the
CB's sudden and untimely announcement of the conservatorship over PBP eroded the confidence which the banking
public had hitherto reposed on the bank and resulted in the bank-run; it then concluded that when the CB
"peremptorily and illtimely (sic) announced" the conservatorship, PBP was not given an opportunity to be heard
since the CB arbitrarily brushed aside administrative due process notwithstanding PBP's having sufficiently
established its inherent corporate right to autonomously perform its banking activities without undue governmental
interference that would in effect divest its stockholders of their control over the operations of the bank." It further
held that the challenged resolutions of the MB are not just advisory in character "because the same sought to
impose upon the respondent bank petitioners' governmental acts that were specifically designed and executed to
devise a scheme that would irreparably divest from the stockholders of the respondent bank control of the same."

The motion filed by petitioners for the reconsideration of the above decision was denied by the respondent Court in
its Resolution of 17 May
1989. 21 On the issue of the non-payment of the correct docket fees, the said court, in ruling that the correct amount
was paid, said that "the instant case is incapable of pecuniary estimation because the value of the losses incurred by
the respondent bank cannot be calibrated nor pinned down to a specific amount in view of the damage that may be
caused by the appointment of a conservator to its goodwill and standing in the community."

Undaunted by the adverse decision of the Court of Appeals, petitioners filed with this Court on 30 July 1989 the
instant petition for review under Rule 45 of the Rules of Court. 22 It is alleged therein that the respondent Court
committed grave abuse of discretion in:

(1) Ignoring petitioners' contention that since PBP did not pay the correct filing fees, the trial court
did not acquire jurisdiction over the case; hence, pursuant to Manchester Development Corp., et
al. vs.Court of Appeals, et al., G.R. No. 75919, 7 May 1987, 23 the complaint should have been
dismissed for lack of jurisdiction on the part of the court;

(2) . . . ruling on the propriety or impropriety of the conservatorship as a basis for determining the
existence of a cause of action since the amended complaint does not seek the annulment or lifting
of the conservatorship;

(3) . . . not holding that the amended complaint should have been dismissed because it was filed in
the name of PBP without the authority of its conservator; and

(4) . . . not setting aside the Order of the trial court granting the issuance of a writ of preliminary
injunction which unlawfully restrained the CB from exercising its mandated responsibilities and
effectively compelled it to allow the PBP to continue incurring overdrafts with it.

This petition was docketed as G.R. No. 88353.

On 19 July 1989, this Court required the respondents to comment on the petition. 24

In the Comment 25 filed on 9 October 1989, private respondents maintain that: (a) the issue of whether or not they
paid the correct filing fees involves a question of correctness of judgment, not grave abuse of discretion; errors of
judgment cannot be the subject of the present petition for certiorari; (b) the complaint and the amended complaint
state sufficient causes of action because they both contain specific allegations of an illegal, unnecessary, disastrous

78
and repressive conservatorship conducted contrary to its mandated purpose, and breach of promissory estoppel;
furthermore, the trial court committed no grave abuse of discretion when it found that the questioned MB
Resolutions were arbitrarily issued in contravention of the due process clause of the Constitution; (c) the "Filing of
the complaint without authority from the conservator is an issue involving an error of judgment; besides, it would be
ridiculous and absurd to require such prior authorization from the conservator for no one expects him to sanction
the filing of a suit against his principal –– the CB; moreover, Rule 3 of the Rules of Court requires that every action
must be prosecuted and defended in the name of the real party in interest; besides, no administrative authority, even
the CB, can nullify judicial review of administrative action by requiring that only said administrative authority or its
designated conservator can file suit for judicial review of its actuation; and (d) the writ of preliminary injunction was
properly issued.

Petitioners filed a Reply 26 to the Comment on 3 November 1989.

In their Supplemental Comment, private respondents argue that the Manchester rule is not applicable in the case at
bar because what is primarily sought for herein is a writ of injunction and not an award for damages; it is further
alleged that an order denying a motion to dismiss is neither appealable nor be made the proper subject of a petition
for certiorari absent a clear showing of lack of jurisdiction or grave abuse of discretion.

On 15 February 1990, this Court resolved to give due course to the instant petition and require the parties to
simultaneously file their respective Memoranda, 27 which they complied with.

On 1 March 1990, petitioners filed an Urgent Motion 28 informing this Court of the fact that on 6 June 1989, PBP,
through Henry Co, proposed another rehabilitation plan which involved the infusion of fresh capital into PBP
by Banque Indosuez (Bangue) and the AFP-Retirement and Separation Benefits Systems (ARSBS). Under said
proposal, all existing law suits of PBP against the Central Bank and the PBP Conservator, and vice-versa, shall be
withdrawn upon approval and implementation of the plan. The plan was approved by the Monetary Board in its
Resolution No. 497 dated 23 June 1989. However, before the mechanics of the rehabilitation plan could be threshed
out among the parties, a "quarrel" developed between Henry and Luis Co, who both have controlling interests in
PBP. Luis accused Henry of "serious manipulations" in PBP and both steadfastly refused to settle their differences
notwithstanding efforts of mediators, including prospective investors. Eventually, the prospective investors, in a
letter dated 20 November 1989, advised the Central Bank that they are withdrawing their offer to infuse capital in
PBP and that they have terminated all discussions with the Co family.

Petitioner further allege that with the withdrawal of Banque Indosuez and RSBS, the rehabilitation plan for PBP is no
longer feasible. Meanwhile, the bank's overdraft with the Central Bank continues to rise. As of 13 February 1990,
PBP's overdraft with the CB increased to P1.233 billion. If the injunction is not lifted, PBP will continually bleed the CB
because of the former's liability to discharge its responsibilities under the law.

G.R. No. 92943

Pursuant to the powers and authority conferred upon her by the Central Bank, Atty. Leonida Tansinsin-Encarnacion,
in her capacity as conservator, instituted reforms aimed at making PBP more viable. With this purpose in mind, she
started reorganizing the bank's personnel and committees.

In order to prevent her from continuing with the reorganization, PBP filed on 24 October 1987, or after it obtained a
writ of preliminary injunction in Civil Case No. 17692, an Omnibus Motion asking the trial court for an order: 
(a) reinstating PBP officers to their original positions and restoring the bank's standing committees to their
respective compositions prior to said reorganization; (b) enjoining the lease of any portion of the bank's space in
Producers Bank Centre building to third parties and the relocation of departments/offices of PBP as was
contemplated; and (c) to hold, after an opportunity to be heard is given her, said conservator in contempt of court
for disobedience of and resistance to the writ of injunction. An opposition to the contempt charge was later filed by
said petitioner.

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Subsequently, upon its inclusion as party-plaintiff via the amended complaint, PPI filed on 4 November 1987 a motion
asking the lower court to order the Central Bank and its agents to restore to PPI the administration of the three (3)
buildings earlier assigned to PBP pending the lifting of the conservatorship. PPI claimed that such transfer was
necessary to prevent the rental income of said buildings being dissipated by the conservator.

On 17 November 1987, both PBP and PPI filed a motion praying:

(1) that the CB Conservator be ordered to publish PBP's financial statement for the last quarter of
1987 and every quarterly statement thereafter during the pendency of this case, with the following
claims of plaintiff PBP against the Central Bank, to wit:

(a) Interest in unconscionable rates of CB overdrawing illegally paid by the CB

conservators to CB –– now totaling P56,002,000.00,

(b) Penalties on reserve deficiencies illegally paid by the CB conservators to CB

–– now totaling P20,657,000.00,

(c) Penalties on reserve deficiencies not yet paid but which the conservator has
booked as liabilities –– now totaling P31,717,000.00,

(d) Losses of operation by the CB conservators from January 31, 1984 to October
31, 1987 –– now totaling P461,092,000.00

as "suspense" accounts; and (2) that the CB conservator be ordered to carry those "suspense"
accounts in the books of PBP.

The following day, respondent Judge issued an Order (a) requiring conservator Tansinsin-Encarnacion to reinstate
PBP officers to their original positions prior to the reorganization of the bank's personnel and restore PBP's standing
committees to their original compositions, and (b) restraining her from leasing out to third parties any portion of
PBP's space in the Producers Bank Centre building. However, respondent Judge held in abeyance the contempt
proceedings against the conservator pending her immediate compliance with the Order.

On 22 December 1987, respondent Judge granted PPI's motion for an order transferring to it the administration of
the three (3) buildings assigned to PBP. A motion for reconsideration of this order was filed by petitioners but was
subsequently denied by respondent Judge in the Order of 4 October 1988.

A second Order, issued by respondent Judge on the same day, 22 December 1987, directed conservator Tansinsin-
Encarnacion to publish the financial statement of PBP in the manner prayed for in the aforesaid 17 November 1987
motion. The motion to reconsider this Order was denied by respondent Judge on 3 October 1988.

On several occasions thereafter, conservator Tansinsin-Encarnacion caused the publication of PBP's financial
statement as required by regulations, without, however, carrying the items enumerated by the trial court as
"suspense accounts." Consequently, two (2) contempt charges were filed against her, one for the 3 February 1988
publication in the Manila Standard of PBP's statement of condition as of 29 December 1987 and the other for the 29
July 1988 publication in the Daily Globe of the bank's statement as of 30 June 1988. Oppositions to both charges of
contempt were filed.

On 9 November 1988, respondent Judge declared said conservator guilty of contempt of court on three (3) counts
and imposed upon her a fine of P1,000.00 for each count of contempt. The latter asked for reconsideration of the
order but the respondent Judge denied the same.

Another contempt charge against her was filed for publishing the statement of condition of PBP (as of 13 September
1988) in the 9 November 1988 issue of the Daily Globe without carrying the alleged "suspense accounts." She was

80
again found guilty as charged and her motion for reconsideration was denied. Finding no other adequate relief,
Tansinsin-Encarnacion filed with this Court on 11 January 1989 a petition for certiorariagainst respondent Judge,
Henry L. Co and the law firm of Quisumbing, Torres and Evangelista. This case was docketed as G.R. No. 86526. She
prays therein for judgment declaring respondent judge to be without jurisdiction to entertain both the complaint
and amended complaint in Civil Case No. 17692; declaring null and void all his orders, specially the contempt orders;
and finding respondent Judge and respondent lawyers guilty of violating their respective oaths of office. 29

On 8 February 1989, this Court resolved to refer said petition to the Court of Appeals which docketed it as C.A.-G.R.-
SP No. 16972.

In her Memorandum submitted to the Court of Appeals, Tansinsin-Encarnacion alleged that: (1) respondent Judge
has no jurisdiction over Civil Case No. 17692 because its filing was not authorized by the petitioner or the conservator
in violation of Section 28-A of R.A. No. 265, as amended, it was filed after the ten (10) day period prescribed by Section
29 of R.A. No. 265, as amended, and the correct docket fees were not paid; (2) respondent Judge illegally ordered her
to return to PPI the administration of the bank's three (3) properties, contrary to his own writ of preliminary
injunction and earlier order to make the bank viable, and to publish the alleged "suspense accounts"  contrary to
Section 28-A of R.A. No. 265, as amended, the writ of preliminary injunction and her constitutional right to silence; (3)
respondent Judge erred in declaring her in contempt of court notwithstanding his lack of jurisdiction over the case
and failure to set any date for the hearing and reception of evidence, in violation of her right to due process of law;
and (4) respondents Judge and lawyers are administratively liable for their grossly illegal actuations and for depriving
the Government of at least P13.2 million in filing fees. 30

In its decision dated 17 January 1990, the Court of Appeals (Twelfth Division) 31 dismissed the petition; while finding
the claim of lack of jurisdiction to be without merit, the said court nonetheless gave the following exception:

. . . except that plaintiffs in Civil Case No. 17692, within 15 days from receipt of a copy of this
Decision, shall file the corresponding amendment to their amended complaint in said case, stating
a specific amount "to fully repair the damages inflicted on PBP consisting of losses of operation
and the conservator's bank frauds and abuses", in the prayer of their amended complaint.
Thereafter, the Clerk of Court of the lower court and/or his duly authorized Docket Clerk of Court in
charge, should determine the amount found due, which should be paid by complainants within the
applicable prescriptive or reglementary period, failure of which said claims for damages shall be
dismissed.

In disposing of the issues raised, respondent Court merely adopted with approval the ruling of the respondent Judge
on the question of jurisdiction and cited the decision of the Court of Appeals in C.A.-G.R. SP No. 13624 (subject of G.R.
No. 88353), sustaining the respondent Judge's ruling. As to the filing of the complaint after the lapse of the 10-day
period provided for in Section 29 of R.A. No. 265, it ruled that the Section does not apply because the complaint
essentially seeks to compel the conservator to perform his duties and refers to circumstances and incidents which
transpired after said 10-day period.

On the issue of lack of jurisdiction for non-payment of correct filing fees, to which an exception was made in
the dispositive portion, the respondent Court found the same to be "partly" meritorious. It agreed with
petitioner that while the other losses and damages sought to be recovered are incapable of pecuniary
estimation, the damages inflicted on PBP due to losses of operation and the conservator's bank frauds and
abuses were in fact pegged at P108,479,771.00 in paragraph 26 of the amended complaint. This specific
amount, however, should have been stated in the prayer of the complaint. It also held that
the Manchestercase "has been legally construed in the subsequent case of Sun Insurance Office Ltd. 32 and
the case ofFilipinas Shell Petroleum Corp.  33 to the effect that applying the doctrine initiated in the case
of Manchester, together with said subsequent thereto (sic), plaintiffs in Civil Case No. 17692 should be given
a reasonable time to amend their complaint, more particularly, to state in their prayer in the amended
complaint the specific amount of damages . . ."

On the orders of contempt and the reasons therefor, respondent Court merely stated:

81
 . . . Generally, when the court has jurisdiction over the subject matter and of the person, decisions
upon or questions pertinent to the cause are decisions within its jurisdiction, and however,
irregular or erroneous they may be, they cannot be corrected by certiorari Whether the court's
conclusions was based merely on speculations and conjecture, or on a misapprehension of facts
contrary to the documents and exhibits of the case, is not for us to determine in a petition for
certiorari wherein only issues of jurisdiction may be raised. . . . Thus, the instant petition cannot
prosper.

and opined that under the Rules of Court, a judgment of contempt may be questioned on appeal and not
on certiorari.

Finally, on the administrative liability of the respondent Judge and the lawyers, the respondent Court declared the
claim to be without merit.

Petitioner's motion to reconsider the decision having been denied in the 2 April 1990 Resolution of the respondent
Court, 34 she filed with this Court a petition under Rule 45 of the Rules of Court, which was docketed as G.R. No.
92943. Petitioner Claims that respondent Court grossly erred in confirming/affirming the allegedly void Orders of
respondent Judge which denied the motion to dismiss the complaint and granted the writ of preliminary injunction,
restating in this regard the issues raised by the CB in G.R. 
No. 88353, and in holding her in contempt of court on four occasions. As to the last ground, she asserts that the
Orders were issued in violation of the Rules of Court and infringed her right to due process since there was no
hearing on the motions for contempt, except for the third motion wherein respondent Judge immediately ordered
the movant to present evidence.

In their Comment, 35 filed in compliance with Our Resolution 21 May 1990, private respondents practically reiterated
the arguments in their Comment to the petition in G.R. No. 88353; in addition, more specifically on the issue of
contempt, they assert that while the motions for contempt were set for hearing, there is no showing that the
scheduled hearings actually took place. Besides, the remedy to question a contempt order is an appeal; 36 since
petitioner did not appeal the questioned orders, the same became final and executory. 37

After petitioner filed a Reply and private respondents submitted their Rejoinder thereto, this Court gave due course
to the petition.

THE ISSUES

The basic issue in these cases is whether or not the respondent Court committed reversible error in affirming the
challenged Orders of the respondent Judge. This necessarily calls for a determination of whether or not the
respondent Judge committed grave abuse of discretion amounting to lack of jurisdiction:

(1) In not dismissing Civil Case No. 17692 on the following grounds: (a) lack of legal. personality to
bring the action as the same was filed in the name of the PBP without the authority of the
conservator; 
(b) failure of the complaint and amended complaint to state a cause of action; and (c) non-
payment of the correct amount of docket fee in violation of the rule enunciated in  Manchester
DevelopmentCorp. vs. Court of Appeals, et al.;

(2) In granting the writ of preliminary injunction; and

(3) In issuing the assailed Orders in G.R. No. 92943.

DISCUSSION

We shall take up the issues sequentially.

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1. PBP has been under conservatorship since 20 January 1984. Pursuant to Section 28-A of the Central Bank Act, 38 a
conservator, once appointed, takes over the management of the bank and assumes exclusive powers to oversee
every aspect of the bank's operations and affairs. Petitioners now maintain that this power includes the authority to
determine "whether or not to maintain suit in the bank's name." 39 The trial court overruled this contention stating
that the section alluded to "does not prohibit the Board of Directors of a bank to file suit to lift the conservatorship
over it, to question the validity of the conservator's fraudulent acts and abuses and the arbitrary action of the
conservator's principal –– the Monetary Board of the Central Bank. The conservator cannot be expected to question
his own continued existence and acts. He cannot be expected to file suit to annul the action of his principal . . . or a
suit that would point out the ill-motivation, the disastrous effects of the conservatorship and the conservator's bank
frauds and abuses as alleged in the complaint." 40

Obviously, the trial court was of the impression that what was sought for in Civil Case No. 17692 is the lifting of the
conservatorship because it was arbitrarily and illegally imposed. While it may be true that the PBP devoted the first
38 pages of its 47-page complaint and amended complaint to what it considers an unwarranted, ill-motivated, illegal,
unnecessary, and unjustified conservatorship, it, nevertheless, submitted to the same. There is nothing in the
amended complaint to reflect an unequivocal intention to ask for its lifting. Of course, as subsequent maneuvers
would show, PBP sought to accomplish the lifting thereof through surreptitious means. That such action was not, on
its face, filed to have the conservatorship lifted, is best evidenced by PBP's prayer for a judgment "ordering
defendant Central Bank's conservator to restore the viability of PBP as mandated by Section 28-A of R.A. No.
265 . . ." 41 Unfortunately too, respondent Court was easily misled into believing that the amended complaint sought
the lifting of the conservatorship. Thus, although the matter was not specifically raised in issue and clearly
unnecessary for the determination of the issues squarely raised, the respondent Court opined:

It is Our sober assessment that the respondent bank was not given an opportunity to be heard
when the Central Bank peremptorily and illtimely (sic) announced the appointment of a
conservatorship over the latter (bank) for which reason We believe that administrative due
process was arbitrarily brushed aside to the prejudice of the said bank. . . .

If it were to lift the conservatorship because it was arbitrarily imposed, then the case should have been dismissed on
the grounds of prescription and lack of personality to bring the action. Per the fifth paragraph of Section 29 of the
Central Bank Act, as amended by Executive Order No. 289, the actions of the MB may be assailed in an appropriate
pleading filed by the stockholders of record representing the majority of the capital stock within ten (10) days from
receipt of notice by the said majority stockholders of the order placing the bank under conservatorship. The
pertinent portion of said paragraph reads as follows:

The provisions of any law to the contrary notwithstanding, the actions of the Monetary Board
under this Section, Section 28-A, and the second paragraph of section 34 of this Act shall be final
and executory, and can be set aside by a court only if there is convincing proof, after hearing, that
the action is plainly arbitrary and made in bad faith: Provided, That the same is raised in an
appropriate pleading filed by the stockholders of record representing the majority of the capital
stock within ten (10) days from the date the receiver takes charge of the assets and liabilities of the
bank or non-bank financial intermediary performing quasi-banking functions or, in case of
conservatorship or liquidation, within ten (10) days from receipt of notice by the said majority
stockholders of said bank or non-bank financial intermediary of the order of its placement under
conservatorship or liquidation. . . .

The following requisites, therefore, must be present before the order of conservatorship may be set aside by a court:

1. The appropriate pleading must be filed by the stockholders of record representing the majority
of the capital stock of the bank in the proper court;

2. Said pleading must be filed within ten (10) days from receipt of notice by said majority
stockholders of the order placing the bank under conservatorship; and

83
 3. There must be convincing proof, after hearing, that the action is plainly arbitrary and made in
bad faith. 42

In the instant case, PBP was placed under conservatorship on 20 January 1984. The original complaint in Civil Case
No. 17692 was filed only on 27 August 1987, or three (3) years, seven (7) months and seven (7) days later, long after the
expiration of the 10-day period deferred to above. It is also beyond question that the complaint and the amended
complaint were not initiated by the stockholders of record representing the majority of the capital stock.
Accordingly, the order placing PBP under conservatorship had long become final and its validity could no longer be
litigated upon before the trial court. Applying the original provision of the aforesaid Section 29 of the Central Bank
Act, this Court, in Rural Bank of Lucena, Inc. vs. Arca, et al.,  43 ruled that:

Nor can the proceedings before Judge Arca be deemed a judicial review of the 1962 resolution No.
122 of the Monetary Board, if only because by law (Section 29, R.A. 265) such review must be asked
within 10 days from notice of the resolution of the Board. Between the adoption of Resolution No.
122 and the challenged order of Judge Arca, more than one year had elapsed. Hence, the validity of
the Monetary Board's resolution can no longer be litigated before Judge Arca, whose role under
the fourth paragraph of section 29 is confined to assisting and supervising the liquidation of the
Lucena bank.

This rule is still good law notwithstanding the amendment to Section 29 which expands its scope by including the
action of the MB under Section 28-A of the Act on the appointment of a conservator.

It was precisely an awareness of the futility of any action to set aside the conservatorship which prompted PBP to
limit its action to a claim for damages and a prayer for an injunction against the implementation of MB Resolution
Nos. 649 and 751. However, to make it appear that it had a meritorious case and a valid grievance against the Central
Bank, it wandered long into the past and narrated a sad story of persecution, oppression and injustice since the
inception of the conservatorship –– obviously to gain the sympathy of the court, which it eventually obtained.

The next crucial question that suggests itself for resolution is whether an action for damages arising from the MB's
act of placing the PBP under conservatorship and the acts of the conservator, and to enjoin the MB from
implementing resolutions related or incident to, or in connection with the conservatorship, may be brought only for
and in behalf of the PBP by the stockholders on record representing the majority of the capital stock thereof or
simply upon authority of its Board of Directors, or by its Chairman. We hereby rule that as to the first kind of
damages, the same may be claimed only if the MB's action is plainly arbitrary and made in bad faith, and that the
action therefor is inseparable from an action to set aside the conservatorship. In other words, the same must be filed
within ten (10) days from receipt of notice of the order placing the bank under conservatorship. Otherwise, the
provision of the fifth paragraph of Section 29 of the Central. Bank Act could be rendered meaningless and illusory by
the bank's filing, beyond the prescribed ten-day period, of an action ostensibly claiming damages but in reality
questioning the conservatorship. As to actions for the second kind of damages and for injunction to restrain the
enforcement of the CB's implementing resolutions, said fifth paragraph of Section 29 of the Central Bank Act, as
amended, equally applies because the questioned acts are but incidental to the conservatorship. The purpose of the
law in requiring that only the stockholders of record representing the majority of the capital stock may bring the
action to set aside a resolution to place a bank under conservatorship is to ensure that it be not frustrated or
defeated by the incumbent Board of Directors or officers who may immediately resort to court action to prevent its
implementation or enforcement. It is presumed that such a resolution is directed principally against acts of said
Directors and officers which place the bank in a state of continuing inability to maintain a condition of liquidity
adequate to protect the interest of depositors and creditors. Indirectly, it is likewise intended to protect and
safeguard the rights and interests of the stockholders. Common sense and public policy dictate then that the
authority to decide on whether to contest the resolution should be lodged with the stockholders owning a majority
of the shares for they are expected to be more objective in determining whether the resolution is plainly arbitrary
and issued in bad faith.

The original complaint in Civil Case No. 17692 was not initiated by the majority of the stockholders, hence it should
have been dismissed. However, confronted with this fatal flaw, counsel for PBP, through shrewd maneuvering,

84
attempted to save the day by impleading as co-plaintiff a corporation, the PPI, which was not under conservatorship.
Unfortunately, the maneuver was crudely and imperfectly executed. Except for the inclusion of its name, nothing
new was actually added to the original complaint in terms of causes of action and reliefs for PPI. The amendment
then was an exercise in futility. We cannot, however, subscribe to the petitioner's view that: (a) once a bank is placed
under conservatorship, no action may be filed on behalf of the bank without prior approval of the conservator, and
(b) since in this case such approval was not secured prior to the filing of Civil Case No. 17692, the latter must also be
dismissed on that ground. No such approval is necessary where the action was instituted by the majority of the
bank's stockholders. To contend otherwise would be to defeat the rights of such stockholders under the fifth
paragraph of Section 29 of the Central Bank Act. It must be stressed here that a bank retains its juridical personality
even if placed under conservatorship; 44 it is neither replaced nor substituted by the conservator who, per Section 28-
A of the Central Bank Act, as amended by P.D. No. 1932, shall only:

. . . take charge of the assets, liabilities, and the management of that institution, collect all monies
and debts due said institution and exercise all powers necessary to preserve the assets of the
institution, reorganize the management thereof, and restore its viability. He shall have the power
to overrule, or revoke the actions of the previous management and board of directors . . ., any
provision of law to the contrary notwithstanding, and such other powers as the Monetary Board
shall deem necessary.

Even assuming for the sake of argument that the action was properly brought by an authorized party, the same must
nevertheless be dismissed for failure of the plaintiffs therein to pay the correct docket fees, pursuant to Manchester
Development Corp. vs. Court of Appeals, et al.; 45 the said case was decided by this Court on 7 May 1987, exactly three
(3) months and twenty (20) days before the filing of the original complaint and five (5) months and eighteen (18)
days before the filing of the Amended Complaint in Civil Case No. 17692. We ruled therein that:

The Court acquires jurisdiction over any case only upon the payment of the prescribed docket fee.
An amendment of the complaint or similar pleading will not thereby vest jurisdiction in the Court,
much less the payment of the docket fee based on the amounts sought in the amended pleading.
The ruling in the Magaspi case [115 SCRA 193], in so far as it is inconsistent with this
pronouncement is overturned and reversed.

The respondent Judge, in ruling that PBP and PPI had paid the correct docket fee of P102.00, said that "the value of
the case cannot be estimated" since what is sought is an injunction against the enforcement of the challenged
resolutions of the MB; in short, the claim for damages is merely incidental. Upon the other hand, respondent Court,
in its Resolution of 17 May 1989 in C.A.-G.R. SP No. 13624, ruled that the case is "incapable of pecuniary estimation"
because the value of the losses incurred by the PBP "cannot be calibrated nor pinned down to a specific amount in
view of the damage that may be caused by the appointment of a conservator to its goodwill and standing in the
community." 46

Both conclusions are unfounded and are the result of a misapprehension of the allegations and causes of action in
both the complaint and amended complaint.

While PBP cleverly worded its complaint in Civil Case No. 17692 to make it appear as one principally for injunction,
deliberately omitting the claim for damages as a specific cause of action, a careful examination thereof bears that the
same is in reality an action for damages arising out of the alleged "unwarranted, ill-motivated and illegal
conservatorship," or a conservatorship which "was utterly unnecessary and unjustified," and the "arbitrary"
appointment of a conservator. 47 Thus, as stated earlier, it devoted the bulk of its petition to detailed events,
occurrences and transactions in support thereof and patiently enumerated the losses it sustained and suffered. The
pertinent portions of paragraph 27 of both the original and amended complaints read as follows:

27. The record of the Central Bank –– conservatorship of PBP clearly shows that it was responsible
for the losses.

xxx xxx xxx

85
 [Then follows an enumeration, from (a) to (u), of particular acts causing or resulting in losses, most
of which are specifically stated]

xxx xxx xxx

(v) Total of only the foregoing mentioned and only of those that can be quantified is P108,479,771.00.

And that excludes loss of profits that PBP could have realized if that disastrous
conservatorship had not been imposed on it and loss of goodwill.

The causes for these abuses of the conservators are course graft and corruption
of the conservators aside from fault in the system which denies private
enterprise. (emphasis supplied)

xxx xxx xxx

These are the very damages referred to in the prayer:

. . . to fully repair the damages inflicted on PBP consisting of losses of operation and the
conservators' bank frauds and abuses, . . .

but not specified therein. To this Court's mind, this was done to evade the payment of the corresponding
filing fees which, as computed by petitioner on the basis alone of the specified losses of P108,479,771.00,
would amount to about P 437,000.00. 48 The PBP then clearly acted with manifest bad faith in resorting to
the foregoing clever strategy to avoid paying the correct filing fees. We are thus constrained to reiterate
Our pronouncements in the Manchester case:

The Court cannot close this case without making the observation that it frowns at the practice of
counsel who filed the original complaint in this case of omitting any specification of the amount of
damages in the prayer although the amount of over P78 million is alleged in the body of the
complaint. This is clearly intended for no other purpose than to evade the payment of the correct
filing fees if not to mislead the docket clerk in the assessment of the filing fee. . . .

The respondent Court itself, in its decision of 17 January 1990 in C.A-G.R. SP No. 16972,  49 confronted by the same
issue, but perhaps unaware of its Resolution of 17 May 1989 in C.A.-G.R. SP No. 13624 aforementioned, ruled that PBP
and PPI are liable for the filing fees on the claim for damages. It even directed PBP and PPI to file "the corresponding
amendment to their amended complaint in said case stating a specific amount 'to fully repair the damages inflicted
on PBP consisting of losses of operation and the conservator's bank frauds and abuses' . . .," after which the Clerk of
Court of the lower court or his duly authorized docket clerk should determine the amount found due, which said
plaintiffs shall pay "within the applicable prescriptive or reglementary period,
. . ." 50 The 17 January 1990 ruling, clearly reversing the earlier one, is of doubtful propriety in view of the petition for
review of the decision in C.A.-G.R. SP No. 13624 filed by the petitioner.

In granting PBP and PPI an opportunity to amend their amended complaint to reflect the specific amount of
damages in the prayer of their Amended Complaint, respondent Court took refuge under the rule laid down in  Sun
Insurance Office, Ltd., et al. vs. Asuncion, et al.  51  and Filipinas Shell Petroleum Corp. vs. Court of Appeals, et al. 52 Of
course, it was erroneous for respondent Court to apply these last two (2) cases which were decided by this Court
three (3) months short of two (2) years after the promulgation of the Manchester decision on 7 May 1987.
Accordingly, since the original complaint in Civil Case No. 17692 was filed on 27 August 1987, the Manchester doctrine
was the controlling and applicable law. The lower court had no choice but to apply it when its attention was called by
the petitioner.

86
Moreover, even granting for the sake of argument that Sun Insurance and Pilipinas Shell 53 may apply in this case, We
should not lose sight of the fact that in the former, this Court categorically stated:

1. It is not simply the filing of the complaint or appropriate initiatory pleading, but the payment of
the prescribed docket fee, that vests a trial court with jurisdiction over the subject-matter or
nature of the action. Where the filling of the initiatory pleading is not accompanied by payment of
the docket fee, the court may allow the payment of the fee within a reasonable time but in no case
beyond the applicable prescriptive or reglementary period.

The prescriptive period therein mentioned refers to the period within which a specific action must be filed. It means
that in every case, the docket fee must be paid before the lapse of the prescriptive period. Chapter 3, Title V, Book III
of the Civil Code is the principal law governing prescription of actions.

There can be no question that in the instant case, PBP's claims for damages arise out of an injury to its rights.
Pursuant to Article 1146 of the Civil Code, the action therefor must be initiated within four (4) years from the time the
cause of action accrued. Since the damages arose out of the alleged unwarranted, ill-motivated, illegal, unnecessary
and unjustified conservatorship, the cause of action, if any, first accrued in 1984 and continued until 27 August 1987,
when the original complaint was filed. Even if We are to assume that the four-year period should start running on 27
August 1987, that period lapsed on 27 August 1991. There is no showing that PBP paid the correct filing fee for the
claim within the prescribed period. Hence, nothing can save Civil Case No. 17692 from being dismissed.

2. And now on the issue of the writ of preliminary injunction.

The challenged Orders of the trial court granting the application for a writ of preliminary injunction and the assailed
decision of the respondent Court in C.A. G.R. No. 13624 clearly betray a prejudgment of the case. In both instances,
not only did said courts declare MB Resolutions Nos. 649 and 751 to be arbitrary, both also declared the
conservatorship to have been issued in violation of PBP's right to administrative due process, which the CB
"arbitrarily brushed aside to the prejudice" of the latter. The said courts further concluded that "the sudden and
untimely announcement by the Central Bank that respondent Producers Bank will be under a conservatorship that
will oversee its operations worked havoc over the confidence that the public had hitherto reposed on respondent
bank so that the majority of its depositors over-reacted and rashly withdrew their accounts from said bank, thus it
incurred a loss of P593.707 million or 59.5% of its deposits."

Thus, save only for the determination of the full extent of PBP's claim for damages, said courts have, at the most,
decided or, at the very least, prejudged the case. Courts, notwithstanding the discretion given to them, should avoid
issuing writs of preliminary injunction which in effect dispose of the main case without a trial.  54 We do not then
hesitate to rule that there was grave abuse of discretion in the issuance of the writ of preliminary injunction.

Besides, there was neither arbitrariness nor bad faith in the issuance of MB Resolutions Nos. 649 and 751. It must be
stressed in this connection that the banking business is properly subject to reasonable regulation under the police
power of the state because of its nature and relation to the fiscal affairs of the people and the revenues of the
state. 55 Banks are affected with public interest because they receive funds from the general public in the form of
deposits. Due to the nature of their transactions and functions, a fiduciary relationship is created between the
banking institutions and their depositors. Therefore, banks are under the obligation to treat with meticulous care
and utmost fidelity the accounts of those who have reposed their trust and confidence in them. 56

It is then Government's responsibility to see to it that the financial interests of those who deal with banks and
banking institutions, as depositors or otherwise, are protected. In this country, that task is delegated to the Central
Bank which, pursuant to its Charter, 57 is authorized to administer the monetary, banking and credit system of the
Philippines. Under both the 1973 and 1987 Constitutions, the Central Bank is tasked with providing policy direction in
the areas of money, banking and credit; corollarily, it shall have supervision over the operations of banks.  58 Under its
charter, the CB is further authorized to take the necessary steps against any banking institution if its continued
operation would cause prejudice to its depositors, creditors and the general public as well. This power has been

87
expressly recognized by this Court. In Philippine Veterans Bank Employees Union-NUBE vs. Philippine Veterans
Bank, 59 this Court held that:

. . . Unless adequate and determined efforts are taken by the government against distressed and
mismanaged banks, public faith in the banking system is certain to deteriorate to the prejudice of
the national economy itself, not to mention the losses suffered by the bank depositors, creditors,
and stockholders, who all deserve the protection of the government. The government cannot
simply cross its arms while the assets of a bank are being depleted through mismanagement or
irregularities. It is the duty of the Central Bank in such an event to step in and salvage the
remaining resources of the bank so that they may not continue to be dissipated or plundered by
those entrusted with their management.

One important measure adopted by the government to protect the public against unscrupulous practices of some
bankers is to require banking institutions to set up reserves against their deposit liabilities. These reserves, pegged at
a certain percentage of the volume of deposit liability, is that portion of the deposit received by a banking institution
which it cannot use for loans and investments. The reserve requirement, which ordinarily takes the form of a deposit
with the Central Bank, is one means by which the government ensures the liquidity of banking institutions. 60

These reserve accounts maintained by banking institutions with the Central Bank also serve as a basis for the clearing
of checks and the settlement of interbank balances. 61

The need to maintain these required reserves cannot be over-emphasized. Thus, where over-drawings on deposit
accounts (regardless of amount) are incurred, R.A. No. 265 requires the delinquent bank to:

. . . fully cover said overdraft not later than the next clearing day: Provided, Further, That
settlement of clearing balances shall not be effected for any account which continue to, be
overdrawn for five consecutive banking days until such time as the overdrawing is fully covered or
otherwise converted into an emergency loan or advance pursuant to the provisions of Sec. 90 of
this Act. Provided, Finally, That the appropriate clearing office shall be officially notified of banks
with overdrawn balances. Banks with existing overdrafts with the Central Bank as of the effectivity
of this amended section shall, within such period as may be prescribed by the Monetary Board,
either convert the overdraft into an emergency loan or advance with a plan of payment, or settle
such overdrafts, and that, upon failure to comply herewith, the Central Bank shall take such action
against the bank as may be warranted under this Act. 62 [Emphasis supplied.]

The fact that PBP is grossly overdrawn on its reserve account with the CB (up to P1.233 billion as of 13 February 1990)
is not disputed by PBP. This enormous overdraft evidences the patent inability of the bank's management to keep
PBP liquid. This fact alone sufficiently justifies the remedial measures taken by the Monetary Board.

MB Resolutions Nos. 649 and 751 were not promulgated to arbitrarily divest the present stockholders of control over
PBP, as is claimed by the latter. The same contemplates an effective and viable plan to revive and restore PBP. It is to
be noted that before issuing these resolutions, the MB gave the management of PBP ample opportunity (from 30
March 1984 to June of 1987) to submit a viable rehabilitation plan for the bank.

MB Resolution Nos. 751 merely reiterated the requirement set forth in Resolution No. 649 for PBP to identify and
submit the list of new stockholders who will infuse new capital into the bank for CB approval. In this Resolution, the
MB gave PBP's stockholders one (1) week from notice within which to signify their acceptance or rejection of the
proposed rehabilitation plan.

The foregoing resolutions refer to a recommended rehabilitation plan. What was conveyed to PBP was a mere
proposal. There was nothing in the resolutions to indicate that the plan was mandatory. On the contrary, PBP was
given a specific period within which to accept or reject the plan. And, as petitioners correctly pointed out, the plan
was not self-implementing. The warning given by the MB that should said proposal be rejected, the CB "will take
appropriate alternative actions on the matter," does not make the proposed rehabilitation plan compulsory.

88
Whether or not there is a rehabilitation plan agreed upon between PBP and the MB, the CB is authorized under R.A.
No. 265 to take appropriate measures to protect the interest of the bank's depositors as well as of the general
public.

Furthermore, the assignment of claims to PDIC and the subsequent dacion en pago (payment of credit through
shares) do not divest the present stockholders of control over PBP. As may be readily observed from the terms of
Resolution No. 645, the shares which shall be issued to PDIC under the  dacion are preferred, non-voting and non-
participating shares. Hence, except for the instances enumerated in the Corporation Code where holders of non-
voting shares are given the right to vote, PDIC shall have no hand in the bank's operation or business. In any event,
these preferred shares will eventually be sold to private parties or new stockholders as soon as they are identified by
PBP and approved by the CB. Prior approval by the CB of the stockholders is necessary screening purposes.

There is nothing objectionable to the actions of the MB. We, therefore, find to be completely without legal or
evidentiary basis the contention that the impugned resolutions are arbitrary, illegal and made in bad faith.

Moreover, respondent Judge acted in complete disregard of Section 107 of R.A. No. 265 when he enjoined the CB
from taking appropriate actions against the bank, "including exclusion of (PBP) from settlement of clearing balances
at the Central Bank clearing house" as warranted by law. By using his own standards, and without scrutinizing the
law, respondent Judge arbitrarily determined when CB may or may not initiate measures against a bank that cannot
maintain its liquidity. He also arbitrarily and capriciously decided who can continually overdraw from the deposit
account with the CB, to the prejudice of other banking institutions, the banking public and the government.

3. As could be gleamed from the pleadings in G.R. No. 92943, the respondent Judge, per his order of 18 November
1987, (a) directed the conservator to restore both the PBP officers to their original positions prior to the
reorganization of the bank's personnel, and the PBP's standing committees to their original compositions, and (b)
restrained her from leasing out to a third party any portion of PBP's space in the Producers Bank Centre; per his
Order of 22 December 1987, respondent Judge granted PPI's motion for an order transferring to the latter the
administration of the three (3) buildings; and per the Order of 22 December 1987, he granted the motion directing
the conservator to publish the financial statement of the PBP in the manner prayed for by the latter.

The foregoing Orders were issued without due hearing. Moreover, these reliefs were not prayed for in the Amended
Complaint. They were not even covered by any specific allegations therein. Except for the prohibition to lease, the
rest partook of the nature of a preliminary mandatory injunction which deprived the conservator of her rights and
powers under Section 28-A of R.A. No. 265 and, in effect, set aside the conservatorship with PBP itself had earlier
accepted. It must be remembered that PBP did not ask, in its Amended Complaint, for the setting aside of the
conservatorship. On the contrary, it even prayed that the conservator be ordered to restore the viability of PBP as
mandated by said Section 28-A.

The respondent Judge should not have forgotten the settled doctrine that it is improper to issue a writ of preliminary
mandatory injunction prior to the final hearing, except in cases of extreme urgency, where the right is very clear,
where considerations of relative inconvenience bear strongly in complainant's favor, where there is a willful and
unlawful invasion of plaintiff's right against his protest and remonstrance, the injury being a continuing one, and
where the effect of the mandatory injunction is rather to re-establish and maintain a pre-existing continuing relation
between the parties, recently and arbitrarily interrupted by the defendant, than to establish a new relation. 63

It is plain to this Court that respondent Judge ceased to be an impartial arbitrator; he became the godfather of PBP
and PPI, granting to them practically all that they had asked for in the motions they filed. Upon the issuance of these
Orders, nothing appeared clearer in the judicial horizon than this –– PBP and PPI had everything in the bag, so to
speak, including the reliefs not even contemplated in their Amended Complaint. The challenged Orders then were
whimsically and arbitrarily issued.

Compounding such detestable conduct is the respondent Judge's issuance, with undue haste and unusual speed, of
the orders of contempt without the proper hearing. If the conservator could, at all, be liable for contempt, it would

89
be for indirect contempt punished under Section 3, Rule 71 of the Rules of Court, more specifically item (b) of the
first paragraph which reads:

Sec. 3 Indirect contempts to be punished after charge and hearing. –– After charge in writing has
been filed, and an opportunity given to the accused to be heard by himself or counsel, a person
guilty of any of the following acts may be punished for contempt:

xxx xxx xxx

(b) Disobedience of or resistance to a lawful writ, process, order, judgment, or

command of a court, or injunction granted by a court or judge, . . .;

It is clear from the said section that it is necessary that there be a charge and that the party cited for contempt be
given an opportunity to be heard. The reason for this is that contempt partakes of the nature of a criminal offense. In
the instant case, each motion for contempt served as the charge. It is settled that a charge may be filed by a fiscal, a
judge, or even a private person. 64 Petitioner Tansinsin-Encarnacion filed oppositions thereto. Thereafter, it was the
duty of the respondent Judge to hold a hearing on the motions. Respondent Judge deliberately did away with the
hearing and this Court finds no justifiable reason therefor.

There is, moreover, another reason why the contempt orders must be struck down. The orders which were
supposedly disobeyed and from which the motions for contempt arose were, as earlier indicated, null and void for
having been issued with grave abuse of discretion amounting to lack of jurisdiction. Such Orders, therefore, cannot
then be characterized as lawful. Consequently, resistance thereto cannot be punished as contempt 65

PREMISES CONSIDERED, the petitions in G.R. Nos. 88353 and 92943 are GRANTED. The 6 October 1988 decision and
17 May 1989 resolution of the Court of Appeals in C.A.-G.R. SP No. 13624 are REVERSED and SET ASIDE. Respondent
Judge is ordered to dismiss Civil Case No. 17692. All proceedings undertaken and all orders issued by respondent
Judge are hereby SET ASIDE for being null and void. The writ of preliminary injunction issued by the trial court in its
Order dated 21 September 1987 is hereby LIFTED.

IT IS SO ORDERED.

Narvasa, C.J., Melencio-Herrera, Cruz, Paras, Feliciano, Bidin, Griño-Aquino, Regalado, Romero and Nocon, JJ., concur.

Padilla and Bellosillo, JJ., took no part.

Separate Opinions

GUTIERREZ, JR., J.,  concurring:

While I concur in the Court's decision, I would like to express certain reservations about the arbitrary grant of power
under the law to Central Bank (CB) authorities.

Any displeasure of CB officials against a private bank expressed through official pronouncements or through rumors,
real or imagined, in media, as in this case, will lead to a bank run by depositors. And if the CB, which alone can stem
the disaster, does not sincerely do all it can to help the bank, the inevitable result is the bank's collapse and closure.

90
Subsequent judicial action is illusory. I realize that the possibility of abuse is no reason to invalidate a law but here it is
not a mere "possibility." It is a certainty whenever CB officials decide or will to do so. The absolute power and
discretion over a bank's life or death and the total reliance on the officials' good faith is contrary to principles of
fairness and substantive due process embodied in our Constitution.

The principal function of a CB conservator is to preserve the assets of the private bank and restore its viability. I,
however, note from this petition and earlier cases of the same nature that a conservator usually forgets that he is
supposed to be a friend of the bank under conservatorship and not its adversary. The distinction between a
conservator and a liquidator is overlooked. The conservator starts with a prejudiced attitude. There should be a more
objective and evenhanded way of restoring distressed banks to viability.

Separate Opinions

GUTIERREZ, JR., J.,  concurring:

While I concur in the Court's decision, I would like to express certain reservations about the arbitrary grant of power
under the law to Central Bank (CB) authorities.

Any displeasure of CB officials against a private bank expressed through official pronouncements or through rumors,
real or imagined, in media, as in this case, will lead to a bank run by depositors. And if the CB, which alone can stem
the disaster, does not sincerely do all it can to help the bank, the inevitable result is the bank's collapse and closure.
Subsequent judicial action is illusory. I realize that the possibility of abuse is no reason to invalidate a law but here it is
not a mere "possibility." It is a certainty whenever CB officials decide or will to do so. The absolute power and
discretion over a bank's life or death and the total reliance on the officials' good faith is contrary to principles of
fairness and substantive due process embodied in our Constitution.

The principal function of a CB conservator is to preserve the assets of the private bank and restore its viability. I,
however, note from this petition and earlier cases of the same nature that a conservator usually forgets that he is
supposed to be a friend of the bank under conservatorship and not its adversary. The distinction between a
conservator and a liquidator is overlooked. The conservator starts with a prejudiced attitude. There should be a more
objective and evenhanded way of restoring distressed banks to viability.

Footnotes

G.R. No. 112160           February 28, 2000

OSMUNDO S. CANLAS and ANGELINA CANLAS, petitioner, 

vs.
COURT OF APPEALS, ASIAN SAVINGS BANK, MAXIMO C. CONTRARES and VICENTE MAÑOSCA,respondents.

PURISIMA, J.:

At bar is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, seeking to review and set aside the
Decision1 of the Court of Appeals in CA-G.R. CV No. 25242, which reversed the Decision 2 of Branch 59 of the Regional
Trial Court of Makati City in Civil Case No. M-028; the dispositive portion of which reads:

91
 WHEREFORE, the decision appealed from is hereby REVERSED and SET ASIDE and a new one is hereby
entered DISMISSING the complaint of the spouses Osmundo and Angelina Canlas. On the counterclaim of
defendant Asian Savings Bank, the plaintiffs Canlas spouses are hereby ordered to pay the defendant Asian
Savings Bank the amount of P50,000.00 as moral and exemplary damages, plus P15,000.00 as and for
attorney's fees.

With costs against appellees.

SO ORDERED.3

The facts that matter:

Sometime in August, 1982, the petitioner, Osmundo S. Canlas, and private respondent, Vicente Mañosca, decided to
venture in business and to raise the capital needed therefor. The former then executed a Special Power of Attorney
authorizing the latter to mortgage two parcels of land situated in San Dionisio, (BF Homes) Paranaque, Metro
Manila, each lot with semi-concrete residential house existing thereon, and respectively covered by Transfer
Certificate of Title No. 54366 in his (Osmundo's) name and Transfer Certificate of Title No. S-78498 in the name of his
wife Angelina Canlas.

Subsequently, Osmundo Canlas agreed to sell the said parcels of land to Vicente Mañosca, for and in consideration of
P850,000.00, P500,000.00 of which payable within one week, and the balance of P350,000.00 to serve as his
(Osmundo's) investment in the business. Thus, Osmundo Canlas delivered to Vicente Mañosca the transfer
certificates of title of the parcels of land involved. Vicente Mañosca, as his part of the transaction, issued two
postdated checks in favor of Osmundo Canlas in the amounts of P40,000.00 and P460,000.00, respectively, but it
turned out that the check covering the bigger amount was not sufficiently funded. 4

On September 3, 1982, Vicente Mañosca was able to mortgage the same parcels of land for P100,000.00 to a certain
Attorney Manuel Magno, with the help of impostors who misrepresented themselves as the spouses, Osmundo
Canlas and Angelina Canlas.5

On September 29, 1982, private respondent Vicente Mañosca was granted a loan by the respondent Asian Savings
Bank (ASB) in the amount of P500,000.00, with the use of subject parcels of land as security, and with the
involvement of the same impostors who again introduced themselves as the Canlas spouses. 6 When the loan it
extended was not paid, respondent bank extrajudicially foreclosed the mortgage.

On January 15, 1983, Osmundo Canlas wrote a letter informing the respondent bank that the execution of subject
mortgage over the two parcels of land in question was without their (Canlas spouses) authority, and request that
steps be taken to annul and/or revoke the questioned mortgage. On January 18, 1983, petitioner Osmundo Canlas
also wrote the office of Sheriff Maximo O. Contreras, asking that the auction sale scheduled on February 3, 1983 be
cancelled or held in abeyance. But respondents Maximo C. Contreras and Asian Savings Bank refused to heed
petitioner Canlas' stance and proceeded with the scheduled auction sale. 7

Consequently, on February 3, 1983 the herein petitioners instituted the present case for annulment of deed of real
estate mortgage with prayer for the issuance of a writ of preliminary injunction; and on May 23, 1983, the trial court
issued an Order restraining the respondent sheriff from issuing the corresponding Certificate of Sheriff's Sale. 8

For failure to file his answer, despite several motions for extension of time for the filing thereof, Vicente Mañosca
was declared in default.9

On June 1, 1989, the lower court a quo came out with a decision annulling subject deed of mortgage and disposing,
thus:

Premises considered, judgment is hereby rendered as follows.1âwphi1.nêt

92
 1. Declaring the deed of real estate mortgage (Exhibit "L") involving the properties of the plaintiffs
as null and void;

2. Declaring the public auction sale conducted by the defendant Sheriff, involving the same
properties as illegal and without binding effect;

3. Ordering the defendants, jointly and severally, to pay the plaintiffs the sum of P20,000.00
representing attorney's fees;

4. On defendant ASB's crossclaim: ordering the cross-defendant Vicente Mañosca to pay the
defendant ASB the sum of P350,000.00, representing the amount which he received as proceeds
of the loan secured by the void mortgage, plus interest at the legal rate, starting February 3, 1983,
the date when the original complaint was filed, until the amount is fully paid;

5. With costs against the defendants.

SO ORDERED.10

From such Decision below, Asian Savings Bank appealed to the Court of Appeals, which handed down the assailed
judgment of reversal, dated September 30, 1983, in CA-G.R. CV No. 25242. Dissatisfied therewith, the petitioners
found their way to this Court via the present Petition; theorizing that:

RESPONDENT COURT OF APPEALS ERRED IN HOLDING THAT THE MORTGAGE OF THE PROPERTIES SUBJECT OF THIS
CASE WAS VALID.

II

RESPONDENT COURT OF APPEALS ERRED IN HIOLDING THAT PETITIONERS ARE NOT ENTITLED TO RELIEF BECAUSE
THEY WERE NEGLIGENT AND THEREFORE MUST BEAR THE LOSS.

III

RESPONDENT COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT ASB EXERCISED DUE DILIGENCE IN
GRANTING THE LOAN APPLICATION OF RESPONDENT.

IV

RESPONDENT COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT ASB DID NOT ACT WITH BAD FAITH IN
PROCEEDING WITH THE FORECLOSURE SALE OF THE PROPERTIES.

RESPONDENT COURT OF APPEALS ERRED IN AWARDING RESPONDENT ASB MORAL DAMAGES. 11

The Petition is impressed with merit.

Art. 1173 of the Civil Code, provides:

93
 Art. 1173. The fault or negligence of the obligor consist in the omission of that diligence which is required by
the nature of the obligation and corresponds with the circumstances of the persons, of the time and of the
place. When negligence shows bad faith, the provisions of articles 1171 and 2201, paragraph 2, shall apply.

If the law or contract does not state the diligence which is to be observed in the performance, that which is
expected of a good father of a family shall be required. (1104)

The degree of diligence required of banks is more than that of a good father of a family; 12 in keeping with their
responsibility to exercise the necessary care and prudence in dealing even on a registered or titled property. The
business of a bank is affected with public interest, holding in trust the money of the depositors, which bank deposits
the bank should guard against loss due to negligence or bad faith, by reason of which the bank would be denied the
protective mantle of the land registration law, accorded only to purchasers or mortgagees for value and in good
faith.13

In the case under consideration, from the evidence on hand it can be gleaned unerringly that respondent bank did
not observe the requisite diligence in ascertaining or verifying the real identity of the couple who introduced
themselves as the spouses Osmundo Canlas and Angelina Canlas. It is worthy to note that not even a single
identification card was exhibited by the said impostors to show their true identity; and yet, the bank acted on their
representations simply on the basis of the residence certificates bearing signatures which tended to match the
signatures affixed on a previous deed of mortgage to a certain Atty. Magno, covering the same parcels of land in
question. Felizado Mangubat, Assistant Vice President of Asian Savings Bank, thus testified inter alia:

xxx     xxx     xxx

Q:           According to you, the basis for your having recommended for the approval of MANASCO's ( sic) loan
particularly that one involving the property of plaintiff in this case, the spouses OSMUNDO CANLAS and
ANGELINA CANLAS, the basis for such approval was that according to you all the signatures and other
things taken into account matches with that of the document previously executed by the spouses CANLAS?

Q:           That is the only basis for accepting the signature on the mortgage, the basis for the
recommendation of the approval of the loan are the financial statement of MAÑOSCA?

A:           Yes; among others the signature and TAX Account Number, Residence Certificate appearing on the
previous loan executed by the spouses CANLAS, I am referring to EXHIBIT 5, mortgage to ATTY. MAGNO,
those were made the basis.

A:           That is just the basis of accepting the signature, because at that time the loan have been approved
already on the basis of the financial statement of the client the Bank Statement. Wneh (sic) it was approved
we have to base it on the Financial statement of the client, the signatures were accepted only for the
purpose of signing the mortgage not for the approval, we don't (sic) approve loans on the signature.

ATTY. CLAROS:

Would you agree that as part of ascertaining the identify of the parties particularly the mortgage,
you don't consider also the signature, the Residence Certificate, the particular address of the
parties involved.

A:           I think the question defers (sic) from what you asked a while ago.

Q:           Among others?

A:           We have to accept the signature on the basis of the other signatures given to us it being a public
instrument.

94
 ATTY. CARLOS:

You mean to say the criteria of ascertaining the identity of the mortgagor does not depend so
much on the signature on the residence certificate they have presented.

A:           We have to accept that.

xxx     xxx     xxx

A:           We accepted the signature on the basis of the mortgage in favor of ATTY. MAGNO duly notarized
which I have been reiterrting (sic) entitled to full faith considering that it is a public instrument.

ATTY. CARLOS:

What other requirement did you take into account in ascertaining the identification of the parties
particularly the mortgagor in this case.

A:           Residence Certificate.

Q:           Is that all, is that the only requirement?

A:           We requested for others but they could not produce, and because they presented to us the
Residence Certificate which matches on the signature on the Residence Certificate in favor of Atty. Magno. 14

Evidently, the efforts exerted by the bank to verify the identity of the couple posing as Osmundo Canlas and Angelina
Canlas fell short of the responsibility of the bank to observe more than the diligence of a good father of a family. The
negligence of respondent bank was magnified by the fact that the previous deed of mortgage (which was used as
the basis for checking the genuineness of the signatures of the supposed Canlas spouses) did not bear the tax
account number of the spouses,15 as well as the Community Tax Certificate of Angelina Canlas. 16But such fact
notwithstanding, the bank did not require the impostors to submit additional proof of their true identity.

Under the doctrine of last clear chance, which is applicable here, the respondent bank must suffer the resulting loss.
In essence, the doctrine of last clear chance is to the effect that where both parties are negligent but the negligent
act of one is appreciably later in point of time than that of the other, or where it is impossible to determine whose
fault or negligence brought about the occurrence of the incident, the one who had the last clear opportunity to
avoid the impending harm but failed to do so, is chargeable with the consequences arising therefrom. Stated
differently, the rule is that the antecedent negligence of a person does not preclude recovery of damages caused by
the supervening negligence of the latter, who had the last fair chance to prevent the impending harm by the exercise
of due diligence.17

Assuming that Osmundo Canlas was negligent in giving Vicente Mañosca the opportunity to perpetrate the fraud, by
entrusting to latter the owner's copy of the transfer certificates of title of subject parcels of land, it cannot be denied
that the bank had the last clear chance to prevent the fraud, by the simple expedient of faithfully complying with the
requirements for banks to ascertain the identity of the persons transacting with them.

For not observing the degree of diligence required of banking institutions, whose business is impressed with public
interest, respondent Asian Savings Bank has to bear the loss sued upon.

In ruling for respondent bank, the Court of Appeals concluded that the petitioner Osmundo Canlas was a party to the
fraudulent scheme of Mañosca and therefore, estopped from impugning the validity of subject deed of mortgage;
ratiocinating thus:

95
xxx     xxx     xxx

Thus, armed with the titles and the special power of attorney, Mañosca went to the defendant bank and
applied for a loan. And when Mañosca came over to the bank to submit additional documents pertinent to
his loan application, Osmundo Canlas was with him, together with a certain Rogelio Viray. At that time,
Osmundo Canlas was introduced to the bank personnel as "Leonardo Rey".

When he was introduced as "Leonardo Rey" for the first time Osmundo should have corrected Mañosca
right away. But he did not. Instead, he even allowed Mañosca to avail of his (Osmundo's) membership
privileges at the Metropolitan Club when Mañosca invited two officers of the defendant bank to a luncheon
meeting which Osmundo also attended. And during that meeting, Osmundo did not say who he really is, but
even let Mañosca introduced him again as "Leonardo Rey", which all the more indicates that he connived
with Mañosca in deceiving the defendant bank.

Finally after the loan was finally approved, Osmundo accompanied Mañosca to the bank when the loan was
released. At that time, a manger's check for P200,000.00 was issued in the name of Oscar Motorworks,
which Osmundo admits he owns and operates.

Collectively, the foregoing circumstances cannot but conjure to a single conclusion that Osmundo active
participated in the loan application of defendant Asian Savings Bank, which culminated in his receiving a
portion of the process thereof:18

A meticulous and painstaking scrutiny of the Records on hand, reveals, however, that the findings arrived at by the
Court of Appeals are barren of any sustainable basis. For instance, the execution of the deeds of mortgages
constituted by Mañosca on subject pieces of property of petitioners were made possible not by the Special Power of
Attorney executed by Osmundo Canlas in favor of Mañosca but through the use of impostors who misrepresented
themselves as the spouses Angelina Canlas and Osmundo Canlas. It cannot be said therefore, that the petitioners
authorized Vicente Mañosca to constitute the mortgage on their parcels of land.

What is more, Osmundo Canlas was introduced as "Leonardo Rey" by Vicente Mañosca, only on the occasion of the
luncheon meeting at the Metropolitan Club. 19 Thereat, the failure of Osmundo Canlas to rectify Mañosca's
misrepresentations could not be taken as a fraudulent act. As well explained by the former, he just did not want to
embarrass Mañosca, so that he waited for the end of the meeting to correct Mañosca. 20

Then, too, Osmundo Canlas recounted that during the said luncheon meeting, they did not talk about the security or
collateral for the loan of Mañosca with ASB. 21 So also, Mrs. Josefina Rojo, who was the Account Officer of Asian
Savings Bank when Mañosca applied for subject loan, corroborated the testimony of Osmundo Canlas, she testified:

xxx     xxx     xxx

QUESTION:           Now could you please describe out the lunch conference at the Metro Club in Makati?

ANSWER:           Mr. Mangubat, Mr. Mañosca and I did not discuss with respect to the loan application and
discuss primarily his business.

xxx     xxx     xxx

QUESTION:           So, what is the main topic of your discussion during the meeting?

ANSWER:           The main topic war then, about his business although, Mr. Leonardo Rey, who actually
turned out as Mr. Canlas, supplier of Mr. Mañosca.

96
 QUESTION:           I see . . . other than the business of Mr. Mañosca, were there any other topic discussed?

ANSWER:           YES.

QUESTION:           And what was the topic:

ANSWER:           General Economy then.

x x x           x x x           x x x22

Verily, Osmundo Canlas was left unaware of the illicit plan of Mañosca, explaining thus why he (Osmundo) did not
bother to correct what Mañosca misrepresented and to assert ownership over the two parcels of land in question.

Not only that; while it is true that Osmundo Canlas was with Vicente Mañosca when the latter submitted the
documents needed for his loan application, and when the check of P200,000.00 was released, the former did not
know that the collateral used by Mañosca for the said loan were their (Canlas spouses') properties. Osmundo
happened to be with Mañosca at the time because he wanted to make sure that Mañosca would make good his
promise to pay the balance of the purchase price of the said lots out of the proceeds of the loan. 23

The receipt by Osmundo Canlas of the P200,000.00 check from ASB could not estop him from assailing the validity of
the mortgage because the said amount was in payment of the parcels of land he sold to Mañosca. 24

What is decisively clear on record is that Mañosca managed to keep Osmundo Canlas uninformed of his (Mañosca's)
intention to use the parcels of land of the Canlas spouses as security for the loan obtained from Asian Savings Bank.
Since Vicente Mañosca showed Osmundo Canlas several certificates of title of lots which, according to Mañosca
were the collaterals, Osmundo Canlas was confident that their (Canlases') parcels of land were not involved in the
loan transactions with the Asian Savings Bank. 25 Under the attendant facts and circumstances, Osmundo Canlas was
undoubtedly negligent, which negligence made them (petitioners) undeserving of an award of attorney's fees.

Settled is the rule that a contract of mortgage must be constituted only by the absolute owner on the property
mortgaged;26 a mortgage, constituted by an impostor is void. 27 Considering that it was established indubitably that
the contract of mortgage sued upon was entered into and signed by impostors who misrepresented themselves as
the spouses Osmundo Canlas and Angelina Canlas, the Court is of the ineluctible conclusion and finding that subject
contract of mortgage is a complete nullity.

WHEREFORE, the Petition is GRANTED and the Decision of the Court of Appeals, dated September 30, 1993, in CA-
G.R. CV No. 25242 SET ASIDE. The Decision of Branch 59 of the Regional Trial Court of Makati City in Civil Case No. M-
028 is hereby REINSTATED. No pronouncement as to costs.

SO ORDERED.1âwphi1.nêt

Melo, Vitug and Gonzaga-Reyes, JJ., concur.

Panganiban, J., in the result.

G.R. No. 129471             April 28, 2000

DEVELOPMENT BANK OF THE PHILIPPINES, petitioner, 

vs.
COURT OF APPEALS and CARLOS CAJES, respondents.

97
MENDOZA, J.:

This is a petition for certiorari seeking to reverse the decision 1 and resolution2 of the Court of Appeals dated August
30, 1996 and April 23, 1997, respectively, declaring private respondent Carlos Cajes the owner of 19.4 hectares of land
embraced in TCT No. 10101 and ordering the segregation and reconveyance of said portion to him.

The antecedent facts are as follows:

The land in dispute, consisting of 19.4 hectares located in San Miguel, Province of Bohol, was originally owned by
Ulpiano Mumar, whose ownership since 1917 was evidenced by Tax Declaration No. 3840. 3 In 1950,4 Mumar sold the
land to private respondent who was issued Tax Declaration No. R-1475 that same year. 5 The tax declaration was later
superseded by Tax Declaration Nos. R-799 issued in 1961 6 and D-2247 issued in 1974.7Private respondent occupied and
cultivated the said land,8 planting cassava and camote in certain portions of the land.9

In 1969, unknown to private respondent, Jose Alvarez succeeded in obtaining the registration of a parcel of land with
an area of 1,512,468.00 square meters, 10 in his name for which he was issued OCT No. 546 on June 16, 1969. 11 The
parcel of land included the 19.4 hectares occupied by private respondent. Alvarez never occupied nor introduced
improvements on said land. 12

In 1972, Alvarez sold the land to the spouses Gaudencio and Rosario Beduya to whom TCT No. 10101 was
issued. 13 That same year, the spouses Beduya obtained a loan from petitioner Development Bank of the Philippines
for P526,000.00 and, as security, mortgaged the land covered by TCT No. 10101 to the bank.  14 In 1978, the SAAD
Investment Corp., and the SAAD Agro-Industries, Inc., represented by Gaudencio Beduya, and the spouses Beduya
personally executed another mortgage over the land in favor of petitioner to secure a loan of P1,430,000.00. 15

The spouses Beduya later failed to pay their loans, as a result of which, the mortgage on the property was
foreclosed. 16 In the resulting foreclosure sale held on January 31, 1985, petitioner was the highest bidder.  17 As the
spouses Beduya failed to redeem the property, petitioner consolidated its ownership. 18

It appears that private respondent had also applied for a loan from petitioner in 1978, offering his 19.4 hectare
property under Tax Declaration No. D-2247 as security for the loan. As part of the processing of the application, a
representative of petitioner, Patton R. Olano, inspected the land and appraised its value.

Private respondent's loan application was later approved by petitioner. 19 However after releasing the amount of the
loan to private respondent, petitioner found that the land mortgaged by private respondent was included in the land
covered by TCT No. 10101 in the name of the spouses Beduya. Petitioner, therefore, cancelled the loan and demanded
immediate payment of the amount. 20 Private respondent paid the loan to petitioner for which the former was issued
a Cancellation of Mortgage, dated March 18, 1981, releasing the property in question from encumbrance. 21

Sometime in April of 1986, more than a year after the foreclosure sale, a re-appraisal of the property covered by TCT
No. 10101 was conducted by petitioner's representatives. It was then discovered that private respondent was
occupying a portion of said land. Private respondent was informed that petitioner had become the owner of the land
he was occupying, and he was asked to vacate the property. As private respondent refused to do so, 22petitioner filed
a complaint for recovery of possession with damages against him. The case was assigned to Branch 1 of the Regional
Trial Court, Tagbilaran City, 23 which after trial, rendered a decision, dated August 22, 1989, declaring petitioner the
lawful owner of the entire land covered by TCT No. 10101 on the ground that the decree of registration was binding
upon the land. 24 The dispositive portion of the decision reads:

WHEREFORE, foregoing considered, the court renders judgment:

1 Declaring plaintiff bank Development Bank of the Philippines the true and legal owner of the land in
question covered by TCT No. 10101 farm of Gaudencio Beduya;

98
 2 Dismissing defendant's counterclaim;

3 Ordering defendant to vacate from the land in question; the portion of which he claims to belong to him
for without basis in fact and law;

4 Ordering defendant, his agents or any person representing him or those who may claim substantial rights
on the land to vacate therefrom, cease and desist from disturbing, molesting and interfering plaintiff's
possession of the land in question, and from committing any such act as would tend to mitigate, deny or
deprive plaintiff of its ownership and possession over said land.

SO ORDERED.

On appeal, the Court of Appeals reversed and gave judgment for private respondent, declaring him the owner of the
19.4 hectares of land erroneously included in TCT No. 10101. The dispositive portion of the appellate court's decision
reads:

WHEREFORE, the appealed decision is hereby REVERSED AND SET ASIDE. A new decision is hereby
rendered:

1. Dismissing the complaint.

2. Declaring the disputed 19.4000 hectares of land embraced in TCT 10101 as exclusively belonging
to defendant-appellant, ordering its segregation from plaintiff-appellee's title and its reconveyance
to appellant.

No pronouncement as to costs.

SO ORDERED. 25

Petitioner moved for a reconsideration but its motion was denied in a resolution dated April 23, 1997. 26 Hence this
petition.

Petitioner contends that:

I. THE DECISION OF THE RESPONDENT COURT IS NOT IN ACCORD WITH THE APPLICABLE PROVISIONS OF
LAW (Sections 38 and 46 of ACT 496) AND THE APPLICABLE DECISIONS OF THE SUPREME COURT,
PARTICULARLY IN THE CASE OF BENIN VS. TUASON, 57 SCRA 531.

II. THE RESPONDENT COURT OVERLOOKED THE ISSUES ABOUT THE DBP BEING AN INNOCENT
MORTGAGEE FOR VALUE OF THE LAND IN QUESTION AND OF HAVING PURCHASED LATER THE SAME
DURING A PUBLIC AUCTION SALE.

III. THE RESPONDENT COURT'S RULING DECLARING DBP IN ESTOPPEL IS ILLOGICAL. 27

First. Petitioner invokes the ruling of this Court in Benin v. Tuason  28 in support of its claim that its predecessor-in-
interest, Jose Alvarez, became the owner of the land by virtue of the decree of registration issued in his name. In
Benin, three sets of plaintiffs filed separate complaints against Mariano Severo Tuason and J.M. Tuason & Co., Inc.,
praying for the cancellation of OCT No. 735 covering two parcels of land called the Sta. Mesa Estate, or Parcel 1, with
an area of 8,798,617.00 square meters, and the Diliman Estate, or Parcel 2, with an area of 15,961,246.00 square
meters. They asked that they be declared the owners and lawful possessors of said lands.

99
Benin is distinguished from this case. In the first place, Benin involved vast tracts of lands which had already been
subdivided and bought by innocent purchasers for value and in good faith at the time the claimants obtained
registration. Secondly, when the claimants' ancestors occupied the lands in question and declared them for tax
purposes in 1944, the lands were already covered by the tax declarations in the name of J. M. Tuason & Co., Inc. In
1914, OCT No. 735 was issued in the name of Tuason so that, from that time on, no possession could defeat the title
of the registered owners of the land. Thirdly, the validity of OCT No. 735 had already been recognized by this Court in
several cases 29 and, as a result thereof, the transfer certificates of title acquired by the innocent purchasers for value
were also declared valid. It was held that neither could the claimants file an action to annul these titles for not only
had these actions prescribed, but the fact was that the claimants were also barred from doing so by laches, having
filed the complaint only in 1955, or 41 years after the issuance of OCT No. 735 to J.M. Tuason & Co., Inc. Thus, it was
not solely the decree of registration which was considered in resolving the Benin case. What was considered decisive
was the valid title or right of ownership of J. M. Tuason & Co., Inc. and that of the other innocent purchasers for
value and in good faith compared to the failure of the claimants to show their right to own or possess the
questioned properties.1âwphi1.nêt

Petitioner maintains that the possession by private respondent and his predecessor-in-interest of the 19.4 hectares of
land for more than 30 years cannot overcome the decree of registration issued in favor of its predecessor-in-interest
Jose Alvarez. Petitioner quotes the following statement in the Benin case:

It follows also that the allegation of prescriptive title in favor of plaintiffs does not suffice to establish a
cause of action. If such prescription was completed before the registration of the land in favor of the
Tuasons, the resulting prescriptive title was cut off and extinguished by the decree of registration. If, on the
contrary, the prescription was either begun or completed after the decree of registration, it conferred no
title because, by express provision of law, prescription can not operate against the registered owner (Act
496). 30

Petitioner would thus insist that, by virtue of the decree of registration, Jose Alvarez and those claiming title from
him (i.e., the spouses Beduya) acquired ownership of the 19.4 hectares of land, despite the fact that they neither
possessed nor occupied these lands.

This view is mistaken. A consideration of the cases shows that a decree of registration cut off or extinguished a right
acquired by a person when such right refers to a lien or encumbrance on the land — not to the right of ownership
thereof — which was not annotated on the certificate of title issued thereon. Thus, Act No. 496 provides:

Sec. 39. Every person receiving a certificate of title in pursuance of a decree of registration, and every
subsequent purchaser of registered land who takes a certificate of title for value in good faith shall hold the
same free of all encumbrances except those noted on said certificate, and any of the following
encumbrances which may be subsisting, namely:

First. Liens, claims, or rights arising or existing under the laws of Constitution of the United States or of the
Philippine Islands which the statutes of the Philippine Islands cannot require to appear of record in the
Registry.

Second. Taxes within two years after the same became due and payable.

Third. Any public highway, way, private way established by law, or any Government irrigation canal or lateral
thereof, where the certificate of title does not state that the boundaries of such highway, way, or irrigation
canal or lateral thereof, have been determined.

But if there are easements or other rights appurtenant to a parcel of registered land which for any reason
have failed to be registered, such easements or rights shall remain so appurtenant notwithstanding such
failure, and shall be held to pass with the land until cut off or extinguished by the registration of the servient
estate, or in any other manner.

100
Hence, in Cid v. Javier, 31 it was held:

. . . Consequently, even conceding arguendo that such an easement has been acquired, it had been cut off
and extinguished by the registration of the servient estate under the Torrens system without the easement
being annotated on the corresponding certificate of title, pursuant to Section 39 of the Land Registration
Act.

This principle was reiterated in Purugganan v. Paredes  32 which also involved an easement of light and view that was
not annotated on the certificate of title of the servient estate.

But to make this principle applicable to a situation wherein title acquired by a person through acquisitive prescription
would be considered cut off and extinguished by a decree of registration would run counter to established
jurisprudence before and after the ruling in Benin. Indeed, registration has never been a mode of acquiring
ownership over immovable property. As early as 1911, in the case of City of Manila v. Lack, 33 the Court already ruled
on the purpose of registration of lands, viz.:

The Court of Land Registration was created for a single purpose. The Act is entitled "An Act to provide for
the adjudication and registration of titles to lands in the Philippine Islands." The sole purpose of the
Legislature in its creation was to bring the land titles of the Philippine Islands under one comprehensive and
harmonious system, the cardinal features of which are indefeasibility of title and the intervention of the
State as a prerequisite to the creation and transfer of titles and interest, with the resultant increase in the
use of land as a business asset by reason of the greater certainty and security of title. It does not create a
title nor vest one. It simply confirms a title already created and already vested, rendering it forever
indefeasible. . .

Again, in the case of Angeles v. Samia 34 where land was erroneously registered in favor of persons who neither
possessed nor occupied the same, to the prejudice of the actual occupant, the Court held:

. . . The purpose of the Land Registration Act, as this court has had occasion to so state more than once, is
not to create or vest title, but to confirm and register title already created and already vested, and of
course, said original certificate of title No. 8995 could not have vested in the defendant more title than
what was rightfully due her and her coowners. It appearing that said certificate granted her much more
than she expected, naturally to the prejudice of another, it is but just that the error, which gave rise to said
anomaly, be corrected (City of Manila vs. Lack, 19 Phil., 324). The defendant and her coowners knew or, at
least, came to know that it was through error that the original certificate of title in question was issued by
the court which heard cadastral case No. 11 of Bacolor, not only in or prior to March, 1933, but from the time
said certificate was issued in their favor, that is, from December 15, 1921. This is evidenced by the fact that,
ever since, they remained passive without even attempting to make the least showing of ownership over
the land in question until after the lapse of more than eleven years. The Land Registration Act as well as the
Cadastral Act protects only the holders of a title in good faith and does not permit its provisions to be used
as a shield for the commission of fraud, or that one should enrich himself at the expense of another (Gustilo
vs. Maravilla, 48 Phil., 442; Angelo vs. Director of Lands, 49 Phil., 838). The above-stated Acts do not give
anybody, who resorts to the provisions thereof, a better title than he really and lawfully has. If he happened
to obtain it by mistake or to secure, to the prejudice of his neighbor, more land than he really owns, with or
without bad faith on his part, the certificate of title, which may have been issued to him under the
circumstances, may and should be cancelled or corrected (Legarda and Prieto vs. Saleeby, 31 Phil., 590). This
is permitted by section 112 of Act No. 496, which is applicable to the Cadastral Act because it is so provided
expressly by the provisions of section 11 of the latter Act. It cannot be otherwise because, as stated in the
case of Domingo vs. Santos, Ongsiako, Lim y Cia. (55 Phil., 361), errors in the plans of lands sought to be
registered in the registry and reproduced in the certificate of title issued later, do not annul the decree of
registration on the ground that it is not the plan but the land itself which is registered in the registry. In
other words, if the plan of an applicant for registration or claimant in a cadastral case alleges that the land
referred to in said plan is 100 or 1,000 hectares, and the land which he really owns and desires to register in

101
 the registry is only 80 ares, he cannot claim to be the owner of the existing difference if afterwards he is
issued a certificate of title granting him said area of 100 or 1,000 hectares. 35

The principle laid down in this 1938 case remains the prevailing doctrine, its latest application being in the case
ofReyes v. Court of Appeals  36 wherein we ruled that the fact that a party was able to secure a title in his favor did not
operate to vest ownership upon her of the property.

In the present case, private respondent has been in actual, open, peaceful and continuous possession of the
property since 1950. This fact was corroborated by the testimony of Eleuterio Cambangay who personally knew that
Ulpiano Mumar transferred the land covered by Tax Declaration No. 3840 37 in favor of private respondent in
1950. 38 Private respondent's claim based on actual occupation of the land is bolstered by Tax Declaration Nos. R-
1475, R-799 and D-2247 39 which were issued in his name in 1950, 1961 and 1974, respectively. Together with his actual
possession of the land, these tax declarations constitute strong evidence of ownership of the land occupied by him.
As we said in the case of Republic vs. Court of Appeals: 40

Although tax declarations or realty tax payments of property are not conclusive evidence of ownership,
nevertheless, they are good indicia of possession in the concept of owner for no one in his right mind would
be paying taxes for a property that is not in his actual or at least constructive possession. They constitute at
least proof that the holder has a claim of title over the property. The voluntary declaration of a piece of
property for taxation purposes manifests not only one's sincere and honest desire to obtain title to the
property and announces his adverse claim against the State and all other interested parties, but also the
intention to contribute needed revenues to the Government. Such an act strengthens one's bona fide claim
of acquisition of ownership.

More importantly, it was established that private respondent, having been in possession of the land since 1950, was
the owner of the property when it was registered by Jose Alvarez in 1969, his possession tacked to that of his
predecessor-in-interest, Ulpiano Mumar, which dates back to 1917. 41 Clearly, more than 30 years had elapsed before a
decree of registration was issued in favor of Jose Alvarez. This uninterrupted adverse possession of the land for
more than 30 years could only ripen into ownership of the land through acquisitive prescription which is a mode of
acquiring ownership and other real rights over immovable property. Prescription requires public, peaceful,
uninterrupted and adverse possession of the property in the concept of an owner for ten (10) years, in case the
possession is in good faith and with a just title. Such prescription is called ordinary prescription, as distinguished from
extraordinary prescription which requires possession for 30 years in case possession is without just title or is not in
good faith. 42

In contrast to private respondent, it has been shown that neither Jose Alvarez nor the spouses Beduya were at any
time in possession of the property in question. In fact, despite knowledge by Gaudencio Beduya that private
respondent occupied this 19.4 hectares included in the area covered by TCT No. 10101, 43 he never instituted any
action to eject or recover possession from the latter. Hence, it can be concluded that neither Jose Alvarez nor the
spouses Beduya ever exercised any right of ownership over the land. The fact of registration in their favor never
vested in them the ownership of the land in dispute. "If a person obtains a title under the Torrens system, which
includes by mistake or oversight land which can no longer be registered under the system, he does not, by virtue of
the said certificate alone, become the owner of the lands illegally included." 44

Considering the circumstances pertaining in this case, therefore, we hold that ownership of the 19.4 hectares of land
presently occupied by private respondent was already vested in him and that its inclusion in OCT No. 546 and,
subsequently, in TCT No. 10101, was erroneous. Accordingly, the land in question must be reconveyed in favor of
private respondent, the true and actual owner thereof, reconveyance being clearly the proper remedy in this case.

The true owner may bring an action to have the ownership or title to the land judicially settled and the
Court in the exercise of its equity jurisdiction, without ordering the cancellation of the Torrens title issued
upon the patent, may direct the defendants, the registered owner to reconvey the parcel of land to the
plaintiff who has been found to be the true owner thereof." (Vital vs. Amore, 90 Phil. 955) "The
reconveyance is just and proper in order to terminate the intolerable anomaly that the patentees should

102
 have a torrens title for the land which they and their predecessors never possessed which has been
possessed by Novo in the concept of owner." (Bustarga v. Novo, 129 SCRA 125). 45

Second. Generally, an action for reconveyance based on an implied or constructive trust, such as the instant case,
prescribes in 10 years from the date of issuance of decree of registration. 46 However, this rule does not apply when
the plaintiff is in actual possession of the land. Thus, it has been held:

. . . [A]n action for reconveyance of a parcel of land based on implied or constructive trust prescribes in ten
years, the point of reference being the date of registration of the deed or the date of the issuance of the
certificate of title over the property, but this rule applies only when the plaintiff or the person enforcing the
trust is not in possession of the property, since if a person claiming to be the owner thereof is in actual
possession of the property, as the defendants are in the instant case, the right to seek reconveyance, which
in effect seeks to quiet title to the property, does not prescribe. The reason for this is that one who is in
actual possession of a piece of land claiming to be the owner thereof may wait until his possession is
disturbed or his title is attacked before taking steps to vindicate his right, the reason for the rule being, that
his undisturbed possession gives him a continuing right to seek the aid of a court of equity to ascertain and
determine the nature of the adverse claim of a third party and its effect on his own title, which right can be
claimed only by one who is in possession. 47

Having been the sole occupant of the land in question, private respondent may seek reconveyance of his property
despite the lapse of more than 10 years.

Nor is there any obstacle to the determination of the validity of TCT No. 10101. It is true that the indefeasibility of
torrens titles cannot be collaterally attacked. In the instant case, the original complaint is for recovery of possession
filed by petitioner against private respondent, not an original action filed by the latter to question the validity of TCT
No. 10101 on which petitioner bases its right. To rule on the issue of validity in a case for recovery of possession is
tantamount to a collateral attack. However, it should not be overlooked that private respondent filed a counterclaim
against petitioner, claiming ownership over the land and seeking damages. Hence, we could rule on the question of
the validity of TCT No. 10101 for the counterclaim can be considered a direct attack on the same. "A counterclaim is
considered a complaint, only this time, it is the original defendant who becomes the plaintiff. . . . It stands on the
same footing and is to be tested by the same rules as if it were an independent action." 48 In an analogous case, 49 we
ruled on the validity of a certificate of title despite the fact that the original action instituted before the lower court
was a case for recovery of possession. The Court reasoned that since all the facts of the case are before it, to direct
the party to institute cancellation proceedings would be needlessly circuitous and would unnecessarily delay the
termination of the controversy which has already dragged on for 20 years.

Third. Petitioner nonetheless contends that an action for reconveyance does not lie against it, because it is an
innocent purchaser for value in the foreclosure sale held in 1985.

This contention has no merit. Sec. 38 of Act No. 496, the Land Registration Act, provides:

If the court after hearing finds that the applicant or adverse claimant has title as stated in his application or
adverse claim and proper for registration, a decree of confirmation and registration shall be entered. Every
decree of registration shall bind the land, and quiet title thereto, subject only to the exceptions stated in the
following section. It shall be conclusive upon and against all persons, including the Insular Government and
all the branches thereof, whether mentioned by name in the application, notice, or citation, or included in
the general description "To all whom it may concern." Such decree shall not be opened by reason of the
absence, infancy, or other disability of any person affected thereby, nor by any proceeding in any court for
reversing judgments or decrees; subject, however, to the right of any person deprived of land or of any
estate or interest therein by decree of registration obtained by fraud to file in the competent Court of First
Instance a petition for review within one year after entry of the decree, provided no innocent purchaser for
value has acquired an interest. Upon the expiration of said term of one year, every decree or certificate of
title issued in accordance with this section shall be incontrovertible. If there is any such purchaser, the
decree of registration shall not be opened, but shall remain in full force and effect forever, subject only to

103
 the right of appeal hereinbefore provided: Provided, however, That no decree or certificate of title issued to
persons not parties to the appeal shall be cancelled or annulled. But any person aggrieved by such decree in
any case may pursue his remedy by action for damages against the applicant or any other person for fraud
in procuring the decree. Whenever the phrase "innocent purchaser for value" or an equivalent phrase
occurs in this Act, it shall be deemed to include an innocent lessee, mortgagee, or other encumbrancer for
value. (As amended by Sec. 3, Act 3621; and Sec. 1, Act No. 3630.)

Succinctly put, §38 provides that a certificate of title is conclusive and binding upon the whole world. Consequently, a
buyer need not look behind the certificate of title in order to determine who is the actual owner of the land.
However, this is subject to the right of a person deprived of land through fraud to bring an action for reconveyance,
provided that it does not prejudice the rights of an innocent purchaser for value and in good faith. "It is a
condition sine qua non for an action for reconveyance to prosper that the property should not have passed to the
hands of an innocent purchaser for value." 50 The same rule applies to mortgagees, like petitioner. Thus, we held:

Where the certificate of title is in the name of the mortgagor when the land is mortgaged, the innocent
mortgagee for value has the right to rely on what appears on the certificate of title. In the absence of
anything to excite suspicion, said mortgagee is under no obligation to look beyond the certificate and
investigate the title of the mortgagor appearing on the face of said certificate. Although Article 2085 of the
Civil Code provides that absolute ownership of the mortgaged property by the mortgagor is essential, the
subsequent declaration of a title as null and void is not a ground for nullifying the mortgage right of a
mortgagee in good faith.51

The evidence before us, however, indicates that petitioner is not a mortgagee in good faith. To be sure, an innocent
mortgagee is not expected to conduct an exhaustive investigation on the history of the mortgagor's title.
Nonetheless, especially in the case of a banking institution, a mortgagee must exercise due diligence before entering
into said contract. Judicial notice is taken of the standard practice for banks, before approving a loan, to send
representatives to the premises of the land offered as collateral and to investigate who are the real owners thereof.
Banks, their business being impressed with public interest, are expected to exercise more care and prudence than
private individuals in their dealings, even those involving registered lands. 52

In this case, petitioner's representative, Patton R. Olano, admitted that he came to know of the property for the first
time in 1979 when he inspected it to determine whether the portion occupied by private respondent and mortgaged
by the latter to petitioner was included in TCT No. 10101. This means that when the land was mortgaged by the
spouses Beduya in 1972, no investigation had been made by petitioner. It is clear, therefore, that petitioner failed to
exercise due care and diligence in establishing the condition of the land as regards its actual owners and possessors
before it entered into the mortgage contract in 1972 with the Beduyas. Had it done so, it would not have failed to
discover that private respondent was occupying the disputed portion of 19.4 hectares. For this reason, petitioner
cannot be considered an innocent purchaser for value when it bought the land covered by TCT No. 10101 in 1985 at
the foreclosure sale.

Indeed, two circumstances negate petitioner's claim that it was an innocent purchaser for value when it bought the
land in question, including the portion occupied by private respondent: (1) petitioner was already informed by
Gaudencio Beduya that private respondent occupied a portion of the property covered by TCT No. 10101; and (2)
petitioner's representative conducted an investigation of the property in 1979 to ascertain whether the land
mortgaged by private respondent was included in TCT No. 10101. In other words, petitioner was already aware that a
person other than the registered owner was in actual possession of the land when it bought the same at the
foreclosure sale. A person who deliberately ignores a significant fact which would create suspicion in an otherwise
reasonable man is not an innocent purchaser for value. "It is a well-settled rule that a purchaser cannot close his eyes
to facts which should put a reasonable man upon his guard, and then claim that he acted in good faith under the
belief that there was no defect in the title of the vendor." 53

Petitioner deliberately disregarded both the fact that private respondent already occupied the property and that he
was claiming ownership over the same. It cannot feign ignorance of private respondent's claim to the land since the
latter mortgaged the same land to petitioner as security for the loan he contracted in 1978 on the strength of the tax

104
declarations issued under his name. Instead of inquiring into private respondent's occupation over the land,
petitioner simply proceeded with the foreclosure sale, pretending that no doubts surround the ownership of the
land covered by TCT No. 10101. Considering these circumstances, petitioner cannot be deemed an innocent
mortgagee/purchaser for value. As we ruled:

The failure of appellees to take the ordinary precautions which a prudent man would have taken under the
circumstances, specially in buying a piece of land in the actual, visible and public possession of another
person, other than the vendor, constitutes gross negligence amounting to bad faith.

In this connection, it has been held that where, as in this case, the land sold is in the possession of a person
other than the vendor, the purchaser is required to go beyond the certificates of title and ma[k]e inquiries
concerning the rights of the actual possessor. (Citations omitted.)

x x x           x x x          x x x

One who purchases real property which is in the actual possession of another should, at least, make some
inquiry concerning the right of those in possession. The actual possession by other than the vendor should,
at least put the purchaser upon inquiry. He can scarcely, in the absence of such inquiry, be regarded as
abona fide purchaser as against such possessors. 54

Fourth. From the foregoing, we find that the resolution of the issue of estoppel will not affect the outcome of this
case. Petitioner claims that the fact that it approved a loan in favor of private respondent and executed a mortgage
contract covering the 19.4 hectares covered by tax declarations issued under private respondent's name does not
mean that it is estopped from questioning the latter's title. Petitioner accuses private respondent of having made
misrepresentations which led it to believe in his valid title and ownership.

The claim has no basis. Private respondent made no misrepresentation with regard to the land occupied by him as he
is actually the real owner thereof. Moreover, when private respondent entered into a mortgage contract with
petitioner, his claim of ownership was supported not only by the tax declarations but also by a certification of the
Clerk of Court of the Court of First Instance of Bohol that no civil, land registration or cadastral case has been filed or
instituted before the court affecting the validity of Tax Declaration No. D-2247 covering the land located in Bugang,
San Miguel, Bohol and declared in the name of Carlos Cajes. 55 These documents were relied upon by private
respondent in support of his claim of ownership. We cannot consider the submission of these documents as
misrepresentations by private respondent as to the actual ownership of the land. Rather, private respondent
believed in good faith and with good reason that he was the owner of the 19.4 hectares occupied by him.

As to the question of estoppel, we do not find petitioner to be estopped from questioning private respondent's
title.1âwphi1 "Estoppel in pais arises when one, by his acts, representations or admission, or by his own silence when
he ought to speak out, intentionally or through culpable negligence, induces another to believe certain facts to exist
and such other rightfully relies and acts on such belief, so that he will be prejudiced if the former is permitted to deny
the existence of such facts." 56 In the case at bar, upon learning that the land occupied by private respondent was
also covered by TCT No. 10101, petitioner immediately demanded full payment of the loan and thereafter cancelled
the mortgage contract, a fact that is admitted by private respondent himself. 57 Indeed, nothing in record indicates
that petitioner impliedly acquiesced to the validity of private respondent's title when it found out that the latter was
occupying a portion of the land covered by TCT No. 10101.1âwphi1.nêt

However, for reasons aforestated, we uphold private respondent's ownership of 19.4 hectares occupied by him. As a
necessary consequence thereof, such portion of land included in TCT No. 10101 must be segregated and reconveyed
in his favor.

WHEREFORE, the decision of the Court of Appeals is AFFIRMED in toto.

105
G.R. No. 125536 March 16, 2000

PRUDENTIAL BANK, petitioner,

vs.

COURT OF APPEALS and LETICIA TUPASI-VALENZULA joined by husband Francisco Valenzuela, respondents.

QUISUMBING, J.:

This appeal by certiorari under Rule 45 of the Rules of Court seeks to annul and set aside the Decision dated January
31, 1996, and the Resolution dated July 2, 1997, of the Court of Appeals in CA G.R. CV No. 35532, which reversed the
judgment of the Regional Trial Court of Valenzuela, Metro Manila, Branch 171, in Civil Case No. 2913-V-88, dismissing
the private respondent's complaint for damages.1

In setting aside the trial court's decision, the Court of Appeals disposed as follows:

WHEREFORE, the appealed decision is hereby REVERSED and SET ASIDE and, another rendered ordering the appellee
bank to pay appellant the sum of P100,000.00 by way of moral damages; P50,000.00 by way of exemplary damages,
P50,000.00 for and as attorney's fees; and to pay the costs.

SO ORDERED.2

The facts of the case on record are as follows:

Private respondent Leticia Tupasi-Valenzuela opened Savings Account No. 5744 and Current Account No. 01016-3 in
the Valenzuela Branch of petitioner Prudential Bank, with automatic transfer of funds from the savings account to
the current account.

106
On June 1, 1988, herein private respondent deposited in her savings account Check No. 666B (104561 of even date)
the amount of P35,271.60, drawn against the Philippine Commercial International Bank (PCIB). Taking into account
that deposit and a series of withdrawals, private respondent as of June 21, 1988 had a balance of P35,993.48 in her
savings account and P776.93 in her current account, or total deposits of P36,770.41, with petitioner.

Thereafter, private respondent issued Prudential Bank Check No. 983395 in the amount of P11,500.00 post-dated
June 20, 1988, in favor of one Belen Legaspi. It was issued to Legaspi as payment for jewelry which private
respondent had purchased. Legaspi, who was in jewelry trade, endorsed the check to one Philip Lhuillier, a
businessman also in the jewelry business. When Lhuillier deposited the check in his account with the PCIB, Pasay
Branch, it was dishonored for being drawn against insufficient funds. Lhuillier's secretary informed the secretary of
Legaspi of the dishonor. The latter told the former to redeposit the check, Legaspi's secretary tried to contact
private respondent but to no avail.

Upon her return from the province, private respondent was surprised to learn of the dishonor of the check. She went
to the Valenzuela Branch of Prudential Bank on July 4, 1988, to inquire why her check was dishonored. She
approached one Albert Angeles Reyes, the officer in charge of current account, and requested him for the ledger of
her current account. Private respondent discovered a debit of P300.00 penalty for the dishonor of her Prudential
Check No. 983395. She asked why her check was dishonored when there were sufficient funds in her account as
reflected in her passbook. Reyes told her that there was no need to review the passbook because the bank ledger
was the best proof that she did not have sufficient funds. Then, he abruptly faced his typewriter and started typing.

Later, it was found out that the check in the amount of P35,271.60 deposited by private respondent on June 1, 1988,
was credited in her savings account only on June 24, 1988, or after a period of 23 days. Thus the P11,500.00 check was
redeposited by Lhuillier on June 24, 1988, and properly cleared on June 27, 1988.

Because of this incident, the bank tried to mollify private respondent by explaining to Legaspi and Lhuillier that the
bank was at fault. Since this was not the first incident private respondent had experienced with the bank, private
respondent was unmoved by the bank's apologies and she commenced the present suit for damages before the RTC
of Valenzuela.

After trial, the court rendered a decision on August 30, 1991, dismissing the complaint of private respondent, as well
as the counterclaim filed by the defendant, now petitioner.

Undeterred, private respondent appealed to the Court of Appeals. On January 31, 1996, respondent appellate court
rendered a decision in her favor, setting aside the trial court's decision and ordering herein petitioner to pay private
respondent the sum of P100,000.00 by way of moral damages; P50,000.00 exemplary damages; P50,000.00 for and
as attorney's fees; and to pay the costs.3

107
Petitioner filed a timely motion for reconsideration but it was denied. Hence, this petition, raising the following
issues:

I. WHETHER OR NOT THE RESPONDENT COURT OF APPEALS ACTED WITH GRAVE ABUSE OF DISCRETION
AMOUNTING TO LACK OF JURISDICTION IN DEVIATING FROM ESTABLISHED JURISPRUDENCE IN REVERSING THE
DISMISSAL JUDGMENT OF THE TRIAL COURT AND INSTEAD AWARDED MORAL DAMAGES, EXEMPLARY DAMAGES
AND ATTORNEY'S FEES.

II. WHETHER OR NOT THE RESPONDENT COURT OF APPEALS ACTED IN GRAVE ABUSE OF DISCRETION AMOUNTING
TO LACK OF JURISDICTION WHERE, EVEN IN THE ABSENCE OF EVIDENCE AS FOUND BY THE TRIAL COURT,
AWARDED MORAL DAMAGES IN THE AMOUNT OF P100,000.00.

III. WHETHER OR NOT THE RESPONDENT COURT OF APPEALS ACTED IN GRAVE ABUSE OF DISCRETION AMOUNTING
TO LACK OF JURISDICTION, WHERE, EVEN IN THE ABSENCE OF EVIDENCE AS FOUND BY THE TRIAL COURT,
AWARDED P50,000.00 BY WAY OF EXEMPLARY DAMAGES.

IV. WHETHER OR NOT THE RESPONDENT COURT OF APPEALS ACTED WITH GRAVE ABUSE OF DISCRETION WHERE
EVEN IN THE ABSENCE OF EVIDENCE, AWARDED ATTORNEY'S FEES.

Simply stated, the issue is whether the respondent court erred and gravely abused its discretion in awarding moral
and exemplary damages and attorney's fees to be paid by petitioner to private respondent.

Petitioner claims that generally the factual findings of the lower courts are final and binding upon this Court.
However, there are exceptions to this rule. One is where the trial court and the Court of Appeals had arrived at
diverse factual findings.4 Petitioner faults the respondent court from deviating from the basic rule that finding of
facts by the trial court is entitled to great weight, because the trial court had the opportunity to observe the
deportment of witness and the evaluation of evidence presented during the trial. Petitioner contends that the
appellate court gravely abused its discretion when it awarded damages to the plaintiff, even in the face of lack of
evidence to prove such damages, as found by the trial court.

Firstly, petitioner questions the award of moral damages. It claims that private respondent did not suffer any
damage upon the dishonor of the check. Petitioner avers it acted in good faith. It was an honest mistake on its part,
according to petitioner, when misposting of private respondent's deposit on June 1, 1988, happened. Further,
petitioner contends that private respondent may not "claim" damages because the petitioner's manager and other
employees had profusely apologized to private respondent for the error. They offered to make restitution and
apology to the payee of the check, Legaspi, as well as the alleged endorsee, Lhuillier. Regrettably, it was private
respondent who declined the offer and allegedly said, that there was nothing more to it, and that the matter had
been put to rest.5

108
Admittedly, as found by both the respondent appellate court and the trial court, petitioner bank had committed a
mistake.1âwphi1.nêt It misposted private respondent's check deposit to another account and delayed the posting of
the same to the proper account of the private respondent. The mistake resulted to the dishonor of the private
respondent's check. The trial court found "that the misposting of plaintiff's check deposit to another account and
the delayed posting of the same to the account of the plaintiff is a clear proof of lack of supervision on the part of
the defendant bank."6 Similarly, the appellate court also found that "while it may be true that the bank's negligence
in dishonoring the properly funded check of appellant might not have been attended with malice and bad faith, as
appellee [bank] submits, nevertheless, it is the result of lack of due care and caution expected of an employee of a
firm engaged in so sensitive and accurately demanding task as banking."7

In Simex International (Manila), Inc. vs. Court of Appeals, 183 SCRA 360, 367 (1990), and Bank of Philippine Islands vs.
IAC, et al., 206 SCRA 408, 412-413 (1992), this Court had occasion to stress the fiduciary nature of the relationship
between a bank and its depositors and the extent of diligence expected of the former in handling the accounts
entrusted to its care, thus:

In every case, the depositor expects the bank to treat his account with the utmost fidelity, whether such account
consists only of a few hundred pesos or of millions. The bank must record every single transaction accurately, down
to the last centavo, and as promptly as possible. This has to be done if the account is to reflect at any given time the
amount of money the depositor can dispose of as he sees fit, confident that the bank will deliver it as and to
whomever he directs. A blunder on the part of bank, such as the dishonor of a check without good reason, can cause
the depositor not a little embarrassment if not also financial loss and perhaps even civil and criminal litigation.

The paint is that as a business affected with public interest and because of the nature of its functions, the bank is
under obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary
nature of their relationship. . . .

In the recent case of Philippine National Bank vs. Court of Appeals,8 we held that "a bank is under obligation to treat
the accounts of its depositors with meticulous care whether such account consists only of a few hundred pesos or of
millions of pesos. Responsibility arising from negligence in the performance of every kind of obligation is
demandable. While petitioner's negligence in this case may not have been attended with malice and bad faith,
nevertheless, it caused serious anxiety, embarrassment and humiliation". Hence we ruled that the offended party in
said case was entitled to recover reasonable moral damages.

Even if malice or bad faith was not sufficiently proved in the instant case, the fact remains that petitioner has
committed a serious mistake. It dishonored the check issued by the private respondent who turned out to have
sufficient funds with petitioner. The bank's negligence was the result of lack of due care and caution required of
managers and employees of a firm engaged in so sensitive and demanding business as banking. Accordingly, the
award of moral damages by the respondent Court of Appeals could not be said to be in error nor in grave abuse of its
discretion.

109
There is no hard-and-fast rule in the determination of what would be a fair amount of moral damages since each case
must be governed by its own peculiar facts. The yardstick should be that it is not palpably and scandalously
excessive. In our view, the award of P100,000.00 is reasonable, considering the reputation and social standing of
private respondent Leticia T. Valenzuela.9

The law allows the grant of exemplary damages by way of example for the public good. 10 The public relies on the
banks' sworn profession of diligence and meticulousness in giving irreproachable service. The level of
meticulousness must be maintained at all times by the banking sector. Hence, the Court of Appeals did not err in
awarding exemplary damages. In our view, however, the reduced amount of P20,000.00 is more appropriate.

The award of attorney's fees is also proper when exemplary damages are awarded and since private respondent was
compelled to engage the services of a lawyer and incurred expenses to protect her interest. 11 The standards in fixing
attorney's fees are: (1) the amount and the character of the services rendered; (2) labor, time and trouble involved;
(3) the nature and importance of the litigation and business in which the services were rendered; (4) the
responsibility imposed; (5) the amount of money and the value of the property affected by the controversy or
involved in the employment; (6) the skill and the experience called for in the performance of the services; (7) the
professional character and the social standing of the attorney; (8) the results secured, it being a recognized rule that
an attorney may properly charge a much larger fee when it is contingent than when it is not. 12 In this case, all the
aforementioned weighed, and considering that the amount involved in the controversy is only P36,770.41, the total
deposit of private respondent which was misposted by the bank, we find the award of respondent court of
P50,000.00 for attorney's fees, excessive and reduce the same to P30,000.00.

WHEREFORE, the assailed DECISION of the Court of Appeals is hereby AFFIRMED, with MODIFICATION. The
petitioner is ordered to pay P100,000.00 by way of moral damages in favor of private respondent Leticia T.
Valenzuela. It is further ordered to pay her exemplary damages in the amount of P20,000.00 and P30,000.00,
attorney's fees.

Costs against petitioner.

110
G.R. No. 148582 January 16, 2002

FAR EAST BANK AND TRUST COMPANY, petitioner,

vs.

ESTRELLA O. QUERIMIT, respondent.

MENDOZA, J.:

This is a petition for review on certiorari seeking review of the decision, dated March 6, 2001, and resolution, dated
June 19, 2001, of the Court of Appeals1 in CA-G.R. CV No. 67147, entitled "Estrella O. Querimit v. Far East Bank and
Trust Company," which affirmed with modification the decision of the Regional Trial Court, Branch 38, Manila,2
ordering petitioner Far East Bank and Trust Co. (FEBTC) to allow respondent Estrella O. Querimit to withdraw her
time deposit with the FEBTC.

The facts are as follows:

Respondent Estrella O. Querimit worked as internal auditor of the Philippine Savings Bank (PSB) for 19 years, from
1963 to 1992.3 On November 24, 1986, she opened a dollar savings account in petitioner's Harrison Plaza branch,4 for
which she was issued four (4) Certificates of Deposit (Nos. 79028, 79029, 79030, and 79031), each certificate
representing the amount of $15,000.00, or a total amount of $60,000.00. The certificates were to mature in 60 days,
on January 23, 1987, and were payable to bearer at 4.5% interest per annum. The certificates bore the word
"accrued," which meant that if they were not presented for encashment or pre-terminated prior to maturity, the
money deposited with accrued interest would be "rolled over" by the bank and annual interest would accumulate
automatically.5 The petitioner bank's manager assured respondent that her deposit would be renewed and earn
interest upon maturity even without the surrender of the certificates if these were not indorsed and withdrawn.6
Respondent kept her dollars in the bank so that they would earn interest and so that she could use the fund after she
retired.7

In 1989, respondent accompanied her husband Dominador Querimit to the United States for medical treatment. She
used her savings in the Bank of the Philippine Islands (BPI) to pay for the trip and for her husband's medical
expenses.8 In January 1993, her husband died and Estrella returned to the Philippines. She went to petitioner FEBTC
to withdraw her deposit but, to her dismay, she was told that her husband had withdrawn the money in deposit.9
Through counsel, respondent sent a demand letter to petitioner FEBTC. In another letter, respondent reiterated her
request for updating and payment of the certificates of deposit, including interest earned.10 As petitioner FEBTC
refused respondent's demands, the latter filed a complaint, joining in the action Edgardo F. Blanco, Branch Manager
of FEBTC Harrison Plaza Branch, and Octavio Espiritu, FEBTC President.11

111
Petitioner FEBTC alleged that it had given respondent's late husband Dominador an "accommodation" to allow him
to withdraw Estrella's deposit.12 Petitioner presented certified true copies of documents showing that payment had
been made, to wit:

1. Four FEBTC Harrison Plaza Branch Dollar Demand Drafts Nos. 886694903, 886694904, 886694905 and 886694906
for US$15,110.96 each, allegedly issued by petitioner to respondent's husband Dominador after payment on the
certificates of deposit;13

2. A letter of Alicia de Bustos, branch cashier of FEBTC at Harrison Plaza, dated January 23, 1987, which was sent to
Citibank, N.A., Citibank Center, Paseo de Roxas, Makati, Metro Manila, informing the latter that FEBTC had issued the
four drafts and requesting Citibank New York to debit from petitioner's account $60,443.84, the aggregate value of
the four drafts;14

3. "Citicorp Remittance Service: Daily Summary and Payment Report" dated January 23, 1987;15

4. Debit Ticket dated January 23, 1987, showing the debit of US$60,443.84 or its equivalent at the time of
P1,240,912.04 from the FEBTC Harrison Plaza Branch;16 and

5. An Interbranch Transaction Ticket Register or Credit Ticket dated January 23, 1987 showing that US$60,443.84 or
P1,240,912.04 was credited to petitioner's International Operation Division (IOD).17

On May 6, 2000, the trial court rendered judgment for respondent. The dispositive portion of the decision stated:

WHEREFORE, judgment is hereby rendered in favor of plaintiff [Estrella O. Querimit] and against defendants [FEBTC
et al.]:

1. ORDERING defendants to allow plaintiff to withdraw her U.S.$ Time Deposit of $60,000.00 plus accrued interests;

2. ORDERING defendants to pay moral damages in the amount of P50,000.00;

3. ORDERING defendants to pay exemplary damages in the amount of P50,000.00;

112
4. ORDERING defendants to pay attorney's fees in the amount of P100,000.00 plus P10,000.00 per appearance of
counsel; and

5. ORDERING defendants to pay the costs of the suit.

SO ORDERED.18

On May 15, 2000, petitioner appealed to the Court of Appeals which, on March 6, 2001, affirmed through its
Fourteenth Division the decision of the trial court, with the modification that FEBTC was declared solely liable for the
amounts adjudged in the decision of the trial court. The appeals court stated that petitioner FEBTC failed to prove
that the certificates of deposit had been paid out of its funds, since "the evidence by the [respondent] stands
unrebutted that the subject certificates of deposit until now remain unindorsed, undelivered and unwithdrawn by
[her]."19 But the Court of Appeals held that the individual defendants, Edgardo F. Blanco, FEBTC-Harrison Plaza
Branch Manager, and Octavio Espiritu, FEBTC President, could not be held solidarily liable with the FEBTC because
the latter has a personality separate from its officers and stockholders.20

Hence this appeal.

As stated by the Court of Appeals, the main issue in this case is whether the subject certificates of deposit have
already been paid by petitioner.21 Petitioner contends that-

I. Petitioner is not liable to respondent for the value of the four (4) Certificates of Deposit, including the interest
thereon as well as moral and exemplary damages, attorney's and appearance fees.

II. The aggregate value - both principal and interest earned at maturity - of the four (4) certificates of deposit was
already paid to or withdrawn at maturity by the late Dominador Querimit who was the respondent's deceased
husband.

III. Respondent is guilty of laches since the four (4) certificates of deposit were all issued on 24 November 1986 but
she attempted to withdraw their aggregate value on 29 July 1996 only on or after the lapse of more than nine (9)
years and eight (8) months.

113
IV. Respondent is not liable to petitioner for attorney's fees.22

After reviewing the records, we find the petition to be without merit.

First. Petitioner bank failed to prove that it had already paid Estrella Querimit, the bearer and lawful holder of the
subject certificates of deposit. The finding of the trial court on this point, as affirmed by the Court of Appeals, is that
petitioner did not pay either respondent Estrella or her husband the amounts evidenced by the subject certificates of
deposit. This Court is not a trier of facts and generally does not weigh anew the evidence already passed upon by the
Court of Appeals.23 The finding of respondent court which shows that the subject certificates of deposit are still in
the possession of Estrella Querimit and have not been indorsed or delivered to petitioner FEBTC is substantiated by
the record and should therefore stand.24

A certificate of deposit is defined as a written acknowledgment by a bank or banker of the receipt of a sum of money
on deposit which the bank or banker promises to pay to the depositor, to the order of the depositor, or to some
other person or his order, whereby the relation of debtor and creditor between the bank and the depositor is
created. The principles governing other types of bank deposits are applicable to certificates of deposit,25 as are the
rules governing promissory notes when they contain an unconditional promise to pay a sum certain of money
absolutely.26 The principle that payment, in order to discharge a debt, must be made to someone authorized to
receive it is applicable to the payment of certificates of deposit. Thus, a bank will be protected in making payment to
the holder of a certificate indorsed by the payee, unless it has notice of the invalidity of the indorsement or the
holder's want of title.27 A bank acts at its peril when it pays deposits evidenced by a certificate of deposit, without its
production and surrender after proper indorsement.28 As a rule, one who pleads payment has the burden of proving
it. Even where the plaintiff must allege non-payment, the general rule is that the burden rests on the defendant to
prove payment, rather than on the plaintiff to prove payment. The debtor has the burden of showing with legal
certainty that the obligation has been discharged by payment.29

In this case, the certificates of deposit were clearly marked payable to "bearer," which means, to "[t]he person in
possession of an instrument, document of title or security payable to bearer or indorsed in blank."30 Petitioner
should not have paid respondent's husband or any third party without requiring the surrender of the certificates of
deposit.

Petitioner claims that it did not demand the surrender of the subject certificates of deposit since respondent's
husband, Dominador Querimit, was one of the bank's senior managers. But even long after respondent's husband
had allegedly been paid respondent's deposit and before his retirement from service, the FEBTC never required him
to deliver the certificates of deposit in question.31 Moreover, the accommodation given to respondent's husband
was made in violation of the bank's policies and procedures.32

Petitioner FEBTC thus failed to exercise that degree of diligence required by the nature of its business.33 Because the
business of banks is impressed with public interest, the degree of diligence required of banks is more than that of a
good father of the family or of an ordinary business firm. The fiduciary nature of their relationship with their
depositors requires them to treat the accounts of their clients with the highest degree of care.34 A bank is under

114
obligation to treat the accounts of its depositors with meticulous care whether such accounts consist only of a few
hundred pesos or of millions of pesos. Responsibility arising from negligence in the performance of every kind of
obligation is demandable.35 Petitioner failed to prove payment of the subject certificates of deposit issued to the
respondent and, therefore, remains liable for the value of the dollar deposits indicated thereon with accrued
interest.

Second. The equitable principle of laches is not sufficient to defeat the rights of respondent over the subject
certificates of deposit.

Laches is the failure or neglect, for an unreasonable length of time, to do that which, by exercising due diligence,
could or should have been done earlier. It is negligence or omission to assert a right within a reasonable time,
warranting a presumption that the party entitled to assert it either has abandoned it or declined to assert it.36

There is no absolute rule as to what constitutes laches or staleness of demand; each case is to be determined
according to its particular circumstances. The question of laches is addressed to the sound discretion of the court
and, being an equitable doctrine, its application is controlled by equitable considerations. It cannot be used to defeat
justice or perpetrate fraud and injustice. Courts will not be guided or bound strictly by the statute of limitations or
the doctrine of laches when to do so, manifest wrong or injustice would result.37

In this case, it would be unjust to allow the doctrine of laches to defeat the right of respondent to recover her
savings which she deposited with the petitioner. She did not withdraw her deposit even after the maturity date of
the certificates of deposit precisely because she wanted to set it aside for her retirement. She relied on the bank's
assurance, as reflected on the face of the instruments themselves, that interest would "accrue" or accumulate
annually even after their maturity.38

Third. Respondent is entitled to moral damages because of the mental anguish and humiliation she suffered as a
result of the wrongful refusal of the FEBTC to pay her even after she had delivered the certificates of deposit.39 In
addition, petitioner FEBTC should pay respondent exemplary damages, which the trial court imposed by way of
example or correction for the public good.40 Finally, respondent is entitled to attorney's fees since petitioner's act
or omission compelled her to incur expenses to protect her interest, making such award just and equitable.41
However, we find the award of attorney's fees to be excessive and accordingly reduce it to P20,000.00.42

WHEREFORE, premises considered, the present petition is hereby DENIED and the Decision in CA-G.R. CV No. 67147
AFFIRMED, with the modification that the award of attorney's fees is reduced to P20,000.00.

SO ORDERED.

115
G.R. No. 136603 January 18, 2002

EMILIO Y. TAÑEDO, petitioner,

vs.

ALLIED BANKING CORPORATION, respondent.

PARDO, J.:

Appeal via certiorari from the decision of the Court of Appeals1 reversing the ruling of the trial court and holding
petitioner liable solidarily with defendant Cheng Ban Yek Co., Inc. for all items of the money judgment and costs of
suit.

The Facts

The facts, as found by the Court of Appeals, are as follows:

"Appeal by both the plaintiff Allied Banking Corporation and the defendant Cheng Ban Yek & Co., Inc. from the
Order, as summary judgment, of the Regional Trial Court (Branch XLIV, Manila), the decretal part whereof reads:

"WHEREFORE, and in view of the foregoing considerations, summary judgment is hereby rendered in favor of the
plaintiff, Allied Banking Corporation, and against defendant Cheng Ban Yek and Co., Inc. as follows:

"1. On the first cause of action:

"Ordering the defendant Cheng Ban Yek Co., Inc. to pay plaintiff the sum of P2,000,000.00, plus interest thereon at
14% per annum, 2% per annum as service charge, and penalty charge of 1% per month from February 11, 1981 until fully
paid;

"2. On the second cause of action:

116
"Ordering the defendant Cheng Ban Yek Co., Inc. to pay plaintiff the sum of P2,500,000.00, plus interest thereon at
14% per annum, service charge of 2% per annum, and penalty charge of 1 % per month, from February 3, 1981 until fully
paid;

"3. On the third cause of action:

"Ordering the defendant Cheng Ban Yek Co., Inc. to pay plaintiff the sum of P1,000,000.00 plus interest thereon at
14% per annum, service charge of 2% per annum, and penalty charge of 1 % per month, from February 12, 1981 until
fully paid;

"4. On the fourth cause of action:

"Ordering the defendant Cheng Ban Yek Co., Inc. to pay plaintiff the sum of P1,000,000.00 plus interest thereon at
14% per annum, service charge of 2% per annum, and penalty charge of 1 % per month, from February 12, 1981 until
fully paid;

"5. On the fifth cause of action:

"Ordering the defendant Cheng Ban Yek Co., Inc. to pay plaintiff the sum of P1,000,000.00 plus interest thereon at
14% per annum, service charge of 2% per annum, and penalty charge of 1% per month, from February 12, 1981 until fully
paid;

"6. On the sixth cause of action:

"Ordering the defendant Cheng Ban Yek Co., Inc. to pay plaintiff the sum of P1,000,000.00 plus interest thereon at
14% per annum, service charge of 2% per annum, and penalty charge of 1% per month, from February 12, 1981 until fully
paid;

"7. On the seventh cause of action:

117
" Ordering the defendant Cheng Ban Yek Co., Inc. to pay plaintiff the sum of P1,500,000.00 plus interest thereon at
14% per annum, service charge of 2% per annum, and penalty charge of 1% per month, from February 12, 1981 until fully
paid;

"8. On all the causes of action:

"Ordering the defendant Cheng Ban Yek Co., Inc. to pay plaintiff the sum equivalent to 25% of the amount due and
demandable as and for attorney’s fees;

"9. Declaring the "Continuing Guaranty" as having been extinguished after plaintiff branded it as a "worthless
security" and preferred to avail, as it did avail, of the provisional remedy of attachment; and declaring defendants
Alfredo Ching and Emilio Tañedo relieved of their obligation under the said continuing Guaranty; and

"10. Ordering the defendant Cheng Ban Yek Co., Inc. to pay the costs of suit.

"SO ORDERED."2

"The foregoing summary judgment has its roots in a complaint with preliminary attachment filed by plaintiff bank to
recover sums of money from defendant corporation on its seven past due promissory notes with principal amounts
totaling P10,000,000.00, from defendants Alfredo Ching and Emilio Tañedo under a Continuing Guaranty providing
for joint and several liability relative to the said promissory notes. The preliminary attachment sought was granted
upon the required bond and was thereafter maintained despite defendant corporation’s efforts to have it
discharged.

"The appeal of plaintiff bank is limited to paragraph 9 of the summary judgment (supra, p. 3) which declared
defendants Aldredo Ching and Emilio Tañedo as free from any liability under the Continuing Guaranty since their
respective liabilities thereunder became extinguished when plaintiff bank in its pleading branded the Continuing
Guaranty as "worthless security".

"On the other hand, defendant corporation’s appeal is an attack on the summary nature of the proceeding adopted
by the lower court since, according to defendant corporation, there was a petition for suspension of payment filed
by it with the Securities and Exchange Commission which, although dismissed, was duly appealed to the Court of
Appeals.

118
"xxx

"Defendant corporation’s petition for suspension of payment was dismissed by the Securities and Exchange
Commission for lack of quorum. At the creditors’ meeting called and accordingly held to approve the corporation’s
petition for suspension of payment, out of outstanding liabilities of P237,718,426.00, only the creditors representing
P110,355,607.37 thereof attended. This was far short of the three-fifths quorum unqualifiedly required by law which
should have been P142,631,055.60 (Act No. 1956, Sec. 8) x x x ."3

On October 16, 1984, the trial court rendered a summary judgment, as quoted above.4

Both plaintiff Allied Banking Corporation and the defendant Cheng Ban Yek & Co., Inc. appealed from the summary
judgment to the Court of Appeals.5

On March 27, 1990, the Court of Appeals promulgated a decision, the dispositive portion of which reads:

"WHEREFORE, the Order appealed from is in part REVERSED and MODIFIED by deleting paragraph 9 from the
dispositive portion thereof, and declaring the defendants Alfredo Ching and Emilio Tañedo solidarily liable with
defendant Cheng Ban Yek Co., Inc. for all items of the money judgment set forth in paragraphs one 91) to eight (8)
inclusive, and paragraph ten (10), of said dispositive portion. The Order is AFFIRMED in its other aspects. No costs in
this instance.

"SO ORDERED."6

On April 11, 1990, petitioner Emilio Y. Tañedo filed a motion for reconsideration of the decision, contending that while
the case was pending before the Court of Appeals the Allied Bank and Cheng Ban Yek & Co., Inc. agreed to extend
the time of payment of the indebtedness, without the consent of petitioner, thereby relieving him of his obligation
as guarantor or surety of such obligation.7

On November 27, 1998, the Court of Appeals denied the motion for lack of merit.8

Hence, this appeal.9

119
The Issues

The basic issues raised are (a) whether the execution by the respondent Bank of the Fourth Amendatory Agreement
extinguished petitioner’s obligations as surety, and (b) whether the "continuing guarantee" executed by the
petitioner is a contract of (surety) adhesion.10

The Court’s Ruling

We find the petition without merit.

Resolving the first issue, we note that the amendatory agreement between the respondent Allied Banking
Corporation and Cheng Ban Yek & Co., Inc. extended the maturity of the promissory notes without notice or consent
of the petitioner as surety of the obligations. However, the "continuing guarantee" executed by the petitioner
provided that he consents and agrees that the bank may, at any time or from time to time extend or change the time
of payments and/or the manner, place or terms of payment of all such instruments, loans, advances, credits or other
obligations guaranteed by the surety. Hence, the extensions of the loans did not release the surety.11

As to the second issue, even if the "continuing guarantee" were considered as one of adhesion, we find the contract
of "surety" valid because petitioner was "free to reject it entirely".12 Petitioner was a stockholder and officer of
Cheng Ban Yek and Co., Inc. and it was common business and banking practice to require "sureties" to guarantee
corporate obligations.

The Fallo

IN VIEW WHEREOF, the Court DENIES the petition and AFFIRMS the decision of the Court of Appeals.13

No costs in this instance.

G.R. No. 95326 March 11, 1999

120
ROMEO P. BUSUEGO, CATALINO F. BANEZ and RENATO F. LIM, petitioners,

vs.

THE HONORABLE COURT OF APPEALS and THE MONETARY BOARD OF THE CENTRAL BANK OF THE PHILIPPINES,
respondents.

PURISIMA, J.:

This is a petition for review on certiorari under Rule 45 of the Rules of Court seeking a reversal of the Decision, 1
dated September 14, 1990, of the Court of Appeals in CA-G.R. CV No. 23656.

As culled from the records; the facts of the case are as follows:

The 16th regular examination of the books and records of the PAL Employees Savings and Loan Association, Inc.
("PESALA") was conducted from March 14 to April 16, 1988 by a team of CB examiners headed by Belinda Rodriguez.
Following the said examination, several anomalies and irregularities committed by the herein petitioners; PESALA's
directors and officers, were uncovered, among which are:

1. Questionable investment in a multi-million peso real estate project (Pesalaville).

2. Conflict of interest in the conduct of business.

3. Unwarranted declaration and payment of dividends.

4. Commission of unsound and unsafe business practices.

121
On July 19, 1988, Central Bank ("CB") Supervision and Examination Section ("SES") Department IV Director Ricardo F.
Lirio sent a letter to the Board of Directors of PESALA inviting them to a conference on July 21, 1988 to discuss
subject findings noted in the said 16th regular examination, but petitioners did not attend such conference.

On July 28, 1988, petitioner Renato Lim wrote the PESALA's Board of Directors explaining his side on the said
examination of PESALA's records and requesting that a copy .of his letter be furnished the CB, which was forthwith
made by the Board. 2

On July 29, 1988, PESALA's Board of Directors sent to Director Lirio a letter concerning the 16th regular examination
of PESALA's records.

On September 9, 1988, the Monetary Board adopted and issued MB Resolution No. 805 the pertinent provisions of
which are as follows:

1. To note the report on the examination of the PAL Employees' Savings and Loan Association, Inc. (PESALA)
as of December 31, 1987, as submitted in a memorandum of the Director, Supervision and Examination Section (SES)
Department IV, dated August 19, 1988;

2. To require the board of directors of PESALA to immediately inform the members of PESALA of the results of
the "Central Bank examination. and their effects on the financial condition of the Association;

xxx xxx xxx

5. To include the names of Mr. Catalino Banez, Mr. Romeo Busuego and Mr. Renato Lim in the Sector's
watchlist to prevent them from holding responsible positions in any institution under Central Bank supervision;

6. To require PESALA to enforce collection of the overpayment to the Vista Grande Management and
Development Corporation and to require the accounting of P12.28 million unaccounted and unremitted bank loan
proceeds and P3.9 million other unsupported cash disbursements from the responsible directors and officers; or to
properly charge these against their respective accounts, if necessary;

7. To require the board of directors of PESALA to file civil and criminal cases against Messrs. Catalino Banez,
Romeo Busuego and Renato Lim for all the misfeasance and malfeasance committed by them, as warranted by the
evidence;

122
8. To require the board of directors of PESALA to improve the operations of the Association; correct all
violations noted, and adopt internal control measures to prevent the recurrence of similar incidents as shown in
Annex E of the subject memorandum of the Director, SES Department IV; 3

xxx xxx xxx

On January 23, 1989, petitioners filed a Petition for Injunction with Prayer for the Immediate Issuance of a Temporary
Restraining Order 4 docketed as Civil Case No. Q-89-1617 before Branch 104 of the Regional Trial Court of Quezon
City.

On January 26, 1989, the said court issued. a temporary restraining

order 5 enjoining the defendant, the Monetary Board of the Central Bank, (now Banko Sentral ng Pilipinas) from
including the names of petitioners in the watchlist.

On February 10, 1989, the same trial Court issued a writ of preliminary injunction, 6 conditioned upon the filing by
petitioners of a bond in the amount of Ten Thousand (P10,000.00) Pesos each. The Monetary Board presented a
Motion for Reconsideration 7 of the said Order, but the same was denied.

On September 11, 1999, the trial court handed down its Decision, 8 disposing thus:

WHEREFORE, judgment is hereby rendered declaring Monetary Board Resolution No. 805 as void and in existent. The
writ of preliminary prohibitory injunctions issued on February 10, 1989 is deemed permanent. Costs against
respondent.

The Monetary Board appealed the aforesaid Decision to the Court of Appeals which came out with a Decision 9 of
reversal on September 14, 1990, the decretal portion of which is to the following effect:

WHEREFORE, the decision appealed from is hereby reversed and another one entered dismissing the petition for
injunction.

123
Dissatisfied with the said Decision of the Court of Appeals, petitioners have come to this Court via the present
petition for review on certiorari.

On June 5, 1992, petitioners filed an "Urgent Motion for the Immediate Issuance of a Temporary Restraining Order
and/or Writ of Preliminary Injunction against the Secretary of Justice and the City Prosecutor of Pasay" 10 stating that
several complaints were lodged against the petitioners before the Office of the City Prosecutor of Pasay City
pursuant to Monetary Board Resolution No. 805; that the said complaints were dismissed, by the City Prosecutor and
the dismissals were appealed to the Secretary of Justice for review, some of which have been reversed already.
Petitioners prayed that Temporary Restraining Order and/or Writ of Preliminary Injunction issue "restraining and
enjoining the Secretary of Justice and the City Prosecutor of Pasay City from proceeding and taking further actions,
and more specially from filing Information's in I.S. Nos. 90-1836; 90- 1831; 90-1835; 90-1832; 90-1248; 90-1249; 90-3031;
90-3032; 90- 1837; 90-1834, pending the final resolution of the case at bar . . ." However, in the Resolution 11 dated
September 9, 1992, the court denied the said motion.

The petition poses as issues for resolution:

WHETHER OR NOT THE PETITIONERS WERE DEPRIVED OF THEIR RIGHT TO A NOTICE AND THE OPPORTUNITY TO BE
HEARD BY THE MONETARY BOARD PRIOR TO ITS ISSUANCE OF MONETARY BOARD RESOLUTION NO. 805.

II

WHETHER OR NOT THE RESPONDENT BOARD IS LEGALLY BOUND TO OBSERVE THE ESSENTIAL REQUIREMENTS OF
DUE PROCESS OF A VALID CHARGE, NOTICE AND OPPORTUNITY TO BE HEARD INSOFAR AS THE PETITIONERS
SUBJECT CASE IS CONCERNED.

III

WHETHER OR NOT MONETARY BOARD RESOLUTION NO. 805 IS NULL AND VOID FOR BEING VIOLATIVE OF
PETITIONERS' RIGHTS TO DUE PROCESS.

With respect to the first issue, the trial court said:

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The evidence submitted Preponderates in favor of petitioners. The deprivation of petitioners' rights in the Resolution
undermines the constitutional guarantee of due process. Petitioners were never notified that they were being
investigated, much so, they were not informed of any charges against them and were not afforded the opportunity
to adduce countervailing evidence so as to deserve the punitive measures promulgated in Resolution No. 805 of the
Monetary Board . . . 12

The foregoing disquisition by the trial court is untenable under the facts and circumstances of the case. Petitioners
were duly afforded their right to due process by the Monetary Board, it appearing that:

1. Petitioners were invited by Director Lirio to a conference scheduled for July 21, 1988 to discuss the findings
made in the 16th regular examination of PESALA's records. Petitioners did not attend said conference;

2. Petitioner Renato Lim's letter of July 28, 1988 to PESALA.'s Board of Directors, explaining his side of the
controversy, was forwarded to the Monetary Board which the latter considered in adopting Monetary Board
Resolution No. 805; and

3. PESALA's Board of Director's letter, dated July 29, 1988, to Monetary Board, explaining the Board's side of
the controversy was properly considered in the adoption of Monetary Board Resolution No. 805.

Petitioners therefore cannot complain of deprivation of their right to due process, as they were given ample
opportunity by the Monetary Board to air their submission and defenses as to the findings of irregularity during the
said 16th regular examination. The essence of due process is to be afforded a reasonable opportunity to be heard
and to submit any evidence one may have in support of his defense 13 What is offensive to due process is the denial
of the opportunity to be heard. 14 Petitioner having availed of their opportunity to present their position to the
Monetary Board by their letters-explanation, they were not denied due process. 15

Petitioners cite Ang Tibay v. CIR 16 and assert that the following requisites of procedural due process were not
observed by the Monetary Board:

1. The right to a hearing, which includes the right to present one's case and submit evidence in support
thereof;

2. The tribunal must consider the evidence presented;

125
3. The decision must have something to support itself;

4. The evidence must be substantial;

5. The decision must be rendered on the evidence presented at the hearing, or at least contained in the record
and disclosed to the parties affected;

6. The tribunal or body or any of its judges must act on its or his own independent consideration of the law
and facts of the controversy and not simply accept the view of a subordinate in arriving at a decision;

7. The board or body should, in all controversial question, renders its decision in such manner that the parties
to the proceedings can know the various issues involved and the reason for the decision rendered.

Contrary to petitioners' allegation, it appears that the requisites of procedural due process were complied with by
the Monetary Board before it issued the questioned Monetary Board Resolution No. 805. Firstly, the petitioner were
invited to a conference to discuss the findings gathered during the 16th regular examination of PESALA's records.
(The requirement of a hearing is complied with as long as there was an opportunity to be heard, and not necessarily
that an actual hearing was conducted. 17) Secondly, the Monetary Board considered the evidence presented. Thirdly,
fourthly, and fifthly, Monetary Board Resolution No. 805 was adopted on the basis of said findings unearthed during
the 16th regular examination of PESALA's records and derived from the letter-comments submitted by the parties.
Sixthly, the members of the Monetary Board acted independently on their own in issuing subject Resolution, placing
reliance on the said findings made during the 16th regular examination. Lastly, the reason for the issuance of
Monetary Board Resolution No. 805 is readily apparent, which is to prevent further irregularities from being
committed and to prosecute the officials responsible therefor.

With respect to the second issue, there is tenability in petitioners' contention that the Monetary Board, as an
administrative agency, is legally bound to observe due process, although they are free from the rigidity of certain
procedural requirements. As held in Adamson and Adamson, Inc. v. Amores. 18

While administrative tribunals exercising quasi-judicial functions are free from the rigidity of certain procedural
requirements they are bound by law and practice to observe the fundamental and essential requirements of due
process in justiciable cases presented before them. However, the standard of due process that must be met in
administrative tribunals allows a certain latitude as long as the element of fairness is not ignored. Hence, there is no
denial of due process where records show that hearings were held with prior notice to adverse parties. But even in
the absence of previous notice, there is no denial of procedural due process as long as the parties are given the
opportunity to be heard.

126
Even Section 28, (c) and (d), of Republic Act No. 3779 ("RA 1779") delineating the powers of the Monetary Board
over savings and loan associations, require observance of due process in the exercise of its powers:

xxx xxx xxx

(c) To conduct at least once every year, and whenever necessary, any inspection, examination or investigation
of the books and records, business affairs, administration, and financial condition of any savings and loan association
with or without prior notice but always with fairness and reasonable opportunity for the association or any of its
officials to give their side of the case. . .

(d) After proper notice and hearing, to suspend a savings and loan association for violation of law, for unsafe
and unsound practices or for reason of insolvency. . .

xxx xxx xxx

(f) To decide, after appropriate notice and hearings any controversy as to the rights or obligations of the
savings and loan association, its directors, officers, stockholders and members under its charter, and, by order, to
enforce the same;

xxx xxx xxx (emphasis supplied)

Anent the third issue, petitioners theorize that Monetary Board Resolution No. 805 is null and void for being violative
of petitioners' right to due process. To support their stance, they cite the trial court's ruling, to wit:

A reading of Monetary Board Resolution No. 805 discloses that it imposes administrative sanctions against
petitioners. In fact, it does not only penalize petitioners by including them in the "watchlist to prevent them from
holding responsible positions in any institution under Central Bank supervision," it mandates the PESALA Board of
Directors as well to file Civil and Criminal charges against them 'for all the misfeasance and malfeasance committed
by them, as warranted by the evidence.' Monetary Board Resolution No. 805 virtually deprives petitioners their
respective gainful employment, and at the same time marks them for judicial prosecution. The crucial question here
is that were petitioners afforded due process in the investigations conducted which prompted the issuance of
Monetary Board Resolution No. 805?

127
. . . Although the Monetary Board is free from the rigidity of certain procedural requirements, it failed "to observe
the essential requirement of due process" (Adamson and Adamson, Inc. v. Amores, 152 SCRA 237) specifically its
failure to afford petitioners the opportunity to be heard. In short, there is a clear showing of arbitrariness resulting in
an irreparable injury against petitioners as the Resolution certainly affects their "life, liberty and property.

Monetary Board Resolution No. 805 violates basic and essential requirements. It must therefore be, as it is hereby,
declared, as void and inexistent because among other things, it openly derogates the fundamental rights of
petitioners.

Petitioners opine that with the issuance of Monetary Board Resolution No. 805, "they are now barred from being
elected or designated as officers again of PESALA, and are likewise prevented from future engagements or
employments in all institutions under the supervision of the Central Bank thereby virtually depriving them of the
opportunity to seek employments in the field which they can excel and are best fitted." According to them, the
Monetary Board is not vested with "the authority to disqualify persons from occupying positions in institutions under
the supervision of the Central Bank without proper notice and hearing" nor is it vested with authority "to file civil and
criminal cases against its officers directors for suspected fraudulent acts."

Petitioners' contentions are untenable. It must be remembered that the Central Bank of the Philippines (now Bangko
Sentral ng Pilipinas), through the Monetary Board, is the government agency charged with the responsibility of
administering the monetary, banking and credit system of the country 19 and is granted the power of supervision
and examination over banks and non-bank financial institutions performing quasi-banking functions of which savings
and loan associations, such as PESALA, from part of. 20

The special law governing savings and loan associations is Republic Act No. 3779, as amended, otherwise known as
the "Savings and Loan Association Act." Said law authorizes the Monetary Board to conduct regular yearly
examinations of the books and records of savings and loans associations, to suspend a savings and loan association
for violation of law, to decide any controversy over the obligations and duties of directors and officers, and to take
remedial measures, among others. Section 28 of Rep. Act No. 3779, reads;

Sec. 28. Supervisory powers over savings and loan associations. — In addition to whatever powers have been
conferred by the foregoing provisions, the Monetary Board shall have the power to exercise the following.

xxx xxx xxx

(c) To conduct atleast once every year, and whenever necessary, any inspection, examination or investigation
of the books and records, business affairs, administration, and financial condition of any savings and loan association
with or without prior notice but always with fairness and reasonable opportunity for the association or any of its
official to give their side of the case. Whenever an inspection, examination or investigation is conducted under this

128
grant power, the person authorized to do so may seize books and records and keep them under his custody after
giving proper receipts therefor; may make any marking or notation on any paper, record, document or book to show
that it has been examined and verified; and may padlock or seal shelves, vaults, safes, receptacles or similar
container and prohibit the opening thereof without first securing authority therefor, for as long as may be necessary
in connection with the investigation or examination being conducted. The official of the Central Bank in charge of
savings and loan associations and his deputies are hereby authorized to administer oaths to any directors, officer or
employee of any association under the supervision of the Monetary Board;

xxx xxx xxx

(d) After proper notice and hearing, to suspend a savings and loan association for violation of law, for unsafe
and unsound practices or for reason of insolvency. The Monetary Board may likewise, upon the proof that a savings
and loan association or its board or directors or officers are conducting and managing its affairs in a manner contrary
to laws, orders, instruction, rules and regulations promulgated by the Monetary Board or in a manner substantially
prejudicial to the interest of the government, depositors or creditors, take over the management of the savings and
loan association after due hearing, until a new board of directors and officers are elected and qualified without
prejudice to the prosecution of the persons responsible for such violations. The management by the Monetary Board
shall be without expense to the savings and loan association, except such as is actually necessary for its operation,
pending the election and qualification of a new board of directors and officers to take the place of those responsible
for the violation or acts contrary to the interest of the government, depositors or creditors;

xxx xxx xxx

(f) To decide, after appropriate notice and hearings any controversy as to the rights or obligations of the
savings and loan association, its directors, officers, stockholders and members under its charter, and, by order, to
enforce the same;

xxx xxx xxx

(I) To conduct such investigations, take such remedial measures, exercise all powers which are now or may
hereafter be conferred upon it by Republic Act Numbered Two Hundred sixty-five in the enforcement of this
legislation, and impose upon associations, whether stock or non-stock their directors and/or officers administrative
sanctions under Sections 34-A or 34-B of Republic Act Two Hundred sixty-five, as amended.

From the foregoing, it is gleanable that the Central Bank, through the Monetary Board, is empowered to conduct
investigations and examine the records of savings and loan associations. If any irregularity is discovered in the
process, the Monetary Board may impose appropriate sanctions, such as suspending the offender from holding
office or from being employed with the Central Bank, or placing the names of the offenders in a watchlist.

129
The requirement of prior notice is also relaxed under Section 28 (c) of RA 3779 as investigations or examinations may
be conducted with or without prior notice "but always with fairness and reasonable opportunity for the association
or any of its officials to give their side." As may be gathered from the records, the said requirement was properly
complied with by the respondent Monetary Board.

We sustain the ruling of the Court of Appeals that petitioners' suspension was only preventive in nature and
therefore, no notice or hearing was necessary. Until such time that the petitioners have proved their innocence, they
may be preventively suspended from holding office so as not to influence the conduct of investigation, and to
prevent the commission of further irregularities.

Neither were petitioners deprived of their lawful calling as they are free to look for another employment so long as
the agency or company involved is not subject to Central Bank control and supervision. Petitioners can still practise
their profession or engage in business as long as these are not within the ambit of Monetary Board Resolution No.
805.

All thing studiedly considered, the court upholds the validity of Monetary Board Resolution No. 805 and affirms the
decision of the respondent court.

WHEREFORE, the petition is DENIED, and the assailed Decision dated September 14, 1996 of the AFFIRMED. No
pronouncement as to costs.

SO ORDERED.

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G.R. No. 121413 January 29, 2001

PHILIPPINE COMMERCIAL INTERNATIONAL BANK (formerly INSULAR BANK OF ASIA AND AMERICA), petitioner,

vs.

COURT OF APPEALS and FORD PHILIPPINES, INC. and CITIBANK, N.A., respondents.

G.R. No. 121479 January 29, 2001

FORD PHILIPPINES, INC., petitioner-plaintiff,

vs.

COURT OF APPEALS and CITIBANK, N.A. and PHILIPPINE COMMERCIAL INTERNATIONAL BANK, respondents.

G.R. No. 128604 January 29, 2001

FORD PHILIPPINES, INC., petitioner,

vs.

CITIBANK, N.A., PHILIPPINE COMMERCIAL INTERNATIONAL BANK and COURT OF APPEALS, respondents.

QUISUMBING, J.:

These consolidated petitions involve several fraudulently negotiated checks.

The original actions a quo were instituted by Ford Philippines to recover from the drawee bank, CITIBANK, N.A.
(Citibank) and collecting bank, Philippine Commercial International Bank (PCIBank) [formerly Insular Bank of Asia and
America], the value of several checks payable to the Commissioner of Internal Revenue, which were embezzled
allegedly by an organized syndicate.1âwphi1.nêt

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G.R. Nos. 121413 and 121479 are twin petitions for review of the March 27, 1995 Decision1 of the Court of Appeals in
CA-G.R. CV No. 25017, entitled "Ford Philippines, Inc. vs. Citibank, N.A. and Insular Bank of Asia and America (now
Philipppine Commercial International Bank), and the August 8, 1995 Resolution,2 ordering the collecting bank,
Philippine Commercial International Bank, to pay the amount of Citibank Check No. SN-04867.

In G.R. No. 128604, petitioner Ford Philippines assails the October 15, 1996 Decision3 of the Court of Appeals and its
March 5, 1997 Resolution4 in CA-G.R. No. 28430 entitled "Ford Philippines, Inc. vs. Citibank, N.A. and Philippine
Commercial International Bank," affirming in toto the judgment of the trial court holding the defendant drawee
bank, Citibank, N.A., solely liable to pay the amount of P12,163,298.10 as damages for the misapplied proceeds of the
plaintiff's Citibanl Check Numbers SN-10597 and 16508.

I. G.R. Nos. 121413 and 121479

The stipulated facts submitted by the parties as accepted by the Court of Appeals are as follows:

"On October 19, 1977, the plaintiff Ford drew and issued its Citibank Check No. SN-04867 in the amount of
P4,746,114.41, in favor of the Commissioner of Internal Revenue as payment of plaintiff;s percentage or
manufacturer's sales taxes for the third quarter of 1977.

The aforesaid check was deposited with the degendant IBAA (now PCIBank) and was subsequently cleared at the
Central Bank. Upon presentment with the defendant Citibank, the proceeds of the check was paid to IBAA as
collecting or depository bank.

The proceeds of the same Citibank check of the plaintiff was never paid to or received by the payee thereof, the
Commissioner of Internal Revenue.

As a consequence, upon demand of the Bureau and/or Commissioner of Internal Revenue, the plaintiff was
compelled to make a second payment to the Bureau of Internal Revenue of its percentage/manufacturers' sales
taxes for the third quarter of 1977 and that said second payment of plaintiff in the amount of P4,746,114.41 was duly
received by the Bureau of Internal Revenue.

It is further admitted by defendant Citibank that during the time of the transactions in question, plaintiff had been
maintaining a checking account with defendant Citibank; that Citibank Check No. SN-04867 which was drawn and
issued by the plaintiff in favor of the Commissioner of Internal Revenue was a crossed check in that, on its face were
two parallel lines and written in between said lines was the phrase "Payee's Account Only"; and that defendant
Citibank paid the full face value of the check in the amount of P4,746,114.41 to the defendant IBAA.

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It has been duly established that for the payment of plaintiff's percentage tax for the last quarter of 1977, the Bureau
of Internal Revenue issued Revenue Tax Receipt No. 18747002, dated October 20, 1977, designating therein in
Muntinlupa, Metro Manila, as the authorized agent bank of Metrobanl, Alabang branch to receive the tax payment
of the plaintiff.

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 latter accepted the check and sent it to the
Central Clearing House for clearing on the samd day, with the indorsement at the back "all prior indorsements and/or
lack of indorsements guaranteed." Thereafter, defendant IBAA presented the check for payment to defendant
Citibank on same date, December 19, 1977, and the latter paid the face value of the check in the amount of
P4,746,114.41. Consequently, the amount of P4,746,114.41 was debited in plaintiff's account with the defendant
Citibank and the check was returned to the plaintiff.

Upon verification, plaintiff discovered that its Citibank Check No. SN-04867 in the amount of P4,746,114.41 was not
paid to the Commissioner of Internal Revenue. Hence, in separate letters dated October 26, 1979, addressed to the
defendants, the plaintiff notified the latter that in case it will be re-assessed by the BIR for the payment of the taxes
covered by the said checks, then plaintiff shall hold the defendants liable for reimbursement of the face value of the
same. Both defendants denied liability and refused to pay.

In a letter dated February 28, 1980 by the Acting Commissioner of Internal Revenue addressed to the plaintiff -
supposed to be Exhibit "D", the latter was officially informed, among others, that its check in the amount of P4,
746,114.41 was not paid to the government or its authorized agent and instead encashed by unauthorized persons,
hence, plaintiff has to pay the said amount within fifteen days from receipt of the letter. Upon advice of the plaintiff's
lawyers, plaintiff on March 11, 1982, paid to the Bureau of Internal Revenue, the amount of P4,746,114.41,
representing payment of plaintiff's percentage tax for the third quarter of 1977.

As a consequence of defendant's refusal to reimburse plaintiff of the payment it had made for the second time to the
BIR of its percentage taxes, plaintiff filed on January 20, 1983 its original complaint before this Court.

On December 24, 1985, defendant IBAA was merged with the Philippine Commercial International Bank (PCI Bank)
with the latter as the surviving entity.

Defendant Citibank maintains that; the payment it made of plaintiff's Citibank Check No. SN-04867 in the amount of
P4,746,114.41 "was in due course"; it merely relied on the clearing stamp of the depository/collecting bank, the
defendant IBAA that "all prior indorsements and/or lack of indorsements guaranteed"; and the proximate cause of
plaintiff's injury is the gross negligence of defendant IBAA in indorsing the plaintiff's Citibank check in question.

133
It is admitted that on December 19, 1977 when the proceeds of plaintiff's Citibank Check No. SN-048867 was paid to
defendant IBAA as collecting bank, plaintiff was maintaining a checking account with defendant Citibank."5

Although it was not among the stipulated facts, an investigation by the National Bureau of Investigation (NBI)
revealed that Citibank Check No. SN-04867 was recalled by Godofredo Rivera, the General Ledger Accountant of
Ford. He purportedly needed to hold back the check because there was an error in the computation of the tax due to
the Bureau of Internal Revenue (BIR). With Rivera's instruction, PCIBank replaced the check with two of its own
Manager's Checks (MCs). Alleged members of a syndicate later deposited the two MCs with the Pacific Banking
Corporation.

Ford, with leave of court, filed a third-party complaint before the trial court impleading Pacific Banking Corporation
(PBC) and Godofredo Rivera, as third party defendants. But the court dismissed the complaint against PBC for lack of
cause of action. The course likewise dismissed the third-party complaint against Godofredo Rivera because he could
not be served with summons as the NBI declared him as a "fugitive from justice".

On June 15, 1989, the trial court rendered its decision, as follows:

"Premises considered, judgment is hereby rendered as follows:

"1. Ordering the defendants Citibank and IBAA (now PCI Bank), jointly and severally, to pay the plaintiff 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, 1983, the date when the original complaint was filed until the amount is fully paid, plus
costs;

"2. On defendant Citibank's cross-claim: ordering the cross-defendant IBAA (now PCI Bank) to reimburse defendant
Citibank for whatever amount the latter has paid or may pay to the plaintiff in accordance with next preceding
paragraph;

"3. The counterclaims asserted by the defendants against the plaintiff, as well as that asserted by the cross-
defendant against the cross-claimant are dismissed, for lack of merits; and

"4. With costs against the defendants.

SO ORDERED."6

134
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 follows:

"WHEREFORE, in view of the foregoing, the court AFFIRMS the appealed decision with modifications.

The court hereby renderes judgment:

1. Dismissing the complaint in Civil Case No. 49287 insofar as defendant Citibank N.A. is concerned;

2. Ordering the defendant IBAA now PCI Bank to pay the plaintiff 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, 1983, the
date when the original complaint was filed until the amount is fully paid;

3. Dismissing the counterclaims asserted by the defendants against the plaintiff as well as that asserted by the cross-
defendant against the cross-claimant, for lack of merits.

Costs against the defendant IBAA (now PCI Bank).

IT IS SO ORDERED."7

PCI Bank moved to reconsider the above-quoted decision of the Court of Appeals, while Ford filed a "Motion for
Partial Reconsideration." Both motions were denied for lack of merit.

Separately, PCIBank and Ford filed before this Court, petitions for review by certiorari under Rule 45.

In G.R. No. 121413, PCIBank seeks the reversal of the decision and resolution of the Twelfth Division of the Court of
Appeals contending that it merely acted on the instruction of Ford and such casue of action had already prescribed.

135
PCIBank sets forth the following issues for consideration:

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 petitioner liable to the said respondent for the full
amount of the said check.

II. Did the respondent court err when it did not find prescription in favor of the petitioner.8

In a counter move, Ford filed its petition docketed as G.R. No. 121479, questioning the same decision and resolution
of the Court of Appeals, and praying for the reinstatement in toto of the decision of the trial court which found both
PCIBank and Citibank jointly and severally liable for the loss.

In G.R. No. 121479, appellant Ford presents the following propositions for consideration:

I. Respondent Citibank is liable to petitioner Ford considering that:

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 and contractual duty to pay the proceeds of the subject check only to the payee
thereof, the Commissioner of Internal Revenue.

2. Respondent Citibank failed to observe its duty as banker with respect to the subject check, which was crossed and
payable to "Payee's Account Only."

3. Respondent Citibank raises an issue for the first time on appeal; thus the same should not be considered by the
Honorable Court.

4. As correctly held by the trial court, there is no evidence of gross negligence on the part of petitioner Ford.9

II. PCI Bank is liable to petitioner Ford considering that:

136
1. There were no instructions from petitioner Ford to deliver the proceeds of the subject check to a person other
than the payee named therein, the Commissioner of the Bureau of Internal Revenue; thus, PCIBank's only obligation
is to deliver the proceeds to the Commissioner of the Bureau of Internal Revenue.10

2. PCIBank which affixed its indorsement on the subject check ("All prior indorsement and/or lack of indorsement
guaranteed"), is liable as collecting bank.11

3. PCIBank is barred from raising issues of fact in the instant proceedings.12

4. Petitioner Ford's cause of action had not prescribed.13

II. G.R. No. 128604

The same sysndicate apparently embezzled the proceeds of checks intended, this time, to settle Ford's percentage
taxes appertaining to the second quarter of 1978 and the first quarter of 1979.

The facts as narrated by the Court of Appeals are as follows:

Ford drew Citibank Check No. SN-10597 on July 19, 1978 in the amount of P5,851,706.37 representing the percentage
tax due for the second quarter of 1978 payable to the Commissioner of Internal Revenue. A BIR Revenue Tax Receipt
No. 28645385 was issued for the said purpose.

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 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 the said purpose.

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 account only."

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 corresponding periods above-mentioned.

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As far as the BIR is concernced, the said two BIR Revenue Tax Receipts were considered "fake and spurious". This
anomaly was confirmed by the 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.

The Regional Trial Court of Makati, Branch 57, which tried the case, made its findings on the modus operandi of the
syndicate, as follows:

"A certain Mr. Godofredo Rivera was employed by the plaintiff FORD as its General Ledger Accountant. As such, he
prepared the plaintiff's check marked Ex. 'A' [Citibank Check No. Sn-10597] for payment to the BIR. Instead, however,
fo delivering the same of the payee, he passed on the check to a co-conspirator named Remberto Castro who was a
pro-manager of the San Andres Branch of PCIB.* In connivance with one Winston Dulay, Castro himself subsequently
opened a Checking Account in the name of a fictitious person denominated as 'Reynaldo reyes' in the Meralco
Branch of PCIBank where Dulay works as Assistant Manager.

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) while this worthless check was coursed
through PCIB's main office enroute to the Central Bank for clearing, replaced this 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 CITIBANK, and the fictitious deposit account of 'Reynaldo Reyes' was credited at the PCIB
Meralco Branch with the total amount of the FORD check Exhibit 'A'. The same method was again utilized by the
syndicate in profiting from Exh. 'B' [Citibank Check No. SN-16508] which was subsequently pilfered by Alexis
Marindo, Rivera's Assistant at FORD.

From this 'Reynaldo Reyes' account, Castro drew various checks distributing the sahres of the other participating
conspirators namely (1) CRISANTO BERNABE, the mastermind who formulated the method for the embezzlement;
(2) RODOLFO R. DE LEON a customs broker who negotiated the initial contact between Bernabe, FORD's Godofredo
Rivera and PCIB's Remberto Castro; (3) JUAN VASTILLO who assisted de Leon in the initial arrangements; (4)
GODOFREDO RIVERA, FORD's accountant who passed on the first check (Exhibit "A") to Castro; (5) REMERTO
CASTRO, PCIB's pro-manager at San Andres who performed the switching of checks in the clearing process and
opened the fictitious Reynaldo Reyes account at the PCIB Meralco Branch; (6) WINSTON DULAY, PCIB's Assistant
Manager at its Meralco Branch, who assisted Castro in switching the checks in the clearing process and facilitated the
opening of the fictitious Reynaldo Reyes' bank account; (7) ALEXIS MARINDO, Rivera's Assistant at FORD, who gave
the second check (Exh. "B") to Castro; (8) ELEUTERIO JIMENEZ, BIR Collection Agent who provided the fake and
spurious revenue tax receipts to make it appear that the BIR had received FORD's tax payments.

Several other persons and entities were utilized by the syndicate as conduits in the disbursements of the proceeds of
the two checks, but like the aforementioned participants in the 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 "Reynaldo Reyes" account and indubitably identify the parties who illegally benefited
therefrom and readily indicate in what amounts they did so."14

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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 PCIBank from any liability, disposing as follows:

"WHEREFORE, judgment is hereby rendered sentencing defendant CITIBANK to reimburse plaintiff FORD the total
amount of P12,163,298.10 prayed for in its complaint, with 6% interest thereon from date of first written demand until
full payment, plus P300,000.00 attorney's fees and expenses litigation, and to pay the defendant, PCIB (on its
counterclaim to crossclaim) the sum of P300,000.00 as attorney's fees and costs of litigation, and pay the costs.

SO ORDERED."15

Both Ford and Citibank appealed to the Court of Appeals which affirmed, in toto, the decision of the trial court.
Hence, this petition.

Petitioner Ford prays that judgment be rendered setting aside the portion of the Court of Appeals decision and its
resolution dated March 5, 1997, with respect to the dismissal of the complaint against PCIBank and holding Citibank
solely responsible for the proceeds of Citibank Check Numbers SN-10597 and 16508 for P5,851,706.73 and
P6,311,591.73 respectively.

Ford avers that the Court of Appeals erred in dismissing the complaint against defendant PCIBank considering that:

I. Defendant PCIBank was clearly negligent when it failed to exercise the diligence required to be exercised by it as a
banking insitution.

II. Defendant PCIBank clearly failed to observe the diligence required in the selection and supervision of its officers
and employees.

III. Defendant PCIBank was, due to its negligence, clearly liable for the loss or damage resulting to the plaintiff Ford
as a consequence of the substitution of the check consistent with Section 5 of Central Bank Circular No. 580 series of
1977.

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IV. Assuming arguedo that defedant PCIBank did not accept, endorse or negotiate in due course the subject checks,
it is liable, under Article 2154 of the Civil Code, to return the money which it admits having received, and which was
credited to it its Central bank account.16

The main issue presented for our consideration by these petitions could be simplified as follows: Has petitioner Ford
the right to recover from the collecting bank (PCIBank) and the drawee bank (Citibank) the value of the checks
intended as payment to the Commissioner of Internal Revenue? Or has Ford's cause of action already prescribed?

Note that in these cases, the checks were drawn against the drawee bank, but the title of the person negotiating the
same was allegedly defective because the instrument was obtained by fraud and unlawful means, and the proceeds
of the checks were not remitted to the payee. It was established that instead of paying the checks to the CIR, for the
settlement of the 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 of the Negotiable Instruments Law (NIL), which provides:

"When title defective -- The title of a person who negotiates an instrument is defective within the meaning of this Act
when he 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 such circumstances as
amount to a fraud."

Pursuant to this provision, it is vital to show that the negotiation is made by 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 duties, he may set up the personal
defense to escape liability and recover from other parties who. Though their own negligence, alowed the
commission of the crime.

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 have, even if temporarily, escaped liability for the embezzlement of millions of
pesos. We are thus left only with the task of determining who of the present parties before us must bear the burden
of loss of these millions. It all boils down to thequestion of liability based on the degree of negligence among the
parties concerned.

Foremost, we must resolve whether the injured party, Ford, is guilty of the "imputed contributory negligence" that
would defeat its claim for reimbursement, bearing ing mind that its employees, Godofredo Rivera and Alexis
Marindo, were among the members of the syndicate.

Citibank points out that Ford allowed its very own employee, Godofredo Rivera, to negotiate the checks to his co-
conspirators, instead of delivering them to the designated authorized collecting bank (Metrobank-Alabang) of the

140
payee, CIR. Citibank bewails the fact that Ford was remiss in the supervision and control of its own employees,
inasmuch as it only discovered the syndicate's activities through the information given by the payee of the checks
after an unreasonable period of time.

PCIBank also blames Ford of negligence when it allegedly authorized 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 proximate cause of the damge to Ford lies in its own officers
and employees who carried out the fradulent schemes and the transactions. These circumstances were not checked
by other officers of the company including its comptroller or internal auditor. PCIBank contends that the inaction of
Ford despite the enormity of the amount involved was a sheer negligence and stated that, as between two innocent
persons, one of whom must suffer the consequences of a breach of trust, the one who made it possible, by his act of
negligence, must bear the loss.

For its part, Ford denies any negligence in the performance of its duties. It avers that there was no evidence
presented before the trial court showing lack of diligence on the part of Ford. And, citing the case of Gempesaw vs.
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.

Furthermore, Ford contends the Godofredo rivera was not authorized to make any representation in its behalf,
specifically, to divert the proceeds of the checks. It adds that Citibank raised the issue of imputed negligence against
Ford for the first time on appeal. Thus, it should not be considered by this Court.

On this point, jurisprudence regarding the imputed negligence of employer in a master-servant relationship is
instructive. Since a master may be held for his servant's wrongful act, the law imputes to the master the act of the
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 is
that if the master is injured by the negligence of a third person and by the concuring contributory negligence of his
own servant or agent, the latter's negligence is imputed to his superior and will defeat the superior's action against
the third person, asuming, of course that the contributory negligence was the proximate cause of the injury of which
complaint is made.19

Accordingly, we need to determine whether or not the action of Godofredo 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, unbroken by any efficient, intervening cause
produces the injury and without the result would not have occurred.20

It appears that although the employees of Ford initiated the transactions 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 of the injury to the parties.

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The Board of Directors of Ford, we note, did not confirm the request of Godofredo Rivera to recall Citibank Check
No. SN-04867. Rivera's instruction to replace the said check with PCIBank's Manager's Check was not in theordinary
course of business which could have prompted PCIBank to validate the same.

As to the preparation of Citibank Checks Nos. SN-10597 and 16508, it was established that these checks were made
payable to the CIR. Both were crossed checks. These checks were apparently turned around by Ford's emploees,
who were acting on their own personal capacity.

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 had unusual facilities for perpertrating the fraud and imposing the forged
paper upon the bank, does notentitle the bank toshift the loss to the drawer-payor, in the absence of some
circumstance raising estoppel against the drawer.21 This rule likewise applies to the checks fraudulently negotiated
or diverted by the confidential employees who hold them in their possession.

With respect to the negligence of PCIBank in the payment of the three checks involved, separately, the trial courts
found variations between the negotiation of Citibank Check No. SN-04867 and the misapplication of total proceeds
of Checks SN-10597 and 16508. Therefore, we have to scrutinize, separately, PCIBank's share of negligence when the
syndicate achieved its ultimate agenda of stealing the proceeds of these checks.

G.R. Nos. 121413 and 121479

Citibank Check No. SN-04867 was deposited at PCIBank through its Ermita Branch. It was coursed through the
ordinary banking transaction, sent to Central Clearing with the indorsement at the back "all prior indorsements
and/or lack of indorsements guaranteed," and was presented to Citibank for payment. Thereafter PCIBank, instead
of remitting the proceeds to the CIR, prepared two of its Manager's checks and enabled the syndicate to encash the
same.

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 requesting for the replacement of the Citibank Check No. SN-04867 was duly
authorized, showed lack of care and prudence required in the circumstances.

Furthermore, it was admitted that PCIBank is authorized to collect the payment of taxpayers in behalf of the BIR. As
an agent of BIR, PCIBank is duty bound to consult its principal regarding the unwarranted instructions given by the
payor or its agent. As aptly stated by the trial court, to wit:

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"xxx. Since the questioned crossed check was deposited with IBAA [now PCIBank], which claimed to be a
depository/collecting bank of BIR, it has the responsibility to make sure that the check in question is deposited in
Payee's account only.

xxx xxx xxx

As agent of the BIR (the payee of the check), defendant IBAA should receive instructions only from its principal BIR
and not from any other person especially so when that person is not known to the defendant. It is very imprudent on
the part of the 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."

It is a well-settled rule that the relationship between the payee or holder of commercial paper and the bank to which
it is sent for collection is, in the absence of an argreement to the contrary, that of principal and agent.22 A bank
which receives such paper for collection is the agent of the payee or holder.23

Even considering arguendo, that the diversion of the amount of a check payable to the collecting bank in behalf of
the designated payee may be allowed, still such diversion must be properly authorized by the payor. Otherwise
stated, the diversion can be justified only by proof of authority from the drawer, or that the drawer has clothed his
agent with apparent authority to receive the proceeds of such check.

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 liable because it
made it pass through the clearing house and therefore Citibank had no other option but to pay it. Thus, Citibank had
no other option but to pay it. Thus, Citibank assets that the proximate cause of Ford's injury is the gross negligence
of PCIBank. Since the questione dcrossed check was deposited with PCIBank, which claimed to be a
depository/collecting bank of the BIR, it had the responsibility to make sure that the check in questions is deposited
in Payee's account only.

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 be deposited in payee's account only. Therefore, it is the collecting bank (PCIBank) which is bound to
scruninize the check and to know its depositors before it could make the clearing indorsement "all prior
indorsements and/or lack of indorsement guaranteed".

In Banco de Oro Savings and Mortgage Bank vs. Equitable Banking Corporation,24 we ruled:

143
"Anent petitioner's liability on said instruments, this court is in full accord with the ruling of the PCHC's Board of
Directors that:

'In presenting the checks for clearing and for payment, the defendant made an express guarantee on the validity of
"all prior endorsements." Thus, stamped at the back of the checks are the defedant's clear warranty: ALL PRIOR
ENDORSEMENTS AND/OR LACK OF ENDORSEMENTS GUARANTEED. Without such warranty, plaintiff would not have
paid on the checks.'

No amount of legal jargon can reverse the clear meaning of 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

Lastly, banking business requires that the one who first cashes and 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 permitted to retain the proceeds of the check from the
drawee whose sole fault was that it did not discover the forgery or the defect in the title of the person negotiating
the instrument before paying the check. For this reason, 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 proceeds of the checks were afterwards diverted to the hands of a
third party. In such cases the drawee bank has a right to believe that the cashing bank (or the collecting bank) had,
by the usual proper investigation, satisfied itself 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 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

Having established that the collecting bank's negligence is the proximate cause of the loss, we conclude that
PCIBank is liable in the amount corresponding to the proceeds of Citibank Check No. SN-04867.

G.R. No. 128604

The trial court and the Court of Appeals found that PCIBank had no official act in the ordinary course of business that
would attribute to it the case of the embezzlement of Citibank Check Numbers SN-10597 and 16508, because
PCIBank did not actually receive nor hold the two Ford checks at all. The trial court held, thus:

"Neither is there any proof that defendant PCIBank contributed any official or conscious participation in the process
of the embezzlement. This Court is convinced that the switching operation (involving the checks while in transit for
"clearing") were the clandestine or hidden actuations performed by the members of the syndicate in their own
personl, covert and private capacity and done without the knowledge of the defendant PCIBank…"27

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In this case, there was no evidence presented confirming the conscious particiapation of PCIBank in the
embezzlement. As a general rule, however, a banking corporation is liable for the wrongful or tortuous acts and
declarations of its officers or agents within the course and scope of their employment.28 A bank will be held liable
for the negligence of its officers or agents when acting within the course and scope of their employment. It may be
liable for the tortuous acts of its officers even as regards that species of 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.

The pro-manager of San Andres Branch of PCIBank, Remberto Castro, received Citibank Check Numbers SN-10597
and 16508. He passed the checks to a co-conspirator, an Assistant Manager of PCIBank's Meralco Branch, who
helped Castro open a Checking account of a fictitious person 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 eventual encashment of Citibank Check Nos. SN 10597 and
16508. The PCIBank Ptro-manager, Castro, and his co-conspirator Assistant Manager apparently performed their
activities using facilities in their official capacity or authority but for their personal and private gain or benefit.

A bank holding out its officers and agents as worthy of confidence will not be permitted to profit by the frauds these
officers or agents were enabled to perpetrate in the apparent course of their employment; nor will t be permitted to
shirk its responsibility for such frauds, even though no benefit may accrue to the bank therefrom. For the general
rule is that a bank is liable for the fraudulent acts or representations of an officer or agent acting within the 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 liable for his
misappropriation of such sum.30

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 case is PCIBank.

But in this case, responsibility for negligence does not lie on PCIBank's shoulders alone.

The evidence on record shows that Citibank as drawee bank was likewise negligent in the performance of its duties.
Citibank failed to establish that its payment of Ford's checjs were made in due course and legally in order. In its
defense, Citibank claims the genuineness and due execution of said checks, considering that Citibank (1) has no
knowledge of any informity in the issuance of the checks in question (2) coupled by the fact that said checks were
sufficiently funded and (3) the endorsement of the Payee or lack thereof was guaranteed by PCI Bank (formerly
IBAA), thus, it has the obligation to honor and pay the same.

For its part, Ford contends that Citibank as the drawee bank owes to Ford an absolute and contractual duty to pay
the proceeds of the subject check only to the payee thereof, the CIR. Citing Section 6232 of the Negotiable
Instruments Law, Ford argues that by accepting the instrument, the acceptro which is Citibank engages that it will

145
pay according to the tenor of its acceptance, and that it will pay only to the payee, (the CIR), considering the fact
that here the check was crossed with annotation "Payees Account Only."

As ruled by the Court of Appeals, Citibank must likewise answer for the damages incurred by Ford on Citibank Checks
Numbers SN 10597 and 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. On this score, we agree with the respondent court's ruling.

Citibank should have scrutinized Citibank Check Numbers SN 10597 and 16508 before paying the amount of the
proceeds thereof to the collecting bank of the BIR. One thing is clear from the record: the clearing stamps at 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 to Citibank
Check Nos. 10597 and 16508 would have been discovered in time. For this reason, Citibank had indeed failed to
perform what was incumbent upon it, which is to ensure that the amount of the checks should be paid only to its
designated payee. The fact that the drawee bank did not discover the irregularity seasonably, in our view, consitutes
negligence in carrying out the bank's duty to its depositors. The point is that as a business affected with public
interest and because of the nature of its functions, the bank is under obligation to treat the accounts of its
depositors with meticulous care, always having in mind the fiduciary nature of their relationship.33

Thus, invoking the doctrine of comparative negligence, we are of the view 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.

Time and again, we have stressed that banking business is so impressed with public interest where the trust and
confidence of the public in general is of paramount umportance such that the appropriate standard of diligence must
be very high, if not the highest, degree of diligence.34 A bank's liability as obligor is not merely vicarious but primary,
wherein the defense of exercise of due diligence in the selection and supervision of its employees is of no
moment.35

Banks handle daily transactions involving millions of pesos.36 By the very nature of their work the degree of
responsibility, care and trustworthiness expected of their employees and officials is far greater than those of
ordinary clerks and employees.37 Banks are expected to exercise the highest degree of diligence in the selection and
supervision of their employees.38

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.

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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

Our laws on the matter provide that the action upon a written contract must 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 depositor (normally a month thereafter).
Applying the same rule, the cause of action for the recovery of the proceeds of Citibank Check No. SN 04867 would
normally be a month after December 19, 1977, when Citibank paid the face value of the check in the amount of
P4,746,114.41. Since the original complaint for the cause of action was filed on January 20, 1984, barely six years had
lapsed. Thus, we conclude that Ford's cause of action to recover the amount of Citibank Check No. SN 04867 was
seasonably filed within the period provided by law.

Finally, we also find thet Ford is not completely blameless in its failure to detect the fraud. Failure on the part of the
depositor to examine its passbook, statements of account, and cancelled checks and to give notice within a
reasonable time (or as required by statute) of any discrepancy which it may in the exercise of due care and diligence
find therein, serves to mitigate the banks' liability by reducing the award of interest from twelve percent (12%) to six
percent (6%) per annum. As provided in Article 1172 of the Civil Code 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 contributory negligence of the plaintiff shall reduce
the damages that he may recover.42

WHEREFORE, the assailed Decision and Resolution of the Court of Appeals 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 P4,746,114.41, which shall be paid together with six percent
(6%) interest thereon to Ford Philippines Inc. from the date when the original complaint was filed until said amount is
fully paid.

However, the Decision and Resolution of the Court of Appeals in CA-G.R. No. 28430 are MODIFIED as follows:
PCIBank and Citibank are adjudged liable for and must share the loss, (concerning the proceeds of Citibank Check
Numbers SN 10597 and 16508 totalling P12,163,298.10) on a fifty-fifty ratio, and each bank is ORDERED to pay Ford
Philippines Inc. P6,081,649.05, with six percent (6%) interest thereon, from the date the complaint was filed until full
payment of said amount.1âwphi1.nêt

Costs against Philippine Commercial International Bank and Citibank N.A.

G.R. No. 170574 January 30, 2009

147
PHILIPPINE BANKING CORPORATION (NOW: GLOBAL BUSINESS BANK, INC.), Petitioner,

vs.

COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

CARPIO, J.:

The Case

The Philippine Banking Corporation, now, Global Business Bank, Inc., (petitioner) filed this Petition for Review1 to
reverse the Court of Tax Appeals’ Decision2 dated 23 November 2005 in CTA EB No. 63 (C.T.A. Case No. 6395). In the
assailed decision, the Court of Tax Appeals En Banc ordered petitioner to pay P17,595,488.75 and P47,767,756.24 as
deficiency documentary stamp taxes for the taxable years 1996 and 1997, respectively, on its bank product called
"Special/Super Savings Deposit Account" (SSDA).

The Facts

Petitioner is a domestic corporation duly licensed as a banking institution.3 For the taxable years 1996 and 1997,
petitioner offered its SSDA to its depositors. The SSDA is a form of a savings deposit evidenced by a passbook and
earning a higher interest rate than a regular savings account. Petitioner believes that the SSDA is not subject to
Documentary Stamp Tax (DST) under Section 180 of the 1977 National Internal Revenue Code (NIRC), as amended.4

On 10 January 2000, the Commissioner of Internal Revenue (respondent) sent petitioner a Final Assessment Notice
assessing deficiency DST based on the outstanding balances of its SSDA, including increments, in the total sum of
P17,595,488.75 for 1996 and P47,767,756.24 for 1997. These assessments were based on the outstanding balances of
the SSDA appearing in the schedule attached to petitioner’s audited financial statements for the taxable years 1996
and 1997.5

Petitioner claims that the SSDA is in the nature of a regular savings account since both types of accounts have the
following common features:

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a. They are both evidenced by a passbook;

b. The depositors can make deposits or withdrawals anytime which are not subject to penalty; and

c. Both can have an Automatic Transfer Agreement (ATA) with the depositor’s current or checking account.6

Petitioner alleges that the only difference between the regular savings account and the SSDA is that the SSDA is for
depositors who maintain savings deposits with a substantial average daily balance, and as an incentive, they are
given higher interest rates than regular savings accounts. These deposits are classified separately in petitioner’s
financial statements in order to maintain a separate record for savings deposits with substantial balances entitled to
higher interest rates.7

Petitioner maintains that the tax assessments are erroneous because Section 180 of the 1977 NIRC does not include
deposits evidenced by a passbook among the enumeration of instruments subject to DST. Petitioner asserts that the
language of the law is clear and requires no interpretation.8 Section 180 of the 1977 NIRC, as amended,9 provides:

Sec. 180. Stamp tax on all loan agreements, promissory notes, bills of exchange, drafts, instruments and securities
issued by the government or any of its instrumentalities, certificates of deposit bearing interest and others not
payable on sight or demand. — On all loan agreements signed abroad wherein the object of the contract is located
or used in the Philippines; bills of exchange (between points within the Philippines), drafts, instruments and
securities issued by the Government or any of its instrumentalities or certificates of deposits drawing interest, or
orders for the payment of any sum of money otherwise than at the sight or on demand, or on all promissory notes,
whether negotiable or non-negotiable, except bank notes issued for circulation, and on each renewal of any such
note, there shall be collected a documentary stamp tax of Thirty centavos (P0.30) on each Two hundred pesos, or
fractional part thereof, of the face value of any such agreement, bill of exchange, draft, certificate of deposit, or
note: provided, that only one documentary stamp tax shall be imposed on either loan agreement, or promissory note
issued to secure such loan, whichever will yield a higher tax: provided, however, that loan agreements or promissory
notes the aggregate of which does not exceed Two hundred fifty thousand pesos (P250,000) executed by an
individual for his purchase on installment for his personal use or that of his family and not for business, resale, barter
or hire of a house, lot, motor vehicle, appliance or furniture shall be exempt from the payment of the documentary
stamp tax provided under this section. (Boldfacing supplied)

Petitioner insists that the SSDA, being issued in the form of a passbook, cannot be construed as a certificate of
deposit subject to DST under Section 180 of the 1977 NIRC. Petitioner explains that the SSDA is a necessary offshoot
of the deregulated interest rate regime in bank deposits.10 Petitioner elucidates:

With the removal of the respective interest rate ceilings on savings and time deposit, banks are enabled to
legitimately offer higher rates on savings account which may even be at par with rates on time deposit. Practically,

149
the distinction between a savings and a time deposit was removed insofar as interest rates are concerned. This being
so, and for the legitimate purpose of further enticing deposits for savings account, banks have evolved a product –
the Super/Special Savings Account – which offers the flexibility of a savings deposit but does away with the rigidity of
a time deposit account and with interest rate at par with the latter. This is offered as an incentive for depositors who
maintain or who wish to maintain deposits with substantial average daily balance. Such depositors will be entitled to
an attractive interest rate, a rate higher than that to which the regular savings account is entitled. Just like an
ordinary savings, Super/Special Savings Deposits can be withdrawn anytime. Of course, to be entitled to preferential
interest rate, such account must conform to a stated minimum deposit balance within a specified holding period.
Otherwise, the depositor will lose the incentive of a higher interest rate and the account will revert to an ordinary
savings account and be entitled only to prevailing rates of interest applicable to regular savings account. And unlike a
time deposit account, the Super/Special Savings Account comes in the form of a passbook, hence need not be
formally renewed in the manner that a time deposit certificate has to be formally surrendered and renewed upon
maturity.11

Petitioner argues that the DST is imposed on the basis of a mere inference or perceived implication of what the SSDA
is supposed to be and not on the basis of what the law specifically states. Petitioner points out the differences
between the SSDA and time deposits:12

Time Deposits SSDA

1. The holding period is fixed beforehand.

1. The holding period floats at the option of the depositor. It can be 30, 60, 90 or 120 days or more and as an incentive
for maintaining a longer holding period, the depositor earns higher interest.

2. There is pre-termination because there is no partial withdrawal of a certificate. Pre-termination results in the
surrender and cancellation of the certificate of deposit.

2. No pre-termination and the passbook account is simply reverted to an ordinary savings status in case of early or
partial withdrawal or if the required holding period is not met.

Petitioner also argues that even on the assumption that a passbook evidencing the SSDA is a certificate of deposit,
no DST will be imposed because only negotiable certificates of deposits are subject to tax under Section 180 of the
1977 NIRC.13 Petitioner reasons that a savings passbook is not a negotiable instrument and it cannot be denied that
savings passbooks have never been taxed as certificates of deposits.14

Petitioner alleges that prior to the passage of Republic Act No. 924315 (RA 9243), there was no law subjecting SSDA
to DST during the taxable years 1996 and 1997. The amendatory provision in RA 9243 now specifically includes
"certificates or other evidences of deposits that are either drawing interest significantly higher than the regular
savings deposit taking into consideration the size of the deposit and the risks involved or drawing interest and

150
having a specific maturity date."16 Petitioner admits that with this new taxing clause, its SSDA is now subject to DST.
However, the fact remains that this provision was non-existent during the taxable years 1996 and 1997 subject of the
assessments in the present case.17

Respondent, through the Office of the Solicitor General, contends that the SSDA is substantially the same and
identical to that of a time deposit account because in order to avail of the SSDA, one has to deposit a minimum of
P50,000 and this amount must be maintained for a required period of time to earn higher interest rates.18 In a time
deposit account, the minimum deposit requirement is P20,000 and this amount must be maintained for the agreed
period to earn the agreed interest rate. If a time deposit is pre-terminated, a penalty will be imposed resulting in a
lower interest income. In a regular savings account, the interest rate is fixed and there is no penalty imposed for as
long as the required minimum balance is maintained. Thus, respondent asserts that the SSDA is a time deposit
account, albeit in the guise of a regular savings account evidenced by a passbook.19

Respondent explains that under Section 180 of the 1977 NIRC, certificates of deposits deriving interest are subject to
the payment of DST. Petitioner’s passbook evidencing its SSDA is considered a certificate of deposit, and being very
similar to a time deposit account, it should be subject to the payment of DST.20

Respondent also argues that Section 180 of the 1977 NIRC categorically states that certificates of deposit deriving
interest are subject to DST without limiting the enumeration to negotiable certificates of deposit. Based on the
definition of a certificate of deposit in Far East Bank and Trust Company v. Querimit,21 a certificate of deposit may or
may not be negotiable, since it may be payable only to the depositor.22

The Ruling of the Court of Tax Appeals

On 23 November 2005, the Court of Tax Appeals En Banc (CTA) affirmed the Decision and Resolution of the CTA’s
Second Division. The dispositive portion reads:

WHEREFORE, the instant petition is DENIED for lack of merit. Accordingly, the petitioner is hereby ORDERED to PAY
the amounts of P17,595,488.75 and P47,767,756.24 as deficiency documentary stamp taxes for the taxable years 1996
and 1997, plus 25% surcharge for late payment and 20% annual delinquency interest for late payment from January 20,
2002 until fully paid pursuant to Sections 248 and 249 of the Tax Code.23

The CTA ruled that a deposit account with the same features as a time deposit, i.e., a fixed term in order to earn a
higher interest rate, is subject to DST imposed in Section 180 of the 1977 NIRC.24 It is clear that "certificates of
deposit drawing interest" are subject to DST. The CTA, citing Far East Bank and Trust Company v. Querimit,25 defined
a certificate of deposit as "a written acknowledgment by a bank or banker of the receipt of a sum of money on
deposit which the bank or banker promises to pay to the depositor, to the order of the depositor, or some other
person or his order, whereby the relation of debtor and creditor between the bank and the depositor is created."26

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The CTA pointed out that this Court neither referred to a particular form of deposit nor limited the coverage to time
deposits only. This Court used the term "written acknowledgment" which means that for as long as there is some
written memorandum of the fact that the bank accepted a deposit of a sum of money from a depositor, the writing
constitutes a certificate of deposit. The CTA held that a passbook representing an interest-earning deposit account
issued by a bank qualifies as a certificate of deposit drawing interest.27

The CTA emphasized that Section 180 of the 1977 NIRC imposes DST on documents, whether the documents are
negotiable or non-negotiable.28 The CTA held that petitioner’s argument that Section 180 of the 1977 NIRC imposes
the DST only on negotiable certificates of deposit as implied from the old tax provision is erroneous.29 Section 217 of
Commonwealth Act No. 466, as amended (old NIRC) reads:

Sec. 217. Stamp tax on negotiable promissory notes, bills of exchange, drafts, certificate of deposit bearing interest
and others not payable on sight or demand. - On all bills of exchange (between points within the Philippines), drafts
or certificates of deposit drawing interest, or orders for the payment of any sum of money otherwise than at sight or
on demand, or all negotiable promissory notes, except bank notes issued for circulation, and on each renewal of any
such note, there shall be collected a documentary stamp tax of four centavos on each two hundred pesos, or
fractional part thereof, of the face value of any such bill of exchange, draft, certificate of deposit, or note. (As
amended by Sec. 6, Republic Act No. 40)30 (Emphasis in the original)

The CTA observed that the requirement of negotiability pertains to promissory notes only. Such intention is disclosed
by the fact that the word negotiable was written before promissory notes followed by a comma, hence, the word
negotiable modifies promissory notes only. Therefore, with respect to all other documents mentioned in Section 217
of the old NIRC, the attribute of negotiability is not required.31 The CTA added that the applicable provision is Section
180 of the 1977 NIRC and not Section 217 of the old NIRC.32 Section 180 of the 1977 NIRC provides that the following
are subject to DST, to wit: (1) Loan Agreements; (2) Bills of Exchange; (3) Drafts; (4) Instruments and Securities
issued by the Government or any of its instrumentalities; (5) Certificates of Deposits drawing interest; (6) Orders for
the payment of any sum of money otherwise than at sight or on demand; and (7) Promissory Notes, whether
negotiable or non-negotiable. Therefore, the DST is imposed on all certificates of deposit drawing interest without
any qualification.33

The CTA held that a certificate of time deposit, a type of a certificate of deposit drawing interest, is subject to DST.
The CTA observed that the SSDA has the same nature and characteristics as a time deposit.34 The CTA discussed the
similarities of a time deposit account with an SSDA:

In order for the depositor to earn the agreed higher interest rate in a Special/Super Savings Account, the required
minimum amount of deposit must not only be met but should also be maintained for a definite period. Thus, the
Special/Super Savings Account is a deposit with a fixed term. Withdrawal before the expiration of said fixed term
results to the reduction of the interest rate. The fixed term and reduction of interest rate in case of pre-termination
are essentially the features of a time deposit. Hence, this Court concurs with the conclusion reached in the assailed
Decision that petitioner’s Special/Super Savings Deposits and certificates of time deposit are substantially the same,
if not one and the same product, and therefore both are subject to the DST on certificates of deposit.35

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The CTA stated that the fact that the SSDA is evidenced by a passbook is immaterial because in determining whether
certain instruments are subject to DST, substance would control over form and labels.36

On 14 December 2005, petitioner appealed to this Court the CTA decision.37

The Issue

Petitioner submits this sole issue for our consideration: whether petitioner’s product called Special/Super Savings
Account is subject to DST under Section 180 of the 1977 NIRC prior to the passage of RA 9243 in 2004.38

The Ruling of the Court

The issue in the present case is whether petitioner’s SSDAs are "certificates of deposits drawing interest" as used in
Section 180 of the 1977 NIRC. If they are, then the SSDAs are subject to DST. If not, then they are merely regular
savings account which concededly are not subject to DST. So what are "certificates of deposits drawing interest,"
and how do they differ from a regular savings account?

Section 180 of the 1977 NIRC, as amended, provides:

Sec. 180. Stamp tax on all loan agreements, promissory notes, bills of exchange, drafts, instruments and securities
issued by the government or any of its instrumentalities, certificates of deposit bearing interest and others not
payable on sight or demand. — On all loan agreements signed abroad wherein the object of the contract is located
or used in the Philippines; bills of exchange (between points within the Philippines), drafts, instruments and
securities issued by the Government or any of its instrumentalities or certificates of deposits drawing interest, or
orders for the payment of any sum of money otherwise than at the sight or on demand, or on all promissory notes,
whether negotiable or non- negotiable, except bank notes issued for circulation, and on each renewal of any such
note, there shall be collected a documentary stamp tax of Thirty centavos (P0.30) on each Two hundred pesos, or
fractional part thereof, of the face value of any such agreement, bill of exchange, draft, certificate of deposit, or
note: provided, that only one documentary stamp tax shall be imposed on either loan agreement, or promissory note
issued to secure such loan, whichever will yield a higher tax: provided, however, that loan agreements or promissory
notes the aggregate of which does not exceed Two hundred fifty thousand pesos (P250,000) executed by an
individual for his purchase on installment for his personal use or that of his family and not for business, resale, barter
or hire of a house, lot, motor vehicle, appliance or furniture shall be exempt from the payment of the documentary
stamp tax provided under this section. lavvphil.zw+(Boldfacing and underscoring supplied)

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In Far East Bank and Trust Company v. Querimit,39 the Court defined a certificate of deposit as "a written
acknowledgment by a bank or banker of the receipt of a sum of money on deposit which the bank or banker
promises to pay to the depositor, to the order of the depositor, or to some other person or his order, whereby the
relation of debtor and creditor between the bank and the depositor is created." A certificate of deposit is also
defined as "a receipt issued by a bank for an interest-bearing time deposit coming due at a specified future date."40

The deposit operations of a bank as listed in the Bangko Sentral ng Pilipinas Manual of Regulations for Banks41
consist of the following:

1. Demand Deposits – are deposits, subject to withdrawal either by check or thru the automated tellering machines
which are otherwise known as current or checking accounts. The Bank may or may not pay interest on these
accounts.42

2. Savings Deposits – are interest-bearing deposits which are withdrawable either upon presentation of a properly
accomplished withdrawal slip together with the corresponding passbook or thru the automated tellering
machines.43

3. Negotiable Order of Withdrawal Accounts – are interest-bearing savings deposit which are withdrawable by means
of Negotiable Orders of Withdrawal.44

4. Time Deposits – are interest-bearing deposits with specific maturity dates and evidenced by certificates issued by
the bank.45

Petitioner treats the SSDA as a regular savings deposit account since it is evidenced by a passbook and allows
withdrawal. Respondent treats the SSDA as a time deposit account because of the higher interest rates and holding
period. It is then significant to differentiate a regular savings deposit and a time deposit vis-à-vis the SSDA to
determine if the SSDA is a certificate of deposit drawing interest referred to in Section 180 of the 1977 NIRC. A
comparison of a savings account, time deposit account, and SSDA is shown in the table below:

Savings Account Time Deposit SSDA

Interest rate Regular savings interest Higher interest rate Higher interest rate

Period None Fixed Term Fixed Term

Evidenced by: Passbook Certificate of Time Deposit Passbook

Pre-termination None With penalty With penalty

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Holding Period None Yes Yes

Withdrawal Allowed Withdrawal amounts to pre-termination Allowed provided the minimum amount to
earn the higher interest rate is maintained, otherwise, the regular savings interest rate will apply.

Based on the definition and comparison, it is clear that a certificate of deposit drawing interest as used in Section 180
of the 1977 NIRC refers to a time deposit account. As the Bureau of Internal Revenue (BIR) explained in Revenue
Memorandum Circular No. 16-2003,46 the distinct features of a certificate of deposit from a technical point of view
are as follows:

a. Minimum deposit requirement;

b. Stated maturity period;

c. Interest rate is higher than the ordinary savings account;

d. Not payable on sight or demand, but upon maturity or in case of pre-termination, prior notice is required; and

e. Early withdrawal penalty in the form of partial loss or total loss of interest in case of pre-termination.

The SSDA is for depositors who maintain savings deposits with substantial average daily balance and which earn
higher interest rates. The holding period of an SSDA floats at the option of the depositor at 30, 60, 90, 120 days or
more and for maintaining a longer holding period, the depositor earns higher interest rates. There is no pre-
termination of accounts in an SSDA because the account is simply reverted to an ordinary savings status in case of
early or partial withdrawal or if the required holding period is not met. Based on the foregoing, the SSDA has all of
the distinct features of a certificate of deposit.

Petitioner argues that a deposit account evidenced by a passbook cannot be construed as a certificate of deposit
subject to DST under Section 180 of the 1977 NIRC. In International Exchange Bank v. Commissioner of Internal
Revenue,47 this Court categorically ruled that a passbook representing an interest earning deposit account issued by
a bank qualifies as a certificate of deposit drawing interest and should be subject to DST. The Court added that "a
document to be deemed a certificate of deposit requires no specific form as long as there is some written
memorandum that the bank accepted a deposit of a sum of money from a depositor."48

Petitioner also argues that prior to the passage of RA 9243, there was no law subjecting SSDA to DST. In
International Exchange Bank v. Commissioner of Internal Revenue,49 the Court held that the amendment to include

155
"other evidences of deposits that are drawing interest significantly higher than the regular savings deposit" was
intended to eliminate the ambiguity. The Court explained:

If at all, the further amendment was intended to eliminate precisely the scheme used by banks of issuing passbooks
to "cloak" its time deposits as regular savings deposits. This is reflected from the following exchanges between Mr.
Miguel Andaya of the Bankers Association of the Philippines and Senator Ralph Recto, Senate Chairman of the
Committee on Ways and Means, during the deliberations on Senate Bill No. 2518 which eventually became RA 9243:

MR. MIGUEL ANDAYA (Bankers Association of the Philippines). Just to clarify. Savings deposit at the present is not
subject to DST.

THE CHAIRMAN. That’s right.

MR. ANDAYA. Time deposit is subject. I agree with you in principle that if we are going to encourage deposits,
whether savings or time...

THE CHAIRMAN. Uh-huh.

MR. ANDAYA. ...it’s questionable whether we should tax it with DST at all, even the question of imposing final
withholding tax has been raised as an issue.

THE CHAIRMAN. If I had it my way, I'll cut it by half.

MR. ANDAYA. Yeah, but I guess concerning the constraint of government revenue, even the industry itself right now
is not pushing in that direction, but in the long term, when most of us in this room are gone, we hope that DST will
disappear from the face of this earth, no.

Now, I think the move of the DOF to expand the coverage of or to add that phrase, "Other evidence of
indebtedness," it just removed ambiguity. When we testified earlier in the House on this very same bill, we did not
interpose any objections if only for the sake of avoiding further ambiguity in the implementation of DST on deposits.
Because of what has happened so far is, we don't know whether the examiner is gonna come in and say, "This
savings deposit is not savings but it’s time deposit." So, I think what DOF has done is to eliminate any confusion. They
said that a deposit that has a maturity...

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THE CHAIRMAN. Uh-huh.

MR. ANDAYA. ...which is time, in effect, regardless of what form it takes should be subject to DST.

THE CHAIRMAN. Would you include savings deposit now?

MR. ANDAYA. So that if we cloaked a deposit as savings deposit but it has got a fixed maturity...

THE CHAIRMAN. Uh-huh.

MR. ANDAYA. ..that would fall under the purview. (Italics in the original)

DST is imposed on Certificates of Deposits Bearing Interest

including a special savings account evidenced by a passbook.

Documentary stamp tax is a tax on documents, instruments, loan agreements, and papers evidencing the
acceptance, assignment, sale or transfer of an obligation, right or property incident thereto. A DST is actually an
excise tax because it is imposed on the transaction rather than on the document.50 A DST is also levied on the
exercise by persons of certain privileges conferred by law for the creation, revision, or termination of specific legal
relationships through the execution of specific instruments.51 Hence, in imposing the DST, the Court considers not
only the document but also the nature and character of the transaction.

Section 180 of the 1977 NIRC imposes a DST of P0.30 on each P200 of the face value of any certificate of deposit
drawing interest. As correctly observed by the CTA, a certificate of deposit is a written acknowledgment by a bank of
the receipt of a sum of money on deposit which the bank promises to pay to the depositor, to the order of the
depositor, or to some other person or his order, whereby the relation of debtor or creditor between the bank and
the depositor is created.52

Petitioner’s SSDA has the following features:

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1. Although the money placed in the SSDA can be withdrawn anytime, the money is subject to a holding period in
order to earn a higher interest rate. Otherwise, in case of premature withdrawal, the depositor will not earn the
preferred interest ranging from 8% or higher but only the normal interest rate on regular savings deposit.

2. In order to qualify for an SSDA, the depositor must place a substantial amount of money of not less than P50,000.
This amount is even larger than what is needed to open a time deposit which is P20,000. Aside from the substantial
amount of money required, this amount must be maintained within a certain period just like a time deposit.

3. On the issue of penalty, in an SSDA, if the depositor withdraws the money and the balance falls below the
"minimum balance" of P50,000, the interest is reduced. This condition is identical to that imposed on a time deposit
that is withdrawn before maturity. 53

Based on these features, it is clear that the SSDA is a certificate of deposit drawing interest subject to DST even if it is
evidenced by a passbook and non-negotiable in character. In International Exchange Bank v. Commissioner of
Internal Revenue,54 we held that:

A document to be deemed a certificate of deposit requires no specific form as long as there is some written
memorandum that the bank accepted a deposit of a sum of money from a depositor. What is important and
controlling is the nature or meaning conveyed by the passbook and not the particular label or nomenclature
attached to it, inasmuch as substance, not form, is paramount.lavvph!l.net

Moreover, a certificate of deposit may be payable to the depositor, to the order of the depositor, or to some other
person or his order. From the use of the conjunction or, instead of and, the negotiable character of a certificate of
deposit is immaterial in determining the imposition of DST.55

In Banco de Oro Universal Bank v. Commissioner of Internal Revenue,56 this Court upheld the CTA’s decision and
ruled:

The CTA en banc likewise declared that in practice, a time deposit transaction is covered by a certificate of deposit
while petitioner's Investment Savings Account (ISA) transaction is through a passbook. Despite the differences in the
form of any documents, the CTA en banc ruled that a time deposit and ISA have essentially the same attributes and
features. It explained that like time deposit, ISA transactions bear a fixed term or maturity because the bank
acknowledges receipt of a sum of money on deposit which the bank promises to pay the depositor, bearer or to the
order of a bearer on a specified period of time. Section 180 of the 1997 NIRC does not prescribed the form of a
certificate of deposit. It may be any 'written acknowledgment by a bank of the receipt of money on deposit.' The

158
definition of a certificate of deposit is all encompassing to include a savings account deposit such as ISA. (Emphasis
supplied)

Availment of the Tax Amnesty Program

On 24 May 2007, during the pendency of this case before this Court, Republic Act No. 9480 or "An Act Enhancing
Revenue Administration and Collection by Granting an Amnesty on All Unpaid Internal Revenue Taxes Imposed by
the National Government for Taxable Year 2005 and Prior Years" (RA 9480), lapsed into law.

The pertinent provisions of RA 9480 are:

Section 1. Coverage. There is hereby authorized and granted a tax amnesty which shall cover all national internal
revenue taxes for the taxable year 2005 and prior years, with or without assessments duly issued therefor, that have
remained unpaid as of December 31, 2005: Provided, however, That the amnesty hereby authorized and granted shall
not cover persons or cases enumerated under Section 8 hereof.

xxx

Sec. 6. Immunities and Privileges. Those who availed themselves of the tax amnesty under Section 5 hereof, and
have fully complied with all its conditions shall be entitled to the following immunities and privileges:

1. The taxpayer shall be immune from the payment of taxes, as well as addition thereto, and the appurtenant civil,
criminal or administrative penalties under the National Internal Revenue Code of 1997, as amended, arising from the
failure to pay any and all internal revenue taxes for taxable year 2005 and prior years.

xxx

Sec. 8. Exceptions. The tax amnesty provided in Section 5 hereof shall not extend to the following persons or cases
existing as of the effectivity of this Act:

1. Withholding agents with respect to their withholding tax liabilities;

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2. Those with pending cases falling under the jurisdiction of the Presidential Commission on Good Government;

3. Those with pending cases involving unexplained or unlawfully acquired wealth or under the Anti-Graft and Corrupt
Practices Act;

4. Those with pending cases filed in court involving violation of the Anti-Money Laundering Law;

5. Those with pending criminal cases for tax evasion and other criminal offenses under Chapter II of Title X of the
National Internal Revenue Code of 1997, as amended, and the felonies of frauds, illegal exactions and transactions,
and malversation of public funds and property under Chapters III and IV of Title VII of the Revised Penal Code; and

6. Tax cases subject of final and executory judgment by the courts. (Emphasis supplied)

The Department of Finance (DOF) issued DOF Department Order No. 29-07 (DO 29-07).57 Section 6 of DO 29-07
provides:

SEC. 6. Method of Availment of Tax Amnesty. -

1. Forms/Documents to be filed. - To avail of the general tax amnesty, concerned taxpayers shall file the following
documents/requirements:

a. Notice of Availment in such form as may be prescribed by the BIR;

b. Statements of Assets, Liabilities and Networth (SALN) as of December 31, 2005 in such form, as may be prescribed
by the BIR;

c. Tax Amnesty Return in such form as may be prescribed by the BIR.

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xxx

The Acceptance of Payment Form, the Notice of Availment, the SALN, and the Tax Amnesty Return shall be
submitted to the RDO, which shall be received only after complete payment. The completion of these requirements
shall be deemed full compliance with the provisions of RA 9480. (Emphasis supplied)

The BIR issued Revenue Memorandum Circular No. 19-2008 (RMC 19-2008).58 The pertinent provisions are:

Who may avail of the amnesty?

The following taxpayers may avail of the Tax Amnesty Program:

P Individuals

P Estates and Trusts

P Corporations

P Cooperatives and tax-exempt entities that have become taxable as of December 31, 2005

P Other juridical entities including partnerships.

Ø Fiscal year taxpayers may likewise avail of the tax amnesty using their Financial Statement ending in any month of
2005.

EXCEPT:

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Q Withholding agents with respect to their withholding tax liabilities

Q Those with pending cases:

Q Under the jurisdiction of the PCGG

Q Involving violations of the Anti-Graft and Corrupt Practices Act

Q Involving violations of the Anti-Money Laundering Law

Q For tax evasion and other criminal offenses under the NIRC and/or the RPC

Q Issues and cases which were ruled by any court (even without finality) in favor of the BIR prior to amnesty
availment of the taxpayer. (e.g. Taxpayers who have failed to observe or follow BOI and/or PEZA rules on
entitlement to Income Tax Holiday Incentives and other incentives)

Q Cases involving issues ruled with finality by the Supreme Court prior to the effectivity of RA 9480 (e.g. DST on
Special Savings Account)

Q Taxes passed on and collected from customers for remittance to the BIR

Q Delinquent Accounts/Accounts Receivable considered as assets of the BIR/Government, including self-assessed

tax. (Emphasis supplied)

The BIR also issued Revenue Memorandum Circular No. 69-2007 (RMC 69-2007).59 The pertinent portion provides:

Q-32 May surviving or new corporations avail of the tax amnesty in behalf of the corporations absorbed or dissolved
pursuant to a merger or consolidation that took effect prior to Taxable Year 2005? Can they avail of the Tax Amnesty?

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A-32 Yes, these companies can avail of the tax amnesty for purposes of obtaining tax clearances for the dissolved or
absorbed corporations. (Emphasis supplied)

On 21 September 2007, Metropolitan Bank and Trust Company (Metrobank), the surviving entity that absorbed
petitioner’s banking business, filed a Tax Amnesty Return,60 paid the amnesty tax and fully complied with all the
requirements61 of the Tax Amnesty Program under RA 9480. Petitioner alleges that by virtue of this availment,
petitioner is now deemed "immune from the payment of taxes as well as additions thereto," and is statutorily
discharged from paying all internal revenue tax liabilities for the taxable year 2005 and prior years. Petitioner
contends that the availment includes all deficiency tax assessments of the BIR subject of this petition.

A tax amnesty is a general pardon or the intentional overlooking by the State of its authority to impose penalties on
persons otherwise guilty of violation of a tax law. It partakes of an absolute waiver by the government of its right to
collect what is due it and to give tax evaders who wish to relent a chance to start with a clean slate. A tax amnesty,
much like a tax exemption, is never favored nor presumed in law. The grant of a tax amnesty, similar to a tax
exemption, must be construed strictly against the taxpayer and liberally in favor of the taxing authority.62

The DST is one of the taxes covered by the Tax Amnesty Program under RA 9480.63 As discussed above, petitioner is
clearly liable to pay the DST on its SSDA for the years 1996 and 1997. However, petitioner, as the absorbed
corporation, can avail of the tax amnesty benefits granted to Metrobank.

Records show that Metrobank, a qualified tax amnesty applicant,64 has duly complied with the requirements
enumerated in RA 9480, as implemented by DO 29-07 and RMC 19-2008.65 Considering that the completion of these
requirements shall be deemed full compliance with the tax amnesty program,66 the law mandates that the taxpayer
shall thereafter be immune from the payment of taxes, and additions thereto, as well as the appurtenant civil,
criminal or administrative penalties under the NIRC of 1997, as amended, arising from the failure to pay any and all
internal revenue taxes for taxable year 2005 and prior years.67

The BIR’s inclusion of "issues and cases which were ruled by any court (even without finality) in favor of the BIR prior
to amnesty availment of the taxpayer" as one of the exceptions in RMC 19-2008 is misplaced. RA 9480 is specifically
clear that the exceptions to the tax amnesty program include "tax cases subject of final and executory judgment by
the courts." The present case has not become final and executory when Metrobank availed of the tax amnesty
program.

Wherefore, we GRANT the petition, and SET ASIDE the Court of Tax Appeals’ Decision dated 23 November 2005 in
CTA EB No. 63 solely in view of petitioner’s availment of the Tax Amnesty Program.

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G.R. No. L-30511 February 14, 1980

MANUEL M. SERRANO, petitioner,

vs.

CENTRAL BANK OF THE PHILIPPINES; OVERSEAS BANK OF MANILA; EMERITO M. RAMOS, SUSANA B. RAMOS,
EMERITO B. RAMOS, JR., JOSEFA RAMOS DELA RAMA, HORACIO DELA RAMA, ANTONIO B. RAMOS, FILOMENA
RAMOS LEDESMA, RODOLFO LEDESMA, VICTORIA RAMOS TANJUATCO, and TEOFILO TANJUATCO, respondents.

Rene Diokno for petitioner.

F.E. Evangelista & Glecerio T. Orsolino for respondent Central Bank of the Philippines.

Feliciano C. Tumale, Pacifico T. Torres and Antonio B. Periquet for respondent Overseas Bank of Manila.

Josefina G. Salonga for all other respondents.

CONCEPCION, JR., J.:

Petition for mandamus and prohibition, with preliminary injunction, that seeks the establishment of joint and solidary
liability to the amount of Three Hundred Fifty Thousand Pesos, with interest, against respondent Central Bank of the
Philippines and Overseas Bank of Manila and its stockholders, on the alleged failure of the Overseas Bank of Manila
to return the time deposits made by petitioner and assigned to him, on the ground that respondent Central Bank
failed in its duty to exercise strict supervision over respondent Overseas Bank of Manila to protect depositors and
the general public. 1 Petitioner also prays that both respondent banks be ordered to execute the proper and
necessary documents to constitute all properties fisted in Annex "7" of the Answer of respondent Central Bank of
the Philippines in G.R. No. L-29352, entitled "Emerita M. Ramos, et al vs. Central Bank of the Philippines," into a trust
fund in favor of petitioner and all other depositors of respondent Overseas Bank of Manila. It is also prayed that the
respondents be prohibited permanently from honoring, implementing, or doing any act predicated upon the validity
or efficacy of the deeds of mortgage, assignment. and/or conveyance or transfer of whatever nature of the
properties listed in Annex "7" of the Answer of respondent Central Bank in G.R. No. 29352. 2

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A sought for ex-parte preliminary injunction against both respondent banks was not given by this Court.

Undisputed pertinent facts are:

On October 13, 1966 and December 12, 1966, petitioner made a time deposit, for one year with 6% interest, of One
Hundred Fifty Thousand Pesos (P150,000.00) with the respondent Overseas Bank of Manila. 3 Concepcion Maneja
also made a time deposit, for one year with 6-½% interest, on March 6, 1967, of Two Hundred Thousand Pesos
(P200,000.00) with the same respondent Overseas Bank of Manila. 4

On August 31, 1968, Concepcion Maneja, married to Felixberto M. Serrano, assigned and conveyed to petitioner
Manuel M. Serrano, her time deposit of P200,000.00 with respondent Overseas Bank of Manila. 5

Notwithstanding series of demands for encashment of the aforementioned time deposits from the respondent
Overseas Bank of Manila, dating from December 6, 1967 up to March 4, 1968, not a single one of the time deposit
certificates was honored by respondent Overseas Bank of Manila. 6

Respondent Central Bank admits that it is charged with the duty of administering the banking system of the Republic
and it exercises supervision over all doing business in the Philippines, but denies the petitioner's allegation that the
Central Bank has the duty to exercise a most rigid and stringent supervision of banks, implying that respondent
Central Bank has to watch every move or activity of all banks, including respondent Overseas Bank of Manila.
Respondent Central Bank claims that as of March 12, 1965, the Overseas Bank of Manila, while operating, was only on
a limited degree of banking operations since the Monetary Board decided in its Resolution No. 322, dated March 12,
1965, to prohibit the Overseas Bank of Manila from making new loans and investments in view of its chronic reserve
deficiencies against its deposit liabilities. This limited operation of respondent Overseas Bank of Manila continued up
to 1968. 7

Respondent Central Bank also denied that it is guarantor of the permanent solvency of any banking institution as
claimed by petitioner. It claims that neither the law nor sound banking supervision requires respondent Central Bank
to advertise or represent to the public any remedial measures it may impose upon chronic delinquent banks as such
action may inevitably result to panic or bank "runs". In the years 1966-1967, there were no findings to declare the
respondent Overseas Bank of Manila as insolvent. 8

Respondent Central Bank likewise denied that a constructive trust was created in favor of petitioner and his
predecessor in interest Concepcion Maneja when their time deposits were made in 1966 and 1967 with the
respondent Overseas Bank of Manila as during that time the latter was not an insolvent bank and its operation as a
banking institution was being salvaged by the respondent Central Bank. 9

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Respondent Central Bank avers no knowledge of petitioner's claim that the properties given by respondent Overseas
Bank of Manila as additional collaterals to respondent Central Bank of the Philippines for the former's overdrafts and
emergency loans were acquired through the use of depositors' money, including that of the petitioner and
Concepcion Maneja. 10

In G.R. No. L-29362, entitled "Emerita M. Ramos, et al. vs. Central Bank of the Philippines," a case was filed by the
petitioner Ramos, wherein respondent Overseas Bank of Manila sought to prevent respondent Central Bank from
closing, declaring the former insolvent, and liquidating its assets. Petitioner Manuel Serrano in this case, filed on
September 6, 1968, a motion to intervene in G.R. No. L-29352, on the ground that Serrano had a real and legal
interest as depositor of the Overseas Bank of Manila in the matter in litigation in that case. Respondent Central Bank
in G.R. No. L-29352 opposed petitioner Manuel Serrano's motion to intervene in that case, on the ground that his
claim as depositor of the Overseas Bank of Manila should properly be ventilated in the Court of First Instance, and if
this Court were to allow Serrano to intervene as depositor in G.R. No. L-29352, thousands of other depositors would
follow and thus cause an avalanche of cases in this Court. In the resolution dated October 4, 1968, this Court denied
Serrano's, motion to intervene. The contents of said motion to intervene are substantially the same as those of the
present petition. 11

This Court rendered decision in G.R. No. L-29352 on October 4, 1971, which became final and executory on March 3,
1972, favorable to the respondent Overseas Bank of Manila, with the dispositive portion to wit:

WHEREFORE, the writs prayed for in the petition are hereby granted and respondent Central Bank's resolution Nos.
1263, 1290 and 1333 (that prohibit the Overseas Bank of Manila to participate in clearing, direct the suspension of its
operation, and ordering the liquidation of said bank) are hereby annulled and set aside; and said respondent Central
Bank of the Philippines is directed to comply with its obligations under the Voting Trust Agreement, and to desist
from taking action in violation therefor. Costs against respondent Central Bank of the Philippines. 12

Because of the above decision, petitioner in this case filed a motion for judgment in this case, praying for a decision
on the merits, adjudging respondent Central Bank jointly and severally liable with respondent Overseas Bank of
Manila to the petitioner for the P350,000 time deposit made with the latter bank, with all interests due therein; and
declaring all assets assigned or mortgaged by the respondents Overseas Bank of Manila and the Ramos groups in
favor of the Central Bank as trust funds for the benefit of petitioner and other depositors. 13

By the very nature of the claims and causes of action against respondents, they in reality are recovery of time
deposits plus interest from respondent Overseas Bank of Manila, and recovery of damages against respondent
Central Bank for its alleged failure to strictly supervise the acts of the other respondent Bank and protect the
interests of its depositors by virtue of the constructive trust created when respondent Central Bank required the
other respondent to increase its collaterals for its overdrafts said emergency loans, said collaterals allegedly acquired
through the use of depositors money. These claims shoud be ventilated in the Court of First Instance of proper
jurisdiction as We already pointed out when this Court denied petitioner's motion to intervene in G.R. No. L-29352.
Claims of these nature are not proper in actions for mandamus and prohibition as there is no shown clear abuse of
discretion by the Central Bank in its exercise of supervision over the other respondent Overseas Bank of Manila, and

166
if there was, petitioner here is not the proper party to raise that question, but rather the Overseas Bank of Manila, as
it did in G.R. No. L-29352. Neither is there anything to prohibit in this case, since the questioned acts of the
respondent Central Bank (the acts of dissolving and liquidating the Overseas Bank of Manila), which petitioner here
intends to use as his basis for claims of damages against respondent Central Bank, had been accomplished a long
time ago.

Furthermore, both parties overlooked one fundamental principle in the nature of bank deposits when the petitioner
claimed that there should be created a constructive trust in his favor when the respondent Overseas Bank of Manila
increased its collaterals in favor of respondent Central Bank for the former's overdrafts and emergency loans, since
these collaterals were acquired by the use of depositors' money.

Bank deposits are in the nature of irregular deposits. They are really loans because they earn interest. All kinds of
bank deposits, whether fixed, savings, or current are to be treated as loans and are to be covered by the law on
loans. 14 Current and savings deposit are loans to a bank because it can use the same. The petitioner here in making
time deposits that earn interests with respondent Overseas Bank of Manila was in reality a creditor of the
respondent Bank and not a depositor. The respondent Bank was in turn a debtor of petitioner. Failure of he
respondent Bank to honor the time deposit is failure to pay s obligation as a debtor and not a breach of trust arising
from depositary's failure to return the subject matter of the deposit

WHEREFORE, the petition is dismissed for lack of merit, with costs against petitioner.

SO ORDERED.

Antonio, Abad Santos, JJ., concur.

Barredo (Chairman) J., concur in the judgment on the of the concurring opinion of Justice Aquino.

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Separate Opinions

AQUINO, J., concurring:

The petitioner prayed that the Central Bank be ordered to pay his time deposits of P350,000, plus interests, which he
could not recover from the distressed Overseas Bank of Manila, and to declare all the assets assigned or mortgaged
by that bank and the Ramos group to the Central Bank as trust properties for the benefit of the petitioner and other
depositors.

The petitioner has no causes of action agianst the Central Bank to obtain those reliefs. They cannot be granted in
petitioner's instant original actions in this Court for mandamus and prohibition. It is not the Central Bank's ministerial
duty to pay petitioner's time deposits or to hold the mortgaged properties in trust for the depositors of the Overseas
Bank of Manila. The petitioner has no cause of action for prohibition, a remedy usually available against any tribunal,
board, corporation or person exercising judicial or ministerial functions.

Since the Overseas Bank of Manila was found to be insolvent and the Superintendent of Banks was ordered to take
over its assets preparatory to its liquidation under section 29 of Republic Act No. 265 (p. 197, Rollo, Manifestation of
September 19, 1973), petitioner's remedy is to file his claim in the liquidating proceeding (Central Bank vs. Morfe, L-
38427, March 12, 1975, 63 SCRA 114; Hernandez vs. Rural Bank of Lucena, Inc., L-29791, January 10, 1978, 81 SCRA 75).

Separate Opinions

AQUINO, J., concurring:

168
The petitioner prayed that the Central Bank be ordered to pay his time deposits of P350,000, plus interests, which he
could not recover from the distressed Overseas Bank of Manila, and to declare all the assets assigned or mortgaged
by that bank and the Ramos group to the Central Bank as trust properties for the benefit of the petitioner and other
depositors.

The petitioner has no causes of action agianst the Central Bank to obtain those reliefs. They cannot be granted in
petitioner's instant original actions in this Court for mandamus and prohibition. It is not the Central Bank's ministerial
duty to pay petitioner's time deposits or to hold the mortgaged properties in trust for the depositors of the Overseas
Bank of Manila. The petitioner has no cause of action for prohibition, a remedy usually available against any tribunal,
board, corporation or person exercising judicial or ministerial functions.

Since the Overseas Bank of Manila was found to be insolvent and the Superintendent of Banks was ordered to take
over its assets preparatory to its liquidation under section 29 of Republic Act No. 265 (p. 197, Rollo, Manifestation of
September 19, 1973), petitioner's remedy is to file his claim in the liquidating proceeding (Central Bank vs. Morfe, L-
38427, March 12, 1975, 63 SCRA 114; Hernandez vs. Rural Bank of Lucena, Inc., L-29791, January 10, 1978, 81 SCRA 75).

G.R. No. 105836 March 7, 1994

SPOUSES GEORGE MORAN and LIBRADA P. MORAN, petitioners,

vs.

THE HON. COURT OF APPEALS and CITYTRUST BANKING CORPORATION, respondents.

Gonzales, Batiller, Bilog & Associates for petitioners.

Agcaoli & Associates for private respondent.

REGALADO, J.:

169
Petitioner spouses George and Librada Moran are the owners of the Wack-Wack Petron gasoline station located at
Shaw Boulevard, corner Old Wack-Wack Road, Mandaluyong, Metro Manila. They regularly purchased bulk fuel and
other related products from Petrophil Corporation on cash on delivery (COD) basis. Orders for bulk fuel and other
related products were made by telephone and payments were effected by personal checks upon delivery. 1

Petitioners maintained three joint accounts, namely one current account (No. 37-00066-7) and two savings accounts,
(Nos. 1037002387 and 1037001372) with the Shaw Boulevard branch of Citytrust Banking Corporation. As a special
privilege to the Morans, whom it considered as valued clients, the bank allowed them to maintain a zero balance in
their current account. Transfers from Saving Account No. 1037002387 to their current account could be made only
with their prior authorization, but they gave written authority to Citytrust to automatically transfer funds from their
Savings Account No. 1037001372 to their Current Account No. 37-00066-7 at any time whenever the funds in their
current account were insufficient to meet withdrawals from said current account. Such arrangement for automatic
transfer of funds was called a pre-authorized transfer (PAT) agreement. 2

The PAT letter-agreement entered into by the parties on March 19, 1982 contained the following provisions:

xxx xxx xxx

1. The transfer may be effected on the day following the overdrawing of the current account, but the check/s
would be honored if the savings account has sufficient balance to cover the overdraft.

2. The regular charges on overdraft, and activity fees will be imposed by the Bank.

3. This is merely an accommodation on our part and we have the right, at all times and for any reason
whatsoever, to refuse to effect transfer of funds at our sole and absolute option and discretion, reserving our right
to terminate this arrangement at any time without written notice to you.

4. You hold CITYTRUST free and harmless for any and all omissions or oversight in executing this automatic
transfer of funds; . . . 3

xxx xxx xxx

On December 12, 1983, petitioners, through Librada Moran, drew a check (Citytrust No. 041960) for P50,576.00
payable to Petrophil

170
Corporation. 4 The next day, December 13, 1983, petitioners, again through Librada Moran, issued another check
(Citytrust No. 041962) in the amount of P56,090.00 in favor of the same corporation. 5 The total sum of the two
checks was P106,666.00.

On December 14, 1983, Petrophil Corporation deposited the two aforementioned checks to its account with the
Pandacan branch of the Philippine National Bank (PNB), the collecting bank. In turn, PNB, Pandacan branch
presented them for clearing with the Philippine Clearing House Corporation in the afternoon of the same day. The
records show that on December 14, 1983, Current Account No. 37-00066-7 had a zero balance, while Savings Account
No. 1037001372 (covered by the PAT) had an available balance of

P26,104.30 6 and Savings Account No. 1037002387 had an available balance of P43,268.39. 7

At about ten o'clock in the morning of the following day, December 15, 1983, petitioner George Moran went to the
bank, as was his regular practice, to personally oversee their daily transactions with the bank. He deposited in their
Savings Account No. 1037002387 the amounts of P10,874.58 and P6,754.25, 8 and he likewise deposited in their
Savings Account No. 1037001372 the amounts of P5,900.00, P35,100.00 and 30.00. 9 The amount of P40,000.00 was
then transferred by him from Saving Account No. 1037002387 to their current account by means of a pro forma
withdrawal form (a debit memorandum), which was provided by the bank, authorizing the latter to make the
necessary transfer. At the same time, the amount of P66,666.00 was transferred from Savings Account No.
1037001372 to the same current account through the pre-authorized transfer (PAT) agreement. 10

Sometime on December 15 or 16, 1983 George Moran was informed by his wife Librada, that Petrophil refused to
deliver their orders on a credit basis because the two checks they had previously issued were dishonored upon
presentment for payment. Apparently, the bank dishonored the checks due to "insufficiency of funds." 11 The non-
delivery of gasoline forced petitioners to temporarily stop business operations, allegedly causing them to suffer loss
of earnings. In addition, Petrophil cancelled their credit accommodation, forcing them to pay for their purchases in
cash. 12 George Moran, furious and upset, demanded an explanation from Raul Diaz, the branch manager. Failing to
get a sufficient explanation, he talked to a certain Villareal, a bank officer, who allegedly told him that Amy Belen
Ragodo, the customer service officer, had committed a "grave error". 13

On December 16 or 17, 1983, Diaz went to the Moran residence to get the signatures of the petitioners on an
application for a manager's check so that the dishonored checks could be redeemed. Diaz then went to Petrophil to
personally present the checks in payment for the two dishonored checks. 14

In a chance meeting around May or June, 1984, George Moran learned from one Constancio Magno, credit manager
of Petrophil, that the latter received from Citytrust, through Diaz, a letter dated December 16, 1983, notifying them
that the two aforementioned checks were "inadvertently dishonored . . . due to operational error." Said letter was
received by Petrophil on January 4, 1984. 15

On July 24, 1984, or a little over six months after the incident, petitioners, through counsel, wrote Citytrust claiming
that the bank's dishonor of the checks caused them besmirched business and personal reputation, shame and

171
anxiety, hence they were contemplating the filing of the necessary legal actions unless the bank issued a certification
clearing their name and paid them P1,000,000.00 as moral damages. 16

The bank did not act favorably on their demands, hence petitioners filed a complaint for damages on September 8,
1984, with the Regional Trial Court, Branch 159 at Pasig, Metro Manila, which was docketed therein as Civil Case No.
51549. In turn, Citytrust filed a counterclaim for damages, alleging that the case filed against it was unfounded and
unjust.

After trial, a decision dated October 9, 1989 was rendered by the trial court dismissing both the complaint and the
counterclaim. 17 On appeal, the Court of Appeals rendered judgment in CA-G.R. CV No. 25009 on October 9, 1989
affirming the decision of the trial court. 18

We start some basic and accepted rules, statutory and doctrinal. A check is a bill of exchange drawn on a bank
payable on demand. 19 Thus, a check is a written order addressed to a bank or persons carrying on the business of
banking, by a party having money in their hands, requesting them to pay on presentment, to a person named therein
or to bearer or order, a named sum of money. 20

Fixed savings and current deposits of money in banks and similar institutions shall be governed by the provisions
concerning simple loan. 21 In other words, the relationship between the bank and the depositor is that of a debtor
and creditor. 22 By virtue of the contract of deposit between the banker and its depositor, the banker agrees to pay
checks drawn by the depositor provided that said depositor has money in the hands of the bank. 23

Hence, where the bank possesses funds of a depositor, it is bound to honor his checks to the extent of the amount
of his deposits. The failure of a bank to pay the check of a merchant or a trader, when the deposit is sufficient,
entitles the drawer to substantial damages without any proof of actual

damages. 24

Conversely, a bank is not liable for its refusal to pay a check on account of insufficient funds, notwithstanding the
fact that a deposit may be made later in the day. 25 Before a bank depositor may maintain a suit to recover a specific
amount from his bank, he must first show that he had on deposit sufficient funds to meet his demand. 26

The present action for damages accordingly hinges on the resolution of the inquiry as to whether or not petitioners
had sufficient funds in their accounts when the bank dishonored the checks in question. In view of the factual
findings of the two lower courts the correctness of which are challenged by what appear to be plausible, arguments,
we feel that the same should properly be resolved by us. This would necessarily require us to inquire into both the
savings and current accounts of petitioners in relation to the PAT arrangement.

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On December 14, 1983, when PNB, Pandacan branch, presented the checks for collection, the available balance for
Savings Account No. 1037001372 was P26,104.30 while Current Account No. 37-00066-7 expectedly had a zero
balance. On December 15, 1983, at approximately ten o'clock in the morning, petitioners, through George Moran,
learned that P66,666.00 from Saving Account No. 1037001372 was transferred to their current account. Another
P40,000.00 was transferred from Saving Accounts No. 1037002387 to the current account. Considering that the
transfers were by then sufficient to cover the two checks, it is asserted by petitioners that such fact should have
prevented the dishonor of the checks. It appears, however, that it was not so.

As explained by respondent court in its decision, Gerard E. Rionisto, head of the centralized clearing unit of Citytrust,
detailed on the witness stand the standard clearing procedure adopted by respondent bank and the Philippine
Clearing House Corporation, to wit:.

Q: Let me again re-phase the question. Most of (sic) these two checks issued by Mrs. Librada Moran under the
accounts of the plaintiffs with Citytrust Banking Corporation were drawn dated December 12, 1983 and December 13,
1983(and) these two (2) checks were made payable to Petrophil Corporation. On record, Petrophil Corporation
presented these two (2) checks for clearing with PNB Pandacan Branch on December 14, 1983. Now in accordance
with the bank, what would happen with these checks drawn with (sic) PNB on December 14, 1983?.

A: So these checks will now be presented by PNB with the Philippine Clearing House on December 14, and then
the Philippine Clearing House will process it until midnight of December 14. Citytrust will send a clearing
representative to the Philippine Clearing House at around 2:00 o'clock in the morning of December 15 and then get
the checks. The checks will now be processed at the Citytrust Computer at around 3:00 o'clock in the morning of
December 14 (sic)but it will be processed for balance of Citytrust as of December 14 because for one, we have not
opened on December 15 at 3:00 o'clock. Under the clearing house rules, we are supposed to process it on the date it
was presented for clearing. (tsn, September 9, 1988, pp. 9-10). 27

Considering the clearing process adopted, as explained in the aforequoted testimony, it is clear that the available
balance on December 14, 1983 was used by the bank in determining whether or not there was sufficient cash
deposited to fund the two checks, although what was stamped on the dorsal side of the two checks in question was
"DAIF/12-15-83," since December 15, 1983 was the actual date when the checks were processed. As earlier stated,
when petitioners' checks were dishonored due to insufficiency of funds, the available balance of Savings Account No.
1037001372, which was the subject of the PAT agreement, was not enough to cover either of the two checks. On
December 14, 1983, when PNB, Pandacan branch presented the checks for collection, the available balance for
Savings Account No. 1037001372, to repeat, was only P26,104.30 while Current Account No. 37-0006-7 had no
available balance. It was only on December 15, 1983 at around ten o'clock in the morning that the necessary funds
were deposited, which unfortunately was too late to prevent the dishonor of the checks.

Petitioners argue that public respondent, by relying heavily on Rionisto's testimony, failed to consider the fact that
the witness himself admitted that he had no personal knowledge surrounding the dishonor of the two checks in
question. Thus, although he knew the standard clearing procedure, it does not necessarily mean that the same
procedure was adopted with regard to the two checks.

173
We do not agree. Section 3(q), Rule 131 of the Rules of Court provides a disputable presumption in law that the
ordinary course of business has been followed. In the absence of a contrary showing, it is presumed that the acts in
question were in conformity with the usual conduct of business. In the case at bar, petitioners failed to present
countervailing evidence to rebut the presumption that the checks involved underwent the same regular process for
clearing of checks followed by the bank since 1983.

Petitioner had no reason to complain, for they alone were at fault. A drawer must remember his responsibilities
every time he issues a check. He must personally keep track of his available balance in the bank and not rely on the
bank to notify him of the necessity to fund certain check she previously issued. A check, as distinguished from an
ordinary bill of exchange, is supposed to be drawn against a previous deposit of funds for it is ordinarily intended for
immediately payment. 28

Moreover, between the time of the issuance of said checks on December 12 and 13 and the time of their presentment
on December 14, petitioners had, at the very least, twenty-four hours to replenish their balance in the bank.

As previously noted, it was only during business hours in the morning of December 15, 1983, that P66,666.00 was
automatically transferred from Savings Account No. 1037001372 to Current Account No. 37-00066-7, and another
P40,000.00 was transferred from Savings Account No. 1037002387 to the same current by a debit memorandum.
Petitioners argue that if indeed the checks were dishonored in the early morning of December 15, 1983, the bank
would not have automatically transferred P66,666.00 to said current account. They theorize that the checks having
already been dishonored, there was no necessity to put into effect the pre-authorized transfer agreement.

That theory is incorrect. When the transfer from both savings accounts to the current account were made, they were
done in the hope that the checks may be retrieved, thus preventing their dishonor. Unfortunately, respondent bank
did not succeed in effectuating its good intentions. The transfers were made to preserve its relations with petitioners
whom it knew were valued clients, hence it wanted to prevent the dishonor of their checks, if the same was at all
possible. Although not admitting fault, it tried its best to make sure that the checks would not bounce.

Under similar circumstances, it was held in Whitman vs. First National Bank 29 that a bank performs its full duty
where, upon the receipt of a check drawn against an account in which there are insufficient funds to pay it in full, it
endeavors to induce the drawer to make good his account so that the check can be paid, and failing in this, it
protests the check on the following morning and notifies its correspondent bank by the telegraph of the protest. It
cannot, therefore, be held liable to the payee and holder of the check for not protesting it upon the day when it was
received. In fact, the court added that the bank did more that it was required to do by making an effort to induce the
drawer to deposit sufficient money to make the check good, and by notifying its correspondent of the dishonor of
the check by telegram.

174
Petitioners maintain that at the time the checks were dishonored, they had already deposited sufficient funds to
cover said checks. To prove their point, petitioners quoted in their petition the following testimony of said witness
Rionisto, to wit:

Q: Now according to you, you would receive the checks from (being deposited to) the collecting bank which in
this particular example was the Pandacan Branch of PNB which in turn will deliver it to the Philippine Clearing House
and the Philippine Clearing House will deliver it to your office around 12:00 o'clock of December . . . ?

A: Around 2:00 o'clock of December 15. We sent a clearing representative.

Q: And the checks will be processed in accordance with the balance available as of December 14?

A: Yes, sir.

Q: And naturally you will place there "drawn against insufficient funds, December 14, 1983"?

A: Yes, sir.

Q: Are you sure about that?

A: Yes, sir . . . (tsn, September 9, 1988, p. 14) 30

Obviously witness Rionisto was merely confused as to the dates (December 14 and 15) because it did not jibe with his
previous testimony, wherein he categorically stated that "the checks will now be processed as the Citytrust
Computer at around 3:00 in the morning of December 14 (sic) but it will be processed for balance of Citytrust as of
December 14 because for one, we have not opened on December 15 at 3:00 o'clock. Under the clearing house rules,
we are supposed to process it on the date it was presented for

clearing." 31 Analyzing the procedure he had previously explained, and analyzing his testimony in its entirety and not
in truncated portions, it would logically and ineluctably appear that he actually meant December 15, and not
December 14.

175
In the early morning of every business day, prior to banking hours, the various branches of Citytrust would receive a
computer printout called the "rejected transactions" report from the head office. The report contains, among others,
a listing of "checks to be funded." When Citytrust, Shaw Boulevard branch, received said report in the early morning
of December 15, 1983, the two checks involved were included in the "checks to be funded." That report was used by
the bank as its basis in dishonoring the two checks in question. Petitioner contends that the bank erred when it did
so because on previous occasions, the report was merely used by the bank as a basis for determining whether or not
it was necessary to notify them of the need to deposit certain amounts in their accounts.

Amy Belen Rogado, a bank employee, testified that she would normally copy the details stated in the report and
transfer in on a "pink slip." These pink slips were then given to George Moran. In turn, George Moran testified that
he would deposit the necessary funds stated in the pink slips. As a matter of fact, so petitioner asseverated, not a
single check written on the notices was ever dishonored after he had funded said checks with the bank. Thus,
petitioner argues, the checks were not yet dishonored after the bank received the report in the early morning of
December 15, 1983.

Said argument does not persuade. If ever petitioners on previous occasions were given notices every time a check
was presented for clearing and payment and there were no adequate funds in their accounts, these were, at most,
mere accommodations on the part of respondent bank. It was not a requirement or a general banking practice,
hence non-compliance therewith could not lay the bank open to blame or rebuke. Legally, the bank had all the right
to dishonor the checks because there were no sufficient funds to speak of in the first place. If the demand is by
check, a drawer must have to his credit enough to cover the demand. If his credit with the bank is less than the
amount on the face of the check, the bank may lawfully refuse payment. 32

Pursuing this matter further, the bank could also not be faulted for not accepting either of the two checks. The first
check issued was in the amount of P50,576.00, while the second one was for P56,090.00. Savings Account No.
1307001372 then had a balance of only P26,104.30. This being the case, Citytrust could not be expected to accept for
payment either one of the two checks nor partially honor one check.

A bank is under no obligation to make part payment on a check, up to only the amount of the drawer's funds, where
the check is drawn for an amount larger than what the drawer has on deposit. Such a practice of paying checks in
part has never existed. Upon partial payment, the check holder could not be called upon to surrender the check, and
the bank would be without a voucher affording a certain means of showing the payment. The rule is based on
commercial convenience, and any rule that would work such manifest inconvenience should not be recognized. A
check is intended not only to transfer a right to the amount named in it, but to serve the further purpose of affording
evidence for the bank of the payment of such amount when the check is taken up. 33

On the other hand, assuming arguendo that Savings Account No. 1037002387, which is not covered by a pre-
arranged automatic transfer agreement, had enough amount deposited to cover both checks (which is not so in this
case), the bank still had no obligation to honor said checks as there was then no authority given to it to make the
transfer of funds. Where a depositor has two accounts with a bank, an open account and a savings account, and
draws a check upon the open account for more money than the account contains, the bank may rightfully refuse to
pay the check, and is under no duty to make up the deficiency from the savings account. 34

176
We are agree with respondent Court of Appeals in its assessment and interpretation of the nature of the letter of
Citytrust to Petrophil, dated December 16, 1983. As aptly and correctly stated by said court, ". . . the letter is not an
admission of liability as it was written merely to maintain the goodwill and continued patronage of plaintiff-
appellants. (This) cannot be characterized as baseless, considering the totality of the circumstances surrounding its
writing." 35

In the present case, the actions taken by the bank after the incident clearly show that there was neither malice nor
bad faith, but rather a clear intent to mollify an obviously agitated client. Raul Diaz, the branch manager, even went
for this purpose to the Moran residence to facilitate their application for a manager's check. Later, he went to the
Petrophil Corporation to personally redeem the checks. Still later, the letter was sent by respondent bank to
Petrophil explaining that the dishonor of the checks was due to "operational error." However, we reiterate, it would
be a mistake to construe that letter as an admission of guilt on the part of the bank. It knew that it was confronted
with a client who obviously was not willing to admit any fault on his part, although the facts show otherwise. Thus,
respondent bank ran the risk of losing the business of an important and influential member of the financial
community if it did not do anything to assuage the feelings of petitioners.

It will be recalled that the credit standing of the Morans with Petrophil Corporation was involved, which fact, more
than anything, displeased them, to say the least. On demand of petitioners that their names be cleared, the bank
considered it more prudent to send the letter. It never realized that it would thereafter be used by petitioners as one
of the bases of their legal action. It will be noted that there was no reason for the bank to send the letter to Petrophil
Corporation since the latter was not a client nor was it demanding any explanation. Clearly, therefore, the letter was
merely intended to accommodate the request of the Morans and was part of the series of damage-control measures
taken by the bank to placate petitioners.

Respondent Court of Appeals perceptively observed that "all these somehow pacified plaintiffs-appellants (herein
petitioners) for they did not thereafter take immediate punitive action against the defendant-appellee (herein
private respondent). As pointed out by the court a quo, it took plaintiffs-appellants about six (6) months after the
dishonor of the checks to demand that defendant-appellee pay them P1,000,000.00 as damages. At that time,
plaintiffs-appellants had discovered the letter of Mr. Diaz attributing the dishonor of their checks to 'operational
error'. The attempt to unduly ride on the letter of Mr. Diaz speaks for itself." 36

On the above premises which irresistibly commend themselves to our acceptance, we find no cogent and sufficient
to award actual, moral, or exemplary damages to petitioners. Although we take judicial notice of the fact that there
is a fiduciary relationship between a bank and its depositors, as well as the extent of diligence expected of it in
handling the accounts entrusted to its care, 37 the bank may not be held responsible for such damages in the
absence of fraud, bad faith, malice, or wanton attitude. 38

WHEREFORE, finding no reversible error in the judgment appealed from, the same is hereby AFFIRMED, with costs
against petitioners.

177
G.R. No. 90027 March 3, 1993

CA AGRO-INDUSTRIAL DEVELOPMENT CORP., petitioner,

vs.

THE HONORABLE COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY, respondents.

Dolorfino & Dominguez Law Offices for petitioner.

Danilo B. Banares for private respondent.

DAVIDE, JR., J.:

Is the contractual relation between a commercial bank and another party in a contract of rent of a safety deposit box
with respect to its contents placed by the latter one of bailor and bailee or one of lessor and lessee?

This is the crux of the present controversy.

On 3 July 1979, petitioner (through its President, Sergio Aguirre) and the spouses Ramon and Paula Pugao entered
into an agreement whereby the former purchased from the latter two (2) parcels of land for a consideration of
P350,625.00. Of this amount, P75,725.00 was paid as downpayment while the balance was covered by three (3)
postdated checks. Among the terms and conditions of the agreement embodied in a Memorandum of True and
Actual Agreement of Sale of Land were that the titles to the lots shall be transferred to the petitioner upon full
payment of the purchase price and that the owner's copies of the certificates of titles thereto, Transfer Certificates
of Title (TCT) Nos. 284655 and 292434, shall be deposited in a safety deposit box of any bank. The same could be
withdrawn only upon the joint signatures of a representative of the petitioner and the Pugaos upon full payment of
the purchase price. Petitioner, through Sergio Aguirre, and the Pugaos then rented Safety Deposit Box No. 1448 of
private respondent Security Bank and Trust Company, a domestic banking corporation hereinafter referred to as the
respondent Bank. For this purpose, both signed a contract of lease (Exhibit "2") which contains, inter alia, the
following conditions:

178
13. The bank is not a depositary of the contents of the safe and it has neither the possession nor control of the
same.

14. The bank has no interest whatsoever in said contents, except herein expressly provided, and it assumes
absolutely no liability in connection therewith. 1

After the execution of the contract, two (2) renter's keys were given to the renters — one to Aguirre (for the
petitioner) and the other to the Pugaos. A guard key remained in the possession of the respondent Bank. The safety
deposit box has two (2) keyholes, one for the guard key and the other for the renter's key, and can be opened only
with the use of both keys. Petitioner claims that the certificates of title were placed inside the said box.

Thereafter, a certain Mrs. Margarita Ramos offered to buy from the petitioner the two (2) lots at a price of P225.00
per square meter which, as petitioner alleged in its complaint, translates to a profit of P100.00 per square meter or a
total of P280,500.00 for the entire property. Mrs. Ramos demanded the execution of a deed of sale which
necessarily entailed the production of the certificates of title. In view thereof, Aguirre, accompanied by the Pugaos,
then proceeded to the respondent Bank on 4 October 1979 to open the safety deposit box and get the certificates of
title. However, when opened in the presence of the Bank's representative, the box yielded no such certificates.
Because of the delay in the reconstitution of the title, Mrs. Ramos withdrew her earlier offer to purchase the lots; as
a consequence thereof, the petitioner allegedly failed to realize the expected profit of P280,500.00. Hence, the latter
filed on 1 September 1980 a complaint 2 for damages against the respondent Bank with the Court of First Instance
(now Regional Trial Court) of Pasig, Metro Manila which docketed the same as Civil Case No. 38382.

In its Answer with Counterclaim, 3 respondent Bank alleged that the petitioner has no cause of action because of
paragraphs 13 and 14 of the contract of lease (Exhibit "2"); corollarily, loss of any of the items or articles contained in
the box could not give rise to an action against it. It then interposed a counterclaim for exemplary damages as well
as attorney's fees in the amount of P20,000.00. Petitioner subsequently filed an answer to the counterclaim. 4

In due course, the trial court, now designated as Branch 161 of the Regional Trial Court (RTC) of Pasig, Metro Manila,
rendered a decision 5 adverse to the petitioner on 8 December 1986, the dispositive portion of which reads:

WHEREFORE, premises considered, judgment is hereby rendered dismissing plaintiff's complaint.

On defendant's counterclaim, judgment is hereby rendered ordering plaintiff to pay defendant the amount of FIVE
THOUSAND (P5,000.00) PESOS as attorney's fees.

With costs against plaintiff. 6

179
The unfavorable verdict is based on the trial court's conclusion that under paragraphs 13 and 14 of the contract of
lease, the Bank has no liability for the loss of the certificates of title. The court declared that the said provisions are
binding on the parties.

Its motion for reconsideration 7 having been denied, petitioner appealed from the adverse decision to the
respondent Court of Appeals which docketed the appeal as CA-G.R. CV No. 15150. Petitioner urged the respondent
Court to reverse the challenged decision because the trial court erred in (a) absolving the respondent Bank from
liability from the loss, (b) not declaring as null and void, for being contrary to law, public order and public policy, the
provisions in the contract for lease of the safety deposit box absolving the Bank from any liability for loss, (c) not
concluding that in this jurisdiction, as well as under American jurisprudence, the liability of the Bank is settled and (d)
awarding attorney's fees to the Bank and denying the petitioner's prayer for nominal and exemplary damages and
attorney's fees. 8

In its Decision promulgated on 4 July 1989, 9 respondent Court affirmed the appealed decision principally on the
theory that the contract (Exhibit "2") executed by the petitioner and respondent Bank is in the nature of a contract
of lease by virtue of which the petitioner and its co-renter were given control over the safety deposit box and its
contents while the Bank retained no right to open the said box because it had neither the possession nor control
over it and its contents. As such, the contract is governed by Article 1643 of the Civil Code 10 which provides:

Art. 1643. In the lease of things, one of the parties binds himself to give to another the enjoyment or use of a
thing for a price certain, and for a period which may be definite or indefinite. However, no lease for more than ninety-
nine years shall be valid.

It invoked Tolentino vs. Gonzales 11 — which held that the owner of the property loses his control over the property
leased during the period of the contract — and Article 1975 of the Civil Code which provides:

Art. 1975. The depositary holding certificates, bonds, securities or instruments which earn interest shall be
bound to collect the latter when it becomes due, and to take such steps as may be necessary in order that the
securities may preserve their value and the rights corresponding to them according to law.

The above provision shall not apply to contracts for the rent of safety deposit boxes.

and then concluded that "[c]learly, the defendant-appellee is not under any duty to maintain the contents of the
box. The stipulation absolving the defendant-appellee from liability is in accordance with the nature of the contract
of lease and cannot be regarded as contrary to law, public order and public policy." 12 The appellate court was quick
to add, however, that under the contract of lease of the safety deposit box, respondent Bank is not completely free

180
from liability as it may still be made answerable in case unauthorized persons enter into the vault area or when the
rented box is forced open. Thus, as expressly provided for in stipulation number 8 of the contract in question:

8. The Bank shall use due diligence that no unauthorized person shall be admitted to any rented safe and
beyond this, the Bank will not be responsible for the contents of any safe rented from it. 13

Its motion for reconsideration 14 having been denied in the respondent Court's Resolution of 28 August 1989, 15
petitioner took this recourse under Rule 45 of the Rules of Court and urges Us to review and set aside the
respondent Court's ruling. Petitioner avers that both the respondent Court and the trial court (a) did not properly
and legally apply the correct law in this case, (b) acted with grave abuse of discretion or in excess of jurisdiction
amounting to lack thereof and (c) set a precedent that is contrary to, or is a departure from precedents adhered to
and affirmed by decisions of this Court and precepts in American jurisprudence adopted in the Philippines. It
reiterates the arguments it had raised in its motion to reconsider the trial court's decision, the brief submitted to the
respondent Court and the motion to reconsider the latter's decision. In a nutshell, petitioner maintains that
regardless of nomenclature, the contract for the rent of the safety deposit box (Exhibit "2") is actually a contract of
deposit governed by Title XII, Book IV of the Civil Code of the

Philippines. 16 Accordingly, it is claimed that the respondent Bank is liable for the loss of the certificates of title
pursuant to Article 1972 of the said Code which provides:

Art. 1972. The depositary is obliged to keep the thing safely and to return it, when required, to the depositor,
or to his heirs and successors, or to the person who may have been designated in the contract. His responsibility,
with regard to the safekeeping and the loss of the thing, shall be governed by the provisions of Title I of this Book.

If the deposit is gratuitous, this fact shall be taken into account in determining the degree of care that the depositary
must observe.

Petitioner then quotes a passage from American Jurisprudence 17 which is supposed to expound on the prevailing
rule in the United States, to wit:

The prevailing rule appears to be that where a safe-deposit company leases a safe-deposit box or safe and the lessee
takes possession of the box or safe and places therein his securities or other valuables, the relation of bailee and bail
or is created between the parties to the transaction as to such securities or other valuables; the fact that the

safe-deposit company does not know, and that it is not expected that it shall know, the character or description of
the property which is deposited in such safe-deposit box or safe does not change that relation. That access to the
contents of the safe-deposit box can be had only by the use of a key retained by the lessee ( whether it is the sole
key or one to be used in connection with one retained by the lessor) does not operate to alter the foregoing rule.
The argument that there is not, in such a case, a delivery of exclusive possession and control to the deposit company,
and that therefore the situation is entirely different from that of ordinary bailment, has been generally rejected by

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the courts, usually on the ground that as possession must be either in the depositor or in the company, it should
reasonably be considered as in the latter rather than in the former, since the company is, by the nature of the
contract, given absolute control of access to the property, and the depositor cannot gain access thereto without the
consent and active participation of the company. . . . (citations omitted).

and a segment from Words and Phrases 18 which states that a contract for the rental of a bank safety deposit box in
consideration of a fixed amount at stated periods is a bailment for hire.

Petitioner further argues that conditions 13 and 14 of the questioned contract are contrary to law and public policy
and should be declared null and void. In support thereof, it cites Article 1306 of the Civil Code which provides that
parties to a contract may establish such stipulations, clauses, terms and conditions as they may deem convenient,
provided they are not contrary to law, morals, good customs, public order or public policy.

After the respondent Bank filed its comment, this Court gave due course to the petition and required the parties to
simultaneously submit their respective Memoranda.

The petition is partly meritorious.

We agree with the petitioner's contention that the contract for the rent of the safety deposit box is not an ordinary
contract of lease as defined in Article 1643 of the Civil Code. However, We do not fully subscribe to its view that the
same is a contract of deposit that is to be strictly governed by the provisions in the Civil Code on deposit; 19 the
contract in the case at bar is a special kind of deposit. It cannot be characterized as an ordinary contract of lease
under Article 1643 because the full and absolute possession and control of the safety deposit box was not given to
the joint renters — the petitioner and the Pugaos. The guard key of the box remained with the respondent Bank;
without this key, neither of the renters could open the box. On the other hand, the respondent Bank could not
likewise open the box without the renter's key. In this case, the said key had a duplicate which was made so that
both renters could have access to the box.

Hence, the authorities cited by the respondent Court 20 on this point do not apply. Neither could Article 1975, also
relied upon by the respondent Court, be invoked as an argument against the deposit theory. Obviously, the first
paragraph of such provision cannot apply to a depositary of certificates, bonds, securities or instruments which earn
interest if such documents are kept in a rented safety deposit box. It is clear that the depositary cannot open the box
without the renter being present.

We observe, however, that the deposit theory itself does not altogether find unanimous support even in American
jurisprudence. We agree with the petitioner that under the latter, the prevailing rule is that the relation between a
bank renting out safe-deposit boxes and its customer with respect to the contents of the box is that of a bail or and
bailee, the bailment being for hire and mutual benefit. 21 This is just the prevailing view because:

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There is, however, some support for the view that the relationship in question might be more properly characterized
as that of landlord and tenant, or lessor and lessee. It has also been suggested that it should be characterized as that
of licensor and licensee. The relation between a bank, safe-deposit company, or storage company, and the renter of
a safe-deposit box therein, is often described as contractual, express or implied, oral or written, in whole or in part.
But there is apparently no jurisdiction in which any rule other than that applicable to bailments governs questions of
the liability and rights of the parties in respect of loss of the contents of safe-deposit boxes. 22 (citations omitted)

In the context of our laws which authorize banking institutions to rent out safety deposit boxes, it is clear that in this
jurisdiction, the prevailing rule in the United States has been adopted. Section 72 of the General Banking Act 23
pertinently provides:

Sec. 72. In addition to the operations specifically authorized elsewhere in this Act, banking institutions other than
building and loan associations may perform the following services:

(a) Receive in custody funds, documents, and valuable objects, and rent safety deposit boxes for the
safeguarding of such effects.

xxx xxx xxx

The banks shall perform the services permitted under subsections (a), (b) and (c) of this section as depositories or as
agents. . . . 24 (emphasis supplied)

Note that the primary function is still found within the parameters of a contract of deposit, i.e., the receiving in
custody of funds, documents and other valuable objects for safekeeping. The renting out of the safety deposit boxes
is not independent from, but related to or in conjunction with, this principal function. A contract of deposit may be
entered into orally or in writing 25 and, pursuant to Article 1306 of the Civil Code, the parties thereto may establish
such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law,
morals, good customs, public order or public policy. The depositary's responsibility for the safekeeping of the objects
deposited in the case at bar is governed by Title I, Book IV of the Civil Code. Accordingly, the depositary would be
liable if, in performing its obligation, it is found guilty of fraud, negligence, delay or contravention of the tenor of the
agreement. 26 In the absence of any stipulation prescribing the degree of diligence required, that of a good father of
a family is to be observed. 27 Hence, any stipulation exempting the depositary from any liability arising from the loss
of the thing deposited on account of fraud, negligence or delay would be void for being contrary to law and public
policy. In the instant case, petitioner maintains that conditions 13 and 14 of the questioned contract of lease of the
safety deposit box, which read:

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13. The bank is not a depositary of the contents of the safe and it has neither the possession nor control of the
same.

14. The bank has no interest whatsoever in said contents, except herein expressly provided, and it assumes
absolutely no liability in connection therewith. 28

are void as they are contrary to law and public policy. We find Ourselves in agreement with this proposition for
indeed, said provisions are inconsistent with the respondent Bank's responsibility as a depositary under Section 72(a)
of the General Banking Act. Both exempt the latter from any liability except as contemplated in condition 8 thereof
which limits its duty to exercise reasonable diligence only with respect to who shall be admitted to any rented safe,
to wit:

8. The Bank shall use due diligence that no unauthorized person shall be admitted to any rented safe and
beyond this, the Bank will not be responsible for the contents of any safe rented from it. 29

Furthermore, condition 13 stands on a wrong premise and is contrary to the actual practice of the Bank. It is not
correct to assert that the Bank has neither the possession nor control of the contents of the box since in fact, the
safety deposit box itself is located in its premises and is under its absolute control; moreover, the respondent Bank
keeps the guard key to the said box. As stated earlier, renters cannot open their respective boxes unless the Bank
cooperates by presenting and using this guard key. Clearly then, to the extent above stated, the foregoing
conditions in the contract in question are void and ineffective. It has been said:

With respect to property deposited in a safe-deposit box by a customer of a safe-deposit company, the parties, since
the relation is a contractual one, may by special contract define their respective duties or provide for increasing or
limiting the liability of the deposit company, provided such contract is not in violation of law or public policy. It must
clearly appear that there actually was such a special contract, however, in order to vary the ordinary obligations
implied by law from the relationship of the parties; liability of the deposit company will not be enlarged or restricted
by words of doubtful meaning. The company, in renting

safe-deposit boxes, cannot exempt itself from liability for loss of the contents by its own fraud or negligence or that
of its agents or servants, and if a provision of the contract may be construed as an attempt to do so, it will be held
ineffective for the purpose. Although it has been held that the lessor of a safe-deposit box cannot limit its liability for
loss of the contents thereof through its own negligence, the view has been taken that such a lessor may limits its
liability to some extent by agreement or stipulation. 30 (citations omitted)

Thus, we reach the same conclusion which the Court of Appeals arrived at, that is, that the petition should be
dismissed, but on grounds quite different from those relied upon by the Court of Appeals. In the instant case, the
respondent Bank's exoneration cannot, contrary to the holding of the Court of Appeals, be based on or proceed
from a characterization of the impugned contract as a contract of lease, but rather on the fact that no competent
proof was presented to show that respondent Bank was aware of the agreement between the petitioner and the
Pugaos to the effect that the certificates of title were withdrawable from the safety deposit box only upon both

184
parties' joint signatures, and that no evidence was submitted to reveal that the loss of the certificates of title was
due to the fraud or negligence of the respondent Bank. This in turn flows from this Court's determination that the
contract involved was one of deposit. Since both the petitioner and the Pugaos agreed that each should have one (1)
renter's key, it was obvious that either of them could ask the Bank for access to the safety deposit box and, with the
use of such key and the Bank's own guard key, could open the said box, without the other renter being present.

Since, however, the petitioner cannot be blamed for the filing of the complaint and no bad faith on its part had been
established, the trial court erred in condemning the petitioner to pay the respondent Bank attorney's fees. To this
extent, the Decision (dispositive portion) of public respondent Court of Appeals must be modified.

WHEREFORE, the Petition for Review is partially GRANTED by deleting the award for attorney's fees from the 4 July
1989 Decision of the respondent Court of Appeals in CA-G.R. CV No. 15150. As modified, and subject to the
pronouncement We made above on the nature of the relationship between the parties in a contract of lease of
safety deposit boxes, the dispositive portion of the said Decision is hereby AFFIRMED and the instant Petition for
Review is otherwise DENIED for lack of merit.

No pronouncement as to costs.

SO ORDERED.

G.R. No. 104612 May 10, 1994

BANK OF THE PHILIPPINE ISLANDS (successor-in- interest of COMMERCIAL AND TRUST CO.), petitioner,

vs.

HON. COURT OF APPEALS, EASTERN PLYWOOD CORP. and BENIGNO D. LIM, respondents.

Leonen, Ramirez & Associates for petitioner.

Constante A. Ancheta for private respondents.

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DAVIDE, JR., J.:

The petitioner urges us to review and set aside the amended Decision 1 of 6 March 1992 of respondent Court of
Appeals in CA- G.R. CV No. 25739 which modified the Decision of 15 November 1990 of Branch 19 of the Regional Trial
Court (RTC) of Manila in Civil Case No. 87-42967, entitled Bank of the Philippine Islands (successor-in-interest of
Commercial Bank and Trust Company) versus Eastern Plywood Corporation and Benigno D. Lim. The Court of
Appeals had affirmed the dismissal of the complaint but had granted the defendants' counterclaim for P331,261.44
which represents the outstanding balance of their account with the plaintiff.

As culled from the records and the pleadings of the parties, the following facts were duly established:

Private respondents Eastern Plywood Corporation (Eastern) and

Benigno D. Lim (Lim), an officer and stockholder of Eastern, held at least one joint bank account ("and/or" account)
with the Commercial Bank and Trust Co. (CBTC), the predecessor-in-interest of petitioner Bank of the Philippine
Islands (BPI). Sometime in March 1975, a joint checking account ("and" account) with Lim in the amount of
P120,000.00 was opened by Mariano Velasco with funds withdrawn from the account of Eastern and/or Lim. Various
amounts were later deposited or withdrawn from the joint account of Velasco and Lim. The money therein was
placed in the money market.

Velasco died on 7 April 1977. At the time of his death, the outstanding balance of the account stood at P662,522.87.
On 5 May 1977, by virtue of an Indemnity Undertaking executed by Lim for himself and as President and General
Manager of Eastern, 2 one-half of this amount was provisionally released and transferred to one of the bank
accounts of Eastern with CBTC. 3

Thereafter, on 18 August 1978, Eastern obtained a loan of P73,000.00 from CBTC as "Additional Working Capital,"
evidenced by the "Disclosure Statement on Loan/Credit Transaction" (Disclosure Statement) signed by CBTC through
its branch manager, Ceferino Jimenez, and Eastern, through Lim, as its President and General Manager. 4 The loan
was payable on demand with interest at 14% per annum.

For this loan, Eastern issued on the same day a negotiable promissory note for P73,000.00 payable on demand to the
order of CBTC with interest at 14% per annum. 5 The note was signed by Lim both in his own capacity and as President
and General Manager of Eastern. No reference to any security for the loan appears on the note. In the Disclosure
Statement, the box with the printed word "UNSECURED" was marked with "X" — meaning unsecured, while the line
with the words "this loan is wholly/partly secured by" is followed by the typewritten words "Hold-Out on a 1:1 on C/A
No. 2310-001-42," which refers to the joint account of Velasco and Lim with a balance of P331,261.44.

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In addition, Eastern and Lim, and CBTC signed another document entitled "Holdout Agreement," also dated 18
August 1978, 6 wherein it was stated that "as security for the Loan [Lim and Eastern] have offered [CBTC] and the
latter accepts a holdout on said [Current Account No. 2310-011-42 in the joint names of Lim and Velasco] to the full
extent of their alleged interests therein as these may appear as a result of final and definitive judicial action or a
settlement between and among the contesting parties thereto." 7 Paragraph 02 of the Agreement provides as
follows:

Eastply [Eastern] and Mr. Lim hereby confer upon Comtrust [CBTC], when and if their alleged interests in the
Account Balance shall have been established with finality, ample and sufficient power as shall be necessary to retain
said Account Balance and enable Comtrust to apply the Account Balance for the purpose of liquidating the Loan in
respect of principal and/or accrued interest.

And paragraph 05 thereof reads:

The acceptance of this holdout shall not impair the right of Comtrust to declare the loan payable on demand at any
time, nor shall the existence hereof and the non-resolution of the dispute between the contending parties in respect
of entitlement to the Account Balance, preclude Comtrust from instituting an action for recovery against Eastply
and/or Mr. Lim in the event the Loan is declared due and payable and Eastply and/or Mr. Lim shall default in payment
of all obligations and liabilities thereunder.

In the meantime, a case for the settlement of Velasco's estate was filed with Branch 152 of the RTC of Pasig, entitled
"In re Intestate Estate of Mariano Velasco," and docketed as Sp. Proc. No. 8959. In the said case, the whole balance
of P331,261.44 in the aforesaid joint account of Velasco and Lim was being claimed as part of Velasco's estate. On 9
September 1986, the intestate court granted the urgent motion of the heirs of Velasco to withdraw the deposit
under the joint account of Lim and Velasco and authorized the heirs to divide among themselves the amount
withdrawn. 8

Sometime in 1980, CBTC was merged with BPI. 9 On 2 December 1987, BPI filed with the RTC of Manila a complaint
against Lim and Eastern demanding payment of the promissory note for P73,000.00. The complaint was docketed as
Civil Case No. 87- 42967 and was raffled to Branch 19 of the said court, then presided over by Judge Wenceslao M.
Polo. Defendants Lim and Eastern, in turn, filed a counterclaim against BPI for the return of the balance in the
disputed account subject of the Holdout Agreement and the interests thereon after deducting the amount due on
the promissory note.

After due proceedings, the trial court rendered its decision on

15 November 1990 dismissing the complaint because BPI failed to make out its case. Furthermore, it ruled that "the
promissory note in question is subject to the 'hold-out' agreement," 10 and that based on this agreement, "it was the
duty of plaintiff Bank [BPI] to debit the account of the defendants under the promissory note to set off the loan even
though the same has no fixed maturity." 11 As to the defendants' counterclaim, the trial court, recognizing the fact
that the entire amount in question had been withdrawn by Velasco's heirs pursuant to the order of the intestate

187
court in Sp. Proc. No. 8959, denied it because the "said claim cannot be awarded without disturbing the resolution"
of the intestate court. 12

Both parties appealed from the said decision to the Court of Appeals. Their appeal was docketed as CA-G.R. CV No.
25739.

On 23 January 1991, the Court of Appeals rendered a decision affirming the decision of the trial court. It, however,
failed to rule on the defendants' (private respondents') partial appeal from the trial court's denial of their
counterclaim. Upon their motion for reconsideration, the Court of Appeals promulgated on 6 March 1992 an
Amended Decision 13 wherein it ruled that the settlement of Velasco's estate had nothing to do with the claim of the
defendants for the return of the balance of their account with CBTC/BPI as they were not privy to that case, and that
the defendants, as depositors of CBTC/BPI, are the latter's creditors; hence, CBTC/BPI should have protected the
defendants' interest in Sp. Proc. No. 8959 when the said account was claimed by Velasco's estate. It then ordered
BPI "to pay defendants the amount of P331,261.44 representing the outstanding balance in the bank account of
defendants." 14

On 22 April 1992, BPI filed the instant petition alleging therein that the Holdout Agreement in question was subject to
a suspensive condition stated therein, viz., that the "P331,261.44 shall become a security for respondent Lim's
promissory note only if respondents' Lim and Eastern Plywood Corporation's interests to that amount are
established as a result of a final and definitive judicial action or a settlement between and among the contesting
parties thereto." 15 Hence, BPI asserts, the Court of Appeals erred in affirming the trial court's decision dismissing the
complaint on the ground that it was the duty of CBTC to debit the account of the defendants to set off the amount of
P73,000.00 covered by the promissory note.

Private respondents Eastern and Lim dispute the "suspensive condition" argument of the petitioner. They interpret
the findings of both the trial and appellate courts that the money deposited in the joint account of Velasco and Lim
came from Eastern and Lim's own account as a finding that the money deposited in the joint account of Lim and
Velasco "rightfully belong[ed] to Eastern Plywood Corporation and/or Benigno Lim." And because the latter are the
rightful owners of the money in question, the suspensive condition does not find any application in this case and the
bank had the duty to set off this deposit with the loan. They add that the ruling of the lower court that they own the
disputed amount is the final and definitive judicial action required by the Holdout Agreement; hence, the petitioner
can only hold the amount of P73,000.00 representing the security required for the note and must return the rest. 16

The petitioner filed a Reply to the aforesaid Comment. The private respondents filed a Rejoinder thereto.

We gave due course to the petition and required the parties to submit simultaneously their memoranda.

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The key issues in this case are whether BPI can demand payment of the loan of P73,000.00 despite the existence of
the Holdout Agreement and whether BPI is still liable to the private respondents on the account subject of the
Holdout Agreement after its withdrawal by the heirs of Velasco.

The collection suit of BPI is based on the promissory note for P73,000.00. On its face, the note is an unconditional
promise to pay the said amount, and as stated by the respondent Court of Appeals, "[t]here is no question that the
promissory note is a negotiable instrument." 17 It further correctly ruled that BPI was not a holder in due course
because the note was not indorsed to BPI by the payee, CBTC. Only a negotiation by indorsement could have
operated as a valid transfer to make BPI a holder in due course. It acquired the note from CBTC by the contract of
merger or sale between the two banks. BPI, therefore, took the note subject to the Holdout Agreement.

We disagree, however, with the Court of Appeals in its interpretation of the Holdout Agreement. It is clear from
paragraph 02 thereof that CBTC, or BPI as its successor-in-interest, had every right to demand that Eastern and Lim
settle their liability under the promissory note. It cannot be compelled to retain and apply the deposit in Lim and
Velasco's joint account to the payment of the note. What the agreement conferred on CBTC was a power, not a duty.
Generally, a bank is under no duty or obligation to make the application. 18 To apply the deposit to the payment of a
loan is a privilege, a right of set-off which the bank has the option to exercise. 19

Also, paragraph 05 of the Holdout Agreement itself states that notwithstanding the agreement, CBTC was not in any
way precluded from demanding payment from Eastern and from instituting an action to recover payment of the
loan. What it provides is an alternative, not an exclusive, method of enforcing its claim on the note. When it
demanded payment of the debt directly from Eastern and Lim, BPI had opted not to exercise its right to apply part of
the deposit subject of the Holdout Agreement to the payment of the promissory note for P73,000.00. Its suit for the
enforcement of the note was then in order and it was error for the trial court to dismiss it on the theory that it was
set off by an equivalent portion in C/A No. 2310-001-42 which BPI should have debited. The Court of Appeals also
erred in affirming such dismissal.

The "suspensive condition" theory of the petitioner is, therefore, untenable.

The Court of Appeals correctly decided on the counterclaim. The counterclaim of Eastern and Lim for the return of
the P331,261.44 20 was equivalent to a demand that they be allowed to withdraw their deposit with the bank. Article
1980 of the Civil Code expressly provides that "[f]ixed, savings, and current deposits of money in banks and similar
institutions shall be governed by the provisions concerning simple loan." In Serrano vs. Central Bank of the
Philippines, 21 we held that bank deposits are in the nature of irregular deposits; they are really loans because they
earn interest. The relationship then between a depositor and a bank is one of creditor and debtor. The deposit under
the questioned account was an ordinary bank deposit; hence, it was payable on demand of the depositor. 22

The account was proved and established to belong to Eastern even if it was deposited in the names of Lim and
Velasco. As the real creditor of the bank, Eastern has the right to withdraw it or to demand payment thereof. BPI
cannot be relieved of its duty to pay Eastern simply because it already allowed the heirs of Velasco to withdraw the
whole balance of the account. The petitioner should not have allowed such withdrawal because it had admitted in

189
the Holdout Agreement the questioned ownership of the money deposited in the account. As early as 12 May 1979,
CBTC was notified by the Corporate Secretary of Eastern that the deposit in the joint account of Velasco and Lim was
being claimed by them and that one-half was being claimed by the heirs of Velasco. 23

Moreover, the order of the court in Sp. Proc. No. 8959 merely authorized the heirs of Velasco to withdraw the
account. BPI was not specifically ordered to release the account to the said heirs; hence, it was under no judicial
compulsion to do so. The authorization given to the heirs of Velasco cannot be construed as a final determination or
adjudication that the account belonged to Velasco. We have ruled that when the ownership of a particular property
is disputed, the determination by a probate court of whether that property is included in the estate of a deceased is
merely provisional in character and cannot be the subject of execution. 24

Because the ownership of the deposit remained undetermined, BPI, as the debtor with respect thereto, had no right
to pay to persons other than those in whose favor the obligation was constituted or whose right or authority to
receive payment is indisputable. The payment of the money deposited with BPI that will extinguish its obligation to
the creditor-depositor is payment to the person of the creditor or to one authorized by him or by the law to receive
it. 25 Payment made by the debtor to the wrong party does not extinguish the obligation as to the creditor who is
without fault or negligence, even if the debtor acted in utmost good faith and by mistake as to the person of the
creditor, or through error induced by fraud of a third person. 26 The payment then by BPI to the heirs of Velasco,
even if done in good faith, did not extinguish its obligation to the true depositor, Eastern.

In the light of the above findings, the dismissal of the petitioner's complaint is reversed and set aside. The award on
the counterclaim is sustained subject to a modification of the interest.

WHEREFORE, the instant petition is partly GRANTED. The challenged amended decision in CA-G.R. CV No. 25735 is
hereby MODIFIED. As modified:

(1) Private respondents are ordered to pay the petitioner the promissory note for P73,000.00 with interest at:

(a) 14% per annum on the principal, computed from

18 August 1978 until payment;

(b) 12% per annum on the interest which had accrued up to the date of the filing of the complaint, computed
from that date until payment pursuant to Article 2212 of the Civil Code.

190
(2) The award of P331,264.44 in favor of the private respondents shall bear interest at the rate of 12% per annum
computed from the filing of the counterclaim.

No pronouncement as to costs.

JOSE C. GO,

Petitioner,

- versus -

BANGKO SENTRAL NG PILIPINAS,

Respondent.

G.R. No. 178429

Present:

QUISUMBING, J., Chairperson,

*CARPIO,

CARPIO MORALES,

BRION, and

191
ABAD, JJ.

Promulgated:

October 23, 2009

x ------------------------------------------------------------------------------------------x

DECISION

BRION, J.:

192
Through the present petition for review on certiorari,[1] petitioner Jose C. Go (Go) assails the October 26, 2006
decision[2] of the Court of Appeals (CA) in CA-G.R. SP No. 79149, as well as its June 4, 2007 resolution.[3] The CA
decision and resolution annulled and set aside the May 20, 2003[4] and June 30, 2003[5] orders of the Regional Trial
Court (RTC), Branch 26, Manila which granted Gos motion to quash the Information filed against him.

THE FACTS

On August 20, 1999, an Information[6] for violation of Section 83 of Republic Act No. 337 (RA 337) or the General
Banking Act, as amended by Presidential Decree No. 1795, was filed against Go before the RTC. The charge reads:

That on or about and during the period comprised between June 27, 1996 and September 15, 1997, inclusive, in the
City of Manila, Philippines, the said accused, being then the Director and the President and Chief Executive Officer of
the Orient Commercial Banking Corporation (Orient Bank), a commercial banking institution created, organized and
existing under Philippines laws, with its main branch located at C.M. Recto Avenue, this City, and taking advantage of
his position as such officer/director of the said bank, did then and there wilfully, unlawfully and knowingly borrow,
either directly or indirectly, for himself or as the representative of his other related companies, the deposits or funds
of the said banking institution and/or become a guarantor, indorser or obligor for loans from the said bank to others,
by then and there using said borrowed deposits/funds of the said bank in facilitating and granting and/or caused the
facilitating and granting of credit lines/loans and, among others, to the New Zealand Accounts loans in the total
amount of TWO BILLION AND SEVEN HUNDRED FIFTY-FOUR MILLION NINE HUNDRED FIVE THOUSAND AND EIGHT
HUNDRED FIFTY-SEVEN AND 0/100 PESOS, Philippine Currency, said accused knowing fully well that the same has
been done by him without the written approval of the majority of the Board of Directors of said Orient Bank and
which approval the said accused deliberately failed to obtain and enter the same upon the records of said banking
institution and to transmit a copy of which to the supervising department of the said bank, as required by the
General Banking Act.

CONTRARY TO LAW. [Emphasis supplied.]

On May 28, 2001, Go pleaded not guilty to the offense charged.

After the arraignment, both the prosecution and accused Go took part in the pre-trial conference where the marking
of the voluminous evidence for the parties was accomplished. After the completion of the marking, the trial court
ordered the parties to proceed to trial on the merits.

193
Before the trial could commence, however, Go filed on February 26, 2003[7] a motion to quash the Information,
which motion Go amended on March 1, 2003.[8] Go claimed that the Information was defective, as the facts charged
therein do not constitute an offense under Section 83 of RA 337 which states:

No director or officer of any banking institution shall either directly or indirectly, for himself or as the representative
or agent of another, borrow any of the deposits of funds of such banks, nor shall he become a guarantor, indorser,
or surety for loans from such bank, to others, or in any manner be an obligor for money borrowed from the bank or
loaned by it, except with the written approval of the majority of the directors of the bank, excluding the director
concerned. Any such approval shall be entered upon the records of the corporation and a copy of such entry shall be
transmitted forthwith to the appropriate supervising department. The office of any director or officer of a bank who
violates the provisions of this section shall immediately become vacant and the director or officer shall be punished
by imprisonment of not less than one year nor more than ten years and by a fine of not less than one thousand nor
more than ten thousand pesos.

The Monetary Board may regulate the amount of credit accommodations that may be extended, directly or
indirectly, by banking institutions to their directors, officers, or stockholders. However, the outstanding credit
accommodations which a bank may extend to each of its stockholders owning two percent (2%) or more of the
subscribed capital stock, its directors, or its officers, shall be limited to an amount equivalent to the respective
outstanding deposits and book value of the paid-in capital contribution in the bank. Provided, however, that loans
and advances to officers in the form of fringe benefits granted in accordance with rules and regulations as may be
prescribed by Monetary Board shall not be subject to the preceding limitation. (As amended by PD 1795)

In addition to the conditions established in the preceding paragraph, no director or a building and loan association
shall engage in any of the operations mentioned in said paragraphs, except upon the pledge of shares of the
association having a total withdrawal value greater than the amount borrowed. (As amended by PD 1795)

In support of his motion to quash, Go averred that based on the facts alleged in the Information, he was being
prosecuted for borrowing the deposits or funds of the Orient Bank and/or acting as a guarantor, indorser or obligor
for the banks loans to other persons. The use of the word and/or meant that he was charged for being either a
borrower or a guarantor, or for being both a borrower and guarantor. Go claimed that the charge was not only
vague, but also did not constitute an offense. He posited that Section 83 of RA 337 penalized only directors and
officers of banking institutions who acted either as borrower or as guarantor, but not as both.

Go further pointed out that the Information failed to state that his alleged act of borrowing and/or guarantying was
not among the exceptions provided for in the law. According to Go, the second paragraph of Section 83 allowed
banks to extend credit accommodations to their directors, officers, and stockholders, provided it is limited to an
amount equivalent to the respective outstanding deposits and book value of the paid-in capital contribution in the
bank. Extending credit accommodations to bank directors, officers, and stockholders is not per se prohibited, unless
the amount exceeds the legal limit. Since the Information failed to state that the amount he purportedly borrowed
and/or guarantied was beyond the limit set by law, Go insisted that the acts so charged did not constitute an offense.

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Finding Gos contentions persuasive, the RTC granted Gos motion to quash the Information on May 20, 2003. It
denied on June 30, 2003 the motion for reconsideration filed by the prosecution.

The prosecution did not accept the RTC ruling and filed a petition for certiorari to question it before the CA. The
Information, the prosecution claimed, was sufficient. The word and/or did not materially affect the validity of the
Information, as it merely stated a mode of committing the crime penalized under Section 83 of RA 337. Moreover,
the prosecution asserted that the second paragraph of Section 83 (referring to the credit accommodation limit)
cannot be interpreted as an exception to what the first paragraph provided. The second paragraph only sets
borrowing limits that, if violated, render the bank, not the director-borrower, liable. A violation of the second
paragraph of Section 83 under which Go is being prosecuted is therefore separate and distinct from a violation of the
first paragraph. Thus, the prosecution prayed that the orders of the RTC quashing the Information be set aside and
the criminal case against Go be reinstated.

On October 26, 2006, the CA rendered the assailed decision granting the prosecutions petition for certiorari.[9] The
CA declared that the RTC misread the law when it decided to quash the Information against Go. It explained that the
allegation that Go acted either as a borrower or a guarantor or as both borrower and guarantor merely set forth the
different modes by which the offense was committed. It did not necessarily mean that Go acted both as borrower
and guarantor for the same loan at the same time. It agreed with the prosecutions stand that the second paragraph
of Section 83 of RA 337 is not an exception to the first paragraph. Thus, the failure of the Information to state that
the amount of the loan Go borrowed or guaranteed exceeded the legal limits was, to the CA, an irrelevant issue. For
these reasons, the CA annulled and set aside the RTCs orders and ordered the reinstatement of the criminal charge
against Go. After the CAs denial of his motion for reconsideration,[10] Go filed the present appeal by certiorari.

THE PETITION

In his petition, Go alleges that the appellate court legally erred in overturning the trial courts orders. He insists that
the Information failed to allege the acts or omissions complained of with sufficient particularity to enable him to
know the offense being charged; to allow him to properly prepare his defense; and likewise to allow the court to
render proper judgment.

Repeating his arguments in his motion to quash, Go reads Section 83 of RA 337 as penalizing a director or officer of a
banking institution for either borrowing the deposits or funds of the bank, or guaranteeing or indorsing loans to
others, but not for assuming both capacities. He claimed that the prosecutions shotgun approach in alleging that he
acted as borrower and/or guarantor rendered the Information highly defective for failure to specify with certainty
the specific act or omission complained of. To petitioner Go, the prosecutions approach was a clear violation of his
constitutional right to be informed of the nature and cause of the accusation against him.

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Additionally, Go reiterates his claim that credit accommodations by banks to their directors and officers are legal and
valid, provided that these are limited to their outstanding deposits and book value of the paid-in capital contribution
in the bank. The failure to state that he borrowed deposits and/or guaranteed loans beyond this limit rendered the
Information defective. He thus asks the Court to reverse the CA decision to reinstate the criminal charge.

In its Comment,[11] the prosecution raises the same defenses against Gos contentions. It insists on the sufficiency of
the allegations in the Information and prays for the denial of Gos petition.

THE COURTS RULING

The Court does not find the petition meritorious and accordingly denies it.

The Accuseds Right to be Informed

Under the Constitution, a person who stands charged of a criminal offense has the right to be informed of the nature
and cause of the accusation against him.[12] The Rules of Court, in implementing the right, specifically require that
the acts or omissions complained of as constituting the offense, including the qualifying and aggravating
circumstances, must be stated in ordinary and concise language, not necessarily in the language used in the statute,
but in terms sufficient to enable a person of common understanding to know what offense is being charged and the
attendant qualifying and aggravating circumstances present, so that the accused can properly defend himself and
the court can pronounce judgment.[13] To broaden the scope of the right, the Rules authorize the quashal, upon
motion of the accused, of an Information that fails to allege the acts constituting the offense.[14] Jurisprudence has
laid down the fundamental test in appreciating a motion to quash an Information grounded on the insufficiency of
the facts alleged therein. We stated in People v. Romualdez[15] that:

The determinative test in appreciating a motion to quash xxx is the sufficiency of the averments in the information,
that is, whether the facts alleged, if hypothetically admitted, would establish the essential elements of the offense as
defined by law without considering matters aliunde. As Section 6, Rule 110 of the Rules of Criminal Procedure
requires, the information only needs to state the ultimate facts; the evidentiary and other details can be provided
during the trial.

To restate the rule, an Information only needs to state the ultimate facts constituting the offense, not the finer
details of why and how the illegal acts alleged amounted to undue injury or damage matters that are appropriate for
the trial. [Emphasis supplied]

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The facts and circumstances necessary to be included in the Information are determined by reference to the
definition and elements of the specific crimes. The Information must allege clearly and accurately the elements of the
crime charged.[16]

Elements of Violation of

Section 83 of RA 337

Under Section 83, RA 337, the following elements must be present to constitute a violation of its first paragraph:

1. the offender is a director or officer of any banking institution;

2. the offender, either directly or indirectly, for himself or as representative or agent of another, performs any of
the following acts:

a. he borrows any of the deposits or funds of such bank; or

b. he becomes a guarantor, indorser, or surety for loans from such bank to others, or

c. he becomes in any manner an obligor for money borrowed from bank or loaned by it;

3. the offender has performed any of such acts without the written approval of the majority of the directors of the
bank, excluding the offender, as the director concerned.

A simple reading of the above elements easily rejects Gos contention that the law penalizes a bank director or officer
only either for borrowing the banks deposits or funds or for guarantying loans by the bank, but not for acting in both
capacities. The essence of the crime is becoming an obligor of the bank without securing the necessary written
approval of the majority of the banks directors.

The second element merely lists down the various modes of committing the offense. The third mode, by declaring
that [no director or officer of any banking institution shall xxx] in any manner be an obligor for money borrowed
from the bank or loaned by it, in fact serves a catch-all phrase that covers any situation when a director or officer of
the bank becomes its obligor. The prohibition is directed against a bank director or officer who becomes in any
manner an obligor for money borrowed from or loaned by the bank without the written approval of the majority of
the banks board of directors. To make a distinction between the act of borrowing and guarantying is therefore
unnecessary because in either situation, the director or officer concerned becomes an obligor of the bank against
whom the obligation is juridically demandable.

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The language of the law is broad enough to encompass either 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 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 should allow for a reasonable flexibility in its construction. Section 83 of RA 337, as well as
other banking laws adopting the same prohibition,[17] was enacted to ensure that loans by banks and similar
financial institutions to their own directors, officers, and stockholders are above board.[18] Banks were not created
for the benefit of their directors and officers; they cannot use the assets of the bank for their own benefit, except as
may be permitted by law. Congress has thus deemed it essential to impose restrictions on borrowings by bank
directors and officers in order to protect the public, especially the depositors.[19] Hence, when the law prohibits
directors and officers of banking institutions from becoming in any manner an obligor of the 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 involved in the present case.

Credit accommodation limit is not an exception nor is it an element of the

offense

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.

The approval requirement (found in the first sentence of the first paragraph of the law) refers to the written
approval of the majority of the banks board of directors required before bank directors and officers can in any
manner be an obligor for money borrowed from or loaned by the bank. Failure to secure the approval renders the
bank director or officer concerned liable for prosecution and, upon conviction, subjects him to the penalty provided
in the third sentence of first paragraph of Section 83.

The reportorial requirement, on the other hand, mandates that any such approval should be entered upon the
records of the corporation, and a copy of the entry be transmitted to the appropriate supervising department. The
reportorial requirement is addressed to the bank itself, which, upon its failure to do so, subjects it to quo warranto
proceedings under Section 87 of RA 337.[20]

The ceiling requirement under the second paragraph of Section 83 regulates the amount of credit accommodations
that banks may extend to their directors or officers by limiting these to an amount equivalent to the respective
outstanding deposits and book value of the paid-in capital contribution in the bank. Again, this is a requirement
directed at the bank. In this light, a prosecution for violation of the first paragraph of Section 83, such as the one
involved here, does not require an allegation that the loan exceeded the legal limit. Even if the loan involved is below
the legal limit, a written approval by the majority of the banks directors is still required; otherwise, the bank director
or officer who becomes an obligor of the bank is liable. Compliance with the ceiling requirement does not dispense
with the approval requirement.

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Evidently, the failure to observe the three requirements under Section 83 paves the way for the prosecution of three
different offenses, each with its own set of elements. A successful indictment for failing to comply with the approval
requirement will not necessitate proof that the other two were likewise not observed.

Rules of Court allow amendment of insufficient Information

Assuming that the facts charged in the Information do not constitute an offense, we find it erroneous for the RTC to
immediately order the dismissal of the Information, without giving the prosecution a chance to amend it. Section 4
of Rule 117 states:

SEC. 4. Amendment of complaint or information.If the motion to quash is based on an alleged defect of the
complaint or information which can be cured by amendment, the court shall order that an amendment be made.

If it is based on the ground that the facts charged do not constitute an offense, the prosecution shall be given by the
court an opportunity to correct the defect by amendment. The motion shall be granted if the prosecution fails to
make the amendment, or the complaint or information still suffers from the same defect despite the amendment.
[Emphasis supplied]

Although an Information may be defective because the facts charged do not constitute an offense, the dismissal of
the case will not necessarily follow. The Rules specifically require that the prosecution should be given a chance to
correct the defect; the court can order the dismissal only upon the prosecutions failure to do so. The RTCs failure to
provide the prosecution this opportunity twice[21] constitutes an arbitrary exercise of power that was correctly
addressed by the CA through the certiorari petition. This defect in the RTCs action on the case, while not central to
the issue before us, strengthens our conclusion that this criminal case should be resolved through full-blown trial on
the merits.

WHEREFORE, we DENY the petitioners petition for review 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 of June 4, 2007. The
Regional Trial Court, Branch 26, Manila is directed to PROCEED with the hearing of Criminal Case No. 99-178551. Costs
against the petitioner.

SO ORDERED.

[G.R. No. 138544. October 3, 2000]

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SECURITY BANK AND TRUST COMPANY, Inc., petitioner, vs. RODOLFO M. CUENCA, respondent.

DECISION

PANGANIBAN, J.:

Being an onerous undertaking, a surety agreement is strictly construed against the creditor, and every doubt is
resolved in favor of the solidary debtor. The fundamental rules of fair play require the creditor to obtain the consent
of the surety to any material alteration in the principal loan agreement, or at least to notify it thereof. Hence,
petitioner bank cannot hold herein respondent liable for loans obtained in excess of the amount or beyond the
period stipulated in the original agreement, absent any clear stipulation showing that the latter waived his right to be
notified thereof, or to give consent thereto. This is especially true where, as in this case, respondent was no longer
the principal officer or major stockholder of the corporate debtor at the time the later obligations were incurred. He
was thus no longer in a position to compel the debtor to pay the creditor and had no more reason to bind himself
anew to the subsequent obligations.

The Case

This is the main principle used in denying the present Petition for Review under Rule 45 of the Rules of Court.
Petitioner assails the December 22, 1998 Decision[1] of the Court of Appeals (CA) in CA-GR CV No. 56203, the
dispositive portion of which reads as follows:

WHEREFORE, the judgment appealed from is hereby amended in the sense that defendant-appellant Rodolfo M.
Cuenca [herein respondent] is RELEASED from liability to pay any amount stated in the judgment.

Furthermore, [Respondent] Rodolfo M. Cuencas counterclaim is hereby DISMISSED for lack of merit.

In all other respect[s], the decision appealed from is AFFIRMED.[2]

Also challenged is the April 14, 1999 CA Resolution,[3] which denied petitioners Motion for Reconsideration.

Modified by the CA was the March 6, 1997 Decision[4] of the Regional Trial Court (RTC) of Makati City (Branch 66) in
Civil Case No. 93-1925, which disposed as follows:

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WHEREFORE, judgment is hereby rendered ordering defendants Sta. Ines Melale Corporation and Rodolfo M. Cuenca
to pay, jointly and severally, plaintiff Security Bank & Trust Company the sum of P39,129,124.73 representing the
balance of the loan as of May 10, 1994 plus 12% interest per annum until fully paid, and the sum of P100,000.00 as
attorneys fees and litigation expenses and to pay the costs.

SO ORDERED.

The Facts

The facts are narrated by the Court of Appeals as follows:[5]

The antecedent material and relevant facts are that defendant-appellant Sta. Ines Melale (Sta. Ines) is a corporation
engaged in logging operations. It was a holder of a Timber License Agreement issued by the Department of
Environment and Natural Resources (DENR).

On 10 November 1980, [Petitioner] Security Bank and Trust Co. granted appellant Sta. Ines Melale Corporation
[SIMC] a credit line in the amount of [e]ight [m]llion [p]esos (P8,000,000.00) to assist the latter in meeting the
additional capitalization requirements of its logging operations.

The Credit Approval Memorandum expressly stated that the P8M Credit Loan Facility shall be effective until 30
November 1981:

JOINT CONDITIONS:

1. Against Chattel Mortgage on logging trucks and/or inventories (except logs) valued at 200% of the lines plus JSS of
Rodolfo M. Cuenca.

2. Submission of an appropriate Board Resolution authorizing the borrowings, indicating therein the companys duly
authorized signatory/ies;

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3. Reasonable/compensating deposit balances in current account shall be maintained at all times; in this connection,
a Makati account shall be opened prior to availment on lines;

4. Lines shall expire on November 30, 1981; and

5. The bank reserves the right to amend any of the aforementioned terms and conditions upon written notice to the
Borrower. (Emphasis supplied.)

To secure the payment of the amounts drawn by appellant SIMC from the above-mentioned credit line, SIMC
executed a Chattel Mortgage dated 23 December 1980 (Exhibit A) over some of its machinery and equipment in favor
of [Petitioner] SBTC. As additional security for the payment of the loan, [Respondent] Rodolfo M. Cuenca executed
an Indemnity Agreement dated 17 December 1980 (Exhibit B) in favor of [Petitioner] SBTC whereby he solidarily
bound himself with SIMC as follows:

xxxxxxxxx

Rodolfo M. Cuenca x x x hereby binds himself x x x jointly and severally with the client (SIMC) in favor of the bank for
the payment, upon demand and without the benefit of excussion of whatever amount x x x the client may be
indebted to the bank x x x by virtue of aforesaid credit accommodation(s) including the substitutions, renewals,
extensions, increases, amendments, conversions and revivals of the aforesaid credit accommodation(s) x x x .
(Emphasis supplied).

On 26 November 1981, four (4) days prior to the expiration of the period of effectivity of the P8M-Credit Loan Facility,
appellant SIMC made a first drawdown from its credit line with [Petitioner] SBTC in the amount of [s]ix [m]illion
[o]ne [h]undred [t]housand [p]esos (P6,100,000.00). To cover said drawdown, SIMC duly executed promissory Note
No. TD/TLS-3599-81 for said amount (Exhibit C).

Sometime in 1985, [Respondent] Cuenca resigned as President and Chairman of the Board of Directors of defendant-
appellant Sta. Ines. Subsequently, the shareholdings of [Respondent] Cuenca in defendant-appellant Sta. Ines were
sold at a public auction relative to Civil Case No. 18021 entitled Adolfo A. Angala vs. Universal Holdings, Inc. and
Rodolfo M. Cuenca. Said shares were bought by Adolfo Angala who was the highest bidder during the public auction.

Subsequently, appellant SIMC repeatedly availed of its credit line and obtained six (6) other loan[s] from [Petitioner]
SBTC in the aggregate amount of [s]ix [m]illion [t]hree [h]undred [s]ixty-[n]ine [t]housand [n]ineteen and 50/100
[p]esos (P6,369,019.50). Accordingly, SIMC executed Promissory Notes Nos. DLS/74/760/85, DLS/74773/85,

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DLS/74/78/85, DLS/74/760/85 DLS/74/12/86, and DLS/74/47/86 to cover the amounts of the abovementioned
additional loans against the credit line.

Appellant SIMC, however, encountered difficulty[6] in making the amortization payments on its loans and requested
[Petitioner] SBTC for a complete restructuring of its indebtedness. SBTC accommodated appellant SIMCs request
and signified its approval in a letter dated 18 February 1988 (Exhibit G) wherein SBTC and defendant-appellant Sta.
Ines, without notice to or the prior consent of [Respondent] Cuenca, agreed to restructure the past due obligations
of defendant-appellant Sta. Ines. [Petitioner] Security Bank agreed to extend to defendant-appellant Sta. Ines the
following loans:

a. Term loan in the amount of [e]ight [m]illion [e]ight [h]undred [t]housand [p]esos (P8,800,000.00), to be applied
to liquidate the principal portion of defendant-appellant Sta. Ines[] total outstanding indebtedness to [Petitioner]
Security Bank (cf. P. 1 of Exhibit G, Expediente, at Vol. II, p. 336; Exhibit 5-B-Cuenca, Expediente, et Vol I, pp. 33 to 34)
and

b. Term loan in the amount of [t]hree [m]illion [f]our [h]undred [t]housand [p]esos (P3,400,000.00), to be applied to
liquidate the past due interest and penalty portion of the indebtedness of defendant-appellant Sta. Ines to
[Petitioner] Security Bank (cf. Exhibit G, Expediente, at Vol. II, p. 336; Exhibit 5-B-Cuenca, Expediente, at Vol. II, p. 33
to 34).

It should be pointed out that in restructuring defendant-appellant Sta. Ines obligations to [Petitioner] Security Bank,
Promissory Note No. TD-TLS-3599-81 in the amount of [s]ix [m]illion [o]ne [h]undred [t]housand [p]esos
(P6,100,000.00), which was the only loan incurred prior to the expiration of the P8M-Credit Loan Facility on 30
November 1981 and the only one covered by the Indemnity Agreement dated 19 December 1980 (Exhibit 3-Cuenca,
Expediente, at Vol. II, p. 331), was not segregated from, but was instead lumped together with, the other loans, i.e.,
Promissory Notes Nos. DLS/74/12/86, DLS/74/28/86 and DLS/74/47/86 (Exhibits D, E, and F, Expediente, at Vol. II, pp.
333 to 335) obtained by defendant-appellant Sta. Ines which were not secured by said Indemnity Agreement.

Pursuant to the agreement to restructure its past due obligations to [Petitioner] Security Bank, defendant-appellant
Sta. Ines thus executed the following promissory notes, both dated 09 March 1988 in favor of [Petitioner] Security
Bank:

PROMISSORY NOTE NO. AMOUNT

RL/74/596/88 P8,800,000.00

RL/74/597/88 P3,400,000.00

-------------------

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TOTAL P12,200,000.00

(Exhibits H and I, Expediente, at Vol. II, pp. 338 to 343).

To formalize their agreement to restructure the loan obligations of defendant-appellant Sta. Ines, [Petitioner]
Security Bank and defendant-appellant Sta. Ines executed a Loan Agreement dated 31 October 1989 (Exhibit 5-
Cuenca, Expediente, at Vol. I, pp. 33 to 41). Section 1.01 of the said Loan Agreement dated 31 October 1989 provides:

1.01 Amount - The Lender agrees to grant loan to the Borrower in the aggregate amount of TWELVE MILLION TWO
HUNDRED THOUSAND PESOS (P12,200,000.00), Philippines [c]urrency (the Loan). The loan shall be released in two
(2) tranches of P8,800,000.00 for the first tranche (the First Loan) and P3,400,000.00 for the second tranche (the
Second Loan) to be applied in the manner and for the purpose stipulated hereinbelow.

1.02. Purpose - The First Loan shall be applied to liquidate the principal portion of the Borrowers present total
outstanding indebtedness to the Lender (the indebtedness) while the Second Loan shall be applied to liquidate the
past due interest and penalty portion of the Indebtedness. (Underscoring supplied.) (cf. p. 1 of Exhibit 5-Cuenca,
Expediente, at Vol. I, p. 33)

From 08 April 1988 to 02 December 1988, defendant-appellant Sta. Ines made further payments to [Petitioner]
Security Bank in the amount of [o]ne [m]illion [s]even [h]undred [f]ifty-[s]even [t]housand [p]esos (P1,757,000.00)
(Exhibits 8, 9-P-SIMC up to 9-GG-SIMC, Expediente, at Vol. II, pp. 38, 70 to 165)

Appellant SIMC defaulted in the payment of its restructured loan obligations to [Petitioner] SBTC despite demands
made upon appellant SIMC and CUENCA, the last of which were made through separate letters dated 5 June 1991
(Exhibit K) and 27 June 1991 (Exhibit L), respectively.

Appellants individually and collectively refused to pay the [Petitioner] SBTC. Thus, SBTC filed a complaint for
collection of sum of money on 14 June 1993, resulting after trial on the merits in a decision by the court a quo, x x x
from which [Respondent] Cuenca appealed.

Ruling of the Court of Appeals

In releasing Respondent Cuenca from liability, the CA ruled that the 1989 Loan Agreement had novated the 1980
credit accommodation earlier granted by the bank to Sta. Ines. Accordingly, such novation extinguished the

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Indemnity Agreement, by which Cuenca, who was then the Board chairman and president of Sta. Ines, had bound
himself solidarily liable for the payment of the loans secured by that credit accommodation. It noted that the 1989
Loan Agreement had been executed without notice to, much less consent from, Cuenca who at the time was no
longer a stockholder of the corporation.

The appellate court also noted that the Credit Approval Memorandum had specified that the credit accommodation
was for a total amount of P8 million, and that its expiry date was November 30, 1981. Hence, it ruled that Cuenca was
liable only for loans obtained prior to November 30, 1981, and only for an amount not exceeding P8 million.

It further held that the restructuring of Sta. Ines obligation under the 1989 Loan Agreement was tantamount to a
grant of an extension of time to the debtor without the consent of the surety. Under Article 2079 of the Civil Code,
such extension extinguished the surety.

The CA also opined that the surety was entitled to notice, in case the bank and Sta. Ines decided to materially alter or
modify the principal obligation after the expiry date of the credit accommodation.

Hence, this recourse to this Court.[7]

The Issues

In its Memorandum, petitioner submits the following for our consideration:[8]

A. Whether or not the Honorable Court of Appeals erred in releasing Respondent Cuenca from liability as surety
under the Indemnity Agreement for the payment of the principal amount of twelve million two hundred thousand
pesos (P12,200,000.00) under Promissory Note No. RL/74/596/88 dated 9 March 1988 and Promissory Note No.
RL/74/597/88 dated 9 March 1988, plus stipulated interests, penalties and other charges due thereon;

i. Whether or not the Honorable Court of Appeals erred in ruling that Respondent Cuencas liability under the
Indemnity Agreement covered only availments on SIMCs credit line to the extent of eight million pesos
(P8,000,000.00) and made on or before 30 November 1981;

ii. Whether or not the Honorable Court of Appeals erred in ruling that the restructuring of SIMCs indebtedness under
the P8 million credit accommodation was tantamount to an extension granted to SIMC without Respondent Cuencas
consent, thus extinguishing his liability under the Indemnity Agreement pursuant to Article 2079 of the Civil Code;

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iii. Whether or not the Honorable Court of appeals erred in ruling that the restructuring of SIMCs indebtedness under
the P8 million credit accommodation constituted a novation of the principal obligation, thus extinguishing
Respondent Cuencas liability under the indemnity agreement;

B. Whether or not Respondent Cuencas liability under the Indemnity Agreement was extinguished by the payments
made by SIMC;

C. Whether or not petitioners Motion for Reconsideration was pro-forma;

D. Whether or not service of the Petition by registered mail sufficiently complied with Section 11, Rule 13 of the 1997
Rules of Civil Procedure.

Distilling the foregoing, the Court will resolve the following issues: (a) whether the 1989 Loan Agreement novated
the original credit accommodation and Cuencas liability under the Indemnity Agreement; and (b) whether Cuenca
waived his right to be notified of and to give consent to any substitution, renewal, extension, increase, amendment,
conversion or revival of the said credit accommodation. As preliminary matters, the procedural questions raised by
respondent will also be addressed.

The Courts Ruling

The Petition has no merit.

Preliminary Matters: Procedural Questions

Motion for Reconsideration Not Pro Forma

Respondent contends that petitioners Motion for Reconsideration of the CA Decision, in merely rehashing the
arguments already passed upon by the appellate court, was pro forma; that as such, it did not toll the period for filing
the present Petition for Review.[9] Consequently, the Petition was filed out of time.[10]

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We disagree. A motion for reconsideration is not pro forma just because it reiterated the arguments earlier passed
upon and rejected by the appellate court. The Court has explained that a movant may raise the same arguments,
precisely to convince the court that its ruling was erroneous.[11]

Moreover, there is no clear showing of intent on the part of petitioner to delay the proceedings. In Marikina Valley
Development Corporation v. Flojo,[12] the Court explained that a pro forma motion had no other purpose than to
gain time and to delay or impede the proceedings. Hence, where the circumstances of a case do not show an intent
on the part of the movant merely to delay the proceedings, our Court has refused to characterize the motion as
simply pro forma. It held:

We note finally that because the doctrine relating to pro forma motions for reconsideration impacts upon the reality
and substance of the statutory right of appeal, that doctrine should be applied reasonably, rather than literally. The
right to appeal, where it exists, is an important and valuable right. Public policy would be better served by according
the appellate court an effective opportunity to review the decision of the trial court on the merits, rather than by
aborting the right to appeal by a literal application of the procedural rules relating to pro forma motions for
reconsideration.

Service by Registered Mail Sufficiently Explained

Section 11, Rule 13 of the 1997 Rules of Court, provides as follows:

SEC. 11. Priorities in modes of service and filing. -- Whenever practicable, the service and filing of pleadings and other
papers shall be done personally. Except with respect to papers emanating from the court, a resort to other modes
must be accompanied by a written explanation why the service or filing was not done personally. A violation of this
Rule may be cause to consider the paper as not filed.

Respondent maintains that the present Petition for Review does not contain a sufficient written explanation why it
was served by registered mail.

We do not think so. The Court held in Solar Entertainment v. Ricafort[13] that the aforecited rule was mandatory, and
that only when personal service or filing is not practicable may resort to other modes be had, which must then be
accompanied by a written explanation as to why personal service or filing was not practicable to begin with.

In this case, the Petition does state that it was served on the respective counsels of Sta. Ines and Cuenca by
registered mail in lieu of personal service due to limitations in time and distance.[14] This explanation sufficiently

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shows that personal service was not practicable. In any event, we find no adequate reason to reject the contention
of petitioner and thereby deprive it of the opportunity to fully argue its cause.

First Issue: Original Obligation Extinguished by Novation

An obligation may be extinguished by novation, pursuant to Article 1292 of the Civil Code, which reads as follows:

ART. 1292. In order that an obligation may be extinguished by another which substitute the same, it is imperative that
it be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible with
each other.

Novation of a contract is never presumed. It has been held that [i]n the absence of an express agreement, novation
takes place only when the old and the new obligations are incompatible on every point.[15] Indeed, the following
requisites must be established: (1) there is a previous valid obligation; (2) the parties concerned agree to a new
contract; (3) the old contract is extinguished; and (4) there is a valid new contract.[16]

Petitioner contends that there was no absolute incompatibility between the old and the new obligations, and that
the latter did not extinguish the earlier one. It further argues that the 1989 Agreement did not change the original
loan in respect to the parties involved or the obligations incurred. It adds that the terms of the 1989 Contract were
not more onerous.[17] Since the original credit accomodation was not extinguished, it concludes that Cuenca is still
liable under the Indemnity Agreement.

We reject these contentions. Clearly, the requisites of novation are present in this case. The 1989 Loan Agreement
extinguished the obligation[18] obtained under the 1980 credit accomodation. This is evident from its explicit
provision to liquidate the principal and the interest of the earlier indebtedness, as the following shows:

1.02. Purpose. The First Loan shall be applied to liquidate the principal portion of the Borrowers present total
outstanding Indebtedness to the Lender (the Indebtedness) while the Second Loan shall be applied to liquidate the
past due interest and penalty portion of the Indebtedness.[19] (Italics supplied.)

The testimony of an officer[20] of the bank that the proceeds of the 1989 Loan Agreement were used to pay-off the
original indebtedness serves to strengthen this ruling.[21]

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Furthermore, several incompatibilities between the 1989 Agreement and the 1980 original obligation demonstrate
that the two cannot coexist. While the 1980 credit accommodation had stipulated that the amount of loan was not
to exceed P8 million,[22] the 1989 Agreement provided that the loan was P12.2 million. The periods for payment
were also different.

Likewise, the later contract contained conditions, positive covenants and negative covenants not found in the earlier
obligation. As an example of a positive covenant, Sta. Ines undertook from time to time and upon request by the
Lender, [to] perform such further acts and/or execute and deliver such additional documents and writings as may be
necessary or proper to effectively carry out the provisions and purposes of this Loan Agreement.[23] Likewise, SIMC
agreed that it would not create any mortgage or encumbrance on any asset owned or hereafter acquired, nor would
it participate in any merger or consolidation.[24]

Since the 1989 Loan Agreement had extinguished the original credit accommodation, the Indemnity Agreement, an
accessory obligation, was necessarily extinguished also, pursuant to Article 1296 of the Civil Code, which provides:

ART. 1296. When the principal obligation is extinguished in consequence of a novation, accessory obligations may
subsist only insofar as they may benefit third persons who did not give their consent.

Alleged Extension

Petitioner insists that the 1989 Loan Agreement was a mere renewal or extension of the P8 million original
accommodation; it was not a novation.[25]

This argument must be rejected. To begin with, the 1989 Loan Agreement expressly stipulated that its purpose was
to liquidate, not to renew or extend, the outstanding indebtedness. Moreover, respondent did not sign or consent to
the 1989 Loan Agreement, which had allegedly extended the original P8 million credit facility. Hence, his obligation
as a surety should be deemed extinguished, pursuant to Article 2079 of the Civil Code, which specifically states that
[a]n extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the
guaranty. x x x. In an earlier case,[26] the Court explained the rationale of this provision in this wise:

The theory behind Article 2079 is that an extension of time given to the principal debtor by the creditor without the
suretys consent would deprive the surety of his right to pay the creditor and to be immediately subrogated to the
creditors remedies against the principal debtor upon the maturity date. The surety is said to be entitled to protect
himself against the contingency of the principal debtor or the indemnitors becoming insolvent during the extended
period.

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Binding Nature of the Credit Approval Memorandum

As noted earlier, the appellate court relied on the provisions of the Credit Approval Memorandum in holding that the
credit accommodation was only for P8 million, and that it was for a period of one year ending on November 30, 1981.
Petitioner objects to the appellate courts reliance on that document, contending that it was not a binding agreement
because it was not signed by the parties. It adds that it was merely for its internal use.

We disagree. It was petitioner itself which presented the said document to prove the accommodation. Attached to
the Complaint as Annex A was a copy thereof evidencing the accommodation.[27] Moreover, in its Petition before
this Court, it alluded to the Credit Approval Memorandum in this wise:

4.1 On 10 November 1980, Sta. Ines Melale Corporation (SIMC) was granted by the Bank a credit line in the aggregate
amount of Eight Million Pesos (P8,000,000.00) to assist SIMC in meeting the additional capitalization requirements
for its logging operations. For this purpose, the Bank issued a Credit Approval Memorandum dated 10 November
1980.

Clearly, respondent is estopped from denying the terms and conditions of the P8 million credit accommodation as
contained in the very document it presented to the courts. Indeed, it cannot take advantage of that document by
agreeing to be bound only by those portions that are favorable to it, while denying those that are disadvantageous.

Second Issue: Alleged Waiver of Consent

Pursuing another course, petitioner contends that Respondent Cuenca impliedly gave his consent to any
modification of the credit accommodation or otherwise waived his right to be notified of, or to give consent to, the
same.[28] Respondents consent or waiver thereof is allegedly found in the Indemnity Agreement, in which he held
himself liable for the credit accommodation including [its] substitutions, renewals, extensions, increases,
amendments, conversions and revival. It explains that the novation of the original credit accommodation by the 1989
Loan Agreement is merely its renewal, which connotes cessation of an old contract and birth of another one x x x.
[29]

At the outset, we should emphasize that an essential alteration in the terms of the Loan Agreement without the
consent of the surety extinguishes the latters obligation. As the Court held in National Bank v. Veraguth,[30] [i]t is
fundamental in the law of suretyship that any agreement between the creditor and the principal debtor which
essentially varies the terms of the principal contract, without the consent of the surety, will release the surety from
liability.

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In this case, petitioners assertion - that respondent consented to the alterations in the credit accommodation -- finds
no support in the text of the Indemnity Agreement, which is reproduced hereunder:

Rodolfo M. Cuenca of legal age, with postal address c/o Sta. Ines Malale Forest Products Corp., Alco Bldg., 391
Buendia Avenue Ext., Makati Metro Manila for and in consideration of the credit accommodation in the total amount
of eight million pesos (P8,000,000.00) granted by the SECURITY BANK AND TRUST COMPANY, a commercial bank
duly organized and existing under and by virtue of the laws of the Philippine, 6778 Ayala Avenue, Makati, Metro
Manila hereinafter referred to as the BANK in favor of STA. INES MELALE FOREST PRODUCTS CORP., x x x ----
hereinafter referred to as the CLIENT, with the stipulated interests and charges thereon, evidenced by that/those
certain PROMISSORY NOTE[(S)], made, executed and delivered by the CLIENT in favor of the BANK hereby bind(s)
himself/themselves jointly and severally with the CLIENT in favor of the BANK for the payment , upon demand and
without benefit of excussion of whatever amount or amounts the CLIENT may be indebted to the BANK under and
by virtue of aforesaid credit accommodation(s) including the substitutions, renewals, extensions, increases,
amendment, conversions and revivals of the aforesaid credit accommodation(s), as well as of the amount or
amounts of such other obligations that the CLIENT may owe the BANK, whether direct or indirect, principal or
secondary, as appears in the accounts, books and records of the BANK, plus interest and expenses arising from any
agreement or agreements that may have heretofore been made, or may hereafter be executed by and between the
parties thereto, including the substitutions, renewals, extensions, increases, amendments, conversions and revivals
of the aforesaid credit accommodation(s), and further bind(s) himself/themselves with the CLIENT in favor of the
BANK for the faithful compliance of all the terms and conditions contained in the aforesaid credit accommodation(s),
all of which are incorporated herein and made part hereof by reference.

While respondent held himself liable for the credit accommodation or any modification thereof, such clause should
be understood in the context of the P8 million limit and the November 30, 1981 term. It did not give the bank or Sta.
Ines any license to modify the nature and scope of the original credit accommodation, without informing or getting
the consent of respondent who was solidarily liable. Taking the banks submission to the extreme, respondent (or his
successors) would be liable for loans even amounting to, say, P100 billion obtained 100 years after the expiration of
the credit accommodation, on the ground that he consented to all alterations and extensions thereof.

Indeed, it has been held that a contract of surety cannot extend to more than what is stipulated. It is strictly
construed against the creditor, every doubt being resolved against enlarging the liability of the surety.[31] Likewise,
the Court has ruled that it is a well-settled legal principle that if there is any doubt on the terms and conditions of the
surety agreement, the doubt should be resolved in favor of the surety x x x. Ambiguous contracts are construed
against the party who caused the ambiguity.[32] In the absence of an unequivocal provision that respondent waived
his right to be notified of or to give consent to any alteration of the credit accommodation, we cannot sustain
petitioners view that there was such a waiver.

It should also be observed that the Credit Approval Memorandum clearly shows that the bank did not have absolute
authority to unilaterally change the terms of the loan accommodation. Indeed, it may do so only upon notice to the
borrower, pursuant to this condition:

5. The Bank reserves the right to amend any of the aforementioned terms and conditions upon written notice to the
Borrower.[33]

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We reject petitioners submission that only Sta. Ines as the borrower, not respondent, was entitled to be notified of
any modification in the original loan accommodation.[34] Following the banks reasoning, such modification would
not be valid as to Sta. Ines if no notice were given; but would still be valid as to respondent to whom no notice need
be given. The latters liability would thus be more burdensome than that of the former. Such untenable theory is
contrary to the principle that a surety cannot assume an obligation more onerous than that of the principal.[35]

The present controversy must be distinguished from Philamgen v. Mutuc,[36] in which the Court sustained a
stipulation whereby the surety consented to be bound not only for the specified period, but to any extension
thereafter made, an extension x x x that could be had without his having to be notified.

In that case, the surety agreement contained this unequivocal stipulation: It is hereby further agreed that in case of
any extension of renewal of the bond, we equally bind ourselves to the Company under the same terms and
conditions as herein provided without the necessity of executing another indemnity agreement for the purpose and
that we hereby equally waive our right to be notified of any renewal or extension of the bond which may be granted
under this indemnity agreement.

In the present case, there is no such express stipulation. At most, the alleged basis of respondents waiver is vague
and uncertain. It confers no clear authorization on the bank or Sta. Ines to modify or extend the original obligation
without the consent of the surety or notice thereto.

Continuing Surety

Contending that the Indemnity Agreement was in the nature of a continuing surety, petitioner maintains that there
was no need for respondent to execute another surety contract to secure the 1989 Loan Agreement.

This argument is incorrect. That the Indemnity Agreement is a continuing surety does not authorize the bank to
extend the scope of the principal obligation inordinately.[37] In Dino v. CA,[38] the Court held that a continuing
guaranty is one which covers all transactions, including those arising in the future, which are within the description or
contemplation of the contract of guaranty, until the expiration or termination thereof.

To repeat, in the present case, the Indemnity Agreement was subject to the two limitations of the credit
accommodation: (1) that the obligation should not exceed P8 million, and (2) that the accommodation should expire
not later than November 30, 1981. Hence, it was a continuing surety only in regard to loans obtained on or before the
aforementioned expiry date and not exceeding the total of P8 million.

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Accordingly, the surety of Cuenca secured only the first loan of P6.1 million obtained on November 26, 1991. It did not
secure the subsequent loans, purportedly under the 1980 credit accommodation, that were obtained in 1986.
Certainly, he could not have guaranteed the 1989 Loan Agreement, which was executed after November 30, 1981 and
which exceeded the stipulated P8 million ceiling.

Petitioner, however, cites the Dino ruling in which the Court found the surety liable for the loan obtained after the
payment of the original one, which was covered by a continuing surety agreement. At the risk of being repetitious,
we hold that in Dino, the surety Agreement specifically provided that each suretyship is a continuing one which shall
remain in full force and effect until this bank is notified of its revocation. Since the bank had not been notified of such
revocation, the surety was held liable even for the subsequent obligations of the principal borrower.

No similar provision is found in the present case. On the contrary, respondents liability was confined to the 1980
credit accommodation, the amount and the expiry date of which were set down in the Credit Approval
Memorandum.

Special Nature of the JSS

It is a common banking practice to require the JSS (joint and solidary signature) of a major stockholder or corporate
officer, as an additional security for loans granted to corporations. There are at least two reasons for this. First, in
case of default, the creditors recourse, which is normally limited to the corporate properties under the veil of
separate corporate personality, would extend to the personal assets of the surety. Second, such surety would be
compelled to ensure that the loan would be used for the purpose agreed upon, and that it would be paid by the
corporation.

Following this practice, it was therefore logical and reasonable for the bank to have required the JSS of respondent,
who was the chairman and president of Sta. Ines in 1980 when the credit accommodation was granted. There was no
reason or logic, however, for the bank or Sta. Ines to assume that he would still agree to act as surety in the 1989
Loan Agreement, because at that time, he was no longer an officer or a stockholder of the debtor-corporation. Verily,
he was not in a position then to ensure the payment of the obligation. Neither did he have any reason to bind himself
further to a bigger and more onerous obligation.

Indeed, the stipulation in the 1989 Loan Agreement providing for the surety of respondent, without even informing
him, smacks of negligence on the part of the bank and bad faith on that of the principal debtor. Since that Loan
Agreement constituted a new indebtedness, the old loan having been already liquidated, the spirit of fair play should
have impelled Sta. Ines to ask somebody else to act as a surety for the new loan.

In the same vein, a little prudence should have impelled the bank to insist on the JSS of one who was in a position to
ensure the payment of the loan. Even a perfunctory attempt at credit investigation would have revealed that

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respondent was no longer connected with the corporation at the time. As it is, the bank is now relying on an unclear
Indemnity Agreement in order to collect an obligation that could have been secured by a fairly obtained surety. For
its defeat in this litigation, the bank has only itself to blame.

In sum, we hold that the 1989 Loan Agreement extinguished by novation the obligation under the 1980 P8 million
credit accommodation. Hence, the Indemnity Agreement, which had been an accessory to the 1980 credit
accommodation, was also extinguished. Furthermore, we reject petitioners submission that respondent waived his
right to be notified of, or to give consent to, any modification or extension of the 1980 credit accommodation.

In this light, we find no more need to resolve the issue of whether the loan obtained before the expiry date of the
credit accommodation has been paid.

WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against petitioner.

SO ORDERED.

G.R. No. 112590.* July 12, 2001]

STATE INVESTMENT HOUSE, INC., petitioner, vs. COURT OF APPEALS, LOMUYON TIMBER INDUSTRIES, INC.,
AMANDA MALONJAO and RUFINO MALONJAO, respondents.

DECISION

KAPUNAN, J.:

This is a petition for review of the decision of the Court of Appeals affirming in toto the decision of the Regional Trial
Court, National Capital Region, Branch 38 in Civil Case No. 83-18464 for a sum of money.

The undisputed facts, as quoted from the respondent courts decision are as follows:

On March 9, 1978, Lomuyon Timber Industries, Inc. (hereafter, Lomuyon) agreed to sell to plaintiff its receivables at a
discount on a with recourse basis (Exh. A). It was agreed in that sale that should a receivable remain unpaid, plaintiff,
at its discretion, may impose a penalty fee of 3% per month. To secure the payment of the receivables, the Malonjaos

214
also executed in favor of plaintiff, a real estate mortgage over their real property covered by Transfer Certificates of
Title Nos. (445856) S-65586 and No. (162775) S-65585 (Exh. B).

Pursuant to their agreement, on March 9, 10 and 15, 1978 and July 19, 1978, Lomuyon sold to plaintiff for a total
consideration of P2,558,073.75 (Exhs. C, D, E and F), various receivables consisting of checks as follows:

TCBTC 618821 June 9, 1978 P371,319.58

TCBTC 618820 September 9, 1978 P371,319.58

TCBTC 618819 December 9, 1978 P371,319.58

TCBTC 618818 March 9, 1978 P371,319.58

TCBTC 618817 June 9, 1979 P371,319.58

TCBTC 618816 September 9, 1979 P371,319.58

TCBTC 618814 December 9, 1979 P371,319.58

TCBTC 618828 March 9, 1980 P371,319.58

MBTC 06659490 September 30, 1978 60,000.00

(Exhs. C-1, D-1, E-1, F-1 and G to G-7).

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TCBTC (The Consolidated Bank and Trust Corporation) checks were all drawn by Amanda Malonjao to the order of
payee Lomuyon which in turn, indorsed the checks to plaintiff. The MBTC (Metropolitan Bank and Trust Company)
check was drawn by one Antonietta Malonjao-Roque to the order of payee Amanda Malonjao who in turn, indorsed
said check to plaintiff.

When plaintiff presented the checks for payment to the drawee banks, the same were dishonored for having been
drawn against insufficient funds (Exhs. H to H-7) except for TCBTC 618821.

Plaintiff made repeated written demands on defendants to make good the checks they indorsed and to pay the
penalty charges it has imposed thereon, (Exhs. I, J, K, L, L-1, M and N).

Defendants failed to pay the value of the checks. Plaintiff thus decided to undertake foreclosure of the real estate
mortgage.

On October 6, 1982, plaintiff filed with the Provincial Sheriff of Rizal a petition for extrajudicial foreclosure of real
estate mortgage dated September 28, 1981. In said petition, plaintiff alleged among others, that as of said date,
September 28, 1981, defendants outstanding obligation, inclusive of interest and charges, is P4,809,187.12 (Exh. O).

On February 14, 1983, the Provincial Sheriff sold at public auction, defendants mortgaged properties to plaintiff who
was the highest bidder for P4,233,874.00. The following day, the Provincial Sheriff issued a Certificate of Sale (Exh.
P).

On June 27, 1983, plaintiff filed the complaint alleging that after deducting the price of the mortgaged properties
from defendants outstanding obligation, there remains a deficiency of P2,601,147.62 as of February 14, 1983, which as
of May 31, 1983 amounted to P2,876,929.27 inclusive of interest and charges. As an alternative cause of action,
plaintiff alleged that it is entitled to recover from the defendant the total value of the checks amounting to
P2,239,237.10. Plaintiff further prayed that it be awarded exemplary damages, attorneys fees and litigation expenses
(Records, pp. 1-38).

In their answer, defendants admitted having incurred the obligation with the plaintiff brought about by the dishonor
of the checks. However, defendants contended that plaintiffs computation of their outstanding obligation is
erroneous. Thus, by way of special affirmative defenses, defendants alleged that:

12. x x x.

216
13. The complaint states no cause of action;

14. The value of the mortgaged properties sold at public auction is more than sufficient to cover the obligation of the
defendants;

15. The alleged purchase price of the mortgaged properties sold at public auction is unconscionably very very low;

16. Assuming for the sake of argument, that the outstanding obligation of the defendants as of September 26, 1981
(sic) was P4,809,187.12 per statement of account as alleged in the complaint and the alleged purchase price at public
auction was P4,233,874.00, the deficiency would only be P575,313.12 and not P2,601,147.62 as erroneously alleged in
the complaint.

17. No demand was ever made upon the defendant;

18. The interest and charges made by plaintiff is usurious and unconscionable (id., pp. 91-92).[1]

On January 11, 1981, the trial court rendered its decision with the following dispositive portion:

WHEREFORE, in view of all the foregoing, judgment is hereby rendered:

1. Declaring that the plaintiff is not entitled to any deficiency amount from the defendants;

2. Dismissing defendants counterclaim; and

3. Ordering the plaintiff and defendants to pay the costs of suit.

SO ORDERED.[2]

217
On appeal, petitioner assigned the following errors committed by the trial court:

I. THE LOWER COURT ERRED IN NOT FINDING THAT DEFENDANTS-APPELLEES OBLIGATION TO SIHI AS OF THE TIME
OF FORECLOSURE AUCTION SALE AMOUNTED TO P6,835,021.62 THUS, AFTER DEDUCTING THE AUCTION PRICE OF
THE MORTGAGED PROPERTIES IN THE AMOUNT OF P4,233,874.00, THE BALANCE WOULD BE P2,601,141.62.

II. THE LOWER COURT ERRED IN FINDING THAT SIHI HAD ALREADY FULLY RECOVERED ITS RECEIVABLES FROM THE
DEFENDANTS.

III. THE LOWER COURT ERRED IN FINDING THAT SIHI IS NOT ENTITLED TO ANY DEFICIENCY AMOUNT FROM THE
DEFENDANTS.[3]

On August 27, 1992, the respondent court rendered the assailed decision disallowing the claim for deficiency on the
finding that the penalty charges imposed by petitioner on the principal obligation were highly iniquitous and
unconscionable. The subsequent motion for reconsideration was, likewise, denied. Hence, petitioner filed the instant
petition raising the sole issue that:

THE COURT OF APPEALS GROSSLY MISAPPRECIATED THE FACTS AND APPLICABLE LAW BY NOT DECLARING THAT
SIHI IS STILL ENTITLED TO THE DEFICIENCY AFTER THE FORECLOSURE AUCTION SALE.[4]

In disallowing the claim for deficiency, the respondent court found that the proceeds of the auction sale was
sufficient to cover the principal obligation of the private respondent including interest, penalty and other charges.
Both the respondent court and the trial court took particular attention on the penalty charge of 3% a month which
was imposed on the principal obligation as a result of their default in payments. Undaunted by the disallowance of its
claim in the August 27, 1992 decision, petitioner reiterated its position in a motion for reconsideration, averring that
the respondent court and the trial court failed to reconcile the figures due it.

Petitioner asserts that as of September 26, 1981, private respondents obligation amounted to P4,809,187.12. At that
time of the foreclosure sale on February 14, 1983, the obligation to SIHI was computed to be P6,833,021.62 inclusive
of interest and penalty charges. Considering that the bid price of the foreclosed properties was only P4,233,874.00,
petitioner was still entitled to a deficiency of about P2,601,147.62. Petitioner further added that until the original
obligation is fully paid, private respondents outstanding obligation continue to earn interest and penalty charges
from day to day. Thus, from the time of the foreclosure sale on February 14, 1983 (P2,601,147.62) up to the filing of
the complaint for the deficiency claim on May 31, 1983 (P2,876,929.27), and up to the trial on June 3, 1988 in the RTC,
private respondents outstanding obligation to SIHI rose to P7,651,969.41.

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There is no dispute that the payment of penalty is sanctioned by the law, although the penalty may be reduced by
the courts if it is iniquitous or unconscionable.[5] Petitioner argues that while it recognizes the authority of the court
to reduce the penalty if it is iniquitous or unconscionable, the court, however, does not have the authority to delete
the payment of the penalty charges altogether for this is in clear contravention of Article 1229 and the law of
contracts between the parties.

This contention is not well-taken.

The Court does not find any reversible error committed by the respondent court in ruling that the petitioner was no
longer entitled to recover any deficiency amount after the foreclosure sale on February 14, 1983. Per Statement of
Account dated September 21, 1981, the obligation of the private respondent was computed to be P4,809,187.12
inclusive of interest and penalty charges. Since the private respondent failed to fulfill its obligation, petitioner then
decided to foreclose the real estate mortgage on two properties of the private respondent. At the time of the
auction sale on February 14, 1983, the properties were sold in the amount of P4,223,874.00 with the petitioner as the
highest bidder. Deducting this amount from the outstanding obligation of P4,809,187.12 as stipulated in the
Statement of Account, there would therefore be a balance of only about P575,313.12.

Whether or not the alleged deficiency from the foreclosure sale was P575,313.12 or P2,601,147.62 as claimed by
petitioner was of no moment. The respondent court disallowed the payment of the deficiency altogether because it
found that the principal obligation of the private respondent would not have ballooned to such a horrendous
amount of P4.8M as of September 21, 1991 if not for the penalty charge of 3% per month or 36% per annum. The trial
court justified, to wit:

x x x [F]rom the various checks the defendants had sold originally to the plaintiff at the beginning of their
transactions, it is shown that the amount including interests and other charges, is P2,970,556.64. For a two year
period from June 9, 1978 to March 9, 1980 and up to September 26, 1981 the amount grew to P4,809.187.12. In other
words, the money of the plaintiff has already earned interests and other charges to more or less P1,638,630.48. As
alleged in plaintiffs complaint, the total amount purchased by plaintiff was only for P2,500,000.00. There is reason to
believe that the P2,970,566.64 represented by the various checks include therein, the interest and other charges
upon their maturity dates. Deducting the amount of P2,500,000.00 from P2,970,556.64 is P420,556.64. In brief, the
interests and charges that plaintiff has already earned from the time it has foreclosed defendants' properties has
passed the P2,000,000.00.[6]

Contrary to petitioners contention, the respondent court acted in accordance to Article 1229 when it declared that
petitioner was no longer entitled to the payment of the deficiency amount. The disallowance of the payment of
deficiency was in effect merely a reduction of the penalty charges and not as a deletion of the penalties as contended
by the petitioner.

In the case of Rizal Commercial Banking Corporation vs. Court of Appeals,[7] we held that:

219
xxx

On the issue of payment of surcharges and penalties, we partly agree that GOYUs pitiful situation must be taken into
account. We do not agree, however, that payment of any amount as surcharges and penalties should altogether be
deleted. x x x

Surcharges and penalties agreed to be paid by the debtor in case of default partake of the nature of liquidated
damages, covered by Section 4, Chapter 3, Title XVIII of the Civil Code. Article 2227 thereof provides:

ART. 2227. Liquidated damages, whether intended as an indemnity or penalty, shall be equitably reduced if they are
iniquitous and unconscionable.

In exercising this vested power to determine what is iniquitous and unconscionable, the Court must consider the
circumstances of each case. It should be stressed that the Court will not make any sweeping ruling that surcharges
and penalties imposed by banks for non-payment of the loans extended by them are generally iniquitous and
unconscionable. What may be iniquitous and unconscionable in one case, may be totally just and equitable in
another. This provision of law will have to be applied to the established facts of any given case. Given the
circumstances under which GOYU found itself after the occurrence of the fire, the Court rules the surcharges rates
ranging anywhere from 9% to 27%, plus the penalty charges of 36%, to be definitely iniquitous and unconscionable. x x
x

Likewise, in the case at bar, the two courts below found the penalty charge of 3% a month or 36% per annum
iniquitous and unconscionable. Petitioner computed the amount of P4,809,187.12 as the outstanding obligation of
the petitioner as of September 21, 1981 after imposing the 3% penalty charge when petitioner defaulted in their
payments. This amount was no longer questioned and was particularly taken into consideration when the mortgaged
properties were foreclosed and sold at the auction sale in 1983, obtaining a sum of about P4,223,874.00. These
foreclosed properties located in Makati[8] are undoubtedly valuable properties whose market value has greatly
appreciated to substantially satisfy the payment of the outstanding obligation. Notwithstanding the balance of
P575,313.12, petitioner has clearly recouped its investment and earned more than enough profit in two years (1978-
1981) by way of penalty charges. Although petitioner claims that the penalty charge was well within the banking and
business practice, no proof was adduced thereof. To allow the petitioner to recover the amount of P6,835,021.21 at
the time of the foreclosure sale in 1983, or P7,651,969.41 at the time of the trial of the case in 1988 which amounts
are almost three times more than the original investment of about P2,558,073.75 is rather unwarranted. We quote
with favor the respondent courts ratiocination:

The lower court did not err in its ruling under its statement that since plaintiff had already recovered fully the
receivables from the defendants, the court, considering that the plaintiff for the two properties foreclosed by it
bidded the amount of P4,233,874.00, far and above the amount it had originally given to the defendants which was
only over P2,000,000.00, it is rather most shocking and unconscionable for plaintiff to still collect from the
defendants the alleged collectibles of P2,601,147.62 with 3% penalty charges. The plaintiff should have stopped
imposing the 3% penalty charges and other burdens when it had consolidated finally the two titles of the properties it

220
had foreclosed (Decision, p. 8). After due consideration and reflection on all the factual circumstances obtaining in
the case at bar, it is Our opinion that the lower court properly exercised its discretion under Article 1229 of the Civil
Code to reduce the penalty charges for being highly and grossly unconscionable. x x x[9]

While the Court recognizes the right of the parties to enter into contracts and are expected ro comply with the terms
and obligations, this rule is not absolute. The Court allowed to temper interest rates when necessary. Article 1229 of
the New Civil Code clearly provides:

ART. 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly
complied with by the debtor. Even if there has been no performance, the penalty may also be reduced by the courts
if it is iniquitous or unconscionable.

Likewise, Article 2227 provides:

ART. 2227. Liquidated damages, whether intended as an indemnity or penalty, shall be equitably reduced if they are
iniquitous and unconscionable.

ACCORDINGLY, the judgment appealed from is hereby AFFIRMED.

SO ORDERED.

Davide, Jr., C.J., (Chairman), Puno, Pardo, and Ynares-Santiago, JJ., concur.

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G.R. No. 107569 November 8, 1994

PHILIPPINE NATIONAL BANK, petitioner,

vs.

COURT OF APPEALS, REMEDIOS JAYME-FERNANDEZ and AMADO FERNANDEZ, respondents.

Vidad, Corpus & Associates for petitioner.

Remedios Jayme-Fernandez for privaate respondents.

PUNO, J.:

Petitioner bank seeks the review of the decision, dated October 15, 1992, of the Court of Appeals 1 in CA G.R. CV No.
27195, the dispositive portion of which reads as follows:

WHEREFORE, the judgment appealed from is hereby SET ASIDE and a new one is entered ordering defendant-
appellee PNB to re-apply the interest rate of 12% per annum to plaintiffs-appellants' (referring to herein private
respondents) indebtedness and to accordingly take the appropriate charges from plaintiffs-appellants' (private
respondents') payment of P81,000.00 made on December 26, 1985. Any balance on the indebtedness should,
likewise, be charged interest at the rate of 12% per annum.

SO ORDERED.

The parties do not dispute the facts as laid down by respondent court in its impugned decision, viz.:

On April 7, 1982, (private respondents) as owners of a NACIDA-registered enterprise, obtained a loan under the
Cottage Industry Guaranty Loan Fund (CIGLF) from the Philippine National Bank (PNB) in the amount of Fifty

222
Thousand (P50,000.00) Pesos, as evidenced by a Credit Agreement. Under the Promissory Note covering the loan,
the loan was to be amortized over a period of three (3) years to end on March 29, 1985, at twelve (12%) percent
interest annually.

To secure the loan, (private respondents) executed a Real Estate Mortgage over a 1.5542-hectare parcel of
unregistered agricultural land located at Cambang-ug, Toledo City, which was appraised by the PNB at P1,062.52 and
given a loan value of P531.26 by the Bank. In addition, (private respondents) executed a Chattel Mortgage over a
thermo plastic-forming machine, which had an appraisal value of P8,800 and a loan value of P4,400.00.

The Credit Agreement provided inter alia, that —

(a) The BANK reserves the right to increase the interest rate within the limits allowed by law at any time
depending on whatever policy it may adopt in the future; Provided, that the interest rate on this accommodation
shall be correspondingly decreased in the event that the applicable maximum interest is reduced by law or by the
Monetary Board. In either case, the adjustment in the interest rate agreed upon shall take effect on the effectivity
date of the increase or decrease in the maximum interest rate.

The Promissory Note, in turn, authorized the PNB to raise the rate of interest, at any time without notice, beyond the
stipulated rate of 12% but only "within the limits allowed by law."

The Real Estate Mortgage contract likewise provided that —

(k) INCREASE OF INTEREST RATE: The rate of interest charged on the obligation secured by this mortgage as
well as the interest on the amount which may have been advanced by the MORTGAGE, in accordance with the
provision hereof, shall be subject during the life of this contract to such an increase within the rate allowed by law, as
the Board of Directors of the MORTGAGEE may prescribe for its debtors.

On February 17, 1983, (private respondents) were granted an additional NACIDA loan of Fifty Thousand (P50,000.00)
Pesos by the PNB, for which (private respondents) executed another Promissory Note, which was to mature on April
1, 1985. Other than the date of maturity, the second promissory note contained the same terms and stipulations as
the previous note. The parties likewise executed a new Credit Agreement, changing the amount of the loan from
P50,000.00 to P100,000.00, but otherwise preserving the stipulations contained in the original agreement.

As additional security for the loan, (private respondents) constituted another real estate mortgage over 2 parcels of
registered land, with a combined area of 311 square meters, located at Guadalupe, Cebu City. The land, upon which

223
several buildings are standing, was appraised by the PNB to have a value of P40,000.00 and a loan value of
P28,000.00.

In a letter dated August 1, 1984, the PNB informed (private respondents) "that the interest rate of your CIGLF loan
account with us is now 25% per annum plus a penalty of 6% per annum on past dues." The PNB further increased this
interest rate to 30% on October 15, 1984; and to 42% on October 25, 1984.

The records show that as of December 1985, (private respondents) had an outstanding principal account of
P81,000.00 of which P18,523.14 was credited to the principal, P57,488.89 to the interest, and the rest to penalty and
other charges. Thus, as of said date, the unpaid principal obligation of (private respondent) amounted to P62,830.32.

Thereafter, (private respondents) exerted efforts to get the PNB to re-adopt the 12% interest and to condone the
present interest and penalties due; but to no avail. 2 (Citations omitted.)

On December 15, 1987, private respondents filed a suit for specific performance against petitioner PNB and the
NACIDA. It was docketed as Civil Case No. CEB-5610, and raffled to the Regional Trial Court, 7th Judicial Region, Cebu
City, Br. 7. 3 Private respondents prayed the trial court to order:

1. The PNB and NACIDA to issue in (private respondents') favor, a release of mortgage;

2. The PNB to pay pecuniary consequential damages for the destruction of (private respondents') enterprise;

3. The PNB to pay moral and exemplary damages as well as the costs of suit; and

4. Granting (private respondents') such other relief as may be found just and equitable in the premises. 4

On February 26, 1990, the trial court dismissed private respondents' complaint in Civil Case No. CEB-5610. On October
15, 1992, the Court of Appeals reversed the dismissal with respect to petitioner bank, and disallowed the increases in
interest rates.

224
Petitioner bank now contends that "respondent Court of Appeals committed grave error when it ruled (1) that the
increase in interest rates are unauthorized; (2) that the Credit Agreement and the Promissory Notes are not the law
between the parties; (3) that CB Circular No. 773 and CB Circular

No. 905 are not applicable; and (4) that private respondents are not estopped from questioning the increase of rate
interest made by petitioner." 5

The petition is bereft of merit.

In making the unilateral increases in interest rates, petitioner bank relied on the escalation clause contained in their
credit agreement which provides, as follows:

The Bank reserves the right to increase the interest rate within the limits allowed by law at any time depending on
whatever policy it may adopt in the future and provided, that, the interest rate on this accommodation shall be
correspondingly decreased in the event that the applicable maximum interest rate is reduced by law or by the
Monetary Board. In either case, the adjustment in the interest rate agreed upon shall take effect on the effectivity
date of the increase or decrease in maximum interest rate.

This clause is authorized by Section 2 of Presidential Decree (P.D.)

No. 1684 which further amended Act No. 2655 ("The Usury Law"), as amended, thus:

Section 2. The same Act is hereby amended by adding a new section after Section 7, to read as follows:

Sec. 7-a. Parties to an agreement pertaining to a loan or forbearance of money, goods or credits may stipulate that
the rate of interest agreed upon may be increased in the event that the applicable maximum rate of interest is
increased by law or by the Monetary Board; Provided, That such stipulation shall be valid only if there is also a
stipulation in the agreement that the rate of interest agreed upon shall be reduced in the event that the applicable
maximum rate of interest is reduced by law or by the Monetary Board; Provided further, That the adjustment in the
rate of interest agreed upon shall take effect on or after the effectivity of the increase or decrease in the maximum
rate of interest.

Section 1 of P.D. No. 1684 also empowered the Central Bank's Monetary Board to prescribe the maximum rates of
interest for loans and certain forbearances. Pursuant to such authority, the Monetary Board issued Central Bank
(C.B.) Circular No. 905, series of 1982, Section 5 of which provides:

225
Sec. 5. Section 1303 of the Manual of Regulations (for Banks and Other Financial Intermediaries) is hereby
amended to read as follows:

Sec. 1303. Interest and Other Charges. — The rate of interest, including commissions, premiums, fees and
other charges, on any loan, or forbearance of any money, goods or credits, regardless of maturity and whether
secured or unsecured, shall not be subject to any ceiling prescribed under or pursuant to the Usury Law, as amended.

P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to stipulate freely regarding any
subsequent adjustment in the interest rate that shall accrue on a loan or forbearance of money, goods or credits. In
fine, they can agree to adjust, upward or downward, the interest previously stipulated. However, contrary to the
stubborn insistence of petitioner bank, the said law and circular did not authorize either party to unilaterally raise the
interest rate without the other's consent.

It is basic that there can be no contract in the true sense in the absence of the element of agreement, or of mutual
assent of the parties. If this assent is wanting on the part of the one who contracts, his act has no more efficacy than
if it had been done under duress or by a person of unsound mind. 6

Similarly, contract changes must be made with the consent of the contracting parties. The minds of all the parties
must meet as to the proposed modification, especially when it affects an important aspect of the agreement. In the
case of loan contracts, it cannot be gainsaid that the rate of interest is always a vital component, for it can make or
break a capital venture. Thus, any change must be mutually agreed upon, otherwise, it is bereft of any binding effect.

We cannot countenance petitioner bank's posturing that the escalation clause at bench gives it unbridled right to
unilaterally upwardly adjust the interest on private respondents' loan. That would completely take away from private
respondents the right to assent to an important modification in their agreement, and would negate the element of
mutuality in contracts. In Philippine National Bank v. Court of Appeals, et al., 196 SCRA 536, 544-545 (1991) we held —

. . . The unilateral action of the PNB in increasing the interest rate on the private respondent's loan violated the
mutuality of contracts ordained in Article 1308 of the Civil Code:

Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will
of one of them.

In order that obligations arising from contracts may have the force or law between the parties, there must be
mutuality between the parties based on their essential equality. A contract containing a condition which makes its

226
fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties, is void . . . . Hence,
even assuming that

the . . . loan agreement between the PNB and the private respondent gave the PNB a license (although in fact there
was none) to increase the interest rate at will during the term of the loan, that license would have been null and void
for being violative of the principle of mutuality essential in contracts. It would have invested the loan agreement
with the character of a contract of adhesion, where the parties do not bargain on equal footing, the weaker party's
(the debtor) participation being reduced to the alternative "to take it or leave it" . . . . Such a contract is a veritable
trap for the weaker party whom the courts of justice must protect against abuse and imposition. (Citation omitted.)

Private respondents are not also estopped from assailing the unilateral increases in interest rate made by petitioner
bank. No one receiving a proposal to change a contract to which he is a party, is obliged to answer the proposal, and
his silence per se cannot be construed as an acceptance. 7 In the case at bench, the circumstances do not show that
private respondents implicitly agreed to the proposed increases in interest rate which by any standard were too
sudden and too stiff.

IN VIEW THEREOF, the instant petition is DENIED for lack of merit, and the decision of the Court of Appeals in CA-G.R.
CV No. 27195, dated October 15, 1992, is AFFIRMED. Costs against petitioner.

SO ORDERED.

[G.R. No. 113926. October 23, 1996]

SECURITY BANK AND TRUST COMPANY, petitioner, vs. REGIONAL TRIAL COURT OF MAKATI, BRANCH 61,
MAGTANGGOL EUSEBIO and LEILA VENTURA, respondents.

DECISION

HERMOSISIMA, JR., J.:

Questions of law which are the first impression are sought to be resolved in this case: Should the rate of interest on a
loan or forbearance of money, goods or credits, as stipulated in a contract, far in excess of the ceiling prescribed
under or pursuant to the Usury Law, prevail over Section 2 of Central Bank Circular No. 905 which prescribes that the
rate of interest thereof shall continue to be 12% per annum? Do the Courts have the discretion to arbitrarily override
stipulated interest rates of promissory notes and stipulated interest rates of promissory notes and thereby impose a
12% interest on the loans, in the absence of evidence justifying the impositions of a higher rate?

227
This is a petition for review on certiorari for the purpose of assailing the decision of Honorable Judge Fernando V.
Gorospe of the Regional Trial Court of Makati, Branch 61, dated March 30, 1993, which found private respondent
Eusebio liable to petitioner for a sum of money. Interest was lowered by the court a quo from 23% per annum as
agreed upon by the parties to 12% per annum.

The undisputed facts are as follows:

On April 27, 1983, private respondent Magtanggol Eusebio executed Promissory Note No. TL/74/178/83 in favor of
petitioner Security Bank and Trust Co. (SBTC) in the total amount of One Hundred Thousand Pesos (P100,000.00)
payable in six monthly installments with a stipulated interest of 23% per annum up to the fifth installments.[1]

On July 28, 1983, respondent Eusebio again executed Promissory note No TL/74/1296/83 in favor of petitioner SBTC.
Respondent bound himself to pay the sum of One Hundred Thousand Pesos (P100.000.00) in six (6) monthly
installments plus 23% interest per annum.[2]

Finally, another Promissory Note No. TL74/1491/83 was executed on August 31, 1983 in the amount of Sixty Five
Thousand Pesos (P65,000.00). Respondent agreed to pay this note in six (6) monthly installments plus interest at the
rate of 23% per annum.[3]

On all the abovementioned notes, private respondents Leila Ventura had signed as co-maker.[4]

Upon maturity which fell on the different dates below, the principal balance remaining on the notes stood at:

1) PN No. TL/74/748/83 P16,665.00 as of September 1983.

2) PN No. TL/74/1296/83 P83,333.00 as of August 1983

3) PN No. TL/74/1991/83 P65,000.00 as of August 1983.

228
Upon the failure and refusal of respondent Eusebio to pay the aforestated balance payable, a collectible case was
filed in court by petitioner SBTC.[5] On March 30, 1993, the court a quo rendered a judgment in favor of petitioner
SBTC, the dispositive portion which reads:

WHEREFORE, premises above-considered, and plaintiffs claim having been duly proven, judgment is hereby rendered
in favor of plaintiff and as against defendant Eusebio who is hereby ordered to:

1. Pay the sum of P16,665.00, plus interest of 12% per annum starting 27 September 1983, until fully paid;

2. Pay the sum of P83,333.00, plus interest of 12% per annum starting 28 August 1983, until fully paid;

3. Pay the sum of P65,000.00, plus interest of 12% per annum starting 31 August 1983, until fully paid;

4. Pay the sum equivalent to 20% of the total amount due and payable to plaintiff as and by way of attorneys fees;
and to

5. Pay the cost of this suit.

SO ORDERED.[6]

On August 6, 1993, a motion for partial reconsideration was filed by petitioner SBTC contending that:

(1) the interest rate agreed upon by the parties during the signing of the promissory notes was 23% per annum;

(2) the interests awarded should be compounded quarterly from due date as provided in three (3) promissory notes;

(3) defendant Leila Ventura should likewise be held liable to pay the balance on the promissory notes since she has
signed as co-maker and as such, is liable jointly and severally with defendant Eusebio without a need for demand
upon her.[7]

229
Consequently, an Order was issued by the court a quo denying the motion to grant the rates of interest beyond 12%
per annum; and holding defendant Leila Ventura jointly and severally liable with co-defendant Eusebio.

Hence, this petition.

The sole issue to be settled in this petition is whether or not the 23% rate of interest per annum agreed upon by
petitioner bank and respondents is allowable and not against the Usury Law.

We find merit in this petition.

From the examination of the records, it appears that indeed the agreed rate of interest as stipulated on the three (3)
promissory notes is 23% per annum.[8] The applicable provision of law is the Central Bank Circular No. 905 which took
effect on December 22, 1982, particularly Sections 1 and 2 which state:[9]

Sec. 1. The rate of interest, including commissions, premiums, fees and other charges, on a loan or forbearance of
any money, goods or credits, regardless of maturity and whether secured or unsecured, that may be charged or
collected by any person, whether natural or judicial, shall not be subject to any ceiling prescribed under or pursuant
to the Usury Law, as amended.

Sec. 2. The rate of interest for the loan or forbearance of any money, goods or credits and the rate allowed in
judgments, in the absence of express contract as to such rate of interest, shall continue to be twelve per cent (12%)
per annum.

CB Circular 905 was issued by the Central Banks Monetary Board pursuant to P.D. 1684 empowering them to
prescribe the maximum rates of interest for loans and certain forbearances, to wit:

SECTION 1. Section 1-a of Act No. 2655, as amended, is hereby amended to read as follows:

SEC. 1-a The Monetary Board is hereby authorized to prescribed the maximum rate or rates of interest for the loan or
renewal thereof or the forbearance of any money, goods or credits, and to change such rate or rates whenever

230
warranted by prevailing economic and social conditions: Provided, That changes in such rates or rates may be
effected gradually on scheduled dates announced in advance.

In the exercise of the authority herein granted, the Monetary Board may prescribed higher maximum rates for loans
of low priority, such as consumer loans or renewals thereof as well as such loans made by pawnshops, finance
companies and other similar credit institutions although the rates prescribed for these institutions need not
necessarily be uniform. The Monetary Board is also authorized to prescribed different maximum rate or rates for
different types of borrowings, including deposits and deposit substitutes, or loans of financial intermediaries.[10]

This court has ruled in the case of Philippine National Bank v. Court of Appeals[11] that:

P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to stipulate freely regarding any
subsequent adjustment in the interest rate that shall accrue on a loan or forbearance of money, goods or credits. In
fine, they can agree to adjust, upward or downward, the interest previously stipulated.

All the promissory notes were signed in 1983 and, therefore, were already covered by CB Circular No. 905. Contrary
to the claim of respondent court, this circular did not repeal nor in anyway amend the Usury Law but simply
suspended the latters effectivity.

Basic is the rule of statutory construction that when the law is clear and unambiguous, the court is left with no
alternative but to apply the same according to its clear language. As we have held in the case of Quijano v.
Development Bank of the Philippines:[12]

xxx We cannot see any room for interpretation or construction in the clear and unambiguous language of the above-
quoted provision of law. This Court had steadfastly adhered to the doctrine that its first and fundamental duty is the
application of the law according to its express terms, interpretation being called for only when such literal
application is impossible. No process of interpretation or construction need be resorted to where a provision of law
peremptorily calls for application. Where a requirement or condition is made in explicit and unambiguous terms, no
discretion is left to the judiciary. It must see to it that its mandate is obeyed.

The rate of interest was agreed upon by the parties freely. Significantly, respondent did not question that rate. It is
not for respondent court a quo to change the stipulations in the contract where it is not illegal. Furthermore, Article
1306 of the New Civil code provides that contracting parties may establish such stipulations, clauses, terms and
conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order,
or public policy. We find no valid reason for the respondent court a quo to impose a 12% rate of interest on the
principal balance owing to petitioner by respondent in the presence of a valid stipulation. In a loan or forbearance of
money, the interest due should be that stipulated in writing, and in the absence thereof, the rate shall be 12% per
annum.[13] Hence, only in the absence of a stipulation can the court impose the 12% rate of interest.

231
The promissory notes were signed by both parties voluntarily. Therefore, stipulations therein are binding between
them. Respondent Eusebio, likewise, did not question any of the stipulations therein. In fact, in the Comment file by
respondent Eusebio to this court, he chose not to question the decision and instead expressed his desire to
negotiate with the petitioner bank for terms within which to settle his obligation.[14]

IN VIEW OF THE FOREGOING, the decision of the respondent court a quo, is hereby AFFIRMED with the
MODIFICATION that the rate of interest that should be imposed be 23% per annum.

SO ORDERED.

[G.R. No. 113412. April 17, 1996]

Spouses PONCIANO ALMEDA and EUFEMIA P. ALMEDA, petitioners, vs. THE COURT OF APPEALS and PHILIPPINE
NATIONAL BANK, respondents.

SYLLABUS

1. CIVIL LAW; CONTRACTS; BINDING EFFECT OF AGREEMENT BETWEEN PARTIES; PREMISED ON THE PRINCIPLE OF
MUTUALITY AND OBLIGATORY. - The binding effect of any agreement between parties to a contract is premised on
two settled principles: (1) that any obligation arising from contract has the force of law between the parties; and (2)
that there must be mutuality between the parties based on their essential equality. Any contract which appears to be
heavily weighed in favor of one of the parties so as to lead to an unconscionable result is void. Any stipulation
regarding the validity or compliance of the contract which is left solely to the will of one of the parties, is likewise,
invalid.

2. ID.; SPECIAL CONTRACTS; LOAN; INTEREST ARE REQUIRED TO BE EXPRESSLY STIPULATED IN WRITING. - The
manner of agreement is itself explicitly stipulated by the Civil Code when it provides, in Article 1956 that No interest

232
shall be due unless it has been expressly stipulated in writing. What has been stipulated in writing from a perusal of
interest rate provision of the credit agreement signed between the parties is that petitioners were bound merely to
pay 21% interest, subject to a possible escalation or de-escalation, when 1) the circumstances warrant such escalation
or de-escalation; 2) within the limits allowed by law; and (3) upon agreement.

3. ID.; ID.; ID.; LIFTING OF USURY CEILING; DOES NOT GRANT BANKS CARTE BLANCHE AUTHORITY TO RAISE
INTEREST; RULE UNDER CB CIRCULAR 905. - While the Usury Law ceiling on interest rates was lifted by C.B. Circular
905, nothing in the said circular could possibly be read as granting respondent bank carte blanche authority to raise
interest rates to levels which would either enslave its borrowers or lead to a hemorrhaging of their assets. Borrowing
represents a transfusion of capital from lending institutions to industries and businesses in order to stimulate
growth. This would not, obviously, be the effect of PNBs unilateral and lopsided policy regarding the interest rates of
petitioners borrowings in the instant case.

4. ID.; ID.; ID.; ID.; CANNOT BE INVOKED TO JUSTIFY ESCALATION CLAUSES, NOT BEING A GRANT OF SPECIFIC
AUTHORITY. - Apart from violating the principle of mutuality of contracts, there is authority for disallowing the
interest rates imposed by respondent bank, for the credit agreement specifically requires that the increase be within
the limits allowed by law. In the case of PNB vs. Court of Appeals, cited above, this Court clearly emphasized that C.B.
Circular No. 905 could not be properly invoked to justify the escalation clauses of such contracts, not being a grant of
specific authority.

5. ID.; ID.; ID.; ESCALATION CLAUSES; VALID AS LONG AS NOT SOLELY POTESTATIVE BUT BASED ON REASONABLE
AND VALID GROUNDS. - Escalation clauses are not basically wrong or legally objectionable so long as they are not
solely potestative but based on reasonable and valid grounds. Here, as clearly demonstrated above, not only the
increases of the interest rates on the basis of the escalation clause patently unreasonable and unconscionable, but
also there are no valid and reasonable standards upon which the increases are anchored.

6. ID.; ID.; MORTGAGE; AUTOMATIC FORECLOSURE PROVISIONS OF PD 385; CAN BE INVOKED AFTER SETTLEMENT
OF QUESTION INVOLVING INTEREST AND ONLY AFTER DEBTOR REFUSE TO MEET OBLIGATION FOLLOWING SUCH
DETERMINATION. - In the first place, because of the dispute regarding the interest rate increases, an issue which was
never settled on merit in the courts below, the exact amount of petitioners obligations could not be determined.
Thus, the foreclosure provisions of P.D. 385 could be validly invoked by respondent only after settlement of the
question involving the interest rate on the loan, and only after the spouses refused to meet their obligations
following such determination.

7. STATUTORY CONSTRUCTION; THE PHRASE WITHIN THE LIMITS ALLOWED BY LAW REFERS TO LEGISLATIVE
ENACTMENTS NOT ADMINISTRATIVE CIRCULARS. - The escalation clause of the credit agreement requires that the
same be made within the limits allowed by law, obviously referring specifically to legislative enactments not
administrative circulars. Note that the phrase limits imposed by law, refers only to the escalation clause. However,
the same agreement allows reduction on the basis of law or the Monetary Board. Had the parties intended the word
law to refer to both legislative enactments and administrative circulars and issuances, the agreement would not have
gone as far as making a distinction between law or the Monetary Board Circulars in referring to mutually agreed
upon reductions in interest rates.

233
APPEARANCES OF COUNSEL

Cuevas De la Cuesta & De las Alas for petitioners.

Cruz Cruz & Navarro III collaborating counsel for petitioners.

PNB Legal Department for private respondent.

DECISION

KAPUNAN, J.:

On various dates in 1981, the Philippine National Bank granted to herein petitioners, the spouses Ponciano L. Almeda
and Eufemia P. Almeda several loan/credit accommodations totaling P18.0 Million pesos payable in a period of six
years at an interest rate of 21 % per annum. To secure the loan, the spouses Almeda executed a Real Estate Mortgage
Contract covering a 3,500 square meter parcel of land, together with the building erected thereon (the Marvin Plaza)
located at Pasong Tamo, Makati, Metro Manila. A credit agreement embodying the terms and conditions of the loan
was executed between the parties. Pertinent portions of the said agreement are quoted below:

SPECIAL CONDITIONS

xxx xxx xxx

The loan shall be subject to interest at the rate of twenty one per cent (21 %) per annum, payable semi-annually in
arrears, the first interest payment to become due and payable six (6) months from date of initial release of the loan.
The loan shall likewise be subject to the appropriate service charge and a penalty charge of three per cent (3%) per
annum to be imposed on any amount remaining unpaid or not rendered when due.

xxx xxx xxx

III. OTHER CONDITIONS

(c) Interest and Charges

234
(1) The Bank reserves the right to increase the interest rate within the limits allowed by law at any time depending on
whatever policy it may adopt in the future; provided, that the interest rate on this/these accommodations shall be
correspondingly decreased in the event that the applicable maximum interest rate is reduced by law or by the
Monetary Board. In either case, the adjustment in the interest rate agreed upon shall take effect on the effectivity
date of the increase or decrease of the maximum interest rate.1

Between 1981 and 1984, petitioners made several partial payments on the loan totaling P7,735,004.66,2 a substantial
portion of which was applied to accrued interest.3 On March 31, 1984, respondent bank, over petitioners
protestations, raised the interest rate to 28%, allegedly pursuant to Section III-c (1) of its credit agreement. Said
interest rate thereupon increased from an initial 21% to a high of 68% between March of 1984 to September, 1986.4

Petitioners protested the increase in interest rates, to no avail. Before the loan was to mature in March, 1988, the
spouses filed on February 6, 1988 a petition for declaratory relief with prayer for a writ of preliminary injunction and
temporary restraining order with the Regional Trial Court of Makati, docketed as Civil Case No. 18872. In said petition,
which was raffled to Branch 134 presided by Judge Ignacio Capulong, the spouses sought clarification as to whether
or not the PNB could unilaterally raise interest rates on the loan, pursuant to the credit agreements escalation clause,
and in relation to Central Bank Circular No. 905. As a preliminary measure, the lower court, on March 3, 1988, issued a
writ of preliminary injunction enjoining the Philippine National Bank from enforcing an interest rate above the 21%
stipulated in the credit agreement. By this time the spouses were already in default of their loan obligations.

Invoking the Law on Mandatory Foreclosure (Act 3135, as amended and P.D. 385), the PNB countered by ordering the
extrajudicial foreclosure of petitioners mortgaged properties and scheduled an auction sale for March 14, 1989. Upon
motion by petitioners, however, the lower court, on April 5, 1989, granted a supplemental writ of preliminary
injunction, staying the public auction of the mortgaged property.

On January 15, 1990, upon the posting of a counterbond by the PNB, the trial court dissolved the supplemental writ
of preliminary injunction. Petitioners filed a motion for reconsideration. In the interim, respondent bank once more
set a new date for the foreclosure sale of Marvin Plaza which was March 12, 1990. Prior to the scheduled date,
however, petitioners tendered to respondent bank the amount of P40,142,518.00, consisting of the principal
(P18,000,000.00) and accrued interest calculated at the originally stipulated rate of 21%. The PNB refused to accept
the payment.5

As a result of PNBs refusal of the tender of payment, petitioners, on March 8, 1990, formally consigned the amount
of P40,142,518.00 with the Regional Trial Court in Civil Case No. 90-663. They prayed therein for a writ of preliminary
injunction with a temporary restraining order. The case was raffled to Branch 147, presided by Judge Teofilo Guadiz.
On March 15, 1990, respondent bank sought the dismissal of the case.

235
On March 30, 1990 Judge Guadiz in Civil Case No. 90-663 issued an order granting the writ of preliminary injunction
enjoining the foreclosure sale of Marvin Plaza scheduled on March 12, 1990. On April 17, 1990 respondent bank filed a
motion for reconsideration of the said order.

On August 16, 1991, Civil Case No. 90-663 was transferred to Branch 66 presided by Judge Eriberto Rosario who
issued an order consolidating said case with Civil Case 18871 presided by Judge Ignacio Capulong.

For Judge Ignacio Capulongs refusal to lift the writ of preliminary injunction issued March 30, 1990, respondent bank
filed a petition for Certiorari, Prohibition and Mandamus with respondent Court of Appeals, assailing the following
orders of the Regional Trial Court:

1. Order dated March 30, 1990 of Judge Guadiz granting the writ of preliminary injunction restraining the foreclosure
sale of Marvin Plaza set on March 12, 1990;

2. Order of Judge Ignacio Capulong dated January 10, 1992 denying respondent banks motion to lift the writ of
injunction issued by Judge Guadiz as well as its motion to dismiss Civil Case No. 90-663;

3. Order of Judge Capulong dated July 3, 1992 denying respondent banks subsequent motion to lift the writ of
preliminary injunction; and

4. Order of Judge Capulong dated October 20, 1992 denying respondent banks motion for reconsideration.

On August 27, 1993, respondent court rendered its decision setting aside the assailed orders and upholding
respondent banks right to foreclose the mortgaged property pursuant to Act 3135, as amended and P.D. 385.
Petitioners Motion for Reconsideration and Supplemental Motion for Reconsideration, dated September 15, 1993
and October 28, 1993, respectively, were denied by respondent court in its resolution dated January 10, 1994.

Hence the instant petition.

This appeal by certiorari from the respondent courts decision dated August 27, 1993 raises two principal issues
namely: 1) Whether or not respondent bank was authorized to raise its interest rates from 21% to as high as 68% under
the credit agreement; and 2) Whether or not respondent bank is granted the authority to foreclose the Marvin Plaza
under the mandatory foreclosure provisions of P.D. 385.

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In its comment dated April 19, 1994, respondent bank vigorously denied that the increases in the interest rates were
illegal, unilateral, excessive and arbitrary, it argues that the escalated rates of interest it imposed was based on the
agreement of the parties. Respondent bank further contends that it had a right to foreclose the mortgaged property
pursuant to P.D. 385, after petitioners were unable to pay their loan obligations to the bank based on the increased
rates upon maturity in 1984.

The instant petition is impressed with merit.

The binding effect of any agreement between parties to a contract is premised on two settled principles:(1) that any
obligation arising from contract has the force of law between the parties; and (2) that there must be mutuality
between the parties based on their essential equality.6 Any contract which appears to be heavily weighed in favor of
one of the parties so as to lead to an unconscionable result is void. Any stipulation regarding the validity or
compliance of the contract which is left solely to the will of one of the parties, is likewise, invalid.

It is plainly obvious, therefore, from the undisputed facts of the case that respondent bank unilaterally altered the
terms of its contract with petitioners by increasing the interest rates on the loan without the prior assent of the
latter. In fact, the manner of agreement is itself explicitly stipulated by the Civil Code when it provides, in Article 1956
that No interest shall be due unless it has been expressly stipulated in writing. What has been stipulated in writing
from a perusal of interest rate provision of the credit agreement signed between the parties is that petitioners were
bound merely to pay 21% interest, subject to a possible escalation or de-escalation, when 1) the circumstances
warrant such escalation or de-escalation; 2) within the limits allowed by law; and 3) upon agreement.

Indeed, the interest rate which appears to have been agreed upon by the parties to the contract in this case was the
21% rate stipulated in the interest provision. Any doubt about this is in fact readily resolved by a careful reading of the
credit agreement because the same plainly uses the phrase interest rate agreed upon, in reference to the original 21%
interest rate. The interest provision states:

(c) Interest and Charges

(1) The Bank reserves the right to increase the interest rate within the limits allowed by law at any time depending on
whatever policy it may adopt in the future; provided, that the interest rate on this/these accommodations shall be
correspondingly decreased in the event that the applicable maximum interest rate is reduced by law or by the
Monetary Board. In either case, the adjustment in the interest rate agreed upon shall take effect on the effectivity
date of the increase or decrease of the maximum interest rate.

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In Philippine National Bank v. Court of Appeals,7 this Court disauthorized respondent bank from unilaterally raising
the interest rate in the borrowers loan from 18% to 32%, 41% and 48% partly because the aforestated increases violated
the principle of mutuality of contracts expressed in Article 1308 of the Civil Code. The Court held:

CB Circular No. 905, Series of 1982 (Exh. 11) removed the Usury Law ceiling on interest rates

x x x increases in interest rates are not subject to any ceiling prescribed by the Usury Law.

but it did not authorize the PNB, or any bank for that matter, to unilaterally and successively increase the agreed
interest rates from 18% to 48% within a span of four (4) months, in violation of P.D. 116 which limits such changes to
once every twelve months.

Besides violating P.D. 116, the unilateral action of the PNB in increasing the interest rate on the private respondents
loan, violated the mutuality of contracts ordained in Article 1308 of the Civil Code:

ART. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one
of them.

In order that obligations arising from contracts may have the force of law between the parties, there must be
mutuality between the parties based on their essential equality. A contract containing a condition which makes its
fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties, is void (Garcia vs. Rita
Legarda, Inc., 21 SCRA 555). Hence, even assuming that the P1.8 million loan agreement between the PNB and the
private respondent gave the PNB a license (although in fact there was none) to increase the interest rate at will
during the term of the loan, that license would have been null and void for being violative of the principle of
mutuality essential in contracts. It would have invested the loan agreement with the character of a contract of
adhesion, where the parties do not bargain on equal footing, the weaker partys (the debtor) participation being
reduced to the alternative to take it or lease it (Qua vs. Law Union & Rock Insurance Co., 95 Phil. 85). Such a contract
is a veritable trap for the weaker party whom the courts of justice must protect against abuse and imposition.

PNBs successive increases of the interest rate on the private respondents loan, over the latters protest, were
arbitrary as they violated an express provision of the Credit Agreement (Exh. 1) Section 9.01 that its terms may be
amended only by an instrument in writing signed by the party to be bound as burdened by such amendment. The
increases imposed by PNB also contravene Art. 1956 of the Civil Code which provides that no interest shall be due
unless it has been expressly stipulated in writing.

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The debtor herein never agreed in writing to pay the interest increases fixed by the PNB beyond 24% per annum,
hence, he is not bound to pay a higher rate than that.

That an increase in the interest rate from 18% to 48% within a period of four (4) months is excessive, as found by the
Court of Appeals, is indisputable.

Clearly, the galloping increases in interest rate imposed by respondent bank on petitioners loan, over the latters
vehement protests, were arbitrary.

Moreover, respondent banks reliance on C.B. Circular No. 905, Series of 1982 did not authorize the bank, or any
lending institution for that matter, to progressively increase interest rates on borrowings to an extent which would
have made it virtually impossible for debtors to comply with their own obligations. True, escalation clauses in credit
agreements are perfectly valid and do not contravene public policy. Such clauses, however, (as are stipulations in
other contracts) are nonetheless still subject to laws and provisions governing agreements between parties, which
agreements - while they may be the law between the contracting parties - implicitly incorporate provisions of
existing law. Consequently, while the Usury Law ceiling on interest rates was lifted by C.B. Circular 905, nothing in
the said circular could possibly be read as granting respondent bank carte blanche authority to raise interest rates to
levels which would either enslave its borrowers or lead to a hemorrhaging of their assets. Borrowing represents a
transfusion of capital from lending institutions to industries and businesses in order to stimulate growth. This would
not, obviously, be the effect of PNBs unilateral and lopsided policy regarding the interest rates of petitioners
borrowings in the instant case.

Apart from violating the principle of mutuality of contracts, there is authority for disallowing the interest rates
imposed by respondent bank, for the credit agreement specifically requires that the increase be within the limits
allowed by law. In the case of PNB v. Court of Appeals, cited above, this Court clearly emphasized that C.B. Circular
No. 905 could not be properly invoked to justify the escalation clauses of such contracts, not being a grant of specific
authority.

Furthermore, the escalation clause of the credit agreement requires that the same be made within the limits allowed
by law, obviously referring specifically to legislative enactments not administrative circulars. Note that the phrase
limits imposed by law, refers only to the escalation clause. However, the same agreement allows reduction on the
basis of law or the Monetary Board. Had the parties intended the word law to refer to both legislative enactments
and administrative circulars and issuances, the agreement would not have gone as far as making a distinction
between law or the Monetary Board Circulars in referring to mutually agreed upon reductions in interest rates. This
distinction was the subject of the Courts disquisition in the case of Banco Filipino Savings and Mortgage Bank v.
Navarro8 where the Court held that:

What should be resolved is whether BANCO FILIPINO can increase the interest rate on the LOAN from 12% to 17% per
annum under the Escalation Clause. It is our considered opinion that it may not.

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The Escalation Clause reads as follows:

I/We hereby authorize Banco Filipino to correspondingly increase

the interest rate stipulated in this contract without advance notice to me/us in the event.

a law

increasing

the lawful rates of interest

that may be charged

on this particular

kind of loan. (Paragraphing and italics supplied)

It is clear from the stipulation between the parties that the interest rate may be increased in the event a law should
be enacted increasing the lawful rate of interest that may be charged on this particular kind of loan. The Escalation
Clause was dependent on an increase of rate made by law alone.

CIRCULAR No. 494, although it has the effect of law, is not a law. Although a circular duly issued is not strictly a
statute or a law, it has, however, the force and effect of law. (Italics supplied). An administrative regulation adopted
pursuant to law has the force and effect of law. That administrative rules and regulations have the force of law can
no longer be questioned.

The distinction between a law and an administrative regulation is recognized in the Monetary Board guidelines
quoted in the latter to the BORROWER of Ms. Paderes of September 24, 1976 (supra). According to the guidelines,

240
for a loans interest to be subject to the increases provided in CIRCULAR No. 494, there must be an Escalation Clause
allowing the increase in the event that any law or Central Bank regulation is promulgated increasing the maximum
rate for loans. The guidelines thus presuppose that a Central Bank regulation is not within the term any law.

The distinction is again recognized by P.D. No. 1684, promulgated on March 17, 1980, adding Section 7-a to the Usury
Law, providing that parties to an agreement pertaining to a loan could stipulate that the rate of interest agreed upon
may be increased in the event that the applicable maximum rate of interest is increased by law or by the Monetary
Board. To quote:

Sec. 7-a. Parties to an agreement pertaining to a loan or forbearance of money, goods or credits may stipulate that
the rate of interest agreed upon may be increased in the event that the applicable maximum rate of interest

is increased by law or by the Monetary Board:

Provided, That such stipulation shall be valid only if there is also a stipulation in the agreement that the rate of
interest agreed upon shall be reduced in the event that the applicable maximum rate of interest is reduced by law or
by the Monetary Board;

Provided, further, That the adjustment in the rate of interest agreed upon shall take effect on or after the effectivity
of the increase or decrease in the maximum rate of interest. (Paragraphing and italics supplied).

It is now clear that from March 17, 1980, escalation clauses to be valid should specifically provide: (1) that there can
be an increase in interest if increased by law or by the Monetary Board; and (2) in order for such stipulation to be
valid, it must include a provision for reduction of the stipulated interest in the event that the applicable maximum
rate of interest is reduced by law or by the Monetary Board.

Petitioners never agreed in writing to pay the increased interest rates demanded by respondent bank in
contravention to the tenor of their credit agreement. That an increase in interest rates from 18% to as much as 68% is
excessive and unconscionable is indisputable. Between 1981 and 1984, petitioners had paid an amount equivalent to
virtually half of the entire principal (P7,735,004.66) which was applied to interest alone. By the time the spouses
tendered the amount of P40,142,518.00 in settlement of their obligations, respondent bank was demanding
P58,377,487.00 over and above those amounts already previously paid by the spouses.

Escalation clauses are not basically wrong or legally objectionable so long as they are not solely potestative but
based on reasonable and valid grounds.9 Here, as clearly demonstrated above, not only the increases of the interest

241
rates on the basis of the escalation clause patently unreasonable and unconscionable, but also there are no valid and
reasonable standards upon which the increases are anchored.

We go now to respondent banks claim that the principal issue in the case at bench involves its right to foreclose
petitioners properties under P.D. 385. We find respondents pretense untenable.

Presidential Decree No. 385 was issued principally to guarantee that government financial institutions would not be
denied substantial cash inflows necessary to finance the governments development projects all over the country by
large borrowers who resort to litigation to prevent or delay the governments collection of their debts or loans.10 In
facilitating collection of debts through its automatic foreclosure provisions, the government is however, not
exempted from observing basic principles of law, and ordinary fairness and decency under the due process clause of
the Constitution.11

In the first place, because of the dispute regarding the interest rate increases, an issue which was never settled on
merit in the courts below, the exact amount of petitioners obligations could not be determined. Thus, the
foreclosure provisions of P.D. 385 could be validly invoked by respondent bank only after settlement of the question
involving the interest rate on the loan, and only after the spouses refused to meet their obligations following such
determination. In Filipinas Marble Corporation v. Intermediate Appellate Court,12 involving P.D. 385s provisions on
mandatory foreclosure, we held that:

We cannot, at this point, conclude that respondent DBP together with the Bancom people actually misappropriated
and misspent the $5 million loan in whole or in part although the trial court found that there is persuasive evidence
that such acts were committed by the respondent. This matter should rightfully be litigated below in the main action.
Pending the outcome of such litigation, P.D. 385 cannot automatically be applied for if it is really proven that
respondent DBP is responsible for the misappropriation of the loan, even if only in part, then the foreclosure of the
petitioners properties under the provisions of P.D. 385 to satisfy the whole amount of the loan would be a gross
mistake. It would unduly prejudice the petitioner, its employees and their families.

Only after trial on the merits of the main case can the true amount of the loan which was applied wisely or not, for
the benefit of the petitioner be determined. Consequently, the extent of the loan where there was no failure of
consideration and which may be properly satisfied by foreclosure proceedings under P.D. 385 will have to await the
presentation of evidence in a trial on the merits.

In Republic Planters Bank v. Court of Appeals13 the Court reiterating the dictum in Filipinas Marble Corporation, held:

The enforcement of P.D. 385 will sweep under the rug this iceberg of a scandal in the sugar industry during the
Marcos Martial Law years. This we can not allow to happen. For the benefit of future generations, all the dirty linen in
the PHILSUCOM/NASUTRA/RPB closets have to be exposed in public so that the same may NEVER be repeated.

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It is of paramount national interest, that we allow the trial court to proceed with dispatch to allow the parties below
to present their evidence.

Furthermore, petitioners made a valid consignation of what they, in good faith and in compliance with the letter of
the Credit Agreement, honestly believed to be the real amount of their remaining obligations with the respondent
bank. The latter could not therefore claim that there was no honest-to-goodness attempt on the part of the spouses
to settle their obligations. Respondent banks rush to inequitably invoke the foreclosure provisions of P.D. 385
through its legal machinations in the courts below, in spite of the unsettled differences in interpretation of the credit
agreement was obviously made in bad faith, to gain the upper hand over petitioners.

In the face of the unequivocal interest rate provisions in the credit agreement and in the law requiring the parties to
agree to changes in the interest rate in writing, we hold that the unilateral and progressive increases imposed by
respondent PNB were null and void. Their effect was to increase the total obligation on an eighteen million peso loan
to an amount way over three times that which was originally granted to the borrowers. That these increases,
occasioned by crafty manipulations in the interest rates is unconscionable and neutralizes the salutary policies of
extending loans to spur business cannot be disputed.

WHEREFORE, PREMISES CONSIDERED, the decision of the Court of Appeals dated August 27, 1993, as well as the
resolution dated February 10, 1994 is hereby REVERSED AND SET ASIDE. The case is remanded to the Regional Trial
Court of Makati for further proceedings.

G.R. No. 101771 December 17, 1996

SPOUSES MARIANO and GILDA FLORENDO, petitioners,

vs.

COURT OF APPEALS and LAND BANK OF THE PHILIPPINES, respondents.

PANGANIBAN, J.:p

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May a bank unilaterally raise the interest rate on a housing loan granted an employee, by reason of the voluntary
resignation of the borrower?

Such is the query raised in the petition for review on certiorari now before us, which assails the Decision
promulgated on June 19, 1991 by respondent Court of Appeals 1 in CA-G.R. CV No. 24956, upholding the validity and
enforceability of the escalation by private respondent Land Bank of the Philippines of the applicable interest rate on
the housing loan taken out by petitioner-spouses.

The Antecedent Facts

Petitioners filed an action for Injunction with Damages docketed as Civil Case No. 86-38146 before the Regional Trial
Court of Manila, Branch XXII against respondent bank. Both parties, after entering into a joint stipulation of facts,
submitted the case for decision on the basis of said stipulation and memoranda. The stipulation reads in part: 2

1. That (Petitioner) Gilda Florendo (was) an employee of (Respondent Bank) from May 17, 1976 until August
16, 1984 when she voluntarily resigned. However, before her resignation, she applied for a housing loan of
P148,000.00, payable within 25 years from (respondent bank's) Provident Fund on July 20, 1983;

2. That (petitioners) and (respondent bank), through the latter's duly authorized representative, executed the
Housing Loan Agreement, . . .;

3. That, together with the Housing Loan Agreement, (petitioners) and (respondent bank), through the latter's
authorized representative, also executed a Real Estate Mortgage and Promissory

Note, . . .;

4. That the loan . . . was actually given to (petitioner) Gilda Florendo, . . ., in her capacity as employee of
(respondent bank);

5. That on March 19, 1985, (respondent bank) increased the interest rate on (petitioner's) loan from 9% per
annum to 17%, the said increase to take effect on March 19, 1985;

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6. That the details of the increase are embodied in (Landbank's) ManCom Resolution No. 85-08 dated March
19, 1985, . . . , and in a PF (Provident Fund) Memorandum Circular (No. 85-08, Series of 1985), . . .;

7. That (respondent bank) first informed (petitioners) of the said increase in a letter dated June 7, 1985, . . . .
Enclosed with the letter are a copy of the PF Memo Circular . . . and a Statement of Account as of May 31, 1985, . . .;

8. That (petitioners) protested the increase in a letter dated June 11, 1985 to which (respondent bank) replied
through a letter dated July 1, 1985, . . . Enclosed with the letter is a Memorandum dated June 26, 1985 of (respondent
bank's) legal counsel, A.B. F. Gaviola, Jr., . . .;

9. That thereafter, (respondent bank) kept on demanding that (petitioner) pay the increased interest or the
new monthly installments based on the increased interest rate, but Plaintiff just as vehemently maintained that the
said increase is unlawful and unjustifiable. Because of (respondent bank's) repeated demands, (petitioners) were
forced to file the instant suit for Injunction and Damages;

10. That, just the same, despite (respondent bank's) demands that (petitioners) pay the increased interest or
increased monthly installments, they (petitioners) have faithfully paid and discharged their loan obligations, more
particularly the monthly payment of the original stipulated installment of P1,248.72. Disregarding (respondent
bank's) repeated demand for increased interest and monthly installment, (petitioners) are presently up-to-date in
the payments of their obligations under the original contracts (Housing Loan Agreement, Promissory Note and Real
Estate Mortgage) with (respondent bank);

xxx xxx xxx

The clauses or provisions in the Housing Loan Agreement and the Real Estate Mortgage referred to above as the
basis for the escalation are:

a. Section I-F of Article VI of the Housing Loan Agreement, 3 which provides that, for as long as the loan or any
portion thereof or any sum that may be due and payable under the said loan agreement remains outstanding, the
borrower shall —

f) Comply with all the rules and regulations of the program imposed by the LENDER and to comply with all the
rules and regulations that the Central Bank of the Philippines has imposed or will impose in connection with the
financing programs for bank officers and employees in the form of fringe benefits.

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b. Paragraph (f) of the Real Estate Mortgage 4 which states:

The rate of interest charged on the obligation secured by this mortgage. . ., shall be subject, during the life of this
contract, to such an increase/decrease in accordance with prevailing rules, regulations and circulars of the Central
Bank of the Philippines as the Provident Fund Board of Trustees of the Mortgagee may prescribe for its debtors and
subject to the condition that the increase/decrease shall only take effect on the date of effectivity of said
increase/decrease and shall only apply to the remaining balance of the loan.

c. and ManCom (Management Committee) Resolution No. 85-08, together with PF (Provident Fund)
Memorandum Circular No. 85-08, which escalated the interest rates on outstanding housing loans of bank
employees who voluntarily "secede" (resign) from the Bank; the range of rates varied depending upon the number
of years service rendered by the employees concerned. The rates were made applicable to those who had previously
resigned from the bank as well as those who would be resigning in the future.

The trial court ruled in favor of respondent bank, and held that the bank was vested with authority to increase the
interest rate (and the corresponding monthly amortizations) pursuant to said escalation provisions in the housing
loan agreement and the mortgage contract. The dispositive portion of the said decision reads: 5

WHEREFORE, judgment is hereby rendered denying the instant suit for injunction and declaring that the rate of
interest on the loan agreement in question shall be 17% per annum and the monthly amortization on said loan
properly raised to P2,064.75 a month, upon the finality of this judgment.

xxx xxx xxx

Petitioners promptly appealed, arguing that, inter alia, the increased rate of interest is onerous and was imposed
unilaterally, without the consent of the borrower-spouses. Respondent bank likewise appealed and contested the
propriety of having the increased interest rate apply only upon the finality of the judgment and not from March 19,
1985.

The respondent Court subsequently affirmed with modification the decision of the trial court, holding that: 6

. . . Among the salient provisions of the mortgage is paragraph (f) which provides that the interest rate shall be
subject, during the term of the loan, to such increases/decreases as may be allowed under the prevailing rules and/or
circulars of the Central Bank and as the Provident Fund of the Bank may prescribe for its borrowers. In other words,
the spouses agreed to the escalation of the interest rate on their original loan. Such an agreement is a contractual
one and the spouses are bound by it. Escalation clauses have been ruled to be valid stipulations in contracts in order

246
to maintain fiscal stability and to retain the value of money in long term contracts (Insular Bank of Asia and America
vs. Spouses Epifania Salazar and Ricardo Salazar, 159 SCRA 133). One of the conditions for the validity of an escalation
clause such as the one which refers to an increase rate is that the contract should also contain a proviso for a
decrease when circumstances so warrant it. Paragraph (f) referred to above contains such provision.

A contract is binding on the parties no matter that a provision thereof later proves onerous and which on hindsight, a
party feels he should not have agreed to in the first place.

and disposed as follows: 7

WHEREFORE, the dispositive part of the decision is MODIFIED in the sense that the interest of 17% on the balance of
the loan of the spouses shall be computed starting July 1, 1985.

Dissatisfied, the petitioners had recourse to this Court.

The Issues

Petitioners ascribe to respondent Court "a grave and patent error" in not nullifying the respondent bank's unilateral
increase of the interest rate and monthly amortizations of the loan —

1. . . . (simply because of) a bare and unqualified stipulation that the interest rate may be increased;

2. . . . on the ground that the increase has no basis in the contracts between the parties;

3. . . . on the ground that the increase violates Section 7-A of the Usury Law;

4. . . . on the ground that the increase and the contractual provision that (respondent bank) relies upon for the
increase are contrary to morals, good customs, public order and public policy. 8

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The key issue may be simply presented as follows: Did the respondent bank have a valid and legal basis to impose an
increased interest rate on the petitioners' housing loan?

The Court's Ruling

Basis for Increased Interest Rate

Petitioners argue that the HLA provision covers only administrative and other matters, and does not include interest
rates per se, since Article VI of the agreement deals with insurance on and upkeep of the mortgaged property. As for
the stipulation in the mortgage deed, they claim that it is vague because it does not state if the "prevailing" CB rules
and regulations referred to therein are those prevailing at the time of the execution of these contracts or at the time
of the increase or decrease of the interest rate. They insist that the bank's authority to escalate interest rates has not
been shown to be "crystal-clear as a matter of fact" and established beyond doubt. The contracts being "contracts of
adhesion," any vagueness in their provisions should be interpreted in favor of petitioners.

We note that Section 1-F of Article VI of the HLA cannot be read as an escalation clause as it does not make any
reference to increases or decreases in the interest rate on loans. However, paragraph (f) of the mortgage contract is
clearly and indubitably an escalation provision, and therefore, the parties were and are bound by the said stipulation
that "(t)he rate of interest charged on the obligation secured by this mortgage . . ., shall be subject, during the life of
this contract, to such an increase/decrease in accordance with prevailing rules, regulations and circulars of the
Central Bank of the Philippines as the Provident Fund Board of Trustees of the Mortgagee (respondent bank) may
prescribe for its debtors . . . ." 9 Contrary to petitioners' allegation, there is no vagueness in the aforequoted proviso;
even their own arguments (below) indicate that this provision is quite clear to them.

In Banco Filipino Savings & Mortgage Bank vs. Navarro, 10 this Court in essence ruled that in general there is nothing
inherently wrong with escalation clauses. In IBAA vs. Spouses Salazar, 11 the Court reiterated the rule that escalation
clauses are valid stipulations in commercial contracts to maintain fiscal stability and to retain the value of money in
long term contracts.

Application of the Escalation to Petitioners

Petitioners however insist that while ManCom Resolution No. 85-08 authorized a rate increase for resigned
employees, it could not apply as to petitioner-employee because nowhere in the loan agreement or mortgage
contract is it provided that petitioner-wife's resignation will be a ground for the adjustment of interest rates, which is
the very bedrock of and the raison d'etre specified in said ManCom Resolution.

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They additionally contend that the escalation is violative of Section 7-A of the Usury Law (Act No. 2655, as amended)
which requires a law or MB act fixing an increased maximum rate of interest, and that escalation upon the will of the
respondent bank is contrary to the principle of mutuality of contracts, per Philippine National Bank vs. Court of
Appeals. 12

What is actually central to the disposition of this case is not really the validity of the escalation clause but the
retroactive enforcement of the ManCom Resolution as against petitioner-employee. In the case at bar, petitioners
have put forth a telling argument that there is in fact no Central Bank rule, regulation or other issuance which would
have triggered an application of the escalation clause as to her factual situation.

In Banco Filipino, 13 this Court, speaking through Mme. Justice Ameurfina M. Herrera, disallowed the bank from
increasing the interest rate on the subject loan from 12% to 17% despite an escalation clause in the loan agreement
authorizing the bank to "correspondingly increase the interest rate stipulated in this contract without advance notice
to me/us in the event a law should be enacted increasing the lawful rates of interest that may be charged on this
particular kind of loan". In said case, the bank had relied upon a Central Bank circular as authority to up its rates. The
Court ruled that CB Circular No. 494, although it has the effect of law, is not a law, but an administrative regulation.

In PNB vs. Court of Appeals, 14 this Court disallowed the increases in interest rate imposed by the petitioner-bank
therein, on the ground, among others, that said bank relied merely on its own Board Resolution (No. 681), PNB
Circular No. 40-79-84, and PNB Circular No. 40-129-84, which were neither laws nor resolutions of the Monetary
Board.

In the case at bar, the loan was perfected on July 20, 1983. PD No. 116 became effective on January 29, 1973. CB
Circular No. 416 was issued on July 29, 1974. CB Circ. 504 was issued February 6, 1976. CB Circ. 706 was issued
December 1, 1979. CB Circ. 905, lifting any interest rate ceiling prescribed under or pursuant to the Usury Law, as
amended, was promulgated in 1982. These and other relevant CB issuances had already come into existence prior to
the perfection of the housing loan agreement and mortgage contract, and thus it may be said that these regulations
had been taken into consideration by the contracting parties when they first entered into their loan contract. In light
of the CB issuances in force at that time, respondent bank was fully aware that it could have imposed an interest rate
higher than 9% per annum rate for the housing loans of its employees, but it did not. In the subject loan, the
respondent bank knowingly agreed that the interest rate on petitioners' loan shall remain at 9% p.a. unless a CB
issuance is passed authorizing an increase (or decrease) in the rate on such employee loans and the Provident Fund
Board of Trustees acts accordingly. Thus, as far as the parties were concerned, all other onerous factors, such as
employee resignations, which could have been used to trigger an application of the escalation clause were
considered barred or waived. If the intention were otherwise, they — especially respondent bank — should have
included such factors in their loan agreement.

ManCom Resolution No. 85-08, which is neither a rule nor a resolution of the Monetary Board, cannot be used as
basis for the escalation in lieu of CB issuances, since paragraph (f) of the mortgage contract very categorically
specifies that any interest rate increase be in accordance with "prevailing rules, regulations and circulars of the
Central Bank . . . as the Provident Fund Board . . . may prescribe." The Banco Filipino and PNB doctrines are applicable
four-square in this case. As a matter of fact, the said escalation clause further provides that the increased interest

249
rate "shall only take effect on the date of effectivity of (the) increase/decrease" authorized by the CB rule, regulation
or circular. Without such CB issuance, any proposed increased rate will never become effective.

We have already mentioned (and now reiterate our holding in several

cases 15) that by virtue of CB Circular 905, the Usury Law has been rendered ineffective. Thus, petitioners' contention
that the escalation clause is violative of the said law is bereft of any merit.

On the other hand, it will not be amiss to point out that the unilateral determination and imposition of increased
interest rates by the herein respondent bank is obviously violative of the principle of mutuality of contracts ordained
in Article 1308 of the Civil Code. As this Court held in PNB: 16

In order that obligations arising from contracts may have the force of law between the parties, there must be
mutuality between the parties based on their essential equality. A contract containing a condition which makes its
fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties, is void (Garcia vs. Rita
Legarda, Inc., 21 SCRA 555). Hence, even assuming that the . . . loan agreement between the PNB and the private
respondent gave the PNB a license (although in fact there was none) to increase the interest rate at will during the
term of the loan, that license would have been null and void for being violative of the principle of mutuality essential
in contracts. It would have invested the loan agreement with the character of a contract of adhesion, where the
parties do not bargain on equal footing, the weaker party's (the debtor) participation being reduced to the
alternative "to take it or leave it" (Qua vs. Law Union & Rock Insurance Co., 95 Phil 85). Such a contract is a veritable
trap for the weaker party whom the courts of justice must protect against abuse and imposition.

The respondent bank tried to sidestep this difficulty by averring that petitioner Gilda Florendo as a former bank
employee was very knowledgeable concerning respondent bank's lending rates and procedures, and therefore,
petitioners were "on an equal footing" with respondent bank as far as the subject loan contract was concerned. That
may have been true insofar as entering into the original loan agreement and mortgage contract was concerned.
However, that does not hold true when it comes to the determination and imposition of escalated rates of interest
as unilaterally provided in the ManCom Resolution, where she had no voice at all in its preparation and application.

To allay fears that respondent bank will inordinately be prejudiced by being stuck with this "sweetheart loan" at
patently concessionary interest rates, which according to respondent bank is the "sweetest deal" anyone could
obtain and is an act of generosity considering that in 1985 lending rates in the banking industry were peaking well
over 30% p.a., 17 we need only point out that the bank had the option to impose in its loan contracts the condition
that resignation of an employee-borrower would be a ground for escalation. The fact is it did not. Hence, it must live
with such omission. And it would be totally unfair to now impose said condition, not to mention that it would violate
the principle of mutuality of consent in contracts. It goes without saying that such escalation ground can be included
in future contracts — not to agreements already validly entered into.

Let it be clear that this Court understands respondent bank's position that the concessional interest rate was really
intended as a means to remunerate its employees and thus an escalation due to resignation would have been a valid

250
stipulation. But no such stipulation was in fact made, and thus the escalation provision could not be legally applied
and enforced as against herein petitioners.

WHEREFORE, the petition is hereby GRANTED. The Court hereby REVERSES and SETS ASIDE the challenged Decision
of the Court of Appeals. The interest rate on the subject housing loan remains at nine (9) percent per annum and the
monthly amortization at P1,248.72.

SO ORDERED.

[G.R. No. 147788. March 19, 2002]

EDILBERTO CRUZ and SIMPLICIO CRUZ, petitioners, vs. BANCOM FINANCE CORPORATION (NOW UNION BANK OF
THE PHILIPPINES), respondent.

DECISION

PANGANIBAN, J.:

An absolutely simulated contract of sale is void ab initio and transfers no ownership right. The purported buyer, not
being the owner, cannot validly mortgage the subject property. Consequently, neither does the buyer at the
foreclosure sale acquire any title thereto.

Statement of the Case

Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, assailing the March 30, 2001
Decision[1] of the Court of Appeals (CA) in CA-GR No. 58346. The decretal portion of the challenged Decision reads as
follows:

WHEREFORE, upon the premises, the assailed Decision is REVERSED and SET ASIDE. A new one is rendered declaring
BANCOMs right to the subject land as a purchaser in good faith and for value, and ordering the cancellation of the
Notice of Lis Pendens on TCT No. 248262-Bulacan. Without pronouncement as to costs.[2]

The Facts

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The factual antecedents of the case are summarized by the Court of Appeals thus:

Brothers Rev. Fr. Edilberto Cruz and Simplicio Cruz, plaintiffs herein, were the registered owners of a 339,335 square
meter or 33.9335 hectare parcel of agricultural land together with improvements located in Barangay Pulang Yantoc,
Angat, Bulacan covered by TCT No. 19587. Sometime in May 1978, defendant Norma Sulit, after being introduced by
Candelaria Sanchez to Fr. Cruz, offered to purchase the land. Plaintiffs asking price for the land was P700,000.00, but
Norma only had P25,000.00 which Fr. Cruz accepted as earnest money with the agreement that titles would be
transferred to Norma upon payment of the balance of P675,000.00. Norma failed to pay the balance and proposed
[to] Fr. Cruz to transfer the property to her but the latter refused, obviously because he had no reason to trust
Norma. But capitalizing on the close relationship of Candelaria Sanchez with the plaintiffs, Norma succeeded in
having the plaintiffs execute a document of sale of the land in favor of Candelaria who would then obtain a bank loan
in her name using the plaintiffs land as collateral. On the same day, Candelaria executed another Deed of Absolute
Sale over the land in favor of Norma. In both documents, it appeared that the consideration for the sale of the land
was only P150,000.00. Pursuant to the sale, Norma was able to effect the transfer of the title to the land in her name
under TCT No. T-248262.

Evidence shows that aside from the P150,000.00, Candelaria undertook to pay the plaintiffs the amount of
P655,000.00 representing the balance of the actual price of the land. In a Special Agreement dated September 1,
1978, Norma assumed Candelarias obligation, stipulating to pay the plaintiffs the said amount within six months on
pain of fine or penalty in case of non-fulfillment. Unknown to the plaintiffs, Norma managed to obtain a loan from
Bancom in the amount of P569,000.00 secured by a mortgage over the land now titled in her name.

On account of Normas failure to pay the amount stipulated in the Special Agreement and her subsequent
disappearance from her usual address, plaintiffs were prompted to file the herein complaint for the reconveyance of
the land.

Norma filed an Answer on February 11, 1980 but failed to appear in court and was eventually declared in default. On
May 20, 1980, Bancom filed a motion for leave to intervene which was granted by the trial court. In its Answer in
Intervention, Bancom claimed priority as mortgagee in good faith; and that its contract of mortgage with Norma had
been executed before the annotation of plaintiffs interest in the title.

Meanwhile in the middle of 1980, Norma defaulted in her payment to the Bank and her mortgage was foreclosed. At
the subsequent auction sale, Bancom was declared the highest bidder and was issued the corresponding certificate
of sale over the land.

On January 25, 1996, the trial court rendered the herein assailed Decision in favor of the plaintiffs. It ruled that the
contract of sale between plaintiffs and Candelaria was absolutely simulated. Consequently, the second contract of
sale, that is, between Candelaria and Norma, produced no legal effect. As for Bancom, the trial court held that the
Bank was not a mortgagee in good faith thus it can not claim priority of rights over plaintiffs property.[3]

252
Ruling of the Court of Appeals

In reversing the RTC, the CA held that the Deeds of Sale were valid and binding, not simulated. Thus, the Contract of
Mortgage between Sulit and respondent was likewise valid.

Petitioners, the CA ruled, intended to be bound by the Contracts of Sale and Mortgage, because they did not seek to
annul the same but instead executed a special agreement to enforce payment of the balance of the price in the
amount of P665,000.00.[4]

Furthermore, it upheld respondent as a mortgagee in good faith; ergo, it had a preferential right to the land.

Hence, this Petition.[5]

Issues

In their Memorandum, petitioners raise the following issues for this Courts consideration:

Whether or not the Honorable Court of Appeals seriously erred when it held that the petitioners intended to enter
into a sale of the property in question and that the declarations of Petitioner Fr. Edilberto Cruz in Court belied the
court a quos finding that the Deeds of Sale in question were absolute simulations.

II

Whether or not the Honorable Court of Appeals gravely erred when it ruled that respondent bank was a mortgagee
in good faith, despite the fact that respondent Bancom was in truth and in fact a mortgagee in bad faith over the
subject property.

253
III

Whether or not the Honorable Court of Appeals seriously erred when it ruled that the face of the title [to] the
property did not disclose any irregularity that would arouse suspicion by respondent bank as to the condition of the
subject land despite the fact that questions and circumstances abound which would render respondent bank not a
mortgagee in good faith, and that the case of Sunshine Finance Investment Corporation vs. Intermediate Appellate
Court applies to the instant case.

IV

Whether or not the Honorable Court of Appeals gravely erred when it ruled that respondent bank possesses a
preferential right over petitioners on the subject land as a mortgagee in good faith.[6]

The above issues can be summed up into two: (1) the validity of the Deeds of Sale and Mortgage and (2) the good
faith of the mortgagee.

This Courts Ruling

The Petition is meritorious.

First Issue:

Validity of the Sale and the Mortgage

Petitioners claim that the Deed of Sale[7] they executed with Sanchez, as well as the Deed of Sale[8] executed
between Sanchez and Sulit, was absolutely simulated; hence, null and void. On the other hand, echoing the appellate
court, respondent contends that petitioners intended to be bound by those Deeds, and that the real estate
mortgage over the subject property was valid.

As a general rule, when the terms of a contract are clear and unambiguous about the intention of the contracting
parties, the literal meaning of its stipulations shall control. But if the words appear to contravene the evident

254
intention of the parties, the latter shall prevail over the former.[9] The real nature of a contract may be determined
from the express terms of the agreement, as well as from the contemporaneous and subsequent acts of the parties
thereto.[10]

On the other hand, simulation takes place when the parties do not really want the contract they have executed to
produce the legal effects expressed by its wordings.[11] Simulation or vices of declaration may be either absolute or
relative. Article 1345 of the Civil Code distinguishes an absolute simulation from a relative one while Article 1346
discusses their effects, as follows:

Art. 1345. Simulation of a contract may be absolute or relative. The former takes place when the parties do not
intend to be bound at all; the latter when the parties conceal their true agreement.

Art. 1346. An absolutely simulated contract is void. A relative simulation, when it does not prejudice a third person
and is not intended for any purpose contrary to law, morals, good customs, public order or public policy binds the
parties to their agreement.

In Rongavilla v. Court of Appeals,[12] we held that a deed of sale, in which the stated consideration had not in fact
been paid, was a false contract; that is void ab initio. Furthermore, Ocejo v. Flores,[13] ruled that a contract of
purchase and sale is null and void and produces no effect whatsoever where it appears that [the] same is without
cause or consideration which should have been the motive thereof, or the purchase price which appears thereon as
paid but which in fact has never been paid by the purchaser to the vendor.

Although the Deed of Sale[14] between petitioners and Sanchez stipulated a consideration of P150,000, there was
actually no exchange of money between them. Petitioner Edilberto Cruz narrated how the transaction came about:

ATTY. CABRERA:

Q Why did you execute the deed of sale in favor of Candelaria Sanchez since it was Norma Sulit with whom you are
transacting?

A Because Norma Sulit made the promise to Mrs. Candelaria Sanchez that upon acquiring the title from us, they can
borrow money from the Bank. So it is a way of acquiring the title from us, sir.

255
Q. This deed of sale marked Exhibit D which you just identified, stipulates a consideration of P150,000.00. The
question, Father, is - did you receive the P150,000.00?

ATTY. AGRAVANTE

Objection, your Honor, the document is the best evidence.

ATTY. CABRERA

This is an action to annul a certain contract.

COURT

He received the consideration stated in the contract. The witness may answer.

WITNESS

A Not a single centavo we received from Candelaria Sanchez as if it is nominal, sir.

ATTY. CABRERA

Q If you did not receive this P150,000.00 stated in this deed of sale that you and your brother executed from
Candelaria Sanchez, did you receive the said amount from Norma Sulit or anybody else for that matter?

A Not a single centavo, sir.[15]

256
His claim was corroborated by Sanchez. She likewise said that the Deed of Sale[16] she executed with Sulit, for which
she did not receive any consideration was only for the purpose of placing the title to the property in the latters
name. She testified as follows:

Q And so you transferred the property in favor of Norma Sulit?

A Yes, sir.

Q I am showing to you this document which has already been marked when the representative of the Register of
Deeds produced the pertinent documents before the court as Exhibit C, is this that document that you executed
transferring the property in the name of Norma Sulit?

A Yes, sir, this is it.

Q There is a consideration of P150,000.00 stated in this Exhibit C, were you paid by Norma Sulit the amount of
P150,000.00 appearing in this Exhibit C?

ATTY BUYCO:

The question is leading, Your Honor.

COURT:

Witness may answer.

A No amount was given, sir. We prepared this document to transfer the title [to] her name only.[17]

257
Respondent never offered any evidence to refute the foregoing testimonies.[18] On the contrary, it even admitted
that the stipulated consideration of P150,000 in the two Deeds of Sale had never been actually paid by Sanchez to
petitioners;[19] neither by Sulit to the former.[20]

Another telling sign of simulation was the complete absence of any attempt on the part of the buyers -- Sanchez and
Sulit -- to assert their alleged rights of ownership over the subject property.[21] This fact was confirmed by
respondent which, however, tried to justify the non-occupancy of the land by Sanchez and Sulit. Supposedly,
because the two failed to pay the purchase price of the land, they could not force petitioners to vacate it.[22]

The records clearly show that the two Deeds of Absolute Sale were executed over the same property on the same
date, June 21, 1978. Six days thereafter, on June 27, 1978, it was mortgaged by Sulit to Federal Insurance Company for
P500,000. The mortgage was cancelled when she again mortgaged the property to respondent for P569,000 on
August 22, 1979. It is also undisputed that petitioners did not receive any portion of the proceeds of the loan.

Clearly, the Deeds of Sale were executed merely to facilitate the use of the property as collateral to secure a loan
from a bank.[23] Being merely a subterfuge, these agreements could not have been the source of any consideration
for the supposed sales.[24] Indeed, the execution of the two documents on the same day sustains the position of
petitioners that the Contracts of Sale were absolutely simulated, and that they received no consideration therefor.
[25]

The failure of Sulit to take possession of the property purportedly sold to her was a clear badge of simulation that
rendered the whole transaction void and without force and effect, pursuant to Article 1409[26] of the Civil Code.[27]
The fact that she was able to secure a Certificate of Title to the subject property in her name did not vest her with
ownership over it.[28] A simulated deed of sale has no legal effect; consequently any transfer certificate of title (TCT)
issued in consequence thereof should be cancelled.[29] A simulated contract is not a recognized mode of acquiring
ownership.[30]

Second Issue:

Good Faith of Mortgagee

Petitioners argue that respondent was not a mortgagee in good faith because, at the time it registered the real
estate mortgage over the subject property, their adverse claim and notice of lis pendens had already been annotated
on the TCT (on October 30, 1979 and December 10, 1979, respectively). On the other hand, respondent maintains that
petitioners were the ones in bad faith, because they already had knowledge of the existence of the mortgage over
the property when they caused the annotation of their adverse claim and notice of lis pendens.

258
As a general rule, every person dealing with registered land may safely rely on the correctness of the certificate of
title and is no longer required to look behind the certificate in order to determine the actual owner.[31] To do so
would be contrary to the evident purpose of Section 39 of Act 496 which we quote hereunder:

Sec. 39. Every person receiving a certificate of title in pursuance of a decree of registration, and every subsequent
purchaser of registered land who takes a certificate of title for value in good faith shall hold the same free of all
encumbrances except those noted on said certificate, and any of the following encumbrances which may be
subsisting, namely:

First. Liens, claims, or rights arising or existing under the laws or Constitution of the United States or of the Philippine
Islands which the statutes of the Philippine Islands cannot require to appear of record in the Registry.

Second. Taxes within two years after the same became due and payable.

Third. Any public highway, way, private way established by law, or any Government irrigation canal or lateral thereof,
where the certificate of title does not state that the boundaries of such highway, way, or irrigation canal or lateral
thereof, have been determined.

But if there are easements or other rights appurtenant to a parcel of registered land which for any reason have failed
to be registered, such easements or rights shall remain so appurtenant notwithstanding such failure, and shall be
held to pass with the land until cut off or extinguished by the registration of the servient estate, or in any other
manner.

This rule is, however, subject to the right of a person deprived of land through fraud to bring an action for
reconveyance, provided the rights of innocent purchasers for value and in good faith are not prejudiced. An innocent
purchaser for value or any equivalent phrase shall be deemed, under Section 38 of the same Act,[32] to include an
innocent lessee, mortgagee or any other encumbrancer for value.[33]

Respondent claims that, being an innocent mortgagee, it should not be required to conduct an exhaustive
investigation on the history of the mortgagors title before it could extend a loan.[34]

Respondent, however, is not an ordinary mortgagee; it is a mortgagee-bank. As such, unlike private individuals, it is
expected to exercise greater care and prudence in its dealings, including those involving registered lands.[35] A
banking institution is expected to exercise due diligence before entering into a mortgage contract.[36] The
ascertainment of the status or condition of a property offered to it as security for a loan must be a standard and
indispensable part of its operations.[37]

259
In Rural Bank of Compostela v. CA,[38] we held that a bank that failed to observe due diligence was not a mortgagee
in good faith. In the words of the ponencia:

x x x [T]he rule that persons dealing with registered lands can rely solely on the certificate of title does not apply to
banks.

Banks, indeed, should exercise more care and prudence in dealing even with registered lands, than private
individuals, for their business is one affected with public interest, keeping in trust money belonging to their
depositors, which they should guard against loss by not committing any act of negligence which amounts to lack of
good faith by which they would be denied the protective mantle of the land registration statute, Act [No.] 496,
extended only to purchasers for value and in good faith, as well as to mortgagees of the same character and
description. (Citations omitted)

Recently, in Adriano v. Pangilinan,[39] we said that the due diligence required of banks extended even to persons
regularly engaged in the business of lending money secured by real estate mortgages.

The evidence before us indicates that respondent bank was not a mortgagee in good faith.[40] First, at the time the
property was mortgaged to it, it failed to conduct an ocular inspection.[41] Judicial notice is taken of the standard
practice for banks before they approve a loan: to send representatives to the premises of the land offered as
collateral and to investigate the ownership thereof.[42] As correctly observed by the RTC, respondent, before
constituting the mortgage over the subject property, should have taken into consideration the following questions:

1) Was the price of P150,000.00 for a 33.9 hectare agricultural parcel of land not too cheap even in 1978?

2) Why did Candelaria Sanchez sell the property at the same price of P150,000.00 to Norma Sulit on the same date,
June 21, 1978 when she supposedly acquired it from the plaintiffs?

3) Being agricultural land, didnt it occur to the intervenors that there would be tenants to be compensated or who
might pose as obstacles to the mortgagees exercise of acts of dominion?

4) In an area as big as that property, [why] did they not verify if there were squatters?

260
5) What benefits or prospects thereof could the ultimate owner expect out of the property?

Verily, the foregoing circumstances should have been looked into, for if either or both companies did, they could
have discovered that possession of the land was neither with Candelaria nor with Norma.[43]

Respondent was clearly wanting in the observance of the necessary precautions to ascertain the flaws in the title of
Sulit and to examine the condition of the property she sought to mortgage.[44] It should not have simply relied on
the face of the Certificate of Title to the property, as its ancillary function of investing funds required a greater
degree of diligence.[45] Considering the substantial loan involved at the time, it should have exercised more caution.
[46]

Moreover, the subject property, being situated in Bulacan, could have been easily and conveniently inspected by
respondent. A person who deliberately ignores a significant fact that would create suspicion in an otherwise
reasonable person is not an innocent purchaser for value.[47]

Second, respondent was already aware that there was an adverse claim and notice of lis pendens annotated on the
Certificate of Title when it registered the mortgage on March 14, 1980. Unless duly registered, a mortgage does not
affect third parties like herein petitioners, as provided under Section 51 of PD NO. 1529,[48] which we reproduce
hereunder:

SEC. 51. Conveyance and other dealings by registered owner. - An owner of registered land may convey, mortgage,
lease, charge or otherwise deal with the same in accordance with existing laws. He may use such forms of deeds,
mortgages, leases or other voluntary instruments [as] are sufficient in law. But no deed, mortgage, lease, or other
voluntary instrument except a will, purporting to convey or affect registered land, shall take effect as a conveyance
or bind the land, but shall operate only as a contract between the parties and as evidence of authority to the clerk or
register of deeds to make registration.

The act of registration shall be the operative act to convey and affect the land, and in all cases under this Act the
registration shall be made in the office of the register of deeds for the province or city, where the land lies.

True, registration is not the operative act for a mortgage to be binding between the parties. But to third persons, it is
indispensible.[49] In the present case, the adverse claim and the notice of lis pendens were annotated on the title on
October 30, 1979 and December 10, 1979, respectively; the real estate mortgage over the subject property was
registered by respondent only on March 14, 1980. Settled in this jurisdiction is the doctrine that a prior registration of
a lien creates a preference.[50] Even a subsequent registration of the prior mortgage will not diminish this
preference, which retroacts to the date of the annotation of the notice of lis pendens and the adverse claim.[51]
Thus, respondents failure to register the real estate mortgage[52] prior to these annotations, resulted in the
mortgage being binding only between it and the mortgagor, Sulit. Petitioners, being third parties to the mortgage,

261
were not bound by it.[53] Contrary to respondents claim that petitioners were in bad faith because they already had
knowledge of the existence of the mortgage in favor of respondent when they caused the aforesaid annotations,
petitioner Edilberto Cruz said that they only knew of this mortgage when respondent intervened in the RTC
proceedings.[54]

On the question of who has a preferential right over the property, the long-standing rule, as provided by Article
2085[55] of the Civil Code,[56] is that only the absolute owner of the property can constitute a valid mortgage on it.
In case of foreclosure, a sale would result in the transmission only of whatever rights the seller had over of the thing
sold.[57]

In the instant case, the two Deeds of Sale were absolutely simulated; hence, null and void.[58] Thus, they did not
convey any rights that could ripen into valid titles.[59] Necessarily, the subsequent real estate mortgage constituted
by Sulit in favor of respondent was also null and void, because the former was not the owner thereof. There being no
valid real estate mortgage, there could also be no valid foreclosure or valid auction sale, either. At bottom,
respondent cannot be considered either as a mortgagee or as a purchaser in good faith. This being so, petitioners
would be in the same position as they were before they executed the simulated Deed of Sale in favor of Sanchez.
They are still the owners of the property.[60]

WHEREFORE, the Petition is GRANTED and the assailed Decision SET ASIDE. The Decision of the RTC of Bulacan,
(Branch 21) dated January 25, 1996 is REINSTATED. No costs.

SO ORDERED.

[G.R. No. 128567. September 1, 2000]

HUERTA ALBA RESORT, INC., petitioner, vs. COURT OF APPEALS and SYNDICATED MANAGEMENT GROUP, INC.,
respondents.

DECISION

PURISIMA, J.:

Litigation must at some time be terminated, even at the risk of occasional errors. Public policy dictates that once a
judgment becomes final, executory and unappealable, the prevailing party should not be denied the fruits of his
victory by some subterfuge devised by the losing party. Unjustified delay in the enforcement of a judgment sets at
naught the role of courts in disposing justiciable controversies with finality.

262
TheCase

At bar is a petition assailing the Decision, dated November 14, 1996, and Resolution, dated March 11, 1997, of the
Court of Appeals in CA-G.R. No. 38747, which set aside the Order, dated July 21, 1995, and Order, dated September 4,
1997, of the Regional Trial Court of Makati City, in Civil Case No. 89-5424. The aforesaid orders of the trial court held
that petitioner had the right to redeem subject pieces of property within the one-year period prescribed by Section
78 of Republic Act No. 337 otherwise known as the General Banking Act.

Section 78 of R.A. No. 337 provides that in case of a foreclosure of a mortgage in favor of a bank, banking or credit
institution, whether judicially or extrajudicially, the mortgagor shall have the right, within one year after the sale of
the real estate as a result of the foreclosure of the respective mortgage, to redeem the property.

TheFacts

The facts that matter are undisputed:

In a complaint for judicial foreclosure of mortgage with preliminary injunction filed on October 19, 1989, docketed as
Civil Case No. 89-5424 before the Regional Trial Court of Makati City, the herein private respondent sought the
foreclosure of four (4) parcels of land mortgaged by petitioner to Intercon Fund Resource, Inc. (Intercon).

Private respondent instituted Civil Case No. 89-5424 as mortgagee-assignee of a loan amounting to P8.5 million
obtained by petitioner from Intercon, in whose favor petitioner mortgaged the aforesaid parcels of land as security
for the said loan.

In its answer below, petitioner questioned the assignment by Intercon of its mortgage right thereover to the private
respondent, on the ground that the same was ultra vires. Petitioner also questioned during the trial the correctness
of the charges and interest on the mortgage debt in question.

On April 30, 1992, the trial court, through the then Judge now Court of Appeals Justice Buenaventura J. Guerrero,
came out with its decision granting herein private respondent SMGIs complaint for judicial foreclosure of mortgage,
disposing as follows:

WHEREFORE, judgment is hereby rendered ordering defendant to pay plaintiff the following:

263
(1) P8,500,000.00 representing the principal of the amount due;

(2) P850,000.00 as penalty charges with interest at 6% per annum, until fully paid;

(3) 22% per annum interest on the above principal from September 6, 1998, until fully paid;

(4) 5% of the sum total of the above amounts, as reasonable attorneys fees; and,

(5) Costs.

All the above must be paid within a period of not less than 150 days from receipt hereof by the defendant. In default
of such payment, the four parcels of land subject matter of the suit including its improvements shall be sold to
realize the mortgage debt and costs, in the manner and under the regulations that govern sales of real estate under
execution.[1]

Petitioner appealed the decision of the trial court to the Court of Appeals, the appeal docketed as CA-G.R. CV No.
39243 before the Sixth Division of the appellate court, which dismissed the case on June 29, 1993 on the ground of
late payment of docket fees.

Dissatisfied with the dismissal of CA-G.R. No. 39243, petitioner came to this Court via a petition for certiorari,
docketed as G.R. No. 112044, which this court resolved to dismiss on December 13, 1993, on the finding that the Court
of Appeals erred not in dismissing the appeal of petitioner.

Petitioners motion for reconsideration of the dismissal of its petition in G.R. No. 112044 was denied with finality in
this Courts Resolution promulgated on February 16, 1994. On March 10, 1994, leave to present a second motion for
reconsideration in G.R. No. 112044 or to submit the case for hearing by the Court en banc was filed, but to no avail.
The Court resolved to deny the same on May 11, 1994.

On March 14, 1994, the Resolution dated December 13, 1993, in G.R. No. 112044 became final and executory and was
entered in the Book of Entries of Judgment.

264
On July 4, 1994, private respondent filed with the trial court of origin a motion for execution of the Decision
promulgated on April 30, 1992 in Civil Case No. 89-5424. The said motion was granted on July 13, 1994.

Accordingly, on July 15, 1994 a writ of execution issued and, on July 20, 1994, a Notice of Levy and Execution was
issued by the Sheriff concerned, who issued on August 1, 1994 a Notice of Sheriffs Sale for the auction of subject
properties on September 6, 1994.

On August 23, 1994, petitioner filed with the same trial court an Urgent Motion to Quash and Set Aside Writ of
Execution ascribing to it grave abuse of discretion in issuing the questioned Writ of Execution. To support its motion,
petitioner invited attention and argued that the records of the case were still with the Court of Appeals and
therefore, issuance of the writ of execution was premature since the 150-day period for petitioner to pay the
judgment obligation had not yet lapsed and petitioner had not yet defaulted in the payment thereof since no
demand for its payment was made by the private respondent. In petitioners own words, the dispute between the
parties was principally on the issue as to when the 150-day period within which Huerta Alba may exercise its equity of
redemption should be counted.

In its Order of September 2, 1994, the lower court denied petitioners urgent motion to quash the writ of execution in
Civil Case No. 89-5424, opining that subject judgment had become final and executory and consequently, execution
thereof was a matter of right and the issuance of the corresponding writ of execution became its ministerial duty.

Challenging the said order granting execution, petitioner filed once more with the Court of Appeals another petition
for certiorari and prohibition with preliminary injunction, docketed as C.A.-G.R. SP No. 35086, predicated on the same
grounds invoked for its Motion to Quash Writ of Execution.

On September 6, 1994, the scheduled auction sale of subject pieces of properties proceeded and the private
respondent was declared the highest bidder. Thus, private respondent was awarded subject bidded pieces of
property. The covering Certificate of Sale issued in its favor was registered with the Registry of Deeds on October 21,
1994.

On September 7, 1994, petitioner presented an Ex-Parte Motion for Clarification asking the trial court to clarify
whether or not the twelve (12) month period of redemption for ordinary execution applied in the case.

On September 26, 1994, the trial court ruled that the period of redemption of subject property should be governed
by the rule on the sale of judicially foreclosed property under Rule 68 of the Rules of Court.

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Thereafter, petitioner then filed an Exception to the Order dated September 26, 1994 and Motion to Set Aside Said
Order, contending that the said Order materially altered the Decision dated April 30, 1992 which declared that the
satisfaction of the judgment shall be in the manner and under the regulation that govern sale of real estate under
execution.

Meanwhile, in its Decision of September 30, 1994, the Court of Appeals resolved the issues raised by the petitioner in
C.A.-G.R. SP No. 35086, holding that the one hundred-fifty day period within which petitioner may redeem subject
properties should be computed from the date petitioner was notified of the Entry of Judgment in G.R. No. 112044;
and that the 150-day period within which petitioner may exercise its equity of redemption expired on September 11,
1994. Thus:

Petitioner must have received the resolution of the Supreme Court dated February 16, 1994 denying with finality its
motion for reconsideration in G.R. No. 112044 before March 14, 1994, otherwise the Supreme Court would not have
made an entry of judgment on March 14, 1994. While, computing the 150-day period, petitioner may have until
September 11, 1994, within which to pay the amounts covered by the judgment, such period has already expired by
this time, and therefore, this Court has no more reason to pass upon the parties opposing contentions, the same
having become moot and academic.[2](Underscoring supplied).

Petitioner moved for reconsideration of the Decision of the Court of Appeals in C.A.-G.R. SP No. 35086. In its Motion
for Reconsideration dated October 18, 1994, petitioner theorized that the period of one hundred fifty (150) days
should not be reckoned with from Entry of Judgment but from receipt on or before July 29, 1994 by the trial court of
the records of Civil Case No. 89-5424 from the Court of Appeals. So also, petitioner maintained that it may not be
considered in default, even after the expiration of 150 days from July 29, 1994, because prior demand to pay was
never made on it by the private respondent. According to petitioner, it was therefore, premature for the trial court
to issue a writ of execution to enforce the judgment.

The trial court deferred action on the Motion for Confirmation of the Certificate of Sale in view of the pendency of
petitioners Motion for Reconsideration in CA-G.R. SP No. 35086.

On December 23, 1994, the Court of Appeals denied petitioners motion for reconsideration in CA-G.R. SP No. 35086.
Absent any further action with respect to the denial of the subject motion for reconsideration, private respondent
presented a Second Motion for Confirmation of Certificate of Sale before the trial court.

As regards the Decision rendered on September 30, 1994 by the Court of Appeals in CA G.R. SP No. 35086 it became
final and executory on January 25, 1995.

On February 10, 1995, the lower court confirmed the sale of subject properties to the private respondent. The
pertinent Order declared that all pending incidents relating to the Order dated September 26, 1994 had become

266
moot and academic. Conformably, the Transfer Certificates of Title to subject pieces of property were then issued to
the private respondent.

On February 27, 1995, petitioner filed with the Court of Appeals a Motion for Clarification seeking clarification of the
date of commencement of the one (1) year period for the redemption of the properties in question.

In its Resolution dated March 20, 1995, the Court of Appeals merely noted such Motion for Clarification since its
Decision promulgated on September 30, 1994 had already become final and executory; ratiocinating thus:

We view the motion for clarification filed by petitioner, purportedly signed by its proprietor, but which we believe
was prepared by a lawyer who wishes to hide under the cloak of anonymity, as a veiled attempt to buy time and to
delay further the disposition of this case.

Our decision of September 30, 1994 never dealt on the right and period of redemption of petitioner, but was merely
circumscribed to the question of whether respondent judge could issue a writ of execution in its Civil Case No. 89-
5424 xxx.

We further ruled that the one-hundred fifty day period within which petitioner may exercise its equity of redemption
should be counted, not from the receipt of respondent court of the records of Civil Case No. 89-5424 but from the
date petitioner was notified of the entry of judgment made by the appellate court.

But we never made any pronouncement on the one- year right of redemption of petitioner because, in the first place,
the foreclosure in this case is judicial, and as such, the mortgagor has only the equity, not the right of redemption
xxx. While it may be true that under Section 78 of R.A. 337 as amended, otherwise known as the General Banking
Act, a mortgagor of a bank, banking or credit institution, whether the foreclosure was done judicially or
extrajudicially, has a period of one year from the auction sale within which to redeem the foreclosed property, the
question of whether the Syndicated Management Group, Inc., is a bank or credit institution was never brought
before us squarely, and it is indeed odd and strange that petitioner would now sarcastically ask a rhetorical question
in its motion for clarification.[3] (Underscoring supplied).

Indeed, if petitioner did really act in good faith, it would have ventilated before the Court of Appeals in CA-G.R. No.
35086 its pretended right under Section 78 of R.A. No. 337 but it never did so.

At the earliest opportunity, when it filed its answer to the complaint for judicial foreclosure, petitioner should have
averred in its pleading that it was entitled to the beneficial provisions of Section 78 of R.A. No. 337; but again,
petitioner did not make any such allegation in its answer.

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From the said Resolution, petitioner took no further step such that on March 31, 1995, the private respondent filed a
Motion for Issuance of Writ of Possession with the trial court.

During the hearing called on April 21, 1995, the counsel of record of petitioner entered appearance and asked for
time to interpose opposition to the Motion for Issuance of /Writ of Possession.

On May 2, 1995, in opposition to private respondents Motion for Issuance of /writ of Possession, petitioner filed a
Motion to Compel Private Respondent to Accept Redemption. It was the first time petitioner ever asserted the right
to redeem subject properties under Section 78 of R.A. No. 337, the General Banking Act; theorizing that the original
mortgagee, being a credit institution, its assignment of the mortgage credit to petitioner did not remove petitioner
from the coverage of Section 78 of R.A. No. 337. Therefore, it should have the right to redeem subject properties
within one year from registration of the auction sale, theorized the petitioner which concluded that in view of its
right of redemption, the issuance of the titles over subject parcels of land to the private respondent was irregular
and premature.

In its Order of July 21, 1995, the trial court, presided over by Judge Napoleon Inoturan, denied private respondents
motion for a writ of possession, opining that Section 78 of the General Banking Act was applicable and therefore, the
petitioner had until October 21, 1995 to redeem the said parcels of land, said Order ruled as follows:

It is undisputed that Intercon is a credit institution from which defendant obtained a loan secured with a real estate
mortgage over four (4) parcels of land. Assuming that the mortgage debt had not been assigned to plaintiff, there is
then no question that defendant would have a right of redemption in case of foreclosure, judicially or extrajudicially,
pursuant to the above quoted Section 78 of RA 337, as amended.

However, the pivotal issue here is whether or not the defendant lost its right of redemption by virtue of the
assignment of its mortgage debt by Intercon to plaintiff, which is not a bank or credit institution. The issue is
resolved in the negative. The right of redemption in this case is vested by law and is therefore an absolute privilege
which defendant may not lose even though plaintiff-assignee is not a bank or credit institution (Tolentino versus
Court of Appeals, 106 SCRA 513). Indeed, a contrary ruling will lead to a possible circumvention of Section 78 because
all that may be needed to deprive a defaulting mortgagor of his right of redemption is to assign his mortgage debt
from a bank or credit institution to one which is not. Protection of defaulting mortgagors, which is the avowed policy
behind the provision, would not be achieved if the ruling were otherwise. Consequently, defendant still possesses its
right of redemption which it may exercise up to October 21, 1995 only, which is one year from the date of registration
of the certificate of sale of subject properties (GSIS versus Iloilo, 175 SCRA 19, citing Limpin versus IAC, 166 SCRA 87).

Since the period to exercise defendants right of redemption has not yet expired, the cancellation of defendants
transfer certificates of title and the issuance of new ones in lieu thereof in favor of plaintiff are therefore illegal for
being premature, thereby necessitating reconveyance (see Sec. 63 (a) PD 1529, as amended).

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WHEREFORE, the Court hereby rules as follows:

(1) The Motion for Issuance of Writ of Possession is hereby denied;

(2) Plaintiff is directed to accept the redemption on or before October 21, 1995 in an amount computed according to
the terms stated in the Writ of Execution dated July 15, 1994 plus all other related costs and expenses mentioned
under Section 78, RA 337, as amended; and

(3) The Register of Deeds of Valenzuela, Bulacan is directed (a) to reconvey to the defendant the following titles of
the four (4) parcels of land, namely TCT Nos. V-38878, V-38879, V-38880, and V-38881, now in the name of plaintiff,
and (b) to register the certificate of sale dated October 7, 1994 and the Order confirming the sale dated February 10,
1995 by a brief memorandum thereof upon the transfer certificates of title to be issued in the name of defendant,
pursuant to Sec. 63 (a) PD 1529, as amended.

The Omnibus Motion dated June 5, 1995, together with the Opposition thereto, is now deemed resolved.

SO ORDERED.[4]

Private respondent interposed a Motion for Reconsideration seeking the reversal of the Order but to no avail. In its
Order dated September 4, 1995, the trial court denied the same.

To attack and challenge the aforesaid order of July 21, 1995 and subsequent Order of September 4, 1995 of the trial
court, the private respondent filed with this court a Petition for Certiorari, Prohibition and Mandamus, docketed as
G.R. No. 121893, but absent any special and cogent reason shown for entertaining the same, the Court referred the
petition to the Court of Appeals, for proper determination.

Docketed as G.R. No. 387457 on November 14, 1996, the Court of Appeals gave due course to the petition and set
aside the trial courts Order dated July 21, 1995 and Order dated September 4, 1995.

In its Resolution of March 11, 1997, the Court of Appeals denied petitioners Motion for Reconsideration of the
Decision promulgated on November 14, 1996 in CA-G.R. No. 38747.

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Undaunted, petitioner has come to this Court via the present petition, placing reliance on the assignment of errors,
that:

THE RESPONDENT COURT OF APPEALS ERRED GRAVELY IN HOLDING THAT THE COURT OF APPEALS (TWELFTH
DIVISION) IN CA G.R. SP NO. 35086 HAD RESOLVED WITH FINALITY THAT PETITIONER HUERTA ALBA HAD NO RIGHT
OF REDEMPTION BUT ONLY THE EQUITY OF REDEMPTION.

II

THE RESPONDENT COURT OF APPEALS ERRED GRAVELY IN IGNORING THAT PETITIONER HUERTA ALBA POSSESSES
THE ONE-YEAR RIGHT OF REDEMPTION UNDER SECTION 78, R.A. NO. 337 (THE GENERAL BANKING ACT).

III

THE RESPONDENT COURT OF APPEALS ERRED GRAVELY IN HOLDING THAT PRIVATE RESPONDENT SYNDICATED
MANAGEMENT GROUP, INC. IS ENTITLED TO THE ISSUANCE OF A WRIT OF POSSESSION OVER THE SUBJECT
PROPERTY.[5]

In its comment on the petition, private respondent countered that:

A. THE HONORABLE COURT OF APPEALS CORRECTLY HELD THAT IT RESOLVED WITH FINALITY IN C.A.-G.R. SP NO.
35086 THAT PETITIONER ONLY HAD THE RIGHT OF REDEMPTION IN RESPECT OF THE SUBJECT PROPERTIES.

B. THE PETITION IS AN INSIDIOUS AND UNDERHANDED ATTEMPT TO EVADE THE FINALITY OF VARIOUS DECISIONS,
RESOLUTIONS AND ORDERS WHICH HELD THAT PETITIONER ONLY POSSESSES THE EQUITY OF REDEMPTION IN
RESPECT OF THE SUBJECT PROPERTIES.

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C. PETITIONER IS BARRED BY ESTOPPEL FROM BELATEDLY RAISING THE ISSUE OF ITS ALLEGED RIGHT OF
REDEMPTION.

D. IN HOLDING THAT THE PETITIONER HAD THE RIGHT OF REDEMPTION OVER THE SUBJECT PROPERTIES, THE
TRIAL COURT MADE A MOCKERY OF THE LAW OF THE CASE.[6]

And by way of Reply, petitioner argued, that:

I.

THE COURT OF APPEALS IN CA G.R. SP NO. 35086 COULD NOT HAVE POSSIBLY RESOLVED THEREIN - WHETHER
WITH FINALITY OR OTHERWISE - THE ISSUE OF PETITIONER HUERTA ALBAS RIGHT OF REDEMPTION UNDER
SECTION 78, R.A. NO. 337.

II.

THERE IS NO ESTOPPEL HERE. PETITIONER HUERTA ALBA INVOKED ITS RIGHT OF REDEMPTION UNDER SECTION 78,
R.A. NO. 337 IN TIMELY FASHION, i.e., AFTER CONFIRMATION BY THE COURT OF THE FORECLOSURE SALE, AND
WITHIN ONE (1) YEAR FROM THE DATE OF REGISTRATION OF THE CERTIFICATE OF SALE.

III.

THE PRINCIPLE OF THE LAW OF THE CASE HAS ABSOLUTELY NO BEARING HERE:

(1)

THE RIGHT OF REDEMPTION UNDER SECTION 78, R.A. NO. 337 IS IN FACT PREDICATED UPON THE FINALITY AND
CORRECTNESS OF THE DECISION IN CIVIL CASE NO. 89-5424.

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(2)

THUS, THE RTCS ORDER RECOGNIZING PETITIONER HUERTA ALBAS RIGHT OF REDEMPTION UNDER SECTION 78,
R.A. NO. 37 DOES NOT IN ANY WAY HAVE THE EFFECT OF AMENDING, MODIFYING, OR SETTING ASIDE THE
DECISION IN CIVIL CASE NO. 89-5424.

The above arguments and counter-arguments advanced relate to the pivotal issue of whether or not the petitioner
has the one-year right of redemption of subject properties under Section 78 of Republic Act No. 337 otherwise
known as the General Banking Act.

The petition is not visited by merit.

Petitioners assertion of right of redemption under Section 78 of Republic Act No. 337 is premised on the submission
that the Court of Appeals did not resolve such issue in CA-G.R. SP No. 35086; contending thus:

(1)

BY NO STRETCH OF LOGIC CAN THE 20 MARCH 1995 RESOLUTION IN CA G.R. SP NO. 35086 BE INTERPRETED TO
MEAN THE COURT OF APPEALS HAD RESOLVED WITH FINALITY THE ISSUE OF WHETHER PETITIONER HUERTA ALBA
HAD THE RIGHT OF REDEMPTION WHEN ALL THAT THE RESOLUTION DID WAS TO MERELY NOTE THE MOTION FOR
CLARIFICATION.

(2)

THE 20 MARCH 1995 RESOLUTION IN CA G.R. SP NO. 35086 IS NOT A FINAL JUDGMENT, ORDER OR DECREE. IT IS
NOT EVEN A JUDGMENT OR ORDER TO BEGIN WITH. IT ORDERS NOTHING; IT ADJUDICATES NOTHING.

(3)

PETITIONER HUERTA ALBAS RIGHT OF REDEMPTION UNDER SECTION 78, R.A. NO. 37 WAS NOT AN ISSUE AND WAS
NOT IN ISSUE, AND COULD NOT HAVE POSSIBLY BEEN AN ISSUE NOR IN ISSUE, IN CA G.R. SP NO. 35086.

272
(4)

THE 30 SEPTEMBER 1994 DECISION IN CA G.R. SP NO. 35086 HAVING ALREADY BECOME FINAL EVEN BEFORE THE
FILING OF THE MOTION FOR CLARIFICATION, THE COURT OF APPEALS NO LONGER HAD ANY JURISDICTION TO ACT
OF THE MOTION OR ANY OTHER MATTER IN CA G.R. SP NO. 35086, EXCEPT TO MERELY NOTE THE MOTION.

II.

IN STARK CONTRAST, THE ISSUE OF PETITIONER HUERTA ALBAS RIGHT OF REDEMPTION UNDER SECTION 78, R.A.
NO. 337 WAS DIRECTLY RAISED AND JOINED BY THE PARTIES, AND THE SAME DULY RESOLVED BY THE TRIAL
COURT.

III.

THE RIGHT OF REDEMPTION UNDER SECTION 78 OF R.A. NO. 337 IS MANDATORY AND AUTOMATICALLY EXISTS BY
LAW. THE COURTS ARE DUTY-BOUND TO RECOGNIZE SUCH RIGHT.

IV.

EQUITABLE CONSIDERATIONS WEIGH HEAVILY IN FAVOR OF PETITIONER HUERTA ALBA, NOT THE LEAST OF WHICH
IS THE WELL-SETTLED POLICY OF THE LAW TO AID RATHER THAN DEFEAT THE RIGHT OF REDEMPTION.

V.

THEREFORE THE 21 JULY 1995 AND 04 SEPTEMBER 1995 ORDERS OF THE TRIAL COURT ARE VALID AND PROPER IN
ACCORDANCE WITH THE MANDATE OF THE LAW.

From the various decisions, resolutions and orders a quo it can be gleaned that what petitioner has been adjudged to
have was only the equity of redemption over subject properties. On the distinction between the equity of

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redemption and right of redemption, the case of Gregorio Y. Limpin vs. Intermediate Appellate Court,[7] comes to
the fore. Held the Court in the said case:

The equity of redemption is, to be sure, different from and should not be confused with the right of redemption.

The right of redemption in relation to a mortgage - understood in the sense of a prerogative to re-acquire mortgaged
property after registration of the foreclosure sale - exists only in the case of the extrajudicial foreclosure of the
mortgage. No such right is recognized in a judicial foreclosure except only where the mortgagee is the Philippine
National Bank or a bank or banking institution.

Where a mortgage is foreclosed extrajudicially, Act 3135 grants to the mortgagor the right of redemption within one
(1) year from the registration of the sheriffs certificate of foreclosure sale.

Where the foreclosure is judicially effected, however, no equivalent right of redemption exists. The law declares that
a judicial foreclosure sale, when confirmed by an order of the court, x x shall operate to divest the rights of all the
parties to the action and to vest their rights in the purchaser, subject to such rights of redemption as may be allowed
by law. Such rights exceptionally allowed by law (i.e., even after confirmation by an order of the court) are those
granted by the charter of the Philippine National Bank (Acts No. 2747 and 2938), and the General Banking Act (R.A.
337). These laws confer on the mortgagor, his successors in interest or any judgment creditor of the mortgagor, the
right to redeem the property sold on foreclosure - after confirmation by the court of the foreclosure sale - which
right may be exercised within a period of one (1) year, counted from the date of registration of the certificate of sale
in the Registry of Property.

But, to repeat, no such right of redemption exists in case of judicial foreclosure of a mortgage if the mortgagee is not
the PNB or a bank or banking institution. In such a case, the foreclosure sale, when confirmed by an order of the
court. x x shall operate to divest the rights of all the parties to the action and to vest their rights in the purchaser.
There then exists only what is known as the equity of redemption. This is simply the right of the defendant
mortgagor to extinguish the mortgage and retain ownership of the property by paying the secured debt within the
90-day period after the judgment becomes final, in accordance with Rule 68, or even after the foreclosure sale but
prior to its confirmation.

Section 2, Rule 68 provides that -

x x If upon the trial x x the court shall find the facts set forth in the complaint to be true, it shall ascertain the amount
due to the plaintiff upon the mortgage debt or obligation, including interest and costs, and shall render judgment for
the sum so found due and order the same to be paid into court within a period of not less than ninety (90) days from
the date of the service of such order, and that in default of such payment the property be sold to realize the
mortgage debt and costs.

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This is the mortgagors equity (not right) of redemption which, as above stated, may be exercised by him even
beyond the 90-day period from the date of service of the order, and even after the foreclosure sale itself, provided it
be before the order of confirmation of the sale. After such order of confirmation, no redemption can be effected any
longer.[8] (Underscoring supplied)

Petitioner failed to seasonably invoke its purported right under Section 78 of R.A. No. 337.

Petitioner avers in its petition that the Intercom, predecessor in interest of the private respondent, is a credit
institution, such that Section 78 of Republic Act No. 337 should apply in this case. Stated differently, it is the
submission of petitioner that it should be allowed to redeem subject properties within one year from the date of sale
as a result of the foreclosure of the mortgage constituted thereon.

The pivot of inquiry here therefore, is whether the petitioner seasonably invoked its asserted right under Section 78
of R.A. No. 337 to redeem subject properties.

Petitioner theorizes that it invoked its "right" in "timely fashion", that is, after confirmation by the court of the
foreclosure sale, and within one (1) year from the date of registration of the certificate of sale. Indeed, the facts
show that it was only on May 2, 1995 when, in opposition to the Motion for Issuance of Writ of Possession, did
petitioner file a Motion to Compel Private Respondent to Accept Redemption, invoking for the very first time its
alleged right to redeem subject properties under to Section 78 of R.A. No. 337.

In light of the aforestated facts, it was too late in the day for petitioner to invoke a right to redeem under Section 78
of R.A. No. 337. Petitioner failed to assert a right to redeem in several crucial stages of the Proceedings.

For instance, on September 7, 1994, when it filed with the trial court an Ex-part Motion for Clarification, petitioner
failed to allege and prove that private respondent's predecessor in interest was a credit institution and therefore,
Section 78 of R.A. No. 337 was applicable. Petitioner merely asked the trial court to clarify whether the sale of subject
properties was execution sale or judicial foreclosure sale.

So also, when it presented before the trial court an Exception to the Order and Motion to Set Aside Said Order dated
October 13, 1994, petitioner again was silent on its alleged right under Section 78 of R.A. No. 337, even as it failed to
show that private respondent's predecessor in interest is a credit institution. Petitioner just argued that the
aforementioned Order materially altered the trial court's Decision of April 30, 1992.

275
Then, too, nothing was heard from petitioner on its alleged right under Section 78 of R.A. No. 337 and of the
predecessor in interest of private respondent as a credit institution, when the trial court came out with an order on
February 10, 1995, confirming the sale of subject properties in favor of private respondent and declaring that all
pending incidents with respect to the Order dated September 26, 1994 had become moot and academic.

Similarly, when petitioner filed on February 27, 1995 a Motion for Clarification with the Court of Appeals, seeking
"clarification" of the date of commencement of the one (1) year redemption period for the subject properties,
petitioner never intimated any alleged right under Section 78 of R.A. No. 337 nor did it invite attention to its present
stance that private respondent's predecessor-in-interest was a credit institution. Consequently, in its Resolution
dated March 20, 1995, the Court of Appeals ruled on the said motion thus:

But we never made any pronouncement on the one-year right of redemption of petitioner because, in the first place,
the foreclosure in this case is judicial, and as such, the mortgagor has only the equity, not the right of redemption
xxx. While it may be true that under Section 78 of R.A. 337 as amended, otherwise known as the General Banking
Act, a mortgagor of a bank, banking or credit institution, whether the foreclosure was done judicially or
extrajudicially, has a period of one year from the auction sale within which to redeem the foreclosed property, the
question of whether the Syndicated Management Group, Inc., is bank or credit institution was never brought before
us squarely, and it is indeed odd and strange that petitioner would now sarcastically ask a rhetorical question in its
motion for clarification.[9] (Underscoring supplied).

If petitioner were really acting in good faith, it would have ventilated before the Court of Appeals in CA-G.R. No.
35086 its alleged right under Section 78 of R.A. No. 337; but petitioner never did do so.

Indeed, at the earliest opportunity, when it submitted its answer to the complaint for judicial foreclosure, petitioner
should have alleged that it was entitled to the beneficial provisions of Section 78 of R.A. No. 337 but again, it did not
make any allegation in its answer regarding any right thereunder. It bears stressing that the applicability of Section
78 of R.A. No. 337 hinges on the factual question of whether or not private respondents predecessor in interest was
a credit institution. As was held in Limpin, a judicial foreclosure sale, when confirmed by an order of the court, xx
shall operate to divest the rights of all the parties to the action and to vest their rights in the purchaser, subject to
such rights of redemption as may be allowed by law,[10] which confer on the mortgagor, his successors in interest or
any judgment creditor of the mortgagor, the right to redeem the property sold on foreclosure after confirmation by
the court of the judicial foreclosure sale. Thus, the claim that petitioner is entitled to the beneficial provisions of
Section 78 of R.A. No. 337 - since private respondents predecessor-in-interest is a credit institution - is in the nature of
a compulsory counterclaim which should have been averred in petitioners answer to the compliant for judicial
foreclosure.

xxx A counterclaim is, most broadly, a cause of action existing in favor of the defendant against the plaintiff. More
narrowly, it is a claim which, if established, will defeat or in some way qualify a judgment or relief to which plaintiff is
otherwise entitled. It is sometimes defined as any cause of action arising in contract available against any action also
arising in contract and existing at the time of the commencement of such an action. It is frequently defined by the
codes as a cause of action arising out of the contract or transaction set forth in the complaint as the foundation of
the plaintiffs claim, or connected with the subject of the action.[11] (underscoring supplied)

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The counterclaim is in itself a distinct and independent cause of action, so that when properly stated as such, the
defendant becomes, in respect to the matters stated by him, an actor, and there are two simultaneous actions
pending between the same parties, wherein each is at the same time both a plaintiff and a defendant. Counterclaim
is an offensive as well as a defensive plea and is not necessarily confined to the justice of the plaintiffs claim. It
represents the right of the defendant to have the claims of the parties counterbalanced in whole or in part, and
judgment to be entered in excess, if any. A counterclaim stands on the same footing, and is to be tested by the same
rules, as if it were an independent action.[12] (underscoring supplied)

The very purpose of a counterclaim would have been served had petitioner alleged in its answer its purported right
under Section 78 of R.A. No. 337:

xxx The rules of counterclaim are designed to enable the disposition of a whole controversy of interested parties
conflicting claims, at one time and in one action, provided all parties be brought before the court and the matter
decided without prejudicing the rights of any party.[13]

The failure of petitioner to seasonably assert its alleged right under Section 78 of R.A. No. 337 precludes it from so
doing at this late stage of the case. Estoppel may be successfully invoked if the party fails to raise the question in the
early stages of the proceedings.[14] Thus, a party to a case who failed to invoked his claim in the main case, while
having the opportunity to do so, will be precluded, subsequently, from invoking his claim, even if it were true, after
the decision has become final, otherwise the judgment may be reduced to a mockery and the administration of
justice may be placed in disrepute.[15]

All things viewed in proper perspective, it is decisively clear that the trial court erred in still allowing petitioner to
introduce evidence that private respondents predecessor-in-interest was a credit institution, and to thereafter rule
that the petitioner was entitled to avail of the provisions of Section 78 of R.A. No. 337. In effect, the trial court
permitted the petitioner to accomplish what the latter failed to do before the Court of Appeals, that is, to invoke its
alleged right under Section 78 of R.A. No. 337 although the Court of Appeals in CA-G.R. no. 35086 already found that
the question of whether the Syndicated Management Council Group, Inc. is a bank or credit institution was never
brought before (the Court of Appeals) squarely. The said pronouncement by the Court of Appeals unerringly
signified that petitioner did not make a timely assertion of any right under Section 78 of R.A. No. 337 in all the stages
of the proceedings below.

Verily, the petitioner has only itself to blame for not alleging at the outset that the predecessor-in-interest of the
private respondent is a credit institution. Thus, when the trial court, and the Court of Appeals repeatedly passed
upon the issue of whether or not petitioner had the right of redemption or equity of redemption over subject
properties in the decisions, resolutions and orders, particularly in Civil Case no. 89-5424, CA-G.R. CV No. 39243, CA-
G.R. SP No. 35086, and CA-G.R. SP No. 38747, it was unmistakable that the petitioner was adjudged to just have the
equity of redemption without any qualification whatsoever, that is, without any right of redemption allowed by law.

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The law of case holds that petitioner has the equity of redemption without any qualification.

There is, therefore, merit in private respondents contention that to allow petitioner to belatedly invoke its right
under Section 78 of R.A. No. 337 will disturb the law of the case. However, private respondents statement of what
constitutes the law of the case is not entirely accurate. The law of the case is not simply that the defendant
possesses an equity of redemption. As the Court has stated, the law of the case holds that petitioner has the equity
of the redemption without any qualification whatsoever, that is, without the right of redemption afforded by Section
78 of R.A. No. 337. Whether or not the law of the case is erroneous is immaterial, it still remains the law of the case. A
contrary rule will contradict both the letter and spirit of the rulings of the Court of Appeals in CA-G.R. SP No. 35086,
CA-G.R. CV No. 39243, and CA-G.R. 38747, which clearly saw through the repeated attempts of petitioner to forestall
so simple a matter as making the security given for a just debt to answer for its payment.

Hence, in conformity with the ruling in Limpin, the sale of the subject properties, as confirmed by the Order dated
February 10, 1995 of the trial court in Civil Case No. 89-5424 operated to divest the rights of all the parties to the
action and to vest their rights in private respondent. There then existed only what is known as the equity of
redemption, which is simply the right of the petitioner to extinguish the mortgage and retain ownership of the
property by paying the secured debt within the 90-day period after the judgment became final. There being an
explicit finding on the part of the Court of Appeals in its Decision of September 30, 1994 in CA-G.R. No. 35086 - that
the herein petitioner failed to exercise its equity of redemption within the prescribed period, redemption can no
longer be effected. The confirmation of the sale and the issuance of the transfer certificates of title covering the
subject properties to private respondent was then, in order. The trial court therefore, has the ministerial duty to
place private respondent in the possession of subject properties.

WHEREFORE, the petition is DENIED, and the assailed decision of the Court of Appeals, declaring null and void the
Order dated 21 July 1995 and Order dated 4 September 1997 of the Regional Trial Court of Makati City in Civil Case No.
89-5424, AFFIRMED. No pronouncement as to costs.

SO ORDERED.

Melo, (Chairman), Vitug, Panganiban, and Gonzaga-Reyes, JJ., concur.

[G.R. No. 134068. June 25, 2001]

UNION BANK OF THE PHILIPPINES, petitioner, vs. COURT OF APPEALS, APOLONIA DE JESUS GREGORIO, LUCIANA
DE JESUS GREGORIO, GONZALO VINCOY, married to TRINIDAD GREGORIO VINCOY, respondents.

RESOLUTION

278
DE LEON, JR., J.:

This is a motion for reconsideration of the resolution of this Court dated July 12, 1999 dismissing the petition for
review on certiorari filed by petitioner Union Bank of the Philippines which assailed the decision of the Court of
Appeals (a) upholding the validity of the real estate mortgage executed by respondents Gonzalo and Trinidad Vincoy
in favor of petitioner as security for a loan in the principal amount of Two Million Pesos (P2,000,000.00), and (b)
fixing the redemption price of the property mortgaged at Three Million Two Hundred Ninety Thousand Pesos
(P3,290,000.00) representing the purchase price of the said property at the foreclosure sale plus one percent (1%)
monthly interest from April 19, 1991, the date of the foreclosure sale, until its redemption pursuant to Section 30,
Rule 39 of the Rules of Court.

The following are the factual antecedents.

On March 2, 1990, respondents-spouses Gonzalo and Trinidad Vincoy mortgaged their residence in favor of petitioner
to secure the payment of a loan to Delco Industries (Phils.), Incorporated[1] in the amount of Two Million Pesos
(P2,000,000.00). For failure of the respondents to pay the loan at its date of maturity, petitioner extrajudicially
foreclosed the mortgage and scheduled the foreclosure sale on April 10, 1991. The petitioner submitted the highest
bid of Three Million Two Hundred Ninety Thousand Pesos (P3,290,000.00) at the foreclosure sale. Accordingly, a
certificate of sale was issued to petitioner and duly annotated at the back of the Transfer Certificate of Title covering
the property on May 8, 1991.[2]

Prior to the expiration of the redemption period on May 8, 1992, the respondents filed a complaint for annulment of
mortgage with the lower court. In their complaint, respondents alleged that the subject property mortgaged to
petitioner had in fact been constituted as a family home as early as October 27, 1989. Among the beneficiaries of the
said family home are the sisters of respondent Trinidad Vincoy, namely Apolonia and Luciana De Jesus Gregorio
whose consent to the mortgage was not obtained.[3] Respondents thus assailed the validity of the mortgage on the
ground that Article 158 of the Family Code[4] prohibits the execution, forced sale, attachment or any other
encumbrance of a family home without the written consent of majority of the beneficiaries thereof of legal age.[5]
On the other hand, petitioner maintained that the mortgaged property of respondents could not be legally
constituted as a family home because its actual value exceeded Three Hundred Thousand Pesos (P300,000.00), the
maximum value for a family home in urban areas as stipulated in Article 157 of the Family Code.[6]

The lower court rendered judgment declaring the constitution of the family home void and the mortgage executed
in favor of the petitioner valid. It held, among others, that Article 158 of the Family Code was not applicable to
respondents family home as the value of the latter at the time of its alleged constitution exceeded Three Hundred
Thousand Pesos (P300,000.00).[7] It also ordered respondent Gonzalo Vincoy and/or Delco Industries (Phils.), Inc. to
pay petitioner his and/or its outstanding obligation as of February 15, 1993 in the amount of Four Million Eight
Hundred Sixteen Thousand One Hundred Ninety-Four Pesos and Forty-Four Centavos (P4,816,194.44) including such
sums that may accrue by way of interests and penalties.[8]

279
Aggrieved, respondents appealed to the Court of Appeals contending that the lower court erred in finding that their
family home was not duly constituted, and that the mortgage in favor of petitioner is valid. Respondents also
claimed that the correct amount sufficient for the redemption of their property as of February 15, 1993 is Two Million
Seven Hundred Seventy-Three Thousand Seven Hundred Twelve Pesos and Eighty-Seven Centavos (P2,773,712.87)[9]
and not Four Million Eight Hundred Sixteen Thousand One Hundred Ninety-Four Pesos and Forty-Four Centavos
(P4,816,194.44) as found by the lower court.

In a decision promulgated on June 4, 1997, the Court of Appeals sustained the finding of the lower court that the
alleged family home of the respondents did not fall within the purview of Article 157 of the Family Code as its value at
the time of its constitution was more than the maximum value of Three Hundred Thousand Pesos (P300,000.00).
Hence, the Court of Appeals upheld the validity of the mortgage executed over the said property in favor of the
petitioner.[10] However, it found that the amount sufficient for the redemption of the foreclosed property is Three
Million Two Hundred Ninety Thousand Pesos (P3,290,000.00) equivalent to the purchase price at the foreclosure
sale plus one percent (1%) monthly interest from April 19, 1991 up to the date of redemption[11] pursuant to Section
30, Rule 39 of the Rules of Court.[12]

Dissatisfied with the ruling of the Court of Appeals, the petitioner filed a petition for review on certiorari with this
Court submitting the following issues for resolution:

1. The Court of Appeals resolves an issue of redemption which was not even directly raised by the parties and
contrary to the evidence on record.

2. Assuming without admitting that respondents are entitled to redemption, the price set by the Court of Appeals is
not based on law.[13]

Petitioner contends, first of all, that in allowing the respondents to redeem the subject foreclosed property, the
Court of Appeals completely ignored the fact that neither respondents complaint before the lower court nor their
brief filed before the Court of Appeals prayed for the redemption of the said property. On the contrary, respondents
had consistently insisted on the nullity of the mortgage. Thus, to allow them to redeem the property would
contradict the very theory of their case.[14]

Petitioner also contends that the respondents had already lost their right to redeem the foreclosed property when
they failed to exercise their right of redemption by paying the redemption price within the period provided for by
law.[15] In the event, however, that the Court upholds the right of the respondents to redeem the said property, the
petitioner claims that it is not Section 30, Rule 39 of the Rules of Court that applies in determining the amount
sufficient for redemption but Section 78 of the General Banking Act as amended by Presidential Decree No. 1828[16]
which provides:

280
xxx. In the event of foreclosure, whether judicially or extrajudicially, of any mortgage on real estate which is security
for any loan granted before the passage of this Act or under the provisions of this Act, the mortgagor or debtor
whose real property has been sold at public auction, judicially or extrajudicially, for the full or partial payment of an
obligation to any bank, banking or credit institution, within the purview of this Act shall have the right, within one
year after the sale of the real estate as a result of the foreclosure of the respective mortgage, to redeem the
property by paying the amount fixed by the court in the order of execution, or the amount due under the mortgage
deed, as the case may be, with interest thereon at the rate specified in the mortgage, and all the costs, and judicial
and other expenses incurred by the bank or institution concerned by reason of the execution and sale and as a result
of the custody of the said property less the income received from the property. [Italics supplied].

This Court dismissed the petition in a Resolution promulgated on July 12, 1999 on the ground that the Court of
Appeals did not commit any reversible error and that the petition raises mere questions of fact already amply passed
upon by the appellate court.[17] Hence, the instant motion for reconsideration.

We are persuaded to reconsider.

First of all, it is important to note that this case was decided by the lower court on the basis only of the pleadings
submitted by the parties. No trial was conducted, thus, no evidence other than that submitted with the pleadings
could be considered.

A careful scrutiny of the pleadings filed by the respondents before the lower court reveals that at no time did the
respondents pray that they be allowed to redeem the subject foreclosed property.[18] On the other hand,
respondents never wavered from the belief that the mortgage over the said property is, in the first place, void for
having been executed over a duly constituted family home without the consent of the beneficiaries thereof. After
upholding the validity of the mortgage, the lower court ordered respondent Gonzalo Vincoy and/or Delco Industries,
Inc. to pay petitioner the amount of Four Million Eight Hundred Sixteen Thousand One Hundred Ninety-Four Pesos
and Forty-Four Centavos (P4,816,194.44) plus interests and penalties representing Vincoys and/or Delcos outstanding
obligation to petitioner as of February 15, 1993.[19] There is no mention whatsoever of respondents right to redeem
the property.

Respondents raised the issue of redemption for the first time only on appeal in contesting the amount ordered by
the lower court to be paid by respondents to the petitioner. Thus, the actuation of the Court of Appeals in allowing
the respondents to redeem the subject foreclosed property is not legally permissible. In petitions for review or
appeal under Rule 45 of the Rules of Court, the appellate tribunal is limited to the determination of whether the
lower court committed reversible error.[20]

It is settled jurisprudence that an issue which was neither averred in the complaint nor raised during the trial in the
court below cannot be raised for the first time on appeal as it would be offensive to the basic rules of fair play, justice
and due process.[21] On this ground alone, the Court of Appeals should have completely ignored the issue of
respondents right to redeem the subject foreclosed property. In addition, a reason just as glaringly obvious exists for

281
declaring the respondents right of redemption already non-existent one year after May 8, 1991, the date of the
registration of the sale at public auction.

Pursuant to Section 78 of the General Banking Act, a mortgagor whose real property has been sold at a public
auction, judicially or extrajudicially, for the full or partial payment of an obligation to any bank, shall have the right,
within one year after the sale of the real estate to redeem the property. The one-year period is actually to be
reckoned from the date of the registration of the sale.[22] Clearly therefore, respondents had only until May 8, 1992
to redeem the subject foreclosed property. Their failure to exercise that right of redemption by paying the
redemption price within the period prescribed by law effectively divested them of said right. It bears reiterating that
during the one year redemption period, respondents never attempted to redeem the subject property but instead
persisted in their theory that the mortgage is null and void. To allow them now to redeem the same property would,
as petitioner aptly puts it, be letting them have their cake and eat it too.

It cannot also be argued that the action for annulment of the mortgage filed by the respondents tolled the running
of the one year period of redemption. In the case of Sumerariz v. Development Bank of the Philippines,[23]
petitioners therein contended that the one-year period to redeem the property foreclosed by respondent was
suspended by the institution of an action to annul the foreclosure sale filed three (3) days before the expiration of
the period. To this we ruled that:

We have not found, however, any statute or decision in support of this pretense. Moreover, up to now plaintiffs have
not exercised the right of redemption. Indeed, although they have intimated their wish to redeem the property in
question, they have not deposited the amount necessary therefor. It may not be amiss to note that, unlike Section 30
of Rule 39 of the Rules of Court, which permits the extension of the period of redemption of mortgaged properties,
Section 3 of Commonwealth Act No. 459, in relation to Section 9 of Republic Act No. 85, which governs the
redemption of property mortgaged to the Bank does no contain a similar provision. Again this question has been
definitely settled by the previous case declaring that plaintiffs right of redemption has already been extinguished in
view of their failure to exercise it within the statutory period."[24]

Also, in the more recent case of Vaca v. Court of Appeals,[25] we declared that the pendency of an action
questioning the validity of a mortgage cannot bar the issuance of the writ of possession after title to the property
has been consolidated in the mortgagee.[26] The implication is clear: the period of redemption is not interrupted by
the filing of an action assailing the validity of the mortgage, so that at the expiration thereof, the mortgagee who
acquires the property at the foreclosure sale can proceed to have the title consolidated in his name and a writ of
possession issued in his favor.

To rule otherwise, and allow the institution of an action questioning the validity of a mortgage to suspend the
running of the one year period of redemption would constitute a dangerous precedent. A likely offshoot of such a
ruling is the institution of frivolous suits for annulment of mortgage intended merely to give the mortgagor more
time to redeem the mortgaged property.

282
As a final word, although the issue pertaining to the correct amount for the redemption of the subject foreclosed
property has been rendered moot by the foregoing, a point of clarification should perhaps be made as to the
applicable legal provision. Petitioners contention that Section 78 of the General Banking Act governs the
determination of the redemption price of the subject property is meritorious. In Ponce de Leon v. Rehabilitation
Finance Corporation,[27] this Court had occasion to rule that Section 78 of the General Banking Act had the effect of
amending Section 6 of Act No. 3135[28] insofar as the redemption price is concerned when the mortgagee is a bank,
as in this case, or a banking or credit institution.[29] The apparent conflict between the provisions of Act No. 3135
and the General Banking Act was, therefore, resolved in favor of the latter, being a special and subsequent
legislation. This pronouncement was reiterated in the case of Sy v. Court of Appeals[30] where we held that the
amount at which the foreclosed property is redeemable is the amount due under the mortgage deed, or the
outstanding obligation of the mortgagor plus interest and expenses in accordance with Section 78 of the General
Banking Act.[31] It was therefore manifest error on the part of the Court of Appeals to apply in the case at bar the
provisions of Section 30 Rule 39 of the Rules of Court in fixing the redemption price of the subject foreclosed
property.

WHEREFORE, the motion for reconsideration is hereby GRANTED. This Courts Resolution dated July 12, 1999 is
MODIFIED insofar as respondents are found to have lost their right to redeem the subject foreclosed property.

SO ORDERED.

G.R. No. L-11964 April 28, 1962

REGISTER of DEEDS OF MANILA, petitioner-appellee,

vs.

CHINA BANKING CORPORATION, respondent-appellant.

Office of the Solicitor General for petitioner-appellee.

Sycip-Salazar, Luna and Associates for respondent-appellant.

Alfonso Ponce Enrile as Amicus Curiae.

DIZON, J.:

283
Appeal from a resolution of the Land Registration Commission holding "that the deed of transfer in favor of an alien
bank, subject of the present Consulta, is unregisterable for being in contravention of the Constitution of the
Philippines".

In an information filed on June 16, 1953 in the Court of First Instance of Manila (Criminal Case No. 22908) Alfonso
Pangilinan and one Guillermo Chua were charged with qualified theft, the money involved amounting to
P275,000.00. On September 18, 1956, Pangilinan and his wife, Belen Sta. Ana, executed a public instrument entitled
DEED OF TRANSFER whereby, after admitting his civil liability in favor of his employer, the China Banking
Corporation, in relation to the offense aforesaid, he ceded and transferred to the latter, in satisfaction thereof, a
parcel of land located in the City of Manila, registered in the name of "Belen Sta. Ana, married to Alfonso Pangilinan"
(Transfer Certificate of Title No. 32230). On October 24, 1956 the deed was presented for registration to the Register
of Deeds of the City of Manila, but because the transferee — the China Banking Corporation — was alien-owned and,
as such, barred from acquiring lands in the Philippines, in accordance with the provisions of Section 5, Article XIII of
the Constitution of the Philippines, said officer submitted the matter of its registration to the Land Registration
Commission for resolution. After granting the parties concerned ample opportunity to submit their views upon the
issue, the Commission issued the resolution appealed from.

Plainly stated, the question before Us is whether appellant — an alien-owned bank — can acquire ownership of the
residential lot covered by Transfer Certificate of Title No. 32230 by virtue of the deed of transfer mentioned
heretofore (Vide pages 1-6 of the Record on Appeal).

Maintaining the affirmative, appellant argues that: (a) the temporary holding of land by an alien-owned commercial
bank under a public instrument such as the deed of transfer in question "bears no reasonable connection with the
constitutional purpose" underlying the provisions of Section 5, Article XIII of the Constitution of the Philippines;
hence, such holding or acquisition "was not within the contemplation of the framers of the Constitution"; (b) by
judicial as well as by executive-administrative an legislative construction, the constitutional prohibition against alien
landholding does not preclude enjoyment by aliens of temporary rights and land; (c) under the provisions of Section
25 of Republic Act No. 337 (General Banking Act) an alien or an alien-owned commercial bank may acquire land in the
Philippines subject to the obligation of disposing of it within 5 years from the date of its acquisition. 1äwphï1.ñët

Upon the other hand, the argument supporting the appealed resolution is that the privilege of acquiring real estate
granted to commercial banks under the provisions of Section 25 of Republic Act No. 337 was not intended as an
amendment, much less as a nullification of the constitutional prohibition against alien acquisition of lands in the
Philippines, the same being merely an exception to the general rule, under existing banking and corporation laws,
that banks and corporations can engage only in the particular business for which they were specifically created; that
a mere statute, like the republic act relied upon by, appellant, cannot amend the Constitution; that in connection
with the particular constitutional prohibition involved herein, it is the character and nature of the possession —
whether in strict ownership or otherwise — and not the length of possession that is material, the result being that, if
real property is to be held in ownership, an alien may not legally do so even for a single day.

After considering the arguments adduced by appellant in its brief, jointly with those expounded in the briefs
submitted by Alfonso Ponce Enrile and William H. Quasha and Associates, as amici curiae, on the one hand, and on

284
the other, those relied upon in the brief submitted by the Office of the Solicitor General on behalf of the Commission,
we are inclined to uphold, as we do uphold, the appealed resolution.

To support its view appellant relies particularly upon paragraphs (c) and (d), Section 25 of Republic Act 337 which
read as follows: .

SEC. 25. Any commercial bank may purchase, hold, and convey real estate for the following purposes:

xxx xxx xxx

(c) Such shall be conveyed to it in satisfaction of debts previously contracted in the course of its dealings; .

(d) Such as it shall purchase at sales under judgments, decrees, mortgages, or trust deeds held by it and such as it
shall purchase to secure debts due to it.

But no such bank shall hold the possession of any real estate under mortgage or trust deed, or the title and
possession of any real estate purchased to secure any debt due to it, for a longer period than five years.

Assuming, arguendo, that under the provisions of the aforesaid Act any commercial bank, whether alien-owned or
controlled or not, may purchase and hold real estate for the specific purposes and in the particular cases enumerated
in Section 25 thereof, we find that the case before Us does not fall under anyone of them.

Paragraph (c), Section 25 of Republic Act 337 allows a commercial bank to purchase and hold such real estate as shall
be conveyed to it in satisfaction of debts previously contracted in the course of its dealings, We deem it quite clear
and free from doubt that the "debts" referred to in this provision are only those resulting from previous loans and
other similar transactions made or entered into by a commercial bank in the ordinary course of its business as such.
Obviously, whatever "civil liability" — arising from the criminal offense of qualified theft — was admitted in favor of
appellant bank by its former employee, Alfonso Pangilinan, was not a debt resulting from a loan or a similar
transaction had between the two parties in the ordinary course of banking business.

Neither do the provisions of paragraph (d) of the Same section apply to the present case because the deed of
transfer in question can in no sense be considered as a sale made by virtue of a judgment, decree, mortgage, or trust
deed held by appellant bank. In the same manner it cannot be said that the real property in question was purchased
by appellant "to secure debts due to it", considering that, as stated heretofore, the term debt employed in the

285
pertinent legal provision can logically refer only to such debts as may become payable to appellant bank as a result
of a banking transaction.

That the constitutional prohibition under consideration has for its purpose the preservation of the patrimony of the
nation can not be denied, but appellant and the amici curiae claim that it should be liberally construed so that the
prohibition be limited to the permanent acquisition of real estate by aliens — whether natural or juridical persons.
This, of course, would make legal the ownership acquired by appellant bank by virtue of the deed of transfer
mentioned heretofore, subject to its obligation to dispose of it in accordance with law, within 5 years from the date
of its acquisition. We can not give assent to this contention, in view of the fact that the constitutional prohibition in
question is absolute in terms. We have so held in Ong Sui Si Temple vs. The Register of Deeds of Manila (G. R. No. L-
6776, prom. May 21, 1955) where we said, inter alia, the following:

We are of the opinion that the Court below has correctly held that in view of the absolute terms of section 5, Title
XIII, of the Constitution, the provisions of Act 271 of the old Philippine Commission must be deemed repealed since
the Constitution was enacted, in so far as incompatible therewith. In providing that —

Save in cases of hereditary succession no private agricultural land shall be transferred or assigned except to
individuals, corporations or associations qualified to acquire or hold lands of the public domain in the Philippines.

the Constitution makes no exception in favor of religious associations. Neither is there any such saving found in
Sections 1 and 2 of Article XIII, restricting the acquisition of public agricultural lands and other natural resources to
"corporations or associations at least sixty per centum of the capital of which is owned by such citizens" (of the
Philippines). (Emphasis ours) .

Even in the case of Smith Bell & Co. vs. Register of Deeds of Davao (50 O.G., 5239) where a lease of a parcel of land
for a total period of 50 years in favor of an alien corporation was held to be registerable, the reason we gave for such
ruling was that a lease — unlike a sale — does not involve the transfer of dominion over the land, the clear
implication from this being that transfer of ownership over land, even for a limited period of time, is not permissible
in view of the constitutional prohibition. The reason for this is manifestly the desire and purpose of the Constitution
to place and keep in the hands of the people the ownership over private lands in order not to endanger the integrity
of the nation. Inasmuch as when an alien buys land he acquires and will naturally exercise ownership over the same,
either permanently or temporarily, to that extent his acquisition jeopardizes the purpose of the Constitution.

Some may say that this construction is too narrow and unwise; to this we answer that it is not our privilege to
determine the wisdom or lack of wisdom of this constitutional mandate. It is, rather, Our sworn duty to enforce it
free from qualifications and distinctions that tend to render futile the constitutional intent.

WHEREFORE, the resolution appealed from is hereby affirmed, with costs.

286
G.R. No. 97218 May 17, 1993

PROVIDENT SAVINGS BANK, petitioner,

vs.

COURT OF APPEALS, Former SPECIAL EIGHTH DIVISION and WILSON CHUA, respondents.

Gonzales, Batiller, Bilog & Associates for petitioner.

Resty R. Villanueva for private respondent.

MELO, J.:

The error, if error it be, of respondent Court of Appeals which petitioner seeks to rectify via the petitioner for
certiorari before us refers to respondent court's major conclusion arrived at in CA-G.R. CV No. 21312 (Javellana (P),
Kalalo, Dayrit, JJ) barring petitioner from foreclosing the subject realty on account of prescription. Petitioner begs to
differ, insisting that the period during which it was placed under receivership by the Central Bank is akin to a caso
fortuito and should not thus be reckoned against it.

Both petitioner and private respondent accepted the synthesized factual backdrop formulated by respondent court,
to wit:

This an appeal by both plaintiff and defendant from the decision of the Regional Trial Court of the National Capital
Judicial 29 September 1988, in Civil Case No. 977-NW, which directed plaintiff-appellant to pay defendant-appellant
the personal obligation of the spouses Guarin to defendant-appellant in the amount of P62,500.00, together with the
interest, penalties, and bank charges due thereon, and ordering defendant-appellant thereafter to: (1) release the
real estate mortgage executed by the spouses Lorenzo K. Guarin and Liwayway J. Guarin in favor of defendant bank
on 16 February 1967; (2) return to surrender to plaintiff-appellant, as successor-in-interest of the spouses Guarin, the
latter's Owner's Duplicate of Title No. 177014; (3) pay plaintiff-appellant P20,000.00 as and for attorney's fees; and,
(4) pay the costs of suit.

287
The established fact are:

On 16 February 1967, the spouses Lorenzo K. Guarin and Liwayway J. Guarin (Guarins) obtained a loan from
defendant-appellant in the amount of P62,500.00 payable on or before 20 June 1967. As security for the loan, they
executed a real estate mortgage in favor of defendant-appellant over a parcel of land covered by TCT No. 177014.
(Exhs. C and D).

In September, 1972, defendant-appellant was placed under receivership by the Central Bank of the Philippines until
27 July 1981 when the receivership was set aside by the Honorable Supreme Court.

On 11 December 1984, Lorenzo K. Guarin, in reply to the letter of latter's counsel informing that the mortgaged
property would be sold at public auction on 27 December 1984, assured he and his wife had every intention of paying
their obligation and requesting for a recomputation of their account and a postponement of the foreclosure sale.
(Exh. 1).

On 10 February 1986, the Guarins received a Statement of Account from defendant-appellant showing two
outstanding accounts as of 15 February 1986. One was account of Lorenzo K. Guarin in the amount of P591,088.80,
and the other was the account of L.K. Guarin Manufacturing Co., Inc. in the amount of P6,287,380.27 (Attachment to
Exh. 2)

On 26 February 1986, Lorenzo K. Guarin wrote defendant-appellant stating that he was ready and willing to pay his
obligation in the total amount of P591,088.80 as recomputed by defendant-appellant whenever defendant-appellant
was already to receive the payment and inquiring as to when his mortgaged title would be available for him to pick
up. (Exh. 2)

Defendant-appellant replied on 27 February 1986 that Lorenzo K. Guarin may make payment at its office in Makati,
Metro Manila, but that the mortgaged title could not be released to him even after the payment of the obligation of
P591,088.80 as it also served as security for the indebtedness of L.Y. Guarin Manufacturing Co., Inc., to defendant-
appellant which was undertaken by Lorenzo K. Guarin in his personal capacity and as president of the corporation.
(Exh. 3)

On 20 May 1986, plaintiff-appellant wrote defendant-appellant saying that the mortgaged property of the Guarins
had been offered to him as payment of the judgment he obtained against the Guarins in Civil Case No. Q-47465
entitled, "Wilson Chua vs. Lorenzo K. Guarin", and requesting for defendant-appellant's conformity to the
assignment and expressing his willingness to pay for the obligation of Mr. Guarin so that the title could be released
by defendant-appellant. (Exh. 4)

288
On 10 July 1986, the Guarins and plaintiff-appellant executed a Deed of Absolute Sale With Assumption of Mortgaged
whereby the Guarins sold the mortgaged property to Guarins sold the appellant for the sum of P250,000.00 and
plaintiff-appellant undertook to assume the mortgaged obligation of the Guarins with defendant-appellant which as
of 15 February 1985 amounted to P591,088.80.(Exh. B).

On 5 August 1986, plaintiff-appellant informed defendant-appellant that as a result of the judgment in Civil Case No.
Q-47645, the mortgaged property had been sold to him by the Guarins, as evidenced by the Deed of Sale enclosed
for guidance and information of defendant-appellant. He requested that he be allowed to pay the loan secured by
the mortgaged, otherwise, he would be constrained to bring the matter to court. (Exh. 5) In reply, defendant-
appellant, on 11 August 1986, informed plaintiff-appellant that his request could be granted if he would settle the
obligation of L.K. Guarin Manufacturing Co., Inc., as well and defendant-appellant's letter to Mr. Guarin dated 27
February 1986. (Exh. 6)

On 3 August 1987, counsel for plaintiff-appellant addressed a letter to defendant-appellant informing that plaintiff-
appellant had purchased the mortgaged property from the Guarin's and requesting that the owner's copy of TCT No.
177014 in the possession of defendant-appellant be released to him so that he can register the sale and have the title
to the property transferred in his name. He likewise, informed defendant-appellant that it had lost whatever right or
action had against the Guarins because of prescription. (Exh. E) Defendant-appellant replied on 10 August 1987
stating the reasons why they could not comply with plaintiff-appellant's demands. (Exh. F)

On 21 August 1986, plaintiff-appellant filed a complaint against defendant-appellant to compel the latter to: (1)
release the real estate mortgaged executed by the Guarins in favor of defendant-appellant on 16 February 1967; (2)
return or surrender to plaintiff-appellant, as successor-in-interest of the Guarins, the latter's owner's duplicate of TCT
No. 177014; and (3) pay plaintiff-appellant P2,750,000.00 as actual and/or consequential damages, moral damages as
may be proved during the trial, exemplary damages as may be reasonably assessed by the court, and attorney's fees
of P50,00.00. Defendant-appellant answered the complaint thereof and setting up special and affirmative defenses.
After trial, judgment was rendered as stated in the opening paragraph hereof from which both parties appealed . . . .
(pp. 35-37, Rollo.)

Concerning the challenge posed by Provident Saving Bank against the personality of Wilson Chua to initiate the
action to compel the release of the real estate mortgage and the delivery of the owner's duplicate copy of the
certificate of title, respondent court noted that Wilson Chua can be considered a real-property-in-interest because he
is the successor-in-interest of the Guarins who is naturally entitled to the realty as against the so-called right of
Provident Savings Bank, as mortgagee, to foreclose the mortgage which had become stale through sheer lapse of
time. The matter of novation in the form of substitution of the debtor without corresponding acquiesence of the
mortgagee was viewed by respondent court to be legally inconsequential due to the demeanor of the mortgagee-
bank in requiring Wilson Chua to pay the indebtedness of Lorenzo Guarin, posterior to the change of obligors, which
act was construed as equivalent to consent.

To the question of whether petitioner can still foreclose the subject realty, respondent court gave a negative
response on account of the absence of proof to indicate that the bank was precluded from collecting indebtedness
while it was under receivership from September, 1972 until July 20,1981. Thus, there was no legal interruption of the

289
pres-criptive period to speak of, said respondent court, which intervened between June 20, 1967, the date the
mortgage matured, and June 20, 1977 the last day within which petitioner could have foreclosed the mortgage.

Respondent court did not also heed the suggestion of the petitioner bank to interpret Wilson Chua's assumption of
the mortgage on July 10, 1986 as tantamount to an explicit acknowledgement that the obligation was outstanding
and had not yet prescribed.

As a result of these observations, respondent court reversed the decision of the trial court insofar as it ordered
Wilson Chua to pay the sum of P591,088.80 to the bank and affirmed the other dispositions made the court of origin
(p. 42, Rollo).

Following the unfavorable judgment, the bank filed a motion for reconsideration and a motion for new trial premised
on newly discovered evidence relative to a statement of account unearthed by the bank's liaison officer from the
loose folders on October 18, 1990 which it believed to be of legal significance to the case. But respondent court was
unperturbed, observing that the vital piece of document could have been located in the course of trial had the
slightest degree of prudence been exercised, considering that the statement of account sprouted the same day the
liaison officer was advised to take an inventory of the records ( p. 45, Rollo).

Hence, the petitioner at bar.

Consistent with its theory premised on fuerza major, petitioner insists that it can not be blamed for not lifting a
finger, so speak, during the period when it was enjoined by the Central Bank on September 15, 1972 from transacting
business until this Court affirmed on July 27,1981 the decision of the Court of Appeals annulling the proscription
against petitioner in Central Bank vs. Court of Appeals (106 SCRA 143 [1981]. We are not unaware of the rule laid
down in Teal Motor Co. vs. Court of First Instance of Manila (51 Phil. 549 [1928]; Martin, Commentaries and
Jurisprudence on the Philippine Commercial Laws, 1986 Revised ed., p.125) that the appointment of a receiver does
not dissolve the corporation nor does it interfere with the exercise of its corporate rights. But this principles is, of
course, applicable to a situation where there is no restraint imposed on the corporation, unlike in the case at bar
where petitioner Provident Savings Bank was specifically forbidden and immobilized from doing business in the
Philippines on September 15, 1972 through Monetary Board Resolution No. 1766 until 1981 when the decision in
Central Bank vs. Court of Appeals (supra, at p. 150) was rendered. The question which immediately crops up is
whether a foreclose proceeding falls within the purview of the phrase "doing business". In Mentholatum Co., Inc., et
al. vs. Mangaliman, et al. (72 Phil. 524 [1941]; Moreno, Philippine Law Dictionary, Second ed., 1972, p. 186), the term
was construed by Justice Laurel to refer to:

. . . a continuity of commercial dealings and arrangements, and contemplates to that extent, the exercise of some of
the words or the normally incident to, and in progressive prosecution of, the purpose ands object of its
organizations. (p. 528; emphasis supplied.)

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Withal, we believe that a foreclose is deemed embraced by the phrase "doing business" as a preparatory measure to
acquiring or holding property for petitioner as a saving bank under Section 34 of the General Banking Act. Like any
other banking institution, petitioner is vested with the usual attributes and powers of a corporation under Section 36
of the Corporation Code (Vitug, Pandect of Commercial Law and Jurisprudence, 1990 ed., p. 475). The prerogative of
a bank to foreclose is implicit from and is even necessary to enforce collection of secured debts under Section 36(11)
and 45 of the Corporation Code, in conjunction with Section 29 of the General Banking Act (6 Fletcher, 206;
Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the Philippines, 1990 ed., p. 325).

When a bank is prohibited to do business by the Central Bank and a receiver is appointed for such bank, that bank
would not be able to do new business, i.e., to grant new loans or to accept new deposits. However, the receiver of
the bank is obliged to collect debts owing to the bank, which debts form part of the assets of the bank. The receiver
must assemble the assets and pay the obligation of the bank under receivership, and take steps to prevent
dissipation of such assets. Accordingly, the the receiver of the bank is obliged to collect pre-existing debts due to the
bank, and in connection therewith, to foreclose mortgages securing debts. This is not to ignore The Philippine Trust
Co. vs. HSBC (67 Phil. 204 [1939], for in that case, the Court simply rejected the objections of certain creditors to the
report of a receiver, that is, objections that the receiver did not report the collection made before the beginning of
his receivership. It would follow that the bank is bound by the acts, or failure to act, of the receiver. At the same
time, the receiver is liable to the bank for culpable or negligent failure to collect the assets of such bank and to
safeguard said assets.

Having arrived at the conclusion that the foreclosure is part of bank's business activity which could not have been
pursued by the receiver then because of the circumstances discussed in the Central Bank case, we are thus
convinced that the prescriptive period was legally interrupted by fuerza mayor in 1972 on account on the prohibition
imposed by the Monetary Board against petitioner from transacting business, until the directive of the board was
nullified in 1981. Indeed, the period during which the obligee was prevented by a caso fortuito from enforcing his
right is not reckoned against him (Article 1154, New Civil Code). When prescription is interrupted, all the benefits
acquired so far from the possession cease and when prescription starts anew, it will be entirely a new one. This
concept should not be equated with suspension where the past period is included in the computation being added
to the period after prescription is resumed (4 Tolentino, Commentaries and Jurisprudence on the Civil Code of the
Philippines, 1991 ed., pp. 18-19). Consequently, when the closure of was set aside in 1981, the period of ten years
within which to foreclose under Article 1142 of the New Civil Code began to run again and, therefore, the action filed
on August 21, 1986 to compel petitioner to release the mortgage carried with it the mistaken notion that petitioner's
own suit foreclosure had prescribed. What exacerbates the situation is the letter of private respondent requesting
petitioner on August 6, 1986 that private respondent be allowed to pay the loan secured by the mortgage as the
result of the Deed of Sale executed by the Guarins in his favor on July 10, 1986 (pp. 36-37, Rollo). In point of law, this
written communication is synonymous to an express acknowledgment of the obligation and had the effect of
interrupting the prescription for the second time (Article 1155, New Civil Code; Osmeña vs. Rama, 14 Phil. 99 [1909]; 4
Tolentino, supra at p. 50). And this piece of document necessarily estops private respondent from setting up
prescription vis-a-vis his unfounded supposition that acknowledgment of the debt is of no moment because the right
of the petitioner to foreclose had long prescribed in 1977 (p. 13, Petition; p. 7, Comment; pp. 19 and 58, Rollo).

Contrary to respondent court's prescription of the existence of novation, the evidence at hand does not buttress a
finding along this line from the mere fact that petitioner supposedly did not question the substitution when the bank
reacted to private respondent's offer to pay the loan (p. 39, Rollo). What seems to have escaped respondent court's
attention was the condition imposed by the petitioner that it will grant private respondent's request if the latter will
also shoulder the obligation incurred by Lorenzo Guarin in his capacity as president of the corporation (p.37, Rollo).
The consent of the petitioner to the substitution, as creditor, was thus erroneously appreciated.

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With the conclusions reached, we need not discuss the other issues raised in the petition.

WHEREFORE, the petition is hereby GRANTED. The decision dated August 31, 1990, including the resolution dated
February 6, 1991 of respondent court are hereby set aside and another one entered dismissing Wilson Chua's
complaint. No special pronouncement is made to costs.

G.R. No. L-18343 September 30, 1965

PHILIPPINE NATIONAL BANK and EDUARDO Z. ROMUALDEZ, in his capacity as President of the Philippine National
Bank, plaintiffs-appellants,

vs.

EMILIO A. GANCAYCO and FLORENTINO FLOR, Special Prosecutors of the Dept. of Justice, defendants-appellees.

Ramon B. de los Reyes and Zoilo P. Perlas for plaintiffs-appellants.

Villamor & Gancayco for defendants-appellees.

REGALA, J.:

The principal question presented in this case is whether a bank can be compelled to disclose the records of accounts
of a depositor who is under investigation for unexplained wealth.

This question arose when defendants Emilio A. Gancayco and Florentino Flor, as special prosecutors of the
Department of Justice, required the plaintiff Philippine National Bank to produce at a hearing to be held at 10 a.m. on
February 20, 1961 the records of the bank deposits of Ernesto T. Jimenez, former administrator of the Agricultural
Credit and Cooperative Administration, who was then under investigation for unexplained wealth. In declining to
reveal its records, the plaintiff bank invoked Republic Act No. 1405 which provides:

292
SEC. 2. All deposits of whatever nature with banks or banking institutions in the Philippines including investments in
bonds issued by the Government of the Philippines, its political subdivisions and its instrumentalities, are hereby
considered as of an absolutely confidential nature and may not be examined, inquired or looked into by any person,
government official, bureau or office, except upon written permission of the depositor, or in cases of impeachment,
or upon order of a competent court in cases of bribery or dereliction of duty of public officials, or in cases where the
money deposited or invested is the subject matter of the litigation.

The plaintiff bank also called attention to the penal provision of the law which reads:

SEC. 5. Any violation of this law will subject the offender upon conviction, to an imprisonment of not more than five
years or a fine of not more than twenty thousand pesos or both, in the discretion of the court.

On the other hand, the defendants cited the Anti-Graft and Corrupt Practices Act (Republic Act No. 3019) in support
of their claim of authority and demanded anew that plaintiff Eduardo Z. Romualdez, as bank president, produce the
records or he would be prosecuted for contempt. The law invoked by the defendant states:

SEC. 8. Dismissal due to unexplained wealth. — If in accordance with the provisions of Republic Act Numbered One
thousand three hundred seventy-nine, a public official has been found to have acquired during his incumbency,
whether in his name or in the name of other persons, an amount of property and/or money manifestly out of
proportion to his salary and to his other lawful income, that fact shall be a ground for dismissal or removal.
Properties in the name of the spouse and unmarried children of such public official may be taken into consideration,
when their acquisition through legitimate means cannot be satisfactorily shown. Bank deposits shall be taken into
consideration in the enforcement of this section, notwithstanding any provision of law to the contrary.

Because of the threat of prosecution, plaintiffs filed an action for declaratory judgment in the Manila Court of First
Instance. After trial, during which Senator Arturo M. Tolentino, author of the Anti-Graft and Corrupt Practices Act
testified, the court rendered judgment, sustaining the power of the defendants to compel the disclosure of bank
accounts of ACCFA Administrator Jimenez. The court said that, by enacting section 8 of, the Anti-Graft and Corrupt
Practices Act, Congress clearly intended to provide an additional ground for the examination of bank deposits.
Without such provision, the court added prosecutors would be hampered if not altogether frustrated in the
prosecution of those charged with having acquired unexplained wealth while in public office.1awphîl.nèt

From that judgment, plaintiffs appealed to this Court. In brief, plaintiffs' position is that section 8 of the Anti-Graft
Law "simply means that such bank deposits may be included or added to the assets of the Government official or
employee for the purpose of computing his unexplained wealth if and when the same are discovered or revealed in
the manner authorized by Section 2 of Republic Act 1405, which are (1) Upon written permission of the depositor; (2)
In cases of impeachment; (3) Upon order of a competent court in cases of bribery or dereliction of duty of public
officials; and (4) In cases where the money deposited or invested is the subject matter of the litigation."

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In support of their position, plaintiffs contend, first, that the Anti-Graft Law (which took effect on August 17, 1960) is
a general law which cannot be deemed to have impliedly repealed section 2 of Republic Act No. 1405 (which took
effect on Sept. 9, 1955), because of the rule that repeals by implication are not favored. Second, they argue that to
construe section 8 of the Anti-Graft Law as allowing inquiry into bank deposits would be to negate the policy
expressed in section 1 of Republic Act No. 1405 which is "to give encouragement to the people to deposit their
money in banking institutions and to discourage private hoarding so that the same may be utilized by banks in
authorized loans to assist in the economic development of the country."

Contrary to their claim that their position effects a reconciliation of the provisions of the two laws, plaintiffs are
actually making the provisions of Republic Act No. 1405 prevail over those of the Anti-Graft Law, because even
without the latter law the balance standing to the depositor's credit can be considered provided its disclosure is
made in any of the cases provided in Republic Act No. 1405.

The truth is that these laws are so repugnant to each other than no reconciliation is possible. Thus, while Republic
Act No. 1405 provides that bank deposits are "absolutely confidential ... and [therefore] may not be examined,
inquired or looked into," except in those cases enumerated therein, the Anti-Graft Law directs in mandatory terms
that bank deposits "shall be taken into consideration in the enforcement of this section, notwithstanding any
provision of law to the contrary." The only conclusion possible is that section 8 of the Anti-Graft Law is intended to
amend section 2 of Republic Act No. 1405 by providing additional exception to the rule against the disclosure of bank
deposits.

Indeed, it is said that if the new law is inconsistent with or repugnant to the old law, the presumption against the
intent to repeal by implication is overthrown because the inconsistency or repugnancy reveals an intent to repeal the
existing law. And whether a statute, either in its entirety or in part, has been repealed by implication is ultimately a
matter of legislative intent. (Crawford, The Construction of Statutes, Secs. 309-310. Cf. Iloilo Palay and Corn Planters
Ass'n v. Feliciano, G.R. No. L-24022, March 3, 1965).

The recent case of People v. De Venecia, G.R. No. L-20808, July 31, 1965 invites comparison with this case. There it
was held:

The result is that although sec. 54 [Rev. Election Code] prohibits a classified civil service employee from aiding any
candidate, sec. 29 [Civil Service Act of 1959] allows such classified employee to express his views on current political
problems or issues, or to mention the name of his candidate for public office, even if such expression of views or
mention of names may result in aiding one particular candidate. In other words, the last paragraph of sec. 29 is an
exception to sec. 54; at most, an amendment to sec. 54.

With regard to the claim that disclosure would be contrary to the policy making bank deposits confidential, it is
enough to point out that while section 2 of Republic Act 1405 declares bank deposits to be "absolutely confidential,"
it nevertheless allows such disclosure in the following instances: (1) Upon written permission of the depositor; (2) In
cases of impeachment; (3) Upon order of a competent court in cases of bribery or dereliction of duty of public
officials; (4) In cases where the money deposited is the subject matter of the litigation. Cases of unexplained wealth

294
are similar to cases of bribery or dereliction of duty and no reason is seen why these two classes of cases cannot be
excepted from the rule making bank deposits confidential. The policy as to one cannot be different from the policy as
to the other. This policy express the motion that a public office is a public trust and any person who enters upon its
discharge does so with the full knowledge that his life, so far as relevant to his duty, is open to public scrutiny.

WHEREFORE, the decision appealed from is affirmed, without pronouncement as to costs.

G.R. No. L-34964 January 31, 1973

CHINA BANKING CORPORATION and TAN KIM LIONG, petitioners-appellants,

vs.

HON. WENCESLAO ORTEGA, as Presiding Judge of the Court of First Instance of Manila, Branch VIII, and VICENTE G.
ACABAN, respondents-appellees.

Sy Santos, Del Rosario and Associates for petitioners-appellants.

Tagalo, Gozar and Associates for respondents-appellees.

MAKALINTAL, J.:

The only issue in this petition for certiorari to review the orders dated March 4, 1972 and March 27, 1972, respectively,
of the Court of First Instance of Manila in its Civil Case No. 75138, is whether or not a banking institution may validly
refuse to comply with a court process garnishing the bank deposit of a judgment debtor, by invoking the provisions
of Republic Act No. 1405. *

On December 17, 1968 Vicente Acaban filed a complaint in the court a quo against Bautista Logging Co., Inc., B & B
Forest Development Corporation and Marino Bautista for the collection of a sum of money. Upon motion of the

295
plaintiff the trial court declared the defendants in default for failure to answer within the reglementary period, and
authorized the Branch Clerk of Court and/or Deputy Clerk to receive the plaintiff's evidence. On January 20, 1970
judgment by default was rendered against the defendants.

To satisfy the judgment, the plaintiff sought the garnishment of the bank deposit of the defendant B & B Forest
Development Corporation with the China Banking Corporation. Accordingly, a notice of garnishment was issued by
the Deputy Sheriff of the trial court and served on said bank through its cashier, Tan Kim Liong. In reply, the bank'
cashier invited the attention of the Deputy Sheriff to the provisions of Republic Act No. 1405 which, it was alleged,
prohibit the disclosure of any information relative to bank deposits. Thereupon the plaintiff filed a motion to cite Tan
Kim Liong for contempt of court.

In an order dated March 4, 1972 the trial court denied the plaintiff's motion. However, Tan Kim Liong was ordered "to
inform the Court within five days from receipt of this order whether or not there is a deposit in the China Banking
Corporation of defendant B & B Forest Development Corporation, and if there is any deposit, to hold the same intact
and not allow any withdrawal until further order from this Court." Tan Kim Liong moved to reconsider but was
turned down by order of March 27, 1972. In the same order he was directed "to comply with the order of this Court
dated March 4, 1972 within ten (10) days from the receipt of copy of this order, otherwise his arrest and confinement
will be ordered by the Court." Resisting the two orders, the China Banking Corporation and Tan Kim Liong instituted
the instant petition.

The pertinent provisions of Republic Act No. 1405 relied upon by the petitioners reads:

Sec. 2. All deposits of whatever nature with banks or banking institutions in the Philippines including investments
in bonds issued by the Government of the Philippines, its political subdivisions and its instrumentalities, are hereby
considered as of absolutely confidential nature and may not be examined, inquired or looked into by any person,
government official, bureau or office, except upon written permission of the depositor, or in cases of impeachment,
or upon order of a competent court in cases of bribery or dereliction of duty of public officials, or in cases where the
money deposited or invested is the subject matter of the litigation.

Sec 3. It shall be unlawful for any official or employee of a banking institution to disclose to any person other than
those mentioned in Section two hereof any information concerning said deposits.

Sec. 5. Any violation of this law will subject offender upon conviction, to an imprisonment of not more than five
years or a fine of not more than twenty thousand pesos or both, in the discretion of the court.

The petitioners argue that the disclosure of the information required by the court does not fall within any of the four
(4) exceptions enumerated in Section 2, and that if the questioned orders are complied with Tan Kim Liong may be
criminally liable under Section 5 and the bank exposed to a possible damage suit by B & B Forest Development

296
Corporation. Specifically referring to this case, the position of the petitioners is that the bank deposit of judgment
debtor B & B Forest Development Corporation cannot be subject to garnishment to satisfy a final judgment against it
in view of the aforequoted provisions of law.

We do not view the situation in that light. The lower court did not order an examination of or inquiry into the deposit
of B & B Forest Development Corporation, as contemplated in the law. It merely required Tan Kim Liong to inform
the court whether or not the defendant B & B Forest Development Corporation had a deposit in the China Banking
Corporation only for purposes of the garnishment issued by it, so that the bank would hold the same intact and not
allow any withdrawal until further order. It will be noted from the discussion of the conference committee report on
Senate Bill No. 351 and House Bill No. 3977, which later became Republic Act 1405, that it was not the intention of the
lawmakers to place bank deposits beyond the reach of execution to satisfy a final judgment. Thus:

Mr. MARCOS. Now, for purposes of the record, I should like the Chairman of the Committee on Ways and Means
to clarify this further. Suppose an individual has a tax case. He is being held liable by the Bureau of Internal Revenue
for, say, P1,000.00 worth of tax liability, and because of this the deposit of this individual is attached by the Bureau of
Internal Revenue.

Mr. RAMOS. The attachment will only apply after the court has pronounced sentence declaring the liability of
such person. But where the primary aim is to determine whether he has a bank deposit in order to bring about a
proper assessment by the Bureau of Internal Revenue, such inquiry is not authorized by this proposed law.

Mr. MARCOS. But under our rules of procedure and under the Civil Code, the attachment or garnishment of
money deposited is allowed. Let us assume, for instance, that there is a preliminary attachment which is for
garnishment or for holding liable all moneys deposited belonging to a certain individual, but such attachment or
garnishment will bring out into the open the value of such deposit. Is that prohibited by this amendment or by this
law?

Mr. RAMOS. It is only prohibited to the extent that the inquiry is limited, or rather, the inquiry is made only for
the purpose of satisfying a tax liability already declared for the protection of the right in favor of the government;
but when the object is merely to inquire whether he has a deposit or not for purposes of taxation, then this is fully
covered by the law.

Mr. MARCOS. And it protects the depositor, does it not?

Mr. RAMOS. Yes, it protects the depositor.

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Mr. MARCOS. The law prohibits a mere investigation into the existence and the amount of the deposit.

Mr. RAMOS. Into the very nature of such deposit.

Mr. MARCOS. So I come to my original question. Therefore, preliminary garnishment or attachment of the
deposit is not allowed?

Mr. RAMOS. No, without judicial authorization.

Mr. MARCOS. I am glad that is clarified. So that the established rule of procedure as well as the substantive law
on the matter is amended?

Mr. RAMOS. Yes. That is the effect.

Mr. MARCOS. I see. Suppose there has been a decision, definitely establishing the liability of an individual for
taxation purposes and this judgment is sought to be executed ... in the execution of that judgment, does this bill, or
this proposed law, if approved, allow the investigation or scrutiny of the bank deposit in order to execute the
judgment?

Mr. RAMOS. To satisfy a judgment which has become executory.

Mr. MARCOS. Yes, but, as I said before, suppose the tax liability is P1,000,000 and the deposit is half a million, will
this bill allow scrutiny into the deposit in order that the judgment may be executed?

Mr. RAMOS. Merely to determine the amount of such money to satisfy that obligation to the Government, but
not to determine whether a deposit has been made in evasion of taxes.

xxx xxx xxx

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Mr. MACAPAGAL. But let us suppose that in an ordinary civil action for the recovery of a sum of money the plaintiff
wishes to attach the properties of the defendant to insure the satisfaction of the judgment. Once the judgment is
rendered, does the gentleman mean that the plaintiff cannot attach the bank deposit of the defendant?

Mr. RAMOS. That was the question raised by the gentleman from Pangasinan to which I replied that outside the
very purpose of this law it could be reached by attachment.

Mr. MACAPAGAL. Therefore, in such ordinary civil cases it can be attached?

Mr. RAMOS. That is so.

(Vol. II, Congressional Record, House of Representatives, No. 12, pp. 3839-3840, July 27, 1955).

It is sufficiently clear from the foregoing discussion of the conference committee report of the two houses of
Congress that the prohibition against examination of or inquiry into a bank deposit under Republic Act 1405 does not
preclude its being garnished to insure satisfaction of a judgment. Indeed there is no real inquiry in such a case, and if
the existence of the deposit is disclosed the disclosure is purely incidental to the execution process. It is hard to
conceive that it was ever within the intention of Congress to enable debtors to evade payment of their just debts,
even if ordered by the Court, through the expedient of converting their assets into cash and depositing the same in a
bank.

WHEREFORE, the orders of the lower court dated March 4 and 27, 1972, respectively, are hereby affirmed, with costs
against the petitioners-appellants.

Zaldivar, Castro, Fernando, Barredo, Makasiar, Antonio and Esguerra, JJ., concur.

Concepcion, C.J. and Teehankee, J., took no part.

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G.R. No. 107303 February 21, 1994

EMMANUEL C. OÑATE and ECON HOLDINGS CORPORATION, petitioners,

vs.

HON. ZUES C. ABROGAR, as Presiding Judge of Branch 150 of the Regional Trial Court of Makati, and SUN LIFE
ASSURANCE COMPANY OF CANADA, respondents.

G.R. No. 107491 February 21, 1994

BRUNNER DEVELOPMENT CORPORATION, petitioner,

vs.

HON. ZUES C. ABROGAR, as Presiding Judge of Branch 150 of the Regional Trial Court of Makati, and SUN LIFE
ASSURANCE COMPANY OF CANADA, respondents.

Florante A. Bautista for petitioner in G.R. No. 107303.

Andin & Andin Law Offices for Brunner Development Corporation.

Quasha, Asperilla, Ancheta, Pena & Nolasco for Sun Life Assurance Company of Canada.

NOCON, J.:

These are separate petitions for certiorari with a prayer for temporary restraining order filed by Emmanuel C. Oñate
and Econ Holdings Corporation (in G.R. No. 107303), and Brunner Development Corporation (in G.R. No. 107491),
both of which assail several orders issued by respondent Judge Zues C. Abrogar in Civil Case No. 91-3506.

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The pertinent facts are as follows: On December 23, 1991, respondent Sun Life Assurance Company of Canada (Sun
Life, for brevity) filed a complaint for a sum of money with a prayer for the immediate issuance of a writ of
attachment against petitioners, and Noel L. Diño, which was docketed as Civil Case No. 91-3506 and raffled to Branch
150 of the RTC Makati, presided over by respondent Judge. The following day, December 24, 1991, respondent Judge
issued an order granting the issuance of a writ of attachment, and the writ was actually issued on December 27, 1991.

On January 3, 1992, upon Sun Life's ex-parte motion, the trial court amended the writ of attachment to reflect the
alleged amount of the indebtedness. That same day, Deputy Sheriff Arturo C. Flores, accompanied by a
representative of Sun Life, attempted to serve summons and a copy of the amended writ of attachment upon
petitioners at their known office address at 108 Aguirre St., Makati but was not able to do so since there was no
responsible officer to receive the same. 1 Nonetheless, Sheriff Flores proceeded, over a period of several days, to
serve notices of garnishment upon several commercial banks and financial institutions, and levied on attachment a
condominium unit and a real property belonging to petitioner Oñate.

Summons was eventually served upon petitioners on January 9, 1992, while defendant Diño was served with
summons on January 16, 1992.

On January 21, 1992, petitioners filed an "Urgent Motion to Discharge/Dissolve Writ of Attachment." That same day,
Sun Life filed an ex-parte motion to examine the books of accounts and ledgers of petitioner Brunner Development
Corporation (Brunner, for brevity) at the Urban Bank, Legaspi Village Branch, and to obtain copies thereof, which
motion was granted by respondent Judge. The examination of said account took place on January 23, 1992.
Petitioners filed a motion to nullify the proceedings taken thereat since they were not present.

On January 30, 1992, petitioners and their co-defendants filed a memorandum in support of the motion to discharge
attachment. Also on that same day, Sun Life filed another motion for examination of bank accounts, this time
seeking the examination of Account No. 0041-0277-03 with the Bank of Philippine Islands (BPI) — which, incidentally,
petitioners claim not to be owned by them — and the records of Philippine National Bank (PNB) with regard to
checks payable to Brunner. Sun Life asked the court to order both banks to comply with the notice of garnishment.

On February 6, 1992, respondent Judge issued an order (1) denying petitioners' and the co-defendants' motion to
discharge the amended writ of attachment, (2) approving Sun Life's additional attachment, (3) granting Sun Life's
motion to examine the BPI account, and (4) denying petitioners' motion to nullify the proceedings of January 23,
1992.

On March 12, 1992, petitioners filed a motion for reconsideration of the February 6, 1992 order. On September 6,
1992, respondent Judge denied the motion for reconsideration.

301
Hence, the instant petitions. Petitioners' basic argument is that respondent Judge had acted with grave abuse of
discretion amounting to lack or in excess of jurisdiction in (1) issuing ex parte the original and amended writs of
preliminary attachment and the corresponding notices of garnishment and levy on attachment since the trial court
had not yet acquired jurisdiction over them; and (2) allowing the examination of the bank records though no notice
was given to them.

We find both petitions unmeritorious.

Petitioners initially argue that respondent Judge erred in granting Sun Life's prayer for a writ of preliminary
attachment on the ground that the trial court had not acquired jurisdiction over them. This argument is clearly
unavailing since it is well-settled that a writ of preliminary attachment may be validly applied for and granted even
before the defendant is summoned or is heard from. 2 The rationale behind this rule was stated by the Court in this
wise:

A preliminary attachment may be defined, paraphrasing the Rules of Court, as the provisional remedy in virtue of
which a plaintiff or other proper party may, at the commencement of the action or any time thereafter, have the
property of the adverse party taken into the custody of the court as security for the satisfaction of any judgment
that may be recovered. It is a remedy which is purely statutory in respect of which the law requires a strict
construction of the provisions granting it. Withal no principle, statutory or jurisprudential, prohibits its issuance by
any court before acquisition of jurisdiction over the person of the defendant.

Rule 57 in fact speaks of the grant of the remedy "at the commencement of the action or at any time thereafter."
The phrase "at the commencement of the action," obviously refers to the date of the filing of the complaint —
which, as abovepointed out, its the date that marks "the commencement of the action;" and the reference plainly is
to a time before summons is served on the defendant or even before summons issues. What the rule is saying quite
clearly is that after an action is properly

commenced — by the filing of the complaint and the payment of all requisite docket and other fees — the plaintiff
may apply for and obtain a writ of preliminary attachment upon fulfillment of the pertinent requisites laid down by
law, and that he may do so at any time, either before or after service of summons on the defendant. And this indeed,
has been the immemorial practice sanctioned by the courts: for the plaintiff or other proper party to incorporate the
application for attachment in the complaint or other appropriate pleading (counterclaim, cross-claim, third-party
claim) and for the Trial Court to issue the writ ex-parte at the commencement of the action if it finds the application
otherwise sufficient in form and substance. 3

Petitioners then contended that the writ should have been discharged since the ground on which it was issued —
fraud in contracting the obligation — was not present. This cannot be considered a ground for lifting the writ since
this delves into the very complaint of the Sun Life. As this Court stated in Cuatro v. Court of Appeals: 4

Moreover, an attachment may not be dissolved by a showing of its irregular or improper issuance if it is upon a
ground which is at the same time the applicant's cause of action in the main case since an anomalous situation would

302
result if the issues of the main case would be ventilated and resolved in a mere hearing of the motion (Davao Light
and Power Co., Inc. vs. Court of Appeals, supra, The Consolidated Bank and Trust Corp. (Solidbank) vs. Court of
Appeals, 197 SCRA 663 [1991]).

In the present case, one of the allegation in petitioner's complaint below is that the defendant spouses induced the
plaintiff to grant the loan by issuing postdated checks to cover the installment payments and a separate set of
postdated checks for payment of the stipulated interest (Annex "B"). The issue of fraud, then, is clearly within the
competence of the lower court in the main action. 5

The fact that a criminal complaint for estafa filed by Sun Life against the petitioners was dismissed by the Provincial
Prosecutor of Rizal for Makati on April 21, 1992 and was upheld by the Provincial Prosecutor on July 13, 1992 is of no
moment since the same can be indicative only of the absence of criminal liability, but not of civil liability. Besides, Sun
Life had elevated the case for review to the Department of Justice, where the case is presently pending.

Finally, petitioners argue that the enforcement of the writ was invalid since it undisputedly preceded the actual
service of summons by six days at most. Petitioners cite the decisions in Sievert vs. Court of Appeals, et al. 6 and BAC
Manufacturing and Sales Corp. vs. Court of Appeals, et al., 7 wherein this Court held that enforcement of the writ of
attachment can not bind the defendant in view of the failure of the trial court to acquire jurisdiction over the
defendant through either summons or his voluntary appearance.

We do not agree entirely with petitioners. True, this Court had held in a recent decision that the enforcement of writ
of attachment may not validly be effected until and unless proceeded or contemporaneously accompanied by service
of summons. 8

But we must distinguish the case at bar from the Sievert and BAC Manufacturing cases. In those two cases, summons
was never served upon the defendants. The plaintiffs therein did not even attempt to cause service of summons
upon the defendants, right up to the time the cases went up to this Court. This is not true in the case at bar. The
records reveal that Sheriff Flores and Sun Life did attempt a contemporaneous service of both summons and the writ
of attachment on January 3, 1992, but we stymied by the absence of a responsible officer in petitioners' offices. Note
is taken of the fact that petitioners Oñate and Econ Holdings admitted in their answer 9 that the offices of both
Brunner Development Corporation and Econ Holdings were located at the same address and that petitioner Oñate is
the President of Econ Holdings while petitioner Diño is the President of Brunner Development Corporation as well as
a stockholder and director of Econ Holdings.

Thus, an exception to the established rule on the enforcement of the writ of attachment can be made where a
previous attempt to serve the summons and the writ of attachment failed due to factors beyond the control of
either the plaintiff or the process server, provided that such service is effected within a reasonable period thereafter.

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Several reasons can be given for the exception. First, there is a possibility that a defendant, having been alerted of
plaintiffs action by the attempted service of summons and the writ of attachment, would put his properties beyond
the reach of the plaintiff while the latter is trying to serve the summons and the writ anew. By the time the plaintiff
may have caused the service of summons and the writ, there might not be any property of the defendant left to
attach.

Second, the court eventually acquired jurisdiction over the petitioners six days later. To nullify the notices of
garnishment issued prior thereto would again open the possibility that petitioners would transfer the garnished
monies while Sun Life applied for new notices of garnishment.

Third, the ease by which a writ of attachment can be obtained is counter-balanced by the ease by which the same
can be discharged: the defendant can either make a cash deposit or post a counter-bond equivalent to the value of
the property attached. 10 The petitioners herein tried to have the writ of attachment discharged by posting a
counter-bond, the same was denied by respondent Judge on the ground that the amount of the counter-bond was
less than that of Sun Life's bond.

II.

Petitioners' second ground assail the acts of respondent Judge in allowing the examination of Urban Banks' records
and in ordering that the examination of the bank records of BPI and PNB as invalid since no notice of said
examinations were ever given them. Sun Life grounded its requests for the examination of the bank accounts on
Section 10, Rule 57 of the Rules of Court, which provided, to wit:

Sec. 10. Examination of party whose property is attached and persons indebted to him or controlling his property;
delivery of property to officer. — Any person owing debts to the party whose property is attached or having in his
possession or under his control any credit or other personal property belonging to such party, may be required to
attend before the court in which the action is pending, or before a commissioner appointed by the court and be
examined on oath respecting the same. The party whose property is attached may also be required to attend for the
purpose of giving information respecting his property, and may be examined on oath. The court may, after such
examination, order personal property capable of manual delivery belonging to him, in the possession of the person
so required to attend before the court, to be delivered to the clerk or court, sheriff, or other proper officer on such
terms as may be just, having reference to any lien thereon or claim against the same, to await the judgment in the
action.

It is clear from the foregoing provision that notice need only be given to the garnishee, but the person who is
holding property or credits belonging to the defendant. The provision does not require that notice be furnished the
defendant himself, except when there is a need to examine said defendant "for the purpose of giving information
respecting his property.

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Furthermore, Section 10 Rule 57 is not incompatible with Republic Act No. 1405, as amended, "An Act Prohibiting
Disclosure or Inquiry Into, Deposits With Any Banking Institution and Providing Penalty Therefore," for Section 2
therefore provides an exception "in cases where the money deposited or invested is the subject matter of the
litigation."

The examination of the bank records is not a fishing expedition, but rather a method by which Sun Life could trace
the proceeds of the check it paid to petitioners.

WHEREFORE, the instant petitions are hereby DISMISSED. The temporary restraining order issued on June 28, 1993 is
hereby lifted.

SO ORDERED.

[G.R. No. 134699. December 23, 1999]

UNION BANK OF THE PHILIPPINES, petitioner, vs. COURT OF APPEALS and ALLIED BANK CORPORATION,
respondents.

DECISION

KAPUNAN, J.:

Section 2 of the Law on Secrecy of Bank Deposits,[1] as amended, declares bank deposits to be absolutely
confidential except:

(1) In an examination made in the course of a special or general examination of a bank that is specifically authorized
by the Monetary Board after being satisfied that there is reasonable ground to believe that a bank fraud or serious
irregularity has been or is being committed and that it is necessary to look into the deposit to establish such fraud or
irregularity,

(2) In an examination made by an independent auditor hired by the bank to conduct its regular audit provided that
the examination is for audit purposes only and the results thereof shall be for the exclusive use of the bank,

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(3) Upon written permission of the depositor,

(4) In cases of impeachment,

(5) Upon order of a competent court in cases of bribery or dereliction of duty of public officials, or

(6) In cases where the money deposited or invested in the subject matter of the litigation.

Whether or not the case at bar falls under the last exception is the issue in the instant petition.

The facts are not disputed.

On March 21, 1990, a check (Check No. 11669677) dated March 31, 1990 in the amount of One Million Pesos
(P1,000,000.00) was drawn against Account No. 0111-01854-8 with private respondent Allied Bank payable to the
order of one Jose Ch. Alvarez. The payee deposited the check with petitioner Union Bank who credited the
P1,000,000.00 to the account of Mr. Alvarez. On May 21, 1990, petitioner sent the check for clearing through the
Philippine Clearing House Corporation (PCHC). When the check was presented for payment, a clearing discrepancy
was committed by Union Banks clearing staff when the amount of One Million Pesos (P1,000,000.00) was
erroneously under-encoded to One Thousand Pesos (P1,000.00) only.

Petitioner only discovered the under-encoding almost a year later. Thus, on May 7, 1991, Union Bank Notified Allied
Bank of the discrepancy by way of a charge slip for Nine Hundred Ninety-Nine Thousand Pesos (P999,000.00) for
automatic debiting against the account of Allied Bank. The latter, however, refused to accept the charge slip since
[the] transaction was completed per your [Union Banks] original instruction and clients account is now insufficiently
funded.

Subsequently, Union Bank filed a complaint against Allied Bank before the PCHC Arbitration Committee (Arbicom),
praying that:

judgment be rendered in favor of plaintiff against defendant sentencing it to pay plaintiff:

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1. The sum of NINE HUNDRED NINETY-NINE THOUSAND PESOS (P999,000.00);

2. The sum of THREE HUNDRED SIXTY-ONE AND FOUR HUNDRED EIGHTY AND 20/XX P361,480.20 as of October 9,
1991 representing reimbursements for opportunity losses and interest at the rate of 24% per annum arising from
actual losses sustained by plaintiff as of May 21, 1990;

3. The amount for attorneys fees at the rate of 25% of any and all sums due;

4. Penalty Charges at the rate of 1/8 of 1% of P999,000.00 from May 22, 1990 until payment thereof.

5. Exemplary and punitive damages against the defendant in such amounts as may be awarded by this Tribunal in
order to serve a lesson to all member-Banks under the PCHC umbrella to striclty comply with the provisions thereof;

6. The costs of suit which includes filing fee in addition to litigation expenses which shall be proven in the course of
arbitration.

7. Such other damages thay may be awarded by this Tribunal.[2]

Thereafter, Union Bank filed in the Regional Trial court (RTC) of Makati a petition for the examination of Account No.
111-01854-8. Judgment on the arbitration case was held in abeyance pending the resolution of said petition.

Upon motion of private respondent, the RTC dismissed Union Banks petition. The RTC held that:

The case of the herein petitioner does not fall under any of the foregoing exceptions to warrant a disclosure of or
inquiry into the ledgers/books of account of Allied Checking Account No. 111-01854-8. Needless to say, the complaint
filed by herein petitioner against Allied Banking Corporation before the Philippine Clearing House Corporation
(PCHC) Arbitration Committee and docketed therein as Arb[i]com Case No. 91-068 (Annex A, petition) is not one for
bribery or dereliction of duty of public officials much less is there any showing that the subject matter thereof is the
money deposited in the account in question. Petitioners complaint primarily hing[e]s on the alleged deliberate
violation by Allied Bank Corporation of the provisions of the PCHC Rule Book, Sec. 25[.]3, and as principal reliefs, it
seeks for [sic] the recovery of amounts of money as a consequence of an alleged under-coding of check amount to
P1,000,000.00 and damage[s] by way of loss of interest income.[3]

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The Court of Appeals affirmed the dismissal of the petition, ruling that the case was not one where the money
deposited is the subject matter of the litigation.

Petitioner collecting bank itself in its complaint filed before the PCHC, Arbicom Case No. 91-068, clearly stated that its
cause of action against defendant arose from defendants deliberate violation of the provisions of the PCHC Rule
Book, Sec. 25.3, specifically on Under-Encoding of check amouting to P1,000,000.00 drawn upon defendants Tondo
Branch which was deposited with plaintiff herein on May 20, 1990, xxx which was erroneously encoded at P1,000.00
which defendant as the receiving bank thereof, never called nor notified the plaintiff of the error committed thus
causing actual losses to plaintiff in the principal amount of P999,000.00 exclusive of opportunity losses and interest.

Furthermore, a reading of petitioner collecting banks complaint in the Arbicom case shows that its thrust is directed
against respondent drawee banks alleged failure to inform the former of the under-encoding when Sec. 25.3 of the
PCHC Rule Book is clear that it is receiving banks (respondent drawee bank herein) duty and obligation to notify the
erring bank (petitioner collecting bank herein) of any such under-encoding of any check amount submitted for
clearing within the member banks of the PCHC not later than 10:00 a.m. of the following clearing day and prays that
respondent drawee bank be held liable to petitioner collecting bank for penalties in view of the latters violation of
the notification requirement.

Prescinding from the above, we see no cogent reason to depart from the time-honored general banking rule that all
deposits of whatever nature with banks are considered of absolutely confidential nature and may not be examined,
inquired or looked into by any person, government official, bureau or office and corollarily, that it is unlawful for any
official or employee of a bank to disclose to any person any information concerning deposits.

Nowhere in petitioner collecting banks complaint filed before the PCHC does it mention of the amount it seeks to
recover from Account No. 0111-018548 itself, but speaks of P999,000.00 only as an incident of its alleged opportunity
losses and interest as a result of its own employees admitted error in encoding the check.

The money depositied in Account No. 0111-018548 is not the subject matter of the litigation in the Arbicom case for as
clearly stated by petitioner itself, it is the alleged violation by respondent of the rules and regulations of the PCHC.[4]

Union Bank is now before this Court insisting that the money deposited in Account No. 0111-01854-8 is the subject
matter of the litigation Petitioner cites the case of Mathay vs. Consolidated Bank and Trust Company,[5] where we
defined subject matter of the action, thus:

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xxx By the phrase subject matter of the action is meant the physical facts, the things real or personal, the money,
lands, chattels, and the like, in relation to which the suit is prosecuted, and not the delict or wrong committed by the
defendant.

Petitioner contends that the Court of Appeals confuses the cause of action with the subject of the action. In
Yusingco vs. Ong Hing Lian,[6] petitioner points out, this Court distinguished the two concepts.

xxx The cause of action is the legal wrong threatened or committed, while the object of the action is to prevent or
redress the wrong by obtaining some legal relief; but the subject of the action is neither of these since it is not the
wrong or the relief demanded, the subject of the action is the matter or thing with respect to which the controversy
has arisen, concerning which the wrong has been done, and this ordinarily is the property, or the contract and its
subject matter, or the thing in dispute.

The argument is well taken. We note with approval the difference between the subject of the action from the cause
of action. We also find petitioners definition of the phrase subject matter of the action is consistent with the term
subject matter of the litigation, as the latter is used in the Bank Deposits Secrecy Act.

In Mellon Bank, N.A. vs. Magsino,[7] where the petitioner bank inadvertently caused the transfer of the amount of
US$1,000,000.00 instead of only US$1,000.00, the Court sanctioned the examination of the bank accounts where
part of the money was subsequently caused to be deposited:

Section 2 of [Republic Act No. 1405] allows the disclosure of bank deposits in cases where the money deposited is
the subject matter of the litigation. Inasmuch as Civil Case No. 26899 is aimed at recovering the amount converted by
the Javiers for their own benefit, necessarily, an inquiry into the wherabouts of the illegally acquired amount extends
to whatever is concealed by being held or recorded in the name of persons other than the one responsible for the
illegal acquisition.

Clearly, Mellon Bank involved a case where the money deposited was the subject matter of the litigation since the
money so deposited was the very thing in dispute. This, however, is not the case here.

Petitioners theory is that private respondent Allied Bank should have informed petitioner of the under-encoding
pursuant to the provisions of Section 25.3.1 of the PCHC Handbook, which states:

25.3.1. The Receiving Bank should inform the erring Bank about the under-encoding of amount not later than 10:00
A.M. of the following clearing day.

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Failing in that duty, petitioner holds private respondent directly liable for the P999,000.00 and other damages. It
does not appear that petitioner is seeking reimbursement from the account of the drawer. This much is evident in
petitioners complaint before the Arbicom.

xxx plaintiffs cause of action against defendant arose from defendants deliberate violation of the provisions of the
PCHC Rule Book, Sec. 25.3, specifically on Under-Encoding of check amounting to P1,000,000.00 drawn upon
defendants Tondo Branch which was deposited with plaintiff herein sometime on May 20, 1990. From the check
amount of P1,000,000.00, it was instead erroneously encoded at P1,000.00 which defendant as the receiving bank
thereof, never called nor notified the plaintiff of the error committed thus causing actual losses to plaintiff in the
principal amount of P999,000.00 exclusive of opportunity losses and interest thereon whatsoever. xxx[8]

Petitioner even requested private respondents Branch Manager for reimbursement from private respondents
account through the automatic debiting system.

2.7. On May 6, 1991, plaintiffs Senior Vice-President, Ms. ERLINDA V. VALENTON wrote defendants Tondo Branch
Manager, Mr. RODOLFO JOSE on the incident and requested assistance in facilitating correction of the erroneous
coding with request for reimbursement thru the industrys automatic debiting of defendants account.[9]

Further, petitioner rejected private respondents proposal that the drawer issue postdated checks in favor of
petitioner since the identity and credit standing of the depositor were unknown to petitioner.

2.9. On May 23, 1991, defendants Branch Manager, the same Mr. Rodolfo Jose wrote plaintiffs Ms. Erlinda Valenton
again insisting on the execution of the Quitclaim and Release in favor of defendant as the Branch has endeavored to
negotiate with its client for the collection of such amount. Upon a reading of the terms of the Quitclaim and Release
being proposed by defendant, the unmistakable fact lies that again defendant attempts for the second time to take
advantage of plaintiffs plight by indicating that the terms of the payment of the principal amount of P999,000.00 is
by way of several personal postdated checks up to March 21, 1992 from a person whose identity is not even disclosed
to plaintiff.

To an ordinary person aggrieved already by having been taken advantage of for 620 days more or less, the proposal
of defendant could not be acceptable for the reason that aside from the interest lost already for the use of its money
by another party, no assurance is made as to the actual collection thereof from a party whose credit standing, the
recipient is not at all aware of.[10]

Petitioner also believed that it had no privity with the depositor:

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2.12. Plaintiff then replied to defendants letter by requesting that in lieu of the post-dated checks from defendants
client with whom plaintiff has no privity whatsoever, if the defendant could tender the full payment of the amount of
P999,000.00 in defendants own Managers check and that plaintiff is willing to forego its further claims for interest
and losses for a period of 620 days, more or less.[11]

The following argument adduced by petitioner in the Arbicom case leaves no doubt that petitioner is holding private
respondent itself liable for the discrepancy:

Defendant by its acceptance thru the clearing exchange of the check deposit from its client cannot be said to be free
from any liability for the unpaid portion of the check amount considering that defendant as the drawee bank, is
remiss in its duty of verifying possible technicalities on the face of the check.

Since the provisions of the PCHC Rule Book has so imposed upon the defendant being the Receiving Bank of a
discrepant check item to give that timely notification and defendant failing to comply with such requirement, then it
can be said that defendant is guilty of negligence. He who is guilty of negligence in the performance of its [sic] duty
is liable for damages. (Art. 1170, New Civil Code.)

Art. 1172 of the Civil Code provides that:

Responsibility 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.[][12]

Petitioner points to its prayer in its complaint to show that it sought reimbursement from the drawers account. The
prayer, however, does not specifically state that it was seeking recovery of the amount from the depositors account.
Petitioner merely asked that judgment be rendered in favor of plaintiff against defendant sentencing it to pay
plaintiff: 1. The sum of NINE HUNDRED NINETY-NINE THOUSAND PESOS (P999,000.00).[13]

On the other hand, the petition before this court reveals that the true purpose for the examination is to aid
petitioner in proving the extent of Allied Banks liability:

Hence, the amount actually debited from the subject account becomes very material and germane to petitioners
claim for reimbursement as it is only upon examination of subject account can it be proved that indeed a discrepancy
in the amount credited to petitioner was committed, thereby, rendering respondent Allied Bank liable to petitioner
for the deficiency. The money deposited in aforesaid account is undeniably the subject matter of the litigation since

311
the issue in the Arbicom case is whether respondent Bank should be held liable to petitioner for reimbursement of
the amount of money constituting the difference between the amount of the check and the amount credited to
petitioner, that is, P999,000.00, which has remained deposited in aforesaid account.

On top of the allegations in the complaint, which can be verified only by examining the subject bank account, the
defense of respondent Allied Bank that the reimbursement cannot be made since clients account is not sufficiently
funded at the time petitioner sent its Charge Slip, bolsters petitioners contention that the money in subject account
is the very subject matter of the pending Arbicom case.

Indeed, to prove the allegations in its Complaint before the PCHC Arbitration Committee, and to rebut private
respondents defense on the matter, petitioner needs to determine:

1. how long respondent Allied Bank had willfully or negligently allowed the difference of P999,000.00 to be
maintained in the subject account without remitting the same to petitioner;

2. whether indeed the subject account was no longer sufficiently funded when petitioner sent its charge slip for
reimbursement to respondent bank on May 7, 1991; and

3. whether or not respondent Allied Banks actuations in refusing to immediately reimburse the discrepancy was
attended by good or bad faith.

In other words, only a disclosure of the pertinent details and information relating to the transactions involving
subject account will enable petitioner to prove its allegations in the pending Arbicom case. xxx[14]

In short, petitioner is fishing for information so it can determine the culpability of private respondent and the
amount of damages it can recover from the latter. It does not seek recovery of the very money contained in the
deposit. The subject matter of the dispute may be the amount of P999,000.00 that petitioner seeks from private
respondent as a result of the latters alleged failure to inform the former of the discrepancy; but it is not the
P999,000.00 deposited in the drawers account. By the terms of R.A. No. 1405, the money deposited itself should be
the subject matter of the litigation.

That petitioner feels a need for such information in order to establish its case against private respondent does not,
by itself, warrant the examination of the bank deposits. The necessity of the inquiry, or the lack thereof, is immaterial
since the case does not come under any of the exceptions allowed by the Bank Deposits Secrecy Act.

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WHEREFORE, the petition is DENIED.

SO ORDERED.

[G.R. No. 135882. June 27, 2001]

LOURDES T. MARQUEZ, in her capacity as Branch Manager, Union Bank of the Philippines, petitioners, vs. HON.
ANIANO A. DESIERTO, (in his capacity as OMBUDSMAN, Evaluation and Preliminary Investigation Bureau, Office of
the Ombudsman, ANGEL C. MAYOR-ALGO, JR., MARY ANN CORPUZ-MANALAC and JOSE T. DE JESUS, JR., in their
capacities as Chairman and Members of the Panel, respectively, respondents.

DECISION

PARDO, J.:

In the petition at bar, petitioner seeks to--

a. Annul and set aside, for having been issued without or in excess of jurisdiction or with grave abuse of discretion
amounting to lack of jurisdiction, respondents order dated September 7, 1998 in OMB-0-97-0411, In Re: Motion to
Cite Lourdes T. Marquez for indirect contempt, received by counsel of September 9, 1998, and their order dated
October 14, 1998, denying Marquezs motion for reconsideration dated September 10, 1998, received by counsel on
October 20, 1998.

b. Prohibit respondents from implementing their order dated October 14, 1998, in proceeding with the hearing of the
motion to cite Marquez for indirect contempt, through the issuance by this Court of a temporary restraining order
and/or preliminary injunction.[1]

The antecedent facts are as follows:

Sometime in May 1998, petitioner Marquez received an Order from the Ombudsman Aniano A. Desierto dated April
29, 1998, to produce several bank documents for purposes of inspection in camera relative to various accounts
maintained at Union Bank of the Philippines, Julia Vargas Branch, where petitioner is the branch manager. The
accounts to be inspected are Account Nos. 011-37270, 240-020718, 245-30317-3 and 245-30318-1, involved in a case
pending with the Ombudsman entitled, Fact-Finding and Intelligence Bureau (FFIB) v. Amado Lagdameo, et. al. The
order further states:

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It is worth mentioning that the power of the Ombudsman to investigate and to require the production and
inspection of records and documents is sanctioned by the 1987 Philippine Constitution, Republic Act No. 6770,
otherwise known as the Ombudsman Act of 1989 and under existing jurisprudence on the matter. It must be noted
that R. A. 6770 especially Section 15 thereof provides, among others, the following powers, functions and duties of
the Ombudsman, to wit:

xxx

(8) Administer oaths, issue subpoena and subpoena duces tecum and take testimony in any investigation or inquiry,
including the power to examine and have access to bank accounts and records;

(9) Punish for contempt in accordance with the Rules of Court and under the same procedure and with the same
penalties provided therein.

Clearly, the specific provision of R.A. 6770, a later legislation, modifies the law on the Secrecy of Bank Deposits (R.A.
1405) and places the office of the Ombudsman in the same footing as the courts of law in this regard.[2]

The basis of the Ombudsman in ordering an in camera inspection of the accounts is a trail of managers checks
purchased by one George Trivinio, a respondent in OMB-0-97-0411, pending with the office of the Ombudsman.

It would appear that Mr. George Trivinio, purchased fifty one (51) Managers Checks (MCs) for a total amount of
P272.1 Million at Traders Royal Bank, United Nations Avenue branch, on May 2 and 3, 1995. Out of the 51 MCs, eleven
(11) MCs

in the amount of P70.6 million, were deposited and credited to an account maintained at the Union Bank, Julia
Vargas Branch.[3]

On May 26, 1998, the FFIB panel met in conference with petitioner Lourdes T. Marquez and Atty. Fe B. Macalino at
the banks main office, Ayala Avenue, Makati City. The meeting was for the purpose of allowing petitioner and Atty.
Macalino to view the checks furnished by Traders Royal Bank. After convincing themselves of the veracity of the
checks, Atty. Macalino advised Ms. Marquez to comply with the order of the Ombudsman. Petitioner agreed to an in
camera inspection set on June 3, 1998.[4]

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However, on June 4, 1998, petitioner wrote the Ombudsman explaining to him that the accounts in question cannot
readily be identified and asked for time to respond to the order. The reason forwarded by petitioner was that despite
diligent efforts and from the account numbers presented, we can not identify these accounts since the checks are
issued in cash or bearer. We surmised that these accounts have long been dormant, hence are not covered by the
new account number generated by the Union Bank system. We therefore have to verify from the Interbank records
archives for the whereabouts of these accounts.[5]

The Ombudsman, responding to the request of the petitioner for time to comply with the order, stated: firstly, it
must be emphasized that Union Bank, Julia Vargas Branch was the depositary bank of the subject Traders Royal Bank
Managers Checks (MCs), as shown at its dorsal portion and as cleared by the Philippine Clearing House, not the
International Corporate Bank.

Notwithstanding the fact that the checks were payable to cash or bearer, nonetheless, the name of the depositor(s)
could easily be identified since the account numbers x x x where said checks were deposited are identified in the
order.

Even assuming that the accounts xxx were already classified as dormant accounts, the bank is still required to
preserve the records pertaining to the accounts within a certain period of time as required by existing banking rules
and regulations.

And finally, the in camera inspection was already extended twice from May 13, 1998 to June 3, 1998, thereby giving
the bank enough time within which to sufficiently comply with the order.[6]

Thus, on June 16, 1998, the Ombudsman issued an order directing petitioner to produce the bank documents relative
to the accounts in issue. The order states:

Viewed from the foregoing, your persistent refusal to comply with Ombudsmans order is unjustified, and is merely
intended to delay the investigation of the case. Your act constitutes disobedience of or resistance to a lawful order
issued by this office and is punishable as Indirect Contempt under Section 3(b) of R.A. 6770. The same may also
constitute obstruction in the lawful exercise of the functions of the Ombudsman which is punishable under Section
36 of R.A. 6770.[7]

On July 10, 1998, petitioner together with Union Bank of the Philippines, filed a petition for declaratory relief,
prohibition and injunction[8] with the Regional Trial Court, Makati City, against the Ombudsman.

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The petition was intended to clear the rights and duties of petitioner. Thus, petitioner sought a declaration of her
rights from the court due to the clear conflict between R. A. No. 6770, Section 15 and R. A. No. 1405, Sections 2 and 3.

Petitioner prayed for a temporary restraining order (TRO) because the Ombudsman and other persons acting under
his authority were continuously harassing her to produce the bank documents relative to the accounts in question.
Moreover, on June 16, 1998, the Ombudsman issued another order stating that unless petitioner appeared before
the FFIB with the documents requested, petitioner manager would be charged with indirect contempt and
obstruction of justice.

In the meantime,[9] on July 14, 1998, the lower court denied petitioners prayer for a temporary restraining order and
stated thus:

After hearing the arguments of the parties, the court finds the application for a Temporary Restraining Order to be
without merit.

Since the application prays for the restraint of the respondent, in the exercise of his contempt powers under Section
15 (9) in relation to paragraph (8) of R.A. 6770, known as The Ombudsman Act of 1989, there is no great or
irreparable injury from which petitioners may suffer, if respondent is not so restrained. Respondent should he decide
to exercise his contempt powers would still have to apply with the court. x x x Anyone who, without lawful excuse x
x x refuses to produce documents for inspection, when thereunto lawfully required shall be subject to discipline as in
case of contempt of Court and upon application of the individual or body exercising the power in question shall be
dealt with by the Judge of the First Instance (now RTC) having jurisdiction of the case in a manner provided by law
(section 580 of the Revised Administrative Code). Under the present Constitution only judges may issue warrants,
hence, respondent should apply with the Court for the issuance of the warrant needed for the enforcement of his
contempt orders. It is in these proceedings where petitioners may question the propriety of respondents exercise of
his contempt powers. Petitioners are not therefore left without any adequate remedy.

The questioned orders were issued with the investigation of the case of Fact-Finding and Intelligence Bureau vs.
Amado Lagdameo, et. el., OMB-0-97-0411, for violation of R.A. 3019. Since petitioner failed to show prima facie
evidence that the subject matter of the investigation is outside the jurisdiction of the Office of the Ombudsman, no
writ of injunction may be issued by this Court to delay this investigation pursuant to Section 14 of the Ombudsman
Act of 1989.[10]

On July 20, 1998, petitioner filed a motion for reconsideration based on the following grounds:

a. Petitioners application for Temporary Restraining Order is not only to restrain the Ombudsman from exercising his
contempt powers, but to stop him from implementing his Orders dated April 29,1998 and June 16,1998; and

316
b. The subject matter of the investigation being conducted by the Ombudsman at petitioners premises is outside his
jurisdiction.[11]

On July 23, 1998, the Ombudsman filed a motion to dismiss the petition for declaratory relief[12] on the ground that
the Regional Trial Court has no jurisdiction to hear a petition for relief from the findings and orders of the
Ombudsman, citing R. A. No. 6770, Sections 14 and 27. On August 7, 1998, the Ombudsman filed an opposition to
petitioners motion for reconsideration dated July 20, 1998.[13]

On August 19, 1998, the lower court denied petitioners motion for reconsideration,[14] and also the Ombudsmans
motion to dismiss.[15]

On August 21, 1998, petitioner received a copy of the motion to cite her for contempt, filed with the Office of the
Ombudsman by Agapito B. Rosales, Director, Fact Finding and Intelligence Bureau (FFIB).[16]

On August 31, 1998, petitioner filed with the Ombudsman an opposition to the motion to cite her in contempt on the
ground that the filing thereof was premature due to the petition pending in the lower court.[17] Petitioner likewise
reiterated that she had no intention to disobey the orders of the Ombudsman. However, she wanted to be clarified
as to how she would comply with the orders without her breaking any law, particularly R. A. No. 1405.[18]

Respondent Ombudsman panel set the incident for hearing on September 7, 1998.[19] After hearing, the panel
issued an order dated September 7, 1998, ordering petitioner and counsel to appear for a continuation of the hearing
of the contempt charges against her.[20]

On September 10, 1998, petitioner filed with the Ombudsman a motion for reconsideration of the above order.[21]
Her motion was premised on the fact that there was a pending case with the Regional Trial Court, Makati City,[22]
which would determine whether obeying the orders of the Ombudsman to produce bank documents would not
violate any law.

The FFIB opposed the motion,[23] and on October 14, 1998, the Ombudsman denied the motion by order the
dispositive portion of which reads:

Wherefore, respondent Lourdes T. Marquezs motion for reconsideration is hereby DENIED, for lack of merit. Let the
hearing of the motion of the Fact Finding Intelligence Bureau (FFIB) to cite her for indirect contempt be

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intransferrably set to 29 October 1998 at 2:00 oclock p.m. at which date and time she should appear personally to
submit her additional evidence. Failure to do so shall be deemed a waiver thereof.[24]

Hence, the present petition.[25]

The issue is whether petitioner may be cited for indirect contempt for her failure to produce the documents
requested by the Ombudsman. And whether the order of the Ombudsman to have an in camera inspection of the
questioned account is allowed as an exception to the law on secrecy of bank deposits (R. A. No. 1405).

An examination of the secrecy of bank deposits law (R. A. No. 1405) would reveal the following exceptions:

1. Where the depositor consents in writing;

2. Impeachment case;

3. By court order in bribery or dereliction of duty cases against public officials;

4. Deposit is subject of litigation;

5. Sec. 8, R. A. No. 3019, in cases of unexplained wealth as held in the case of PNB vs. Gancayco[26]

The order of the Ombudsman to produce for in camera inspection the subject accounts with the Union Bank of the
Philippines, Julia Vargas Branch, is based on a pending investigation at the Office of the Ombudsman against Amado
Lagdameo, et. al. for violation of R. A. No. 3019, Sec. 3 (e) and (g) relative to the Joint Venture Agreement between
the Public Estates Authority and AMARI.

We rule that before an in camera inspection may be allowed, there must be a pending case before a court of
competent jurisdiction. Further, the account must be clearly identified, the inspection limited to the subject matter
of the pending case before the court of competent jurisdiction. The bank personnel and the account holder must be
notified to be present during the inspection, and such inspection may cover only the account identified in the
pending case.

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In Union Bank of the Philippines v. Court of Appeals, we held that Section 2 of the Law on Secrecy of Bank Deposits,
as amended, declares bank deposits to be absolutely confidential except:

(1) In an examination made in the course of a special or general examination of a bank that is specifically authorized
by the Monetary Board after being satisfied that there is reasonable ground to believe that a bank fraud or serious
irregularity has been or is being committed and that it is necessary to look into the deposit to establish such fraud or
irregularity,

(2) In an examination made by an independent auditor hired by the bank to conduct its regular audit provided that
the examination is for audit purposes only and the results thereof shall be for the exclusive use of the bank,

(3) Upon written permission of the depositor,

(4) In cases of impeachment,

(5) Upon order of a competent court in cases of bribery or dereliction of duty of public officials, or

(6) In cases where the money deposited or invested is the subject matter of the litigation[27]

In the case at bar, there is yet no pending litigation before any court of competent authority. What is existing is an
investigation by the office of the Ombudsman. In short, what the Office of the Ombudsman would wish to do is to
fish for additional evidence to formally charge Amado Lagdameo, et. al., with the Sandiganbayan. Clearly, there was
no pending case in court which would warrant the opening of the bank account for inspection.

Zones of privacy are recognized and protected in our laws. The Civil Code provides that "[e]very person shall respect
the dignity, personality, privacy and peace of mind of his neighbors and other persons" and punishes as actionable
torts several acts for meddling and prying into the privacy of another. It also holds a public officer or employee or any
private individual liable for damages for any violation of the rights and liberties of another person, and recognizes
the privacy of letters and other private communications. The Revised Penal Code makes a crime of the violation of
secrets by an officer, the revelation of trade and industrial secrets, and trespass to dwelling. Invasion of privacy is an
offense in special laws like the Anti-Wiretapping Law, the Secrecy of Bank Deposits Act, and the Intellectual Property
Code.[28]

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IN VIEW WHEREOF, we GRANT the petition. We order the Ombudsman to cease and desist from requiring Union
Bank Manager Lourdes T. Marquez, or anyone in her place to comply with the order dated October 14, 1998, and
similar orders. No costs.

SO ORDERED.

G.R. No. 189206 June 8, 2011

GOVERNMENT SERVICE INSURANCE SYSTEM, Petitioner,

vs.

THE HONORABLE 15th DIVISION OF THE COURT OF APPEALS and INDUSTRIAL BANK OF KOREA, TONG YANG
MERCHANT BANK, HANAREUM BANKING CORP., LAND BANK OF THE PHILIPPINES, WESTMONT BANK and DOMSAT
HOLDINGS, INC., Respondents.

DECISION

PEREZ, J.:

The subject of this petition for certiorari is the Decision1 of the Court of Appeals in CA-G.R. SP No. 82647 allowing the
quashal by the Regional Trial Court (RTC) of Makati of a subpoena for the production of bank ledger. This case is
incident to Civil Case No. 99-1853, which is the main case for collection of sum of money with damages filed by
Industrial Bank of Korea, Tong Yang Merchant Bank, First Merchant Banking Corporation, Land Bank of the
Philippines, and Westmont Bank (now United Overseas Bank), collectively known as "the Banks" against Domsat
Holdings, Inc. (Domsat) and the Government Service Insurance System (GSIS). Said case stemmed from a Loan
Agreement,2 whereby the Banks agreed to lend United States (U.S.) $11 Million to Domsat for the purpose of
financing the lease and/or purchase of a Gorizon Satellite from the International Organization of Space
Communications (Intersputnik).3

The controversy originated from a surety agreement by which Domsat obtained a surety bond from GSIS to secure
the payment of the loan from the Banks. We quote the terms of the Surety Bond in its entirety.4

Republic of the Philippines

320
GOVERNMENT SERVICE INSURANCE SYSTEM

GENERAL INSURANCE FUND

GSIS Headquarters, Financial Center

Roxas Boulevard, Pasay City

G(16) GIF Bond 027461

SURETYBOND

KNOW ALL MEN BY THESE PRESENTS:

That we, DOMSAT HOLDINGS, INC., represented by its President as PRINCIPAL, and the GOVERNMENT SERVICE
INSURANCE SYSTEM, as Administrator of the GENERAL INSURANCE FUND, a corporation duly organized and existing
under and by virtue of the laws of the Philippines, with principal office in the City of Pasay, Metro Manila, Philippines
as SURETY, are held and firmly bound unto the OBLIGEES: LAND BANK OF THE PHILIPPINES, 7th Floor, Land Bank
Bldg. IV. 313 Sen. Gil J. Puyat Avenue, Makati City; WESTMONT BANK, 411 Quintin Paredes St., Binondo, Manila: TONG
YANG MERCHANT BANK, 185, 2-Ka, Ulchi-ro, Chungk-ku, Seoul, Korea; INDUSTRIAL BANK OF KOREA, 50, 2-Ga, Ulchi-
ro, Chung-gu, Seoul, Korea; and FIRST MERCHANT BANKING CORPORATION, 199-40, 2-Ga, Euliji-ro, Jung-gu, Seoul,
Korea, in the sum, of US $ ELEVEN MILLION DOLLARS ($11,000,000.00) for the payment of which sum, well and truly
to be made, we bind ourselves, our heirs, executors, administrators, successors and assigns, jointly and severally,
firmly by these presents.

THE CONDITIONS OF THE OBLIGATION ARE AS FOLLOWS:

WHEREAS, the above bounden PRINCIPAL, on the 12th day of December, 1996 entered into a contract agreement
with the aforementioned OBLIGEES to fully and faithfully

Guarantee the repayment of the principal and interest on the loan granted the PRINCIPAL to be used for the
financing of the two (2) year lease of a Russian Satellite from INTERSPUTNIK, in accordance with the terms and
conditions of the credit package entered into by the parties.

This bond shall remain valid and effective until the loan including interest has been fully paid and liquidated,

321
a copy of which contract/agreement is hereto attached and made part hereof;

WHEREAS, the aforementioned OBLIGEES require said PRINCIPAL to give a good and sufficient bond in the above
stated sum to secure the full and faithful performance on his part of said contract/agreement.

NOW, THEREFORE, if the PRINCIPAL shall well and truly perform and fulfill all the undertakings, covenants, terms,
conditions, and agreements stipulated in said contract/agreements, then this obligation shall be null and void;
otherwise, it shall remain in full force and effect.

WITNESS OUR HANDS AND SEALS this 13th day of December 1996 at Pasay City, Philippines.

DOMSAT HOLDINGS, INC.

Principal GOVERNMENT SERVICE INSURANCE SYSTEM

General Insurance Fund

By:

CAPT. RODRIGO A. SILVERIO

President By:

AMALIO A. MALLARI

Senior Vice-President

General Insurance Group

When Domsat failed to pay the loan, GSIS refused to comply with its obligation reasoning that Domsat did not use
the loan proceeds for the payment of rental for the satellite. GSIS alleged that Domsat, with Westmont Bank as the
conduit, transferred the U.S. $11 Million loan proceeds from the Industrial Bank of Korea to Citibank New York
account of Westmont Bank and from there to the Binondo Branch of Westmont Bank.5 The Banks filed a complaint
before the RTC of Makati against Domsat and GSIS.

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In the course of the hearing, GSIS requested for the issuance of a subpoena duces tecum to the custodian of records
of Westmont Bank to produce the following documents:

1. Ledger covering the account of DOMSAT Holdings, Inc. with Westmont Bank (now United Overseas Bank), any and
all documents, records, files, books, deeds, papers, notes and other data and materials relating to the account or
transactions of DOMSAT Holdings, Inc. with or through the Westmont Bank (now United Overseas Bank) for the
period January 1997 to December 2002, in his/her direct or indirect possession, custody or control (whether actual or
constructive), whether in his/her capacity as Custodian of Records or otherwise;

2. All applications for cashier’s/ manager’s checks and bank transfers funded by the account of DOMSAT Holdings,
Inc. with or through the Westmont Bank (now United Overseas Bank) for the period January 1997 to December 2002,
and all other data and materials covering said applications, in his/her direct or indirect possession, custody or control
(whether actual or constructive), whether in his/her capacity as Custodian of Records or otherwise;

3. Ledger covering the account of Philippine Agila Satellite, Inc. with Westmont Bank (now United Overseas Bank),
any and all documents, records, files, books, deeds, papers, notes and other data and materials relating to the
account or transactions of Philippine Agila Satellite, Inc. with or through the Westmont bank (now United Overseas
Bank) for the period January 1997 to December 2002, in his/her direct or indirect possession, custody or control
(whether actual or constructive), whether in his/her capacity as Custodian of Records or otherwise;

4. All applications for cashier’s/manager’s checks funded by the account of Philippine Agila Satellite, Inc. with or
through the Westmont Bank (now United Overseas Bank) for the period January 1997 to December 2002, and all
other data and materials covering said applications, in his/her direct or indirect possession, custody or control
(whether actual or constructive), whether in his/her capacity as Custodian of Records or otherwise.6

The RTC issued a subpoena decus tecum on 21 November 2002.7 A motion to quash was filed by the banks on three
grounds: 1) the subpoena is unreasonable, oppressive and does not establish the relevance of the documents
sought; 2) request for the documents will violate the Law on Secrecy of Bank Deposits; and 3) GSIS failed to advance
the reasonable cost of production of the documents.8 Domsat also joined the banks’ motion to quash through its
Manifestation/Comment.9 On 9 April 2003, the RTC issued an Order denying the motion to quash for lack of merit.
We quote the pertinent portion of the Order, thus:

After a careful consideration of the arguments of the parties, the Court did not find merit in the motion.

The serious objection appears to be that the subpoena is violative of the Law on Secrecy of Bank Deposit, as
amended. The law declares bank deposits to be "absolutely confidential" except: x x x (6) In cases where the money
deposited or invested is the subject matter of the litigation.

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The case at bench is for the collection of a sum of money from defendants that obtained a loan from the plaintiff.
The loan was secured by defendant GSIS which was the surety. It is the contention of defendant GSIS that the
proceeds of the loan was deviated to purposes other than to what the loan was extended. The quashal of the
subpoena would deny defendant GSIS its right to prove its defenses.

WHEREFORE, for lack of merit the motion is DENIED.10

On 26 June 2003, another Order was issued by the RTC denying the motion for reconsideration filed by the banks.11
On 1 September 2003 however, the trial court granted the second motion for reconsideration filed by the banks. The
previous subpoenas issued were consequently quashed.12 The trial court invoked the ruling in Intengan v. Court of
Appeals,13 where it was ruled that foreign currency deposits are absolutely confidential and may be examined only
when there is a written permission from the depositor. The motion for reconsideration filed by GSIS was denied on
30 December 2003.

Hence, these assailed orders are the subject of the petition for certiorari before the Court of Appeals. GSIS raised the
following arguments in support of its petition:

I.

Respondent Judge acted with grave abuse of discretion when it favorably considered respondent banks’ (second)
Motion for Reconsideration dated July 9, 2003 despite the fact that it did not contain a notice of hearing and was
therefore a mere scrap of paper.

II.

Respondent judge capriciously and arbitrarily ignored Section 2 of the Foreign Currency Deposit Act (RA 6426) in
ruling in his Orders dated September 1 and December 30, 2003 that the US$11,000,000.00 deposit in the account of
respondent Domsat in Westmont Bank is covered by the secrecy of bank deposit.

III.

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Since both respondent banks and respondent Domsat have disclosed during the trial the US$11,000,000.00 deposit,
it is no longer secret and confidential, and petitioner GSIS’ right to inquire into what happened to such deposit can
not be suppressed.14

The Court of Appeals addressed these issues in seriatim.

The Court of Appeals resorted to a liberal interpretation of the rules to avoid miscarriage of justice when it allowed
the filing and acceptance of the second motion for reconsideration. The appellate court also underscored the fact
that GSIS did not raise the defect of lack of notice in its opposition to the second motion for reconsideration. The
appellate court held that failure to timely object to the admission of a defective motion is considered a waiver of its
right to do so.

The Court of Appeals declared that Domsat’s deposit in Westmont Bank is covered by Republic Act No. 6426 or the
Bank Secrecy Law. We quote the pertinent portion of the Decision:

It is our considered opinion that Domsat’s deposit of $11,000,000.00 in Westmont Bank is covered by the Bank
Secrecy Law, as such it cannot be examined, inquired or looked into without the written consent of its owner. The
ruling in Van Twest vs. Court of Appeals was rendered during the effectivity of CB Circular No. 960, Series of 1983,
under Sec. 102 thereof, transfer to foreign currency deposit account or receipt from another foreign currency
deposit account, whether for payment of legitimate obligation or otherwise, are not eligible for deposit under the
System.

CB Circular No. 960 has since been superseded by CB Circular 1318 and later by CB Circular 1389. Section 102 of
Circular 960 has not been re-enacted in the later Circulars. What is applicable now is the decision in Intengan vs.
Court of Appeals where the Supreme Court has ruled that the under R.A. 6426 there is only a single exception to the
secrecy of foreign currency deposits, that is, disclosure is allowed only upon the written permission of the depositor.
Petitioner, therefore, had inappropriately invoked the provisions of Central Bank (CB) Circular Nos. 343 which has
already been superseded by more recently issued CB Circulars. CB Circular 343 requires the surrender to the banking
system of foreign exchange, including proceeds of foreign borrowings. This requirement, however, can no longer be
found in later circulars.

In its Reply to respondent banks’ comment, petitioner appears to have conceded that what is applicable in this case
is CB Circular 1389. Obviously, under CB 1389, proceeds of foreign borrowings are no longer required to be
surrendered to the banking system.

Undaunted, petitioner now argues that paragraph 2, Section 27 of CB Circular 1389 is applicable because Domsat’s
$11,000,000.00 loan from respondent banks was intended to be paid to a foreign supplier Intersputnik and,
therefore, should have been paid directly to Intersputnik and not deposited into Westmont Bank. The fact that it was

325
deposited to the local bank Westmont Bank, petitioner claims violates the circular and makes the deposit lose its
confidentiality status under R.A. 6426. However, a reading of the entire Section 27 of CB Circular 1389 reveals that
the portion quoted by the petitioner refers only to the procedure/conditions of drawdown for service of debts using
foreign exchange. The above-said provision relied upon by the petitioner does not in any manner prescribe the
conditions before any foreign currency deposit can be entitled to the confidentiality provisions of R.A. 6426.15

Anent the third issue, the Court of Appeals ruled that the testimony of the incumbent president of Westmont Bank is
not the written consent contemplated by Republic Act No. 6426.

The Court of Appeals however upheld the issuance of subpoena praying for the production of applications for
cashier’s or manager’s checks by Domsat through Westmont Bank, as well as a copy of an Agreement and/or
Contract and/or Memorandum between Domsat and/or Philippine Agila Satellite and Intersputnik for the acquisition
and/or lease of a Gorizon Satellite. The appellate court believed that the production of these documents does not
involve the examination of Domsat’s account since it will never be known how much money was deposited into it or
withdrawn therefrom and how much remains therein.

On 29 February 2008, the Court of Appeals rendered the assailed Decision, the decretal portion of which reads:

WHEREFORE, the petition is partially GRANTED. Accordingly, the assailed Order dated December 30, 2003 is hereby
modified in that the quashal of the subpoena for the production of Domsat’s bank ledger in Westmont Bank is
upheld while respondent court is hereby ordered to issue subpoena duces tecum ad testificandum directing the
records custodian of Westmont Bank to bring to court the following documents:

a) applications for cashier’s or manager’s checks by respondent Domsat through Westmont Bank from January 1997
to December 2002;

b) bank transfers by respondent Domsat through Westmont Bank from January 1997 to December 2002; and

c) copy of an agreement and/or contract and/or memorandum between respondent Domsat and/or Philippine Agila
Satellite and Intersputnik for the acquisition and/or lease of a Gorizon satellite.

No pronouncement as to costs.16

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GSIS filed a motion for reconsideration which the Court of Appeals denied on 19 June 2009. Thus, the instant petition
ascribing grave abuse of discretion on the part of the Court of Appeals in ruling that Domsat’s deposit with
Westmont Bank cannot be examined and in finding that the banks’ second motion for reconsideration in Civil Case
No. 99-1853 is procedurally acceptable.17

This Court notes that GSIS filed a petition for certiorari under Rule 65 of the Rules of Court to assail the Decision and
Resolution of the Court of Appeals. Petitioner availed of the improper remedy as the appeal from a final disposition
of the Court of Appeals is a petition for review under Rule 45 and not a special civil action under Rule 65.18 Certiorari
under Rule 65 lies only when there is no appeal, nor plain, speedy and adequate remedy in the ordinary course of
law. That action is not a substitute for a lost appeal in general; it is not allowed when a party to a case fails to appeal
a judgment to the proper forum.19 Where an appeal is available, certiorari will not prosper even if the ground
therefor is grave abuse of discretion. Accordingly, when a party adopts an improper remedy, his petition may be
dismissed outright.20lauuphil

Yet, even if this procedural infirmity is discarded for the broader interest of justice, the petition sorely lacks merit.

GSIS insists that Domsat’s deposit with Westmont Bank can be examined and inquired into. It anchored its argument
on Republic Act No. 1405 or the "Law on Secrecy of Bank Deposits," which allows the disclosure of bank deposits in
cases where the money deposited is the subject matter of the litigation. GSIS asserts that the subject matter of the
litigation is the U.S. $11 Million obtained by Domsat from the Banks to supposedly finance the lease of a Russian
satellite from Intersputnik. Whether or not it should be held liable as a surety for the principal amount of U.S. $11
Million, GSIS contends, is contingent upon whether Domsat indeed utilized the amount to lease a Russian satellite as
agreed in the Surety Bond Agreement. Hence, GSIS argues that the whereabouts of the U.S. $11 Million is the subject
matter of the case and the disclosure of bank deposits relating to the U.S. $11 Million should be allowed.

GSIS also contends that the concerted refusal of Domsat and the banks to divulge the whereabouts of the U.S. $11
Million will greatly prejudice and burden the GSIS pension fund considering that a substantial portion of this fund is
earmarked every year to cover the surety bond issued.

Lastly, GSIS defends the acceptance by the trial court of the second motion for reconsideration filed by the banks on
the grounds that it is pro forma and did not conform to the notice requirements of Section 4, Rule 15 of the Rules of
Civil Procedure.21

Domsat denies the allegations of GSIS and reiterates that it did not give a categorical or affirmative written consent
or permission to GSIS to examine its bank statements with Westmont Bank.

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The Banks maintain that Republic Act No. 1405 is not the applicable law in the instant case because the Domsat
deposit is a foreign currency deposit, thus covered by Republic Act No. 6426. Under said law, only the consent of the
depositor shall serve as the exception for the disclosure of his/her deposit.

The Banks counter the arguments of GSIS as a mere rehash of its previous arguments before the Court of Appeals.
They justify the issuance of the subpoena as an interlocutory matter which may be reconsidered anytime and that
the pro forma rule has no application to interlocutory orders.

It appears that only GSIS appealed the ruling of the Court of Appeals pertaining to the quashal of the subpoena for
the production of Domsat’s bank ledger with Westmont Bank. Since neither Domsat nor the Banks interposed an
appeal from the other portions of the decision, particularly for the production of applications for cashier’s or
manager’s checks by Domsat through Westmont Bank, as well as a copy of an agreement and/or contract and/or
memorandum between Domsat and/or Philippine Agila Satellite and Intersputnik for the acquisition and/or lease of a
Gorizon satellite, the latter became final and executory.

GSIS invokes Republic Act No. 1405 to justify the issuance of the subpoena while the banks cite Republic Act No.
6426 to oppose it. The core issue is which of the two laws should apply in the instant case.

Republic Act No. 1405 was enacted in 1955. Section 2 thereof was first amended by Presidential Decree No. 1792 in
1981 and further amended by Republic Act No. 7653 in 1993. It now reads:

Section 2. All deposits of whatever nature with banks or banking institutions in the Philippines including investments
in bonds issued by the Government of the Philippines, its political subdivisions and its instrumentalities, are hereby
considered as of an absolutely confidential nature and may not be examined, inquired or looked into by any person,
government official, bureau or office, except upon written permission of the depositor, or in cases of impeachment,
or upon order of a competent court in cases of bribery or dereliction of duty of public officials, or in cases where the
money deposited or invested is the subject matter of the litigation.

Section 8 of Republic Act No. 6426, which was enacted in 1974, and amended by Presidential Decree No. 1035 and
later by Presidential Decree No. 1246, provides:

Section 8. Secrecy of Foreign Currency Deposits. – All foreign currency deposits authorized under this Act, as
amended by Presidential Decree No. 1035, as well as foreign currency deposits authorized under Presidential Decree
No. 1034, are hereby declared as and considered of an absolutely confidential nature and, except upon the written
permission of the depositor, in no instance shall foreign currency deposits be examined, inquired or looked into by
any person, government official, bureau or office whether judicial or administrative or legislative or any other entity
whether public or private; Provided, however, That said foreign currency deposits shall be exempt from attachment,

328
garnishment, or any other order or process of any court, legislative body, government agency or any administrative
body whatsoever. (As amended by PD No. 1035, and further amended by PD No. 1246, prom. Nov. 21, 1977.)

On the one hand, Republic Act No. 1405 provides for four (4) exceptions when records of deposits may be disclosed.
These are under any of the following instances: a) upon written permission of the depositor, (b) in cases of
impeachment, (c) upon order of a competent court in the case of bribery or dereliction of duty of public officials or,
(d) when the money deposited or invested is the subject matter of the litigation, and e) in cases of violation of the
Anti-Money Laundering Act (AMLA), the Anti-Money Laundering Council (AMLC) may inquire into a bank account
upon order of any competent court.22 On the other hand, the lone exception to the non-disclosure of foreign
currency deposits, under Republic Act No. 6426, is disclosure upon the written permission of the depositor.

These two laws both support the confidentiality of bank deposits. There is no conflict between them. Republic Act
No. 1405 was enacted for the purpose of giving encouragement to the people to deposit their money in banking
institutions and to discourage private hoarding so that the same may be properly utilized by banks in authorized
loans to assist in the economic development of the country.23 It covers all bank deposits in the Philippines and no
distinction was made between domestic and foreign deposits. Thus, Republic Act No. 1405 is considered a law of
general application. On the other hand, Republic Act No. 6426 was intended to encourage deposits from foreign
lenders and investors.24 It is a special law designed especially for foreign currency deposits in the Philippines. A
general law does not nullify a specific or special law. Generalia specialibus non derogant.25 Therefore, it is beyond
cavil that Republic Act No. 6426 applies in this case.

Intengan v. Court of Appeals affirmed the above-cited principle and categorically declared that for foreign currency
deposits, such as U.S. dollar deposits, the applicable law is Republic Act No. 6426.

In said case, Citibank filed an action against its officers for persuading their clients to transfer their dollar deposits to
competitor banks. Bank records, including dollar deposits of petitioners, purporting to establish the deception
practiced by the officers, were annexed to the complaint. Petitioners now complained that Citibank violated Republic
Act No. 1405. This Court ruled that since the accounts in question are U.S. dollar deposits, the applicable law
therefore is not Republic Act No. 1405 but Republic Act No. 6426.

The above pronouncement was reiterated in China Banking Corporation v. Court of Appeals,26 where respondent
accused his daughter of stealing his dollar deposits with Citibank. The latter allegedly received the checks from
Citibank and deposited them to her account in China Bank. The subject checks were presented in evidence. A
subpoena was issued to employees of China Bank to testify on these checks. China Bank argued that the Citibank
dollar checks with both respondent and/or her daughter as payees, deposited with China Bank, may not be looked
into under the law on secrecy of foreign currency deposits. This Court highlighted the exception to the non-
disclosure of foreign currency deposits, i.e., in the case of a written permission of the depositor, and ruled that
respondent, as owner of the funds unlawfully taken and which are undisputably now deposited with China Bank, he
has the right to inquire into the said deposits.

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Applying Section 8 of Republic Act No. 6426, absent the written permission from Domsat, Westmont Bank cannot be
legally compelled to disclose the bank deposits of Domsat, otherwise, it might expose itself to criminal liability under
the same act.27

The basis for the application of subpoena is to prove that the loan intended for Domsat by the Banks and guaranteed
by GSIS, was diverted to a purpose other than that stated in the surety bond. The Banks, however, argue that GSIS is
in fact liable to them for the proper applications of the loan proceeds and not vice-versa. We are however not
prepared to rule on the merits of this case lest we pre-empt the findings of the lower courts on the matter.

The third issue raised by GSIS was properly addressed by the appellate court. The appellate court maintained that the
judge may, in the exercise of his sound discretion, grant the second motion for reconsideration despite its being pro
forma. The appellate court correctly relied on precedents where this Court set aside technicality in favor of
substantive justice. Furthermore, the appellate court accurately pointed out that petitioner did not assail the defect
of lack of notice in its opposition to the second motion of reconsideration, thus it can be considered a waiver of the
defect.

WHEREFORE, the petition for certiorari is DISMISSED. The Decision dated 29 February 2008 and 19 June 2009
Resolution of the Court of Appeals are hereby AFFIRMED.

SO ORDERED.

[G.R. No. 128996. February 15, 2002]

CARMEN LL. INTENGAN, ROSARIO LL. NERI, and RITA P. BRAWNER, petitioners, vs. COURT OF APPEALS,
DEPARTMENT OF JUSTICE, AZIZ RAJKOTWALA, WILLIAM FERGUSON, JOVEN REYES, and VIC LIM, respondents.

DECISION

DE LEON, JR., J.:

Before us is a petition for review on certiorari, seeking the reversal of the Decision[1] dated July 8, 1996 of the former
Fifteenth Division[2] of the Court of Appeals in CA-G.R. SP No. 37577 as well as its Resolution[3] dated April 16, 1997
denying petitioners motion for reconsideration. The appellate court, in its Decision, sustained a resolution of the
Department of Justice ordering the withdrawal of informations for violation of Republic Act No. 1405 against private
respondents.

330
The facts are:

On September 21, 1993, Citibank filed a complaint for violation of section 31,[4] in relation to section 144[5] of the
Corporation Code against two (2) of its officers, Dante L. Santos and Marilou Genuino. Attached to the complaint was
an affidavit[6] executed by private respondent Vic Lim, a vice-president of Citibank. Pertinent portions of his affidavit
are quoted hereunder:

2.1 Sometime this year, the higher management of Citibank, N.A. assigned me to assist in the investigation of certain
anomalous/highly irregular activities of the Treasurer of the Global Consumer Group of the bank, namely, Dante L.
Santos and the Asst. Vice President in the office of Mr. Dante L. Santos, namely Ms. Marilou (also called Malou)
Genuino. Ms. Marilou Genuino apart from being an Assistant Vice President in the office of Mr. Dante L. Santos also
performed the duties of an Account Officer. An Account Officer in the office of Mr. Dante L. Santos personally
attends to clients of the bank in the effort to persuade clients to place and keep their monies in the products of
Citibank, NA., such as peso and dollar deposits, mortgage backed securities and money placements, among others.

xxx xxx xxx

4.1 The investigation in which I was asked to participate was undertaken because the bank had found
records/evidence showing that Mr. Dante L. Santos and Ms. Malou Genuino, contrary to their disclosures and the
aforementioned bank policy, appeared to have been actively engaged in business endeavors that were in conflict
with the business of the bank. It was found that with the use of two (2) companies in which they have personal
financial interest, namely Torrance Development Corporation and Global Pacific Corporation, they managed or
caused existing bank clients/depositors to divert their money from Citibank, N.A., such as those placed in peso and
dollar deposits and money placements, to products offered by other companies that were commanding higher rate
of yields. This was done by first transferring bank clients monies to Torrance and Global which in turn placed the
monies of the bank clients in securities, shares of stock and other certificates of third parties. It also appeared that
out of these transactions, Mr. Dante L. Santos and Ms. Marilou Genuino derived substantial financial gains.

5.1 In the course of the investigation, I was able to determine that the bank clients which Mr. Santos and Ms. Genuino
helped/caused to divert their deposits/money placements with Citibank, NA. to Torrance and Global (their family
corporations) for subsequent investment in securities, shares of stocks and debt papers in other companies were as
follows:

xxx

b) Carmen Intengan

331
xxx

d) Rosario Neri

xxx

i) Rita Brawner

All the above persons/parties have long standing accounts with Citibank, N.A. in savings/dollar deposits and/or in
trust accounts and/or money placements.

As evidence, Lim annexed bank records purporting to establish the deception practiced by Santos and Genuino.
Some of the documents pertained to the dollar deposits of petitioners Carmen Ll. Intengan, Rosario Ll. Neri, and Rita
P. Brawner, as follows:

a) Annex A-6[7] - an Application for Money Transfer in the amount of US $140,000.00, executed by Intengan in favor
of Citibank $ S/A No. 24367796, to be debited from her Account No. 22543341;

b) Annex A-7[8] - a Money Transfer Slip in the amount of US $45,996.30, executed by Brawner in favor of Citibank $
S/A No. 24367796, to be debited from her Account No. 22543236; and

c) Annex A-9[9] - an Application for Money Transfer in the amount of US $100,000.00, executed by Neri in favor of
Citibank $ S/A No. 24367796, to be debited from her Account No. 24501018.

In turn, private respondent Joven Reyes, vice-president/business manager of the Global Consumer Banking Group of
Citibank, admits to having authorized Lim to state the names of the clients involved and to attach the pertinent bank
records, including those of petitioners.[10] He states that private respondents Aziz Rajkotwala and William Ferguson,
Citibank, N.A. Global Consumer Banking Country Business Manager and Country Corporate Officer, respectively, had
no hand in the disclosure, and that he did so upon the advice of counsel.

In his memorandum, the Solicitor General described the scheme as having been conducted in this manner:

332
First step: Santos and/or Genuino would tell the bank client that they knew of financial products of other companies
that were yielding higher rates of interests in which the bank client can place his money. Acting on this information,
the bank client would then authorize the transfer of his funds from his Citibank account to the Citibank account of
either Torrance or Global.

The transfer of the Citibank clients deposits was done through the accomplishment of either an Application For
Managers Checks or a Term Investment Application in favor of Global or Torrance that was prepared/filed by
Genuino herself.

Upon approval of the Application for Managers Checks or Term Investment Application, the funds of the bank client
covered thereof were then deposited in the Citibank accounts of Torrance and/or Global.

Second step: Once the said fund transfers had been effected, Global and/or Torrance would then issue its/ their
checks drawn against its/their Citibank accounts in favor of the other companies whose financial products, such as
securities, shares of stocks and other certificates, were offering higher yields.

Third step: On maturity date(s) of the placements made by Torrance and/or Global in the other companies, using the
monies of the Citibank client, the other companies would then. return the placements to Global and/or Torrance with
the corresponding interests earned.

Fourth step: Upon receipt by Global and/or Torrance of the remittances from the other companies, Global and/or
Torrance would then issue its/their own checks drawn against their Citibank accounts in favor of Santos and Genuino.

The amounts covered by the checks represent the shares of Santos and Genuino in the margins Global and/or
Torrance had realized out of the placements [using the diverted monies of the Citibank clients] made with the other
companies.

Fifth step: At the same time, Global and/or Torrance would also issue its/their check(s) drawn against its/their
Citibank accounts in favor of the bank client.

The check(s) cover the principal amount (or parts thereof) which the Citibank client had previously transferred, with
the help of Santos and/or Genuino, from his Citibank account to the Citibank account(s) of Global and/or Torrance for
placement in the other companies, plus the interests or earnings his placements in other companies had made less
the spreads made by Global, Torrance, Santos and Genuino.

333
The complaints which were docketed as I.S. Nos. 93-9969, 93-10058 and 94-1215 were subsequently amended to
include a charge of estafa under Article 315, paragraph 1(b)[11] of the Revised Penal Code.

As an incident to the foregoing, petitioners filed respective motions for the exclusion and physical withdrawal of
their bank records that were attached to Lims affidavit.

In due time, Lim and Reyes filed their respective counter-affidavits.[12] In separate Memoranda dated March 8, 1994
and March 15, 1994 2nd Assistant Provincial Prosecutor Hermino T. Ubana, Sr. recommended the dismissal of
petitioners complaints. The recommendation was overruled by Provincial Prosecutor Mauro M. Castro who, in a
Resolution dated August 18, 1994,[13] directed the filing of informations against private respondents for alleged
violation of Republic Act No. 1405, otherwise known as the Bank Secrecy Law.

Private respondents counsel then filed an appeal before the Department of Justice (DOJ). On November 17, 1994,
then DOJ Secretary Franklin M. Drilon issued a Resolution[14] ordering, inter alia, the withdrawal of the aforesaid
informations against private respondents. Petitioners motion for reconsideration[15] was denied by DOJ Acting
Secretary Demetrio G. Demetria in a Resolution dated March 6, 1995.[16]

Initially, petitioners sought the reversal of the DOJ resolutions via a petition for certiorari and mandamus filed with
this Court, docketed as G.R. No. 119999-120001. However, the former First Division of this Court, in a Resolution dated
June 5, 1995,[17] referred the matter to the Court of the Appeals, on the basis of the latter tribunals concurrent
jurisdiction to issue the extraordinary writs therein prayed for. The petition was docketed as CA-G.R. SP No. 37577 in
the Court of Appeals.

On July 8, 1996, the Court of Appeals rendered judgment dismissing the petition in CA-G.R. SP No. 37577 and declared
therein, as follows:

Clearly, the disclosure of petitioners deposits was necessary to establish the allegation that Santos and Genuino had
violated Section 31 of the Corporation Code in acquiring any interest adverse to the corporation in respect of any
matter which has been reposed in him in confidence. To substantiate the alleged scheme of Santos and Genuino,
private respondents had to present the records of the monies which were manipulated by the two officers which
included the bank records of herein petitioners.

Although petitioners were not the parties involved in IS. No. 93-8469, their accounts were relevant to the complete
prosecution of the case against Santos and Genuino and the respondent DOJ properly ruled that the disclosure of
the same falls under the last exception of R.A. No. 1405. That ruling is consistent with the principle laid down in the
case of Mellon Bank, N.A. vs. Magsino (190 SCRA 633) where the Supreme Court allowed the testimonies on the bank

334
deposits of someone not a party to the case as it found that said bank deposits were material or relevant to the
allegations in the complaint. Significantly, therefore, as long as the bank deposits are material to the case, although
not necessarily the direct subject matter thereof, a disclosure of the same is proper and falls within the scope of the
exceptions provided for by R.A. No. 1405.

xxx xxx xxx

Moreover, the language of the law itself is clear and cannot be subject to different interpretations. A reading of the
provision itself would readily reveal that the exception or in cases where the money deposited or invested is the
subject matter of the litigation is not qualified by the phrase upon order of competent Court which refers only to
cases of bribery or dereliction of duty of public officials.

Petitioners motion for reconsideration was similarly denied in a Resolution dated April 16, 1997. Appeal was made in
due time to this Court.

The instant petition was actually denied by the former Third Division of this Court in a Resolution[18] dated July 16,
1997, on the ground that petitioners had failed to show that a reversible error had been committed. On motion,
however, the petition was reinstated[19] and eventually given due course.[20]

In assailing the appellate courts findings, petitioners assert that the disclosure of their bank records was
unwarranted and illegal for the following reasons:

I.

IN BLATANT VIOLATION OF R.A. NO. 1405, PRIVATE RESPONDENTS ILLEGALLY MADE DISCLOSURES OF
PETITIONERS CONFIDENTIAL BANK DEPOSITS FOR THEIR SELFISH ENDS IN PROSECUTING THEIR COMPLAINT IN IS.
NO. 93-8469 THAT DID NOT INVOLVE PETITIONERS.

II.

PRIVATE RESPONDENTS DISCLOSURES DO NOT FALL UNDER THE FOURTH EXCEPTION OF R.A. NO. 1405 (i.e., in
cases where the money deposited or invested is the subject matter of the litigation), NOR UNDER ANY OTHER
EXCEPTION:

335
(1)

PETITIONERS DEPOSITS ARE NOT INVOLVED IN ANY LITIGATION BETWEEN PETITIONERS AND RESPONDENTS.
THERE IS NO LITIGATION BETWEEN THE PARTIES, MUCH LESS ONE INVOLVING PETITIONERS DEPOSITS AS THE
SUBJECT MATTER THEREOF.

(2)

EVEN ASSUMING ARGUENDO THAT THERE IS A LITIGATION INVOLVING PETITIONERS DEPOSITS AS THE SUBJECT
MATTER THEREOF, PRIVATE RESPONDENTS DISCLOSURES OF PETITIONERS DEPOSITS ARE NEVERTHELESS ILLEGAL
FOR WANT OF THE REQUISITE COURT ORDER, IN VIOLATION OF R.A. NO. 1405.

III.

THEREFORE, PETITIONERS ARE ENTITLED TO PROSECUTE PRIVATE RESPONDENTS FOR VIOLATIONS OF R.A. NO.
1405 FOR HAVING ILLEGALLY DISCLOSED PETITIONERS CONFIDENTIAL BANK DEPOSITS AND RECORDS IN IS. NO. 93-
8469.

Apart from the reversal of the decision and resolution of the appellate court as well as the resolutions of the
Department of Justice, petitioners pray that the latter agency be directed to issue a resolution ordering the
Provincial Prosecutor of Rizal to file the corresponding informations for violation of Republic Act No. 1405 against
private respondents.

The petition is not meritorious.

Actually, this case should have been studied more carefully by all concerned. The finest legal minds in the country -
from the parties respective counsel, the Provincial Prosecutor, the Department of Justice, the Solicitor General, and
the Court of Appeals - all appear to have overlooked a single fact which dictates the outcome of the entire
controversy. A circumspect review of the record shows us the reason. The accounts in question are U.S. dollar
deposits; consequently, the applicable law is not Republic Act No. 1405 but Republic Act (RA) No. 6426, known as the
Foreign Currency Deposit Act of the Philippines, section 8 of which provides:

336
Sec. 8. Secrecy of Foreign Currency Deposits.- All foreign currency deposits authorized under this Act, as amended by
Presidential Decree No. 1035, as well as foreign currency deposits authorized under Presidential Decree No. 1034, are
hereby declared as and considered of an absolutely confidential nature and, except upon the written permission of
the depositor, in no instance shall such foreign currency deposits be examined, inquired or looked into by any
person, government official bureau or office whether judicial or administrative or legislative or any other entity
whether public or private: Provided, however, that said foreign currency deposits shall be exempt from attachment,
garnishment, or any other order or process of any court, legislative body, government agency or any administrative
body whatsoever.[21] (italics supplied)

Thus, under R.A. No. 6426 there is only a single exception to the secrecy of foreign currency deposits, that is,
disclosure is allowed only upon the written permission of the depositor. Incidentally, the acts of private respondents
complained of happened before the enactment on September 29, 2001 of R.A. No. 9160 otherwise known as the
Anti-Money Laundering Act of 2001.

A case for violation of Republic Act No. 6426 should have been the proper case brought against private respondents.
Private respondents Lim and Reyes admitted that they had disclosed details of petitioners dollar deposits without
the latters written permission. It does not matter if that such disclosure was necessary to establish Citibanks case
against Dante L. Santos and Marilou Genuino. Lims act of disclosing details of petitioners bank records regarding
their foreign currency deposits, with the authority of Reyes, would appear to belong to that species of criminal acts
punishable by special laws, called malum prohibitum. In this regard, it has been held that:

While it is true that, as a rule and on principles of abstract justice, men are not and should not be held criminally
responsible for acts committed by them without guilty knowledge and criminal or at least evil intent xxx, the courts
have always recognized the power of the legislature, on grounds of public policy and compelled by necessity, the
great master of things, to forbid in a limited class of cases the doing of certain acts, and to make their commission
criminal without regard to the intent of the doer. xxx In such cases no judicial authority has the power to require, in
the enforcement of the law, such knowledge or motive to be shown. As was said in the case of State vs. McBrayer
xxx:

It is a mistaken notion that positive, willful intent, as distinguished from a mere intent, to violate the criminal law, is
an essential ingredient in every criminal offense, and that where there is the absence of such intent there is no
offense; this is especially so as to statutory offenses. When the statute plainly forbids an act to be done, and it is
done by some person, the law implies conclusively the guilty intent, although the offender was honestly mistaken as
to the meaning of the law he violates. When the language is plain and positive, and the offense is not made to
depend upon the positive, willful intent and purpose, nothing is left to interpretation.[22]

Ordinarily, the dismissal of the instant petition would have been without prejudice to the filing of the proper charges
against private respondents. The matter would have ended here were it not for the intervention of time, specifically
the lapse thereof. So as not to unduly prolong the settlement of the case, we are constrained to rule on a material
issue even though it was not raised by the parties. We refer to the issue of prescription.

337
Republic Act No. 6426 being a special law, the provisions of Act No. 3326,[23] as amended by Act No. 3763, are
applicable:

SECTION 1. Violations penalized by special acts shall, unless otherwise provided in such acts, prescribe in accordance
with the following rules: (a) after a year for offences punished only by a fine or by imprisonment for not more than
one month, or both: (b) after four years for those punished by imprisonment for more than one month, but less than
two years; (c) after eight years for those punished by imprisonment for two years or more, but less than six years;
and (d) after twelve years for any other offence punished by imprisonment for six years or more, except the crime of
treason, which shall prescribe after twenty years: Provided, however, That all offences against any law or part of law
administered by the Bureau of Internal Revenue shall prescribe after five years. Violations penalized by municipal
ordinances shall prescribe after two months.

Violations of the regulations or conditions of certificates of public convenience issued by the Public Service
Commission shall prescribe after two months.

SEC. 2. Prescription shall begin to run from the day of the commission of the violation of the law, and if the same be
not known at the time, from the discovery thereof and the institution of judicial proceedings for its investigation and
punishment.

The prescription shall be interrupted when proceedings are instituted against the guilty person, and shall begin to
run again if the proceedings are dismissed for reasons not constituting jeopardy.

A violation of Republic Act No. 6426 shall subject the offender to imprisonment of not less than one year nor more
than five years, or by a fine of not less than five thousand pesos nor more than twenty-five thousand pesos, or both.
[24] Applying Act No. 3326, the offense prescribes in eight years.[25] Per available records, private respondents may
no longer be haled before the courts for violation of Republic Act No. 6426. Private respondent Vic Lim made the
disclosure in September of 1993 in his affidavit submitted before the Provincial Fiscal.[26] In her complaint-affidavit,
[27] Intengan stated that she learned of the revelation of the details of her foreign currency bank account on
October 14, 1993. On the other hand, Neri asserts that she discovered the disclosure on October 24, 1993.[28] As to
Brawner, the material date is January 5, 1994.[29] Based on any of these dates, prescription has set in.[30]

The filing of the complaint or information in the case at bar for alleged violation of Republic Act No. 1405 did not
have the effect of tolling the prescriptive period. For it is the filing of the complaint or information corresponding to
the correct offense which produces that effect.[31]

It may well be argued that the foregoing disquisition would leave petitioners with no remedy in law. We point out,
however, that the confidentiality of foreign currency deposits mandated by Republic Act No. 6426, as amended by
Presidential Decree No. 1246, came into effect as far back as 1977. Hence, ignorance thereof cannot be pretended. On

338
one hand, the existence of laws is a matter of mandatory judicial notice;[32] on the other, ignorantia legis non
excusat.[33] Even during the pendency of this appeal, nothing prevented the petitioners from filing a complaint
charging the correct offense against private respondents. This was not done, as everyone involved was content to
submit the case on the basis of an alleged violation of Republic Act No. 1405 (Bank Secrecy Law), however,
incorrectly invoked.[34]

WHEREFORE, the petition is hereby DENIED. No pronouncement as to costs.

SO ORDERED.

G.R. No. 84526 January 28, 1991

PHILIPPINE COMMERCIAL & INDUSTRIAL BANK and JOSE HENARES, petitioners,

vs.

THE HON. COURT OF APPEALS and MARINDUQUE MINING AND INDUSTRIAL CORPORATION, respondents.

Bengzon, Zarraga, Narciso, Cudala, Pecson & Bengson for petitioners.

Rexes V. Alejano for private respondent.

SARMIENTO, J.:

This is a petition for review on certiorari which assails both the resolution 1 dated June 27, 1988 of the Court of
Appeals 2 which reconsidered and set aside its earlier decisions 3 dated February 26, 1988 reversing the decision4 of
the trial court and the subsequent resolution 5 dated August 3, 1988 which denied the petitioners' motion for
reconsideration. The dispositive portion of the resolution in question dated June 27, 1988 reads as follows:

xxx xxx xxx

For the reasons above adduced, We are constrained to reconsider Our aforesaid decision and to set it aside and in
lieu thereof hereby enter another decision AFFIRMING the decision dated January 15, 1985 of the Regional Trial Court

339
of Manila, Branch 11, in Civil Case No. 103100 entitled "Marinduque Mining and Industrial Corporation (MMIC) vs.
Philippine Commercial and Industrial Bank, et al." 6

The undisputed facts 7 as gathered from the findings of the trial court are as follows:

The instant case originated from an action8 filed with the National Labor Relations Commission (NLRC) by a group of
laborers who obtained therefrom a favorable judgment for the payment of backwages amounting to P205,853.00
against the private respondent.

On April 26, 1976, the said Commission issued a writ of execution directing the Deputy Sheriff of Negros Occidental,
one Damian Rojas, to enforce the aforementioned judgment. The pertinent portion of the said writ reads as follows:

xxx xxx xxx

Further, you are to collect from same respondent the total amount of P205,853.00 as their backwage (sic) for twelve
(12) months and then turn over said amount to this commission for further disposition. In case you fail to collect said
amount in cash, you are to cause the satisfaction of the same on the movable or immovable properties of the
respondent not exempt from execution. (Exhs. G, G-1 and G-3, also Exh. 3; Emphasis supplied). 9

Accordingly, on April 28, 1976, the aforenamed deputy sheriff went to the mining site of the private respondent and
served the writ of execution on the persons concerned, but nothing seemed to have happened thereat.

Thereafter, the Sheriff prepared on his own a Notice of Garnishment dated April 29, 1976 addressed to six (6) banks,
all located in Bacolod City, one of which being the petitioner herein, directing the bank concerned to immediately
issue a check in the name of the Deputy Provincial Sheriff of Negros Occidental in an amount equivalent to the
amount of the garnishment and that proper receipt would be issued therefor.

Incidentally, the house lawyer of the private respondent, Atty. Rexes V. Alejano, acting on a tip regarding the
existence of the said notice of garnishment, communicated with the bank manager, the petitioner Jose Henares,
verbally at first at around 2:00 o'clock in the afternoon of that day, April 29, 1976, and later confirmed in a formal
letter received by the petitioner Henares at about 5:00 o'clock of that same day, requesting the withholding of any
release of the deposit of the private respondent with the petitioner bank.

340
Meanwhile, at about 9:30 in the morning of April 29, 1976, the deputy sheriff presented the Notice of Garnishment
and the Writ of Execution attached therewith to the petitioner Henares and later in the afternoon, demanded from
the latter, under pain of contempt, the release of the deposit of the private respondent.

The petitioner Henares, upon knowing from the Acting Provincial Sheriff that there was no restraining order from the
National Labor Relations Commission and on the favorable advice of the bank's legal counsel, issued a debit memo
for the full balance of the private respondent's account with the petitioner bank. Thereafter, he issued a manager's
check in the name of the Deputy Provincial Sheriff of Negros Occidental for the amount of P37,466.18, which was the
exact balance of the private respondent's account as of that day.

On the following day, April 30, 1976, at about 1:00 o'clock in the afternoon, the deputy sheriff returned to the bank in
order to encash the check but before the actual encashment, the petitioner Henares once again inquired about any
existing restraining order from the NLRC and upon being told that there was none, the latter allowed the said
encashment.

On July 6, 1976, the private respondent, then plaintiff, filed a complaint before the Regional Trial Court of Manila,
Branch II, against the petitioners and Damian Rojas, the Deputy Provincial Sheriff of Negros Occidental, then
defendants, alleging that the former's current deposit with the petitioner bank was levied upon, garnished, and with
undue haste unlawfully allowed to be withdrawn, and notwithstanding the alleged unauthorized disclosure of the
said current deposit and unlawful release thereof, the latter have failed and refused to restore the amount of
P37,466.18 to the former's account despite repeated demands.

Both the petitioners and the Deputy Sheriff filed their respective answers denying the material averments of the said
complaint and alleged that their actuations were all in accordance with law and likewise filed counterclaims for
damages, including a cross-claim of the former against the latter. The third-party complaint of the petitioners against
the forty-nine (49) laborers in the NLRC case was, however, dismissed for failure of the sheriff to serve summons
upon the latter.

On January 23, 1982, after several postponements, the pre-trial was finally conducted and terminated with only the
petitioners and the private respondent participating, through their respective counsel.

On January 15, 1985, the trial court rendered its judgment in favor of the private respondent, the dispositive portion
of which reads:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the three (3) defendants by ordering
the latter to pay, jointly and severally, the plaintiff the following amounts, to wit:

341
(a) the sum of P37,466.18, with interest thereon at the rate of 12% per annum from date of first demand on April
29, 1976 until the amount shall have been fully and completely restored and paid;

(b) the sum of P10,000.00 as attorney's fees.

Defendants are ordered to pay, jointly and severally, double costs. 10

xxx xxx xxx

On appeal, the respondent court in a decision dated February 26, 1988, first reversed the said judgment of the lower
court, but however, on the motion for reconsideration filed by the private respondent, subsequently annulled and
set aside its said decision in the resolution dated June 27, 1988. On August 3, 1988, the respondent court denied the
petitioner's own motion for reconsideration.

Hence, this petition.

The petitioners raise two issues, 11 to wit:

1. Whether or not petitioners had legal basis in releasing the garnished deposit of private respondent to the
sheriff.

2. Whether or not petitioners violated Republic Act No. 1405, otherwise known as the Secrecy of Bank
Deposits Act, when they allowed the sheriff to garnish the deposit of private respondent.

The petition is impressed with merit.

The crux of the instant controversy boils down to the question of whether or not a bank is liable for releasing its
depositor's funds on the strength of the notice of garnishment made by the deputy sheriff pursuant to a writ of
execution issued by the National Labor Relations Commission (NLRC).

342
The respondent court in its questioned resolution dated June 27, 1988, held that the petitioners were liable, in this
wise:

In the case at bar, defendant-appellant PCIB, despite vigorous objections from plaintiff-appellee, with indecent haste
disclosed and released the deposit of plaintiff-appellee on the strength of a mere notice of garnishment which the
Honorable Supreme Court ruled upon is no authority for the release of the deposit, thus:

In the second place, the mere garnishment of funds belonging to a party upon order of the court does not have the
effect of delivering the money garnished to the sheriff or to the party in whose favor the attachment is issued. The
fund is retained by the garnishee or the person holding the money for the defendant.

The garnishee, or one in whose hands property is attached or garnished, is universally regarded as charged with its
legal custody pending outcome of the attachment or garnishment unless, by local statute and practice, he is
permitted to surrender or pay the garnished property or funds into court, to the attaching officer, or to a receiver or
trustee appointed to receive them. (5 Am. Jur. 14)

The effect of the garnishment, therefore, was to require the Philippine Trust Company, holder of the funds of the
Luzon Surety Co., to set aside said amount from the funds of the Luzon Surety Co., and keep the same subject to the
final orders of the Court. In the case at bar there was never an order to deliver the full amount garnished to the
plaintiff-appellee; all that was ordered to be delivered after the judgment had become final was the amount found by
the Court of Appeals to be due. The balance of the amount garnished, therefore, remained all the time in the
possession of the bank as part of the funds of the Luzon Surety Co. although the same could not be disposed of by
the owner. (De la Rama vs. Villarosa, et al., L-17927, June 29, 1963, 8 SCRA 413, 418-419; Emphasis supplied). 12

The above-mentioned contention citing De la Rama is not exactly on all fours with the facts of the case at bar. In De
la Rama, the amount garnished was not actually taken possession of by the sheriff, even from the time of
garnishment, because the judgment debtor was able to appeal to the Court of Appeals and obtain from the Court an
injunction prohibiting execution of the judgment.

On the other hand, nowhere in the record of the present case is there any evidence of an appeal by the private
respondent from the decision of the NLRC or the existence of any restraining order to prevent the release of the
private respondent's deposit to the deputy sheriff at the time of the service of the notice of garnishment and writ of
execution to the petitioners.

On the contrary, the uncontroverted statements in the deposition of the petitioner Henares that he had previously
sought the advice of the bank's counsel and that he had checked twice with the Acting Provincial Sheriff who had
informed him of the absence of any restraining order, belie any allegation of undue and indecent haste in the release
of the said deposit in question.

343
The cases more in point to the present controversy are the recent decisions in Engineering Construction Inc. v.
National Power Corporation 13 and Rizal Commercial Banking Corporation (RCBC) vs. De Castro 14 where the Court
absolved both garnishees, MERALCO and RCBC, respectively, from any liability for their prompt compliance in the
release of garnished funds,

The rationale behind Engineering Construction, Inc. and which was quoted in Rizal Commercial Banking Corporation
is persuasive

xxx xxx xxx

But while partial restitution is warranted in favor of NPC, we find that the Appellate Court erred in not absolving
MERALCO, the garnishee, from its obligations to NPC with respect to the payment to ECI of P1,114,543.23, thus in
effect subjecting MERALCO to double liability. MERALCO should not have been faulted for its prompt obedience to a
writ of garnishment. Unless there are compelling reasons such as: a defect on the face of the writ or actual
knowledge on the part of the garnishee of lack of entitlement on the part of the garnisher, it is not incumbent upon
the garnishee to inquire or to judge for itself whether or not the order for the advance execution of a judgment is
valid.

Section 8, Rule 57 of the Rules of Court provides:

Effect of attachment of debts and credits. — All persons having in their possession or under their control any credits
or other similar personal property belonging to the party against whom attachment is issued, or owing any debts to
the same, at the time of service upon them of a copy of the order of attachment and notice as provided in the last
preceding section, shall be liable to the applicant of the amount of such credits, debts or other property, until the
attachment be discharged, or any judgment recovered by him be satisfied, unless such property be delivered or
transferred, or such debts be paid, to the clerk, sheriff or other proper officer of the court issuing the
attachment.1âwphi1

Garnishment is considered as a specie of attachment for reaching credits belonging to the judgment debtor and
owing to him from a stranger to the litigation. Under the above-cited rule, the garnishee [the third person] is obliged
to deliver the credits, etc. to the proper officer issuing the writ and "the law exempts from liability the person having
in his possession or under his control any credits or other personal property belonging to the defendant, . . . if such
property be delivered or transferred, . . . to the clerk, sheriff, or other officer of the court in which the action is
pending."

344
Applying the foregoing to the case at bar, MERALCO, as garnishee, after having been judicially compelled to pay the
amount of the judgment represented by funds in its possession belonging to the judgment debtor or NPC, should be
released from all responsibilities over such amount after delivery thereof to the sheriff. The reason for the rule is self
evident. To expose garnishees to risks for obeying court orders and processes would only undermine the
administration of justice. (Emphasis ours.)15

xxx xxx xxx

Moreover, there is no issue concerning the indebtedness of the petitioner bank to the private respondent since the
latter has never denied the existence of its deposit with the former, the said deposit being considered a credit in
favor of the depositor against the bank.16 We therefore see no application for Sec. 39, Rule 39 of the Rules of Court
invoked by the private respondent as to necessitate the "examination of the debtor of the judgment debtor." 17

Rather, we find the immediate release of the funds by the petitioners on the strength of the notice of garnishment
and writ of execution, whose issuance, absent any patent defect, enjoys the presumption of regularity, sufficiently
supported by Sec. 41, Rule 39 of the Rules of Court which reads:

xxx xxx xxx

After an execution against property has issued, a person indebted to the judgment debtor, may pay to the officer
holding the execution the amount of his debt or so much thereof as may be necessary to satisfy the execution, and
the officer's receipt shall be a sufficient discharge for the amount so paid or directed to be credited by the judgment
creditor on the execution.

xxx xxx xxx

Finally, we likewise take cognizance of the subject of the judgment sought to be enforced in the writ of execution in
question, namely, laborers' backwages. We believe that the petitioners should rather be commended for having
acted with urgent dispatch despite attempts by the private respondent, as with so many scheming employers, to
frustrate or unjustifiably delay the prompt satisfaction of final judgments which often result in undue prejudice to the
legitimate claims of labor.

With regard to the second issue, we find no violation whatsoever by the petitioners of Republic Act No. 1405,
otherwise known as the Secrecy of Bank Deposits Act. The Court in China Banking Corporation vs. Ortega 18 had the
occasion to dispose of this issue when it stated, thus:

345
It is clear from the discussion of the conference committee report on Senate Bill No. 351 and House Bill No. 3977,
which later became Republic Act 1405, that the prohibition against examination of or inquiry into a bank deposit
under Republic Act 1405 does not preclude its being garnished to insure satisfaction of a judgment. Indeed there is
no real inquiry in such a case, and if existence of the deposit is disclosed the disclosure is purely incidental to the
execution process. It is hard to conceive that it was ever within the intention of Congress to enable debtors to evade
payment of their just debts, even if ordered by the Court, through the expedient of converting their assets into cash
and depositing the same in a bank.

Since there is no evidence that the petitioners themselves divulged the information that the private respondent had
an account with the petitioner bank and it is undisputed that the said account was properly the object of the notice
of garnishment and writ of execution carried out by the deputy sheriff, a duly authorized officer of the court, we can
not therefore hold the petitioners liable under R.A. 1405.

While the general rule is that the findings of fact of the appellate court are binding on this Court, the said rule
however admits of exceptions, such as when the Court of Appeals clearly misconstrued and misapplied the law,
drawn from the incorrect conclusions of fact established by evidence and otherwise at certain conclusions which are
based on misapprehension of facts,19 as in the case at bar.

The petitioners are therefore absolved from any liability for the disclosure and release of the private respondent's
deposit to the custody of the deputy sheriff in satisfaction of the final judgment for the laborers' backwages.

WHEREFORE, the petition is GRANTED and the challenged Resolutions dated June 27, 1988 and August 13, 1988 of
the Court of Appeals are hereby ANNULLED and SET ASIDE and its Decision dated February 26, 1988 dismissing the
complaint is hereby REINSTATED. With costs against the private respondent.

[G.R. No. 94723. August 21, 1997]

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

DECISION

TORRES, JR., J.:

346
In our predisposition to discover the original intent of a statute, courts become the unfeeling pillars of the status
quo. Little do we realize that statutes or even constitutions are bundles of compromises thrown our way by their
framers. Unless we exercise vigilance, the statute may already be out of tune and irrelevant to our day.

The petition is for declaratory relief. It prays for the following reliefs:

a.) Immediately upon the filing of this petition, an Order be issued restraining the respondents from applying and
enforcing Section 113 of Central Bank Circular No. 960;

b.) After hearing, judgment be rendered:

1.) Declaring the respective rights and duties of petitioners and respondents;

2.) Adjudging Section 113 of Central Bank Circular No. 960 as contrary to the provision of the Constitution, hence
void; because its provision that Foreign currency deposits shall be exempt from attachment, garnishment, or any
other order to process of any court, legislative body, government agency or any administrative body whatsoever

i.) has taken away the right of petitioners to have the bank deposit of defendant Greg Bartelli y Northcott garnished
to satisfy the judgment rendered in petitioners favor in violation of substantive due process guaranteed by the
Constitution;

ii.) has given foreign currency depositors an undue favor or a class privilege in violation of the equal protection clause
of the Constitution;

iii.) has provided a safe haven for criminals like the herein respondent Greg Bartelli y Northcott since criminals could
escape civil liability for their wrongful acts by merely converting their money to a foreign currency and depositing it
in a foreign currency deposit account with an authorized bank.

The antecedents facts:

347
On February 4, 1989, Greg Bartelli y Northcott, an American tourist, coaxed and lured petitioner Karen Salvacion,
then 12 years old to go with him to his apartment. Therein, Greg Bartelli detained Karen Salvacion for four days, or up
to February 7, 1989 and was able to rape the child once on February 4, and three times each day on February 5, 6, and
7, 1989. On February 7, 1989, after policemen and people living nearby, rescued Karen, Greg Bartelli was arrested and
detained at the Makati Municipal Jail. The policemen recovered from Bartelli the following items: 1.) Dollar Check No.
368, Control No. 021000678-1166111303, US 3,903.20; 2.) COCOBANK Bank Book No. 104-108758-8 (Peso Acct.); 3.)
Dollar Account China Banking Corp., US $/A#54105028-2; 4.) ID-122-30-8877; 5.) Philippine Money (P234.00) cash; 6.)
Door Keys 6 pieces; 7.) Stuffed Doll (Teddy Bear) used in seducing the complainant.

On February 16, 1989, Makati Investigating Fiscal Edwin G. Condaya filed against Greg Bartelli, Criminal Case No. 801
for Serious Illegal Detention and Criminal Cases Nos. 802, 803, 804, and 805 for four (4) counts of Rape. On the same
day, petitioners filed with the Regional Trial Court of Makati Civil Case No. 89-3214 for damages with preliminary
attachment against Greg Bartelli. On February 24, 1989, the day there was a scheduled hearing for Bartellis petition
for bail the latter escaped from jail.

On February 28, 1989, the court granted the fiscals Urgent Ex-Parte Motion for the Issuance of Warrant of Arrest and
Hold Departure Order. Pending the arrest of the accused Greg Bartelli y Northcott, the criminal cases were archived
in an Order dated February 28, 1989.

Meanwhile, in Civil Case No. 89-3214, the Judge issued an Order dated February 22, 1989 granting the application of
herein petitioners, for the issuance of the writ of preliminary attachment. After petitioners gave Bond No. JCL (4)
1981 by FGU Insurance Corporation in the amount P100,000.00, a Writ of Preliminary Attachment was issued by the
trial court on February 28, 1989.

On March 1, 1989, the Deputy Sheriff of Makati served a Notice of Garnishment on China Banking Corporation. In a
letter dated March 13, 1989 to the Deputy Sheriff of Makati, China Banking Corporation invoked Republic Act No.
1405 as its answer to the notice of garnishment served on it. On March 15, 1989, Deputy Sheriff of Makati Armando
de Guzman sent his reply to China Banking Corporation saying that the garnishment did not violate the secrecy of
bank deposits since the disclosure is merely incidental to a garnishment properly and legally made by virtue of a
court order which has placed the subject deposits in custodia legis. In answer to this letter of the Deputy Sheriff of
Makati, China Banking Corporation, in a letter dated March 20, 1989, invoked Section 113 of Central Bank Circular No.
960 to the effect that the dollar deposits of defendant Greg Bartelli are exempt from attachment, garnishment, or
any other order or process of any court, legislative body, government agency or any administrative body,
whatsoever.

This prompted the counsel for petitioners to make an inquiry with the Central Bank in a letter dated April 25, 1989 on
whether Section 113 of CB Circular No. 960 has any exception or whether said section has been repealed or amended
since said section has rendered nugatory the substantive right of the plaintiff to have the claim sought to be
enforced by the civil action secured by way of the writ of preliminary attachment as granted to the plaintiff under
Rule 57 of the Revised Rules of Court. The Central Bank responded as follows:

348
May 26, 1989

Ms. Erlinda S. Carolino

12 Pres. Osmea Avenue

South Admiral Village

Paranaque, Metro Manila

Dear Ms. Carolino:

This is in reply to your letter dated April 25, 1989 regarding your inquiry on Section 113, CB Circular No. 960 (1983).

The cited provision is absolute in application. It does not admit of any exception, nor has the same been repealed nor
amended.

The purpose of the law is to encourage dollar accounts within the countrys banking system which would help in the
development of the economy. There is no intention to render futile the basic rights of a person as was suggested in
your subject letter. The law may be harsh as some perceive it, but it is still the law. Compliance is, therefore, enjoined.

Very truly yours,

(SGD) AGAPITO S. FAJARDO

Director[1]

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

WHEREFORE, judgment is hereby rendered in favor of plaintiffs and against defendant, ordering the latter:

1. To pay plaintiff Karen E. Salvacion the amount of P500,000.00 as moral damages;

349
2. To pay her parents, plaintiffs spouses Federico N. Salvacion, Jr., and Evelina E. Salvacion the amount of
P150,000.00 each or a total of P300,000.00 for both of them;

3. To pay plaintiffs exemplary damages of P100,000.00; and

4. To pay attorneys fees in an amount equivalent to 25% of the total amount of damages herein awarded;

5. To pay litigation expenses of P10,000.00; plus

6. Costs of the suit.

SO ORDERED.

The heinous acts of respondents Greg Bartelli which gave rise to the award were related in graphic detail by the trial
court in its decision as follows:

The defendant in this case was originally detained in the municipal jail of Makati but was able to escape therefrom on
February 24, 1989 as per report of the Jail Warden of Makati to the Presiding Judge, Honorable Manuel M. Cosico of
the Regional Trial Court of Makati, Branch 136, where he was charged with four counts of Rape and Serious Illegal
Detention (Crim. Cases Nos. 802 to 805). Accordingly, upon motion of plaintiffs, through counsel, summons was
served upon defendant by publication in the Manila Times, a newspaper of general circulation as attested by the
Advertising Manager of the Metro Media Times, Inc., the publisher of the said newspaper. Defendant, however,
failed to file his answer to the complaint despite the lapse of the period of sixty (60) days from the last publication;
hence, upon motion of the plaintiffs through counsel, defendant was declared in default and plaintiffs were
authorized to present their evidence ex parte.

In support of the complaint, plaintiffs presented as witness the minor Karen E. Salvacion, her father, Federico N.
Salacion, Jr., a certain Joseph Aguilar and a certain Liberato Mandulio, who gave the following testimony:

Karen took her first year high school in St. Marys Academy in Pasay City but has recently transferred to Arellano
University for her second year.

350
In the afternoon of February 4, 1989, Karen was at the Plaza Fair Makati Cinema Square, with her friend Edna Tangile
whiling away her free time. At about 3:30 p.m. while she was finishing her snack on a concrete bench in front of Plaza
Fair, an American approached her. She was then alone because Edna Tangile had already left, and she was about to
go home. (TSN, Aug. 15, 1989, pp. 2 to 5)

The American asked her name and introduced himself as Greg Bartelli. He sat beside her when he talked to her. He
said he was a Math teacher and told her that he has a sister who is a nurse in New York. His sister allegedly has a
daughter who is about Karens age and who was with him in his house along Kalayaan Avenue. (TSN, Aug. 15, 1989,
pp. 4-5).

The American asked Karen what was her favorite subject and she told him its Pilipino. He then invited her to go with
him to his house where she could teach Pilipino to his niece. He even gave her a stuffed toy to persuade her to teach
his niece. (Id., pp.5-6)

They walked from Plaza Fair along Pasong Tamo, turning right to reach the defendants house along Kalayaan
Avenue. (Id., p.6)

When they reached the apartment house, Karen notices that defendants alleged niece was not outside the house
but defendant told her maybe his niece was inside. When Karen did not see the alleged niece inside the house,
defendant told her maybe his niece was upstairs, and invited Karen to go upstairs. (Id., p. 7)

Upon entering the bedroom defendant suddenly locked the door. Karen became nervous because his niece was not
there. Defendant got a piece of cotton cord and tied Karens hands with it, and then he undressed her. Karen cried
for help but defendant strangled her. He took a packing tape and he covered her mouth with it and he circled it
around her head. (Id., p. 7)

Then, defendant suddenly pushed Karen towards the bed which was just near the door. He tied her feet and hands
spread apart to the bed posts. He knelt in front of her and inserted his finger in her sex organ. She felt severe pain.
She tried to shout but no sound could come out because there were tapes on her mouth. When defendant withdrew
his finger it was full of blood and Karen felt more pain after the withdrawal of the finger. (Id., p.8)

He then got a Johnsons Baby Oil and he applied it to his sex organ as well as to her sex organ. After that he forced his
sex organ into her but he was not able to do so. While he was doing it, Karen found it difficult to breathe and she
perspired a lot while feeling severe pain. She merely presumed that he was able to insert his sex organ a little,
because she could not see. Karen could not recall how long the defendant was in that position. (Id., pp. 8-9)

351
After that, he stood up and went to the bathroom to wash. He also told Karen to take a shower and he untied her
hands. Karen could only hear the sound of the water while the defendant, she presumed, was in the bathroom
washing his sex organ. When she took a shower more blood came out from her. In the meantime, defendant
changed the mattress because it was full of blood. After the shower, Karen was allowed by defendant to sleep. She
fell asleep because she got tired crying. The incident happened at about 4:00 p.m. Karen had no way of determining
the exact time because defendant removed her watch. Defendant did not care to give her food before she went to
sleep. Karen woke up at about 8:00 oclock the following morning. (Id., pp. 9-10)

The following day, February 5, 1989, a Sunday, after breakfast of biscuit and coke at about 8:30 to 9:00 a.m.
defendant raped Karen while she was still bleeding. For lunch, they also took biscuit and coke. She was raped for the
second time at about 12:00 to 2:00 p.m. In the evening, they had rice for dinner which defendant had stored
downstairs; it was he who cooked the rice that is why it looks like lugaw. For the third time, Karen was raped again
during the night. During those three times defendant succeeded in inserting his sex organ but she could not say
whether the organ was inserted wholly.

Karen did not see any firearm or any bladed weapon. The defendant did not tie her hands and feet nor put a tape on
her mouth anymore but she did not cry for help for fear that she might be killed; besides, all those windows and
doors were closed. And even if she shouted for help, nobody would hear her. She was so afraid that if somebody
would hear her and would be able to call a police, it was still possible that as she was still inside the house, defendant
might kill her. Besides, the defendant did not leave that Sunday, ruling out her chance to call for help. At nighttime
he slept with her again. (TSN, Aug. 15, 1989, pp. 12-14)

On February 6, 1989, Monday, Karen was raped three times, once in the morning for thirty minutes after breakfast of
biscuits; again in the afternoon; and again in the evening. At first, Karen did not know that there was a window
because everything was covered by a carpet, until defendant opened the window for around fifteen minutes or less
to let some air in, and she found that the window was covered by styrofoam and plywood. After that, he again
closed the window with a hammer and he put the styrofoam, plywood, and carpet back. (Id., pp. 14-15)

That Monday evening, Karen had a chance to call for help, although defendant left but kept the door closed. She
went to the bathroom and saw a small window covered by styrofoam and she also spotted a small hole. She stepped
on the bowl and she cried for help through the hole. She cried: Maawa na po kayo sa akin. Tulungan nyo akong
makalabas dito. Kinidnap ako! Somebody heard her. It was a woman, probably a neighbor, but she got angry and said
she was istorbo. Karen pleaded for help and the woman told her to sleep and she will call the police. She finally fell
asleep but no policeman came. (TSN, Aug. 15, 1989, pp. 15-16)

She woke up at 6:00 oclock the following morning, and she saw defendant in bed, this time sleeping. She waited for
him to wake up. When he woke up, he again got some food but he always kept the door locked. As usual, she was
merely fed with biscuit and coke. On that day, February 7, 1989, she was again raped three times. The first at about
6:30 to 7:00 a.m., the second at about 8:30 9:00, and the third was after lunch at 12:00 noon. After he had raped her
for the second time he left but only for a short while. Upon his return, he caught her shouting for help but he did not
understand what she was shouting about. After she was raped the third time, he left the house. (TSN, Aug. 15, 1989,

352
pp. 16-17) She again went to the bathroom and shouted for help. After shouting for about five minutes, she heard
many voices. The voices were asking for her name and she gave her name as Karen Salvacion. After a while, she
heard a voice of a woman saying they will just call the police. They were also telling her to change her clothes. She
went from the bathroom to the room but she did not change her clothes being afraid that should the neighbors call
the police and the defendant see her in different clothes, he might kill her. At that time she was wearing a T-shirt of
the American bacause the latter washed her dress. (Id., p. 16)

Afterwards, defendant arrived and opened the door. He asked her if she had asked for help because there were
many policemen outside and she denied it. He told her to change her clothes, and she did change to the one she was
wearing on Saturday. He instructed her to tell the police that she left home and willingly; then he went downstairs
but he locked the door. She could hear people conversing but she could not understand what they were saying. (Id.,
p. 19)

When she heard the voices of many people who were conversing downstairs, she knocked repeatedly at the door as
hard as she could. She heard somebody going upstairs and when the door was opened, she saw a policeman. The
policeman asked her name and the reason why she was there. She told him she was kidnapped. Downstairs, he saw
about five policemen in uniform and the defendant was talking to them. Nakikipag-areglo po sa mga pulis, Karen
added. The policeman told him to just explain at the precinct. (Id., p. 20)

They went out of the house and she saw some of her neighbors in front of the house. They rode the car of a certain
person she called Kuya Boy together with defendant, the policeman, and two of her neighbors whom she called
Kuya Bong Lacson and one Ate Nita. They were brought to Sub-Station I and there she was investigated by a
policeman. At about 2:00 a.m., her father arrived, followed by her mother together with some of their neighbors.
Then they were brought to the second floor of the police headquarters. (Id., p. 21)

At the headquarters, she was asked several questions by the investigator. The written statement she gave to the
police was marked Exhibit A. Then they proceeded to the National Bureau of Investigation together with the
investigator and her parents. At the NBI, a doctor, a medico-legal officer, examined her private parts. It was already
3:00 in early morning, of the following day when they reached the NBI, (TSN, Aug. 15, 1989, p. 22) The findings of the
medico-legal officer has been marked as Exhibit B.

She was studying at the St. Marys Academy in Pasay City at the time of the Incident but she subsequently transferred
to Apolinario Mabini, Arellano University, situated along Taft Avenue, because she was ashamed to be the subject of
conversation in the school. She first applied for transfer to Jose Abad Santos, Arellano University along Taft Avenue
near the Light Rail Transit Station but she was denied admission after she told the school the true reason for her
transfer. The reason for their denial was that they might be implicated in the case. (TSN, Aug. 15, 1989, p. 46)

xxx xxx xxx

353
After the incident, Karen has changed a lot. She does not play with her brother and sister anymore, and she is always
in a state of shock; she has been absent-minded and is ashamed even to go out of the house. (TSN, Sept. 12, 1989, p.
10) She appears to be restless or sad. (Id., p. 11) The father prays for P500,000.00 moral damages for Karen for this
shocking experience which probably, she would always recall until she reaches old age, and he is not sure if she could
ever recover from this experience. (TSN, Sept. 24, 1989, pp. 10-11)

Pursuant to an Order granting leave to publish notice of decision, said notice was published in the Manila Bulletin
once a week for three consecutive weeks. After the lapse of fifteen (15) days from the date of the last publication of
the notice of judgment and the decision of the trial court had become final, petitioners tried to execute on Bartellis
dollar deposit with China Banking Corporation. Likewise, the bank invoked Section 113 of Central Bank Circular No.
960.

Thus, petitioners decided to seek relief from this Court.

The issues raised and the arguments articulated by the parties boil down to two:

May this Court entertain the instant petition despite the fact that original jurisdiction in petitions for declaratory
relief rests with the lower court? She Section 113 of Central Bank Circular No. 960 and Section 8 of R.A. 6426, as
amended by P.D. 1246, otherwise known as the Foreign Currency Deposit Act be made applicable to a foreign
transient?

Petitioners aver as heretofore stated that Section 113 of Central Bank Circular No. 960 providing that Foreign
currency deposits shall be exempt from attachment, garnishment, or any other order or process of any court,
legislative body, government agency or any administrative body whatsoever. should be adjudged as unconstitutional
on the grounds that: 1.) it has taken away the right of petitioners to have the bank deposit of defendant Greg Bartelli
y Northcott garnished to satisfy the judgment rendered in petitioners favor in violation of substantive due process
guaranteed by the Constitution; 2.) it has given foreign currency depositors an undue favor or a class privilege n
violation of the equal protection clause of the Constitution; 3.) it has provided a safe haven for criminals like the
herein respondent Greg Bartelli y Northcott since criminal could escape civil liability for their wrongful acts by merely
converting their money to a foreign currency and depositing it in a foreign currency deposit account with an
authorized bank; and 4.) The Monetary Board, in issuing Section 113 of Central Bank Circular No. 960 has exceeded its
delegated quasi- legislative power when it took away: a.) the plaintiffs substantive right to have the claim sought to
be enforced by the civil action secured by way of the writ of preliminary attachment as granted by Rule 57 of the
Revised Rules of Court; b.) the plaintiffs substantive right to have the judgment credit satisfied by way of the writ of
execution out of the bank deposit of the judgment debtor as granted to the judgment creditor by Rule 39 of the
Revised Rules of Court, which is beyond its power to do so.

On the other hand, respondent Central Bank, in its Comment alleges that the Monetary Board in issuing Section 113
of CB Circular No. 960 did not exceed its power or authority because the subject Section is copied verbatim from a
portion of R.A. No. 6426 as amended by P.D. 1246. Hence, it was not the Monetary Board that grants exemption from
attachment or garnishment to foreign currency deposits, but the law (R.A. 6426 as amended) itself; that it does not

354
violate the substantive due process guaranteed by the Constitution because a.) it was based on a law; b.) the law
seems to be reasonable; c.) it is enforced according to regular methods of procedure; and d.) it applies to all
members of a class.

Expanding, the Central Bank said; that one reason for exempting the foreign currency deposits from attachment,
garnishment or any other order process of any court, is to assure the development and speedy growth of the
Foreign Currency Deposit System and the Offshore Banking System in the Philippines; that another reason is to
encourage the inflow of foreign currency deposits into the banking institutions thereby placing such institutions
more in a position to properly channel the same to loans and investments in the Philippines, thus directly
contributing to the economic development of the country; that the subject section is being enforced according to
the regular methods of procedure; and that it applies to all currency deposits made by any person and therefore
does not violate the equal protection clause of the Constitution.

Respondent Central Bank further avers that the questioned provision is needed to promote the public interest and
the general welfare; that the State cannot just stand idly by while a considerable segment of the society suffers from
economic distress; that the State had to take some measures to encourage economic development; and that in so
doing persons and property may be subjected to some kinds of restraints or burdens to secure the general welfare
or public interest. Respondent Central Bank also alleges that Rule 39 and Rule 57 of the Revised Rules of Court
provide that some properties are exempted from execution/attachment especially provided by law and R.A. No.
6426 as amended is such a law, in that it specifically provides, among others, that foreign currency deposits shall be
exempted from attachment, garnishment, or any other order or process of any court, legislative body, government
agency or any administrative body whatsoever.

For its part, respondent China Banking Corporation, aside from giving reasons similar to that of respondent Central
Bank, also stated that respondent China Bank is not unmindful of the inhuman sufferings experienced by the minor
Karen E. Salvacion from the beastly hands of Greg Bartelli; that it is not only too willing to release the dollar deposit
of Bartelli which may perhaps partly mitigate the sufferings petitioner has undergone; but it is restrained from doing
so in view of R.A. No. 6426 and Section 113 of Central Bank Circular No. 960; and that despite the harsh effect to
these laws on petitioners, CBC has no other alternative but to follow the same.

This court finds the petition to be partly meritorious.

Petitioner deserves to receive the damages awarded to her by the court. But this petition for declaratory relief can
only be entertained and treated as a petition for mandamus to require respondents to honor and comply with the
writ of execution in Civil Case No. 89-3214.

The Court has no original and exclusive jurisdiction over a petition for declatory relief.[2] However, exceptions to this
rule have been recognized. Thus, where the petition has far-reaching implications and raises questions that should be
resolved, it may be treated as one for mandamus.[3]

355
Here is a child, a 12-year old girl, who in her belief that all Americans are good and in her gesture of kindness by
teaching his alleged niece the Filipino language as requested by the American, trustingly went with said stranger to
his apartment, and there she was raped by said American tourist Greg Bartelli. Not once, but ten times. She was
detained therein for four (4) days. This American tourist was able to escape from the jail and avoid punishment. On
the other hand, the child, having received a favorable judgment in the Civil Case for damages in the amount of more
than P1,000,000.00, which amount could alleviate the humiliation, anxiety, and besmirched reputation she had
suffered and may continue to suffer for a long, long time; and knowing that this person who had wronged her has
the money, could not, however get the award of damages because of this unreasonable law. This questioned law,
therefore makes futile the favorable judgment and award of damages that she and her parents fully deserve. As
stated by the trial court in its decision,

Indeed, after hearing the testimony of Karen, the Court believes that it was indoubtedly a shocking and traumatic
experience she had undergone which could haunt her mind for a long, long time, the mere recall of which could
make her feel so humiliated, as in fact she had been actually humiliated once when she was refused admission at the
Abad Santos High School, Arellano University, where she sought to transfer from another school, simply because the
school authorities of the said High School learned about what happened to her and allegedly feared that they might
be implicated in the case.

xxx

The reason for imposing exemplary or corrective damages is due to the wanton and bestial manner defendant had
committed the acts of rape during a period of serious illegal detention of his hapless victim, the minor Karen
Salvacion whose only fault was in her being so naive and credulous to believe easily that defendant, an American
national, could not have such a bestial desire on her nor capable of committing such heinous crime. Being only 12
years old when that unfortunate incident happened, she has never heard of an old Filipino adage that in every forest
there is a snake, xxx.[4]

If Karens sad fate had happened to anybodys own kin, it would be difficult for him to fathom how the incentive for
foreign currency deposit could be more important than his childs right to said award of damages; in this case, the
victims claim for damages from this alien who had the gall to wrong a child of tender years of a country where he is
mere visitor. This further illustrates the flaw in the questioned provisions.

It is worth mentioning that R.A. No. 6426 was enacted in 1983 or at a time when the countrys economy was in a
shambles; when foreign investments were minimal and presumably, this was the reason why said statute was
enacted. But the realities of the present times show that the country has recovered economically; and even if not,
the questioned law still denies those entitled to due process of law for being unreasonable and oppressive. The
intention of the questioned law may be good when enacted. The law failed to anticipate the inquitous effects
producing outright injustice and inequality such as as the case before us.

It has thus been said that-

356
But I also know,[5] that laws and institutions must go hand in hand with the progress of the human mind. As that
becomes more developed, more enlightened, as new discoveries are made, new truths are disclosed and manners
and opinions change with the change of circumstances, institutions must advance also, and keep pace with the times
We might as well require a man to wear still the coat which fitted him when a boy, as civilized society to remain ever
under the regimen of their barbarous ancestors.

In his comment, the Solicitor General correctly opined, thus:

"The present petition has far-reaching implications on the right of a national to obtain redress for a wrong
committed by an alien who takes refuge under a law and regulation promulgated for a purpose which does not
contemplate the application thereof envisaged by the allien. More specifically, the petition raises the question
whether the protection against attachment, garnishment or other court process accorded to foreign currency
deposits PD No. 1246 and CB Circular No. 960 applies when the deposit does not come from a lender or investor but
from a mere transient who is not expected to maintain the deposit in the bank for long.

The resolution of this question is important for the protection of nationals who are victimized in the forum by
foreigners who are merely passing through.

xxx

xxx Respondents China Banking Corporation and Central Bank of the Philippines refused to honor the writ of
execution issued in Civil Case No. 89-3214 on the strength of the following provision of Central Bank Circular No. 960:

Sec. 113 Exemption from attachment. Foreign currency deposits shall be exempt from attachment, garnishment, or
any other order or process of any court, legislative body, government agency or any administrative body
whatsoever.

Central Bank Circular No. 960 was issued pursuant to Section 7 of Republic Act No. 6426:

Sec. 7. Rules and Regulations. The Monetary Board of the Central Bank shall promulgate such rules and regulations
as may be necessary to carry out the provisions of this Act which shall take effect after the publication of such rules
and regulations in the Official Gazette and in a newspaper of national circulation for at least once a week for three
consecutive weeks. In case the Central Bank promulgates new rules and regulations decreasing the rights of
depositors, the rules and regulations at the time the deposit was made shall govern.

357
The aforecited Section 113 was copied from Section 8 of Republic Act No. 6426. As amended by P.D. 1246, thus:

Sec. 8. Secrecy of Foreign Currency Deposits. -- All foreign currency deposits authorized under this Act, as amended
by Presidential Decree No. 1035, as well as foreign currency deposits authorized under Presidential Decree No. 1034,
are hereby declared as and considered of an absolutely confidential nature and, except upon the written permission
of the depositor, in no instance shall such foreign currency deposits be examined, inquired or looked into by any
person, government official, bureau or office whether judicial or administrative or legislative or any other entity
whether public or private: Provided, however, that said foreign currency deposits shall be exempt from attachment,
garnishment, or any other order or process of any court, legislative body, government agency or any administrative
body whatsoever.

The purpose of PD 1246 in according protection against attachment, garnishment and other court process to foreign
currency deposits is stated in its whereases, viz.:

WHEREAS, under Republic Act No. 6426, as amended by Presidential Decree No. 1035, certain Philippine banking
institutions and branches of foreign banks are authorized to accept deposits in foreign currency;

WHEREAS, under provisions of Presidential Decree No. 1034 authorizing the establishment of an offshore banking
system in the Philippines, offshore banking units are also authorized to receive foreign currency deposits in certain
cases;

WHEREAS, in order to assure the development and speedy growth of the Foreign Currency Deposit System and the
Offshore Banking System in the Philippines, certain incentives were provided for under the two Systems such as
confidentiality subject to certain exceptions and tax exemptions on the interest income of depositors who are
nonresidents and are not engaged in trade or business in the Philippines;

WHEREAS, making absolute the protective cloak of confidentiality over such foreign currency deposits, exempting
such deposits from tax, and guaranteeing the vested right of depositors would better encourage the inflow of
foreign currency deposits into the banking institutions authorized to accept such deposits in the Philippines thereby
placing such institutions more in a position to properly channel the same to loans and investments in the Philippines,
thus directly contributing to the economic development of the country;

Thus, one of the principal purposes of the protection accorded to foreign currency deposits is to assure the
development and speedy growth of the Foreign Currency Deposit system and the Offshore Banking in the Philippines
(3rd Whereas).

358
The Offshore Banking System was established by PD No. 1034. In turn, the purposes of PD No. 1034 are as follows:

WHEREAS, conditions conducive to the establishment of an offshore banking system, such as political stability, a
growing economy and adequate communication facilities, among others, exist in the Philippines;

WHEREAS, it is in the interest of developing countries to have as wide access as possible to the sources of capital
funds for economic development;

WHEREAS, an offshore banking system based in the Philippines will be advantageous and beneficial to the country by
increasing our links with foreign lenders, facilitating the flow of desired investments into the Philippines, creating
employment opportunities and expertise in international finance, and contributing to the national development
effort.

WHEREAS, the geographical location, physical and human resources, and other positive factors provide the
Philippines with the clear potential to develop as another financial center in Asia;

On the other hand, the Foreign Currency Deposit system was created by PD No. 1035. Its purpose are as follows:

WHEREAS, the establishment of an offshore banking system in the Philippines has been authorized under a separate
decree;

WHEREAS, a number of local commercial banks, as depository bank under the Foreign Currency Deposit Act (RA No.
6426), have the resources and managerial competence to more actively engage in foreign exchange transactions and
participate in the grant of foreign currency loans to resident corporations and firms;

WHEREAS, it is timely to expand the foreign currency lending authority of the said depository banks under RA 6426
and apply to their transactions the same taxes as would be applicable to transaction of the proposed offshore
banking units;

It is evident from the above [Whereas clauses] that the Offshore Banking System and the Foreign Currency Deposit
System were designed to draw deposits from foreign lenders and investors (Vide second Whereas of PD No. 1034;

359
third Whereas of PD No. 1035). It is these depositors that are induced by the two laws and given protection and
incentives by them.

Obviously, the foreign currency deposit made by a transient or a tourist is not the kind of deposit encourage by PD
Nos. 1034 and 1035 and given incentives and protection by said laws because such depositor stays only for a few days
in the country and, therefore, will maintain his deposit in the bank only for a short time.

Respondent Greg Bartelli, as stated, is just a tourist or a transient. He deposited his dollars with respondent China
Banking Corporation only for safekeeping during his temporary stay in the Philippines.

For the reasons stated above, the Solicitor General thus submits that the dollar deposit of respondent Greg Bartelli is
not entitled to the protection of Section 113 of Central Bank Circular No. 960 and PD No. 1246 against attachment,
garnishment or other court processes.[6]

In fine, the application of the law depends on the extent of its justice. Eventually, if we rule that the questioned
Section 113 of Central Bank Circular No. 960 which exempts from attachment, garnishment, or any other order or
process of any court. Legislative body, government agency or any administrative body whatsoever, is applicable to a
foreign transient, injustice would result especially to a citizen aggrieved by a foreign guest like accused Greg Bartelli.
This would negate Article 10 of the New Civil Code which provides that in case of doubt in the interpretation or
application of laws, it is presumed that the lawmaking body intended right and justice to prevail. Ninguno non deue
enriquecerse tortizerzmente con damo de otro. Simply stated, when the statute is silent or ambiguous, this is one of
those fundamental solutions that would respond to the vehement urge of conscience. (Padilla vs. Padilla, 74 Phil.
377)

It would be unthinkable, that the questioned Section 113 of Central Bank No. 960 would be used as a device by
accused Greg Bartelli for wrongdoing, and in so doing, acquitting the guilty at the expense of the innocent.

Call it what it may but is there no conflict of legal policy here? Dollar against Peso? Upholding the final and executory
judgment of the lower court against the Central Bank Circular protecting the foreign depositor? Shielding or
protecting the dollar deposit of a transient alien depositor against injustice to a national and victim of a crime? This
situation calls for fairness legal tyranny.

We definitely cannot have both ways and rest in the belief that we have served the ends of justice.

IN VIEW WHEREOF, the provisions of Section 113 of CB Circular No. 960 and PD No. 1246, insofar as it amends Section
8 of R.A. 6426 are hereby held to be INAPPLICABLE to this case because of its peculiar circumstances. Respondents

360
are hereby REQUIRED to COMPLY with the writ of execution issued in Civil Case No. 89-3214, Karen Salvacion, et al.
vs. Greg Bartelli y Northcott, by Branch CXLIV, RTC Makati and to RELEASE to petitioners the dollar deposit of
respondent Greg Bartelli y Northcott in such amount as would satisfy the judgment.

SO ORDERED.

[G.R. No. 118917. December 22, 1997]

PHILIPPINE DEPOSIT INSURANCE CORPORATION, petitioner, vs. COURT OF APPEALS, ROSA AQUERO, GERARD YU,
ERIC YU, MINA YU, ELIZABETH NGKAION, MERLY CUESCANO, LETICIA TAN, FELY RUMBANA, LORNA ACUB,
represented by their Attorney-in-Fact, JOHN FRANCIS COTAACO, respondents.

DECISION

KAPUNAN, J.:

Petitioner Philippine Deposit Insurance Corporation (PDIC) seeks the reversal of the decision of the Court of Appeals
affirming with modification the decision of the Regional Trial Court holding petitioner liable for the value of thirteen
(13) certificates of time deposit (CTDs) in the possession of private respondents.

The facts, as found by the Court of Appeals, are as follows:

On September 22, 1983, plaintiffs-appellees invested in money market placements with the Premiere Financing
Corporation (PFC) in the sum of P10,000.00 each for which they were issued by the PFC corresponding promissory
notes and checks. On the same date (September 22, 1983), John Francis Cotaoco, for and in behalf of plaintiffs-
appellees, went to the PFC to encash the promissory notes and checks, but the PFC referred him to the Regent
Saving Bank (RSB). Instead of paying the promissory notes and checks, the RSB, upon agreement of Cotaoco, issued
the subject 13 certificates of time deposit with Nos. 09648 to 09660, inclusive, each stating, among others, that the
same certifies that the bearer thereof has deposited with the RSB the sum of P10,000.00; that the certificate shall
bear 14% interest per annum; that the certificate is insured up to P15,000.00 with the PDIC; and that the maturity date
thereof is on November 3, 1983 (Exhs. B, B-1 to B-12).

On the aforesaid maturity dated (November 3, 1983), Cotaoco went to the RSB to encash the said certificates.
Thereat, RSB Executive Vice President Jose M. Damian requested Cotaoco for a deferment or an extension of a few
days to enable the RSB to raise the amount to pay for the same (Exh. D). Cotaoco agreed. Despite said extension, the
RSB still failed to pay the value of the certificates. Instead, RSB advised Cotaoco to file a claim with the PDIC.

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Meanwhile, on June 15, 1984, the Monetary Board of the Central Bank issued Resolution No. 788 (Exh. 2, Records, p.
159) suspending the operations of the RSB. Eventually, the records of RSB were secured and its deposit liabilities
were eventually determined. On December 7, 1984, the Monetary Board issued Resolution No. 1496 (Exh. 1)
liquidating the RSB. Subsequently, a masterlist or inventory of the RSB assets and liabilities was prepared. However,
the certificates of time deposit of plaintiffs-appellees were not included in the list on the ground that the certificates
were not funded by the PFC or duly recorded as liabilities of RSB.

On September 4, 1984, plaintiffs-appellees filed with the PDIC their respective claims for the amount of the
certificates (Exhs. C, C-1, to C-12). Sabina Yu, James Ngkaion, Elaine Ngkaion and Jeffrey Ngkaion, who have similar
claims on their certificates of time deposit with the RSB, likewise filed their claims with the PDIC. To their dismay,
PDIC refused the aforesaid claims on the ground that the Traders Royal Bank Check No. 299255 dated September 22,
1983 for the amount of P125,846.07 (Exh. B) issued by PFC for the aforementioned certificates was returned by the
drawee bank for having been drawn against insufficient funds; and said check was not replaced by the PFC, resulting
in the cancellation of the certificates as indebtedness or liabilities of RSB.[1]

Consequently, on March 31, 1987, private respondents filed an action for collection against PDIC, RSB and the Central
Bank.

On September 14, 1987, the trial court, declared the Central Bank in default for failing to file an answer.

On May 29, 1989, the trial court rendered its decision ordering the defendants therein to pay plaintiffs, jointly and
severally, the amount corresponding to the latters certificates of time deposit.

Both PDIC and RSB appealed. The Central Bank, on the other hand, filed a petition for certiorari, prohibition and
mandamus before the Court of Appeals praying that the writ of execution issued by the trial court against it be set
aside.

On February 8, 1995, the Court of Appeals rendered its decision granting the Central Banks petition but dismissing
the appeals of PDIC and RSB. Hence, this petition by PDIC assigning the following errors:

THE CA ERRED IN HOLDING THAT THE SUBJECT CTDS ARE NEGOTIABLE INSTRUMENTS

362
II

THE CA ERRED INHOLDING THAT THE CTDS WERE ACQUIRED FOR VALUE AND CONSIDERATION

III

THE CA ERRED WHEN IT HELD THAT BECAUSE THE CTDS STATE THAT THESE WERE INSURED, PETITIONER SHOULD
BE HELD LIABLE FOR THE SAME.

We deal jointly with petitioners first and third assigned errors.

Relying on this Courts ruling in Caltex (Philippines), Inc. v. Court of Appeals and Security Bank and Trust Company,[2]
the Court of Appeals concluded that the subject CTDs are negotiable. Petitioner, on the other hand, contends that
the CTDs are non-negotiable since they do not contain an unconditional promise or order to pay a sum in money are
they made payable to order or bearer, as required by Section 1 of the Negotiable Instruments Law.

Whether the CTDs in question are negotiable or not is, however, immaterial in the present case. The Philippine
Deposit Insurance Corporation was created by law and, as such, is governed primarily by the provisions of the special
law creating it.[3] The liability of the PDIC for insured deposits therefore is statutory and, under Republic Act No.
3591,[4] as amended, such liability rests upon the existence of deposits with the insured bank, not on the
negotiability or non-negotiability of the certificates evidencing these deposits.

The authority for this conclusion finds support in decisions by American state courts applying their respective bank
guaranty laws. Invariably, the plaintiffs in these cases argued that the negotiability of the certificates of deposits in
their possession entitled them to be paid out of the bank guaranty fund, a contention that the courts uniformly
rejected.

Thus, the plaintiffs in Fourth Nat. Bank of Wichita v. Wilson[5] argued that:

x x x the court should hold the certificates to be guaranteed because they are negotiable instruments, and were
acquired by the present holders in due course; otherwise it is said certificates of deposit will be deprived of the
quality of commercial paper. Certificates of deposit have been regarded as the highest form of collateral. They are of
wide currency in the banking and business worlds, and are particularly useful to persons of small means, because

363
they bear interest, and may be readily cashed; therefore to deprive them of the benefit of the guaranty fund would
be a calamity. x x x

The Supreme Court of Kansas, however, found the plaintiffs contention to be without merit, ruling thus:

x x x The argument confuses negotiability of commercial paper with statutory guaranty of deposits. The guaranty is
something extrinsic to all forms of evidence of bank obligation; and negotiability of instruments has no dependence
on existence or nonexistence of the guaranty.

x x x Whatever the status of the plaintiffs may be as holders in due course under the Negotiable Instruments Law,
they cannot be assignees of a deposit which was not made, and cannot be entitled to the benefit of a guaranty which
did not come into existence. x x x

In arriving at the above decision, the Kansas Supreme Court relied on its earlier ruling in American State Bank v.
Foster, [6] which arose from the same facts as the Fourth National Bank case. There, the Court held:

x x x Even if the plaintiff were to be regarded as an innocent purchaser of the certificates as negotiable instruments,
its situation would be in no wise bettered so far as relate to a claim against the guaranty fund. The fund protects
deposits only. And if no deposit is made, or no deposit within the protection of the guaranty law, the transfer of a
certificate cannot impose a liability on the fund. xxx where a certificate of deposit is given under such circumstances
that it is not protected by the guaranty fund, although that fact is not indicated by anything on its face, its
indorsement to an innocent holder cannot confer that qualify upon it.

In like fashion did the Supreme Court of Nebraska brush aside a similar contention in State v. Farmers State Bank:[7]

In this contention we think the appellants fail to distinguish between the liability of the maker of a negotiable
instrument, which rests upon the law pertaining to negotiable paper, and the liability of the guaranty fund, which is
purely statutory. The circumstances under which the guaranty fund may be liable are entirely apart from the law
pertaining to negotiable paper. A holder of a certificate of deposit in a bank who seeks to hold the guaranty fund
liable for its payment must show that the transaction leading up to the issuance of the certificate was such that the
law holds the guaranty fund liable for its payment. x x x

The Farmers State Bank ruling was reiterated by the Nebraska Supreme Court in State v. Home State Bank of
Dunning[8] and in State v. Kilgore State Bank.[9] The same ruling was adopted by the Supreme Court of South
Dakota in Mildenstein v. Hirning.[10]

364
In the case at bar, the Court of Appeals initially found the subject CTDs to be negotiable. Subsequently, however,
respondent court deemed the issue immaterial, albeit for entirely different reasons.

x x x Besides, whether the certificates are negotiable or not is of no moment. The fact remains that the certificates
categorically state that their bearer [sic] have a deposit in the RSB; that the same will mature on November 3, 1993;
and that the certificates are insured by PDIC.[11]

We disagree with respondent courts rationale. The fact that the certificates state that the certificates are insured by
PDIC does not ipso facto make the latter liable for the same should the contingency insured against arise. As stated
earlier, the deposit liability of PDIC is determined by the provisions of R.A. No. 3519, and statements in the
certificates that the same are insured by PDIC are not binding upon the latter.

x x x The mere fact that a certificate recites on its face that a certain sum has been deposited, or that officers of the
bank may have stated that the deposit is protected by the guaranty law, does not make the guaranty fund liable for
payment, if in fact a deposit has not been made xxx. The banks have nothing to do with the guaranty fund as such. It
is a fund raised by assessments against all state banks, administered by officers of the state to protect deposits in
banks. x x x[12]

We come now to petitioners second assigned error.

In order that a claim for deposit insurance with the PDIC may prosper, the law requires that a corresponding deposit
be placed in the insured bank. This is implicit from a reading of the following provisions of R.A. 3519:

SECTION 1. There is hereby created a Philippine Deposit Insurance Corporation. xxx which shall insure, as provided,
the deposits of all banks which are entitled to the benefits of insurance under this Act xxx. (Italics supplied).

xxx

SEC. 10 (a) xxx

xxx

365
( c) Whenever an insured bank shall have been closed on account of insolvency, payment of the insured deposits in
such bank shall be made by the Corporation as soon as possible xxx. (Italics supplied.)

A deposit as defined in Section 3(f) of R.A. No. 3591, may be constituted only if money or the equivalent of money is
received by a bank:

SEC. 3. As used in this Act-

(f) The term deposit means the unpaid balance of money or its equivalent received by a bank in the usual course of
business and for which it has given or is obliged to give credit to a commercial, checking, savings, time or thrift
account or which is evidence by passbook, check and/or certificate of deposit printed or issued in accordance with
Central Bank rules and regulations and other applicable laws, together with such other obligations of a bank which,
consistent with banking usage and practices, the Board of Directors shall determine and prescribe by regulations to
be deposit liabilities of the Bank xxx. (Italics ours.)

Did RSB receive money or its equivalent when it issued the certificates of time deposit? The Court of Appeals, in
resolving who between RSB and PFC issued the certificates to private respondents, answered this question in the
negative. A perusal of the impugned decision, however, reveals that such finding is grounded entirely on speculation,
and thus, cannot bind this Court: [13]

Equally unimpressive is the contention of PDIC and RSB that the certificates were issued to PFC which did not acquire
the same for value because the check issued by the latter for the certificates bounced for insufficiency of funds. First,
granting arguendo that the certificates were originally issued in favor of PFC, such issuance could only give rise to the
presumption that the amount stated in the certificates have been deposited to RSB. Had not PFC deposited the
amount stated therein, then RSB would have surely refused to issue the certificates certifying to such fact. Second,
why did not RSB demand that PFC pay the certificates or file a claim against PFC on the ground that the latter failed
to pay for the value of the certificates? It could very well be that the reason why RSB did not run after PFC for
payment of the value of the certificates was because the instruments were issued to the latter by RSB for value or
were already paid to RSB by plaintiffs-appellees. Third, if it is true at the time RSB issued the certificates to PFC, the
instruments were paid for with checks still to be encashed, then why did not RSB specifically state in the certificates
that the validity thereof hinges on the encashment of said check? Fourth, even if it is true that PFC did not deposit
with or pay the RSB the amount stated in the certificates, the latter is not be such reason freed from civil liability to
plaintiffs-appellees. For, by issuing the certificates, RSB bound itself to pay the amount stated therein to whoever is
the bearer upon its presentment for encashment. Truly, there is no reason to depart from the established principle
that were a bank issues a certificate of deposit acknowledging a deposit made with a third person or an officer of the
bank, or with another bank representing it to be the certificate of the bank, upon which assurance the depositor
accepts it, the bank is liable for the amount of the deposit (Michis, Banks and Banking, Vol. 5A, pp. 48-49, as cited in
the Decision on p. 3 thereof).[14]

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Moreover, such finding totally ignores the evidence presented by defendants. Cardola de Jesus, RSB Deputy
Liquidator, testified that RSB received three (3) checks in consideration for the issuance of several CTDs, including
the ones in dispute. The first check amounted to P159,153.93, the second, P121,665.95, and the third, P125,846.07. In
consideration of the third check, private respondents received thirteen (13) certificates of deposit with Nos. 09648
to 09660, inclusive, with a value of P10,000.00 each or a total of P130,000.00. To conform with the value of the third
check, CTD No. 09648 was chopped, and only the sum of P5,846.07 was credited in favor of private respondents. The
first two checks made good in the clearing while the third was returned for being drawn against insufficient funds.

The check in question appears on the records as Exhibit 3 (for Regent),[15] and is described in RSBs offer of evidence
as Traders Royal Bank Check No. 292555 dated September 22, 1983 covering the amount or P125,846.07 xxx issued by
Premiere Financing Corporation.[16] At the back of said check are the words Refer to Drawer,[17] indicating that the
drawee bank (Traders Royal Bank) refused to pay the value represented by said check. By reason of the checks
dishonor, RSB cancelled the corresponding as evidenced by an RSB ticket dated November 4, 1983.[18]

These pieces of evidence convincingly show that the subject CTDs were indeed issued without RSB receiving any
money therefor. No deposit, as defined in Section 3 (f) of R.A. No. 3591, therefore came into existence. Accordingly,
petitioner PDIC cannot be held liable for value of the certificates of time deposit held by private respondents.

ACCORDINGLY, the instant petition is hereby GRANTED and the decision of the Court of Appeals REVERSED.
Petitioner is absolved from any liability to private respondents.

SO ORDERED.

[G.R. No. 141297. October 8, 2001]

DOMINGO R. MANALO, petitioner, vs. COURT OF APPEALS (Special Twelfth Division) and PAIC SAVINGS AND
MORTGAGE BANK, respondents.

DECISION

PUNO, J.:

This petition for certiorari seeks the review of the Decision of the Court of Appeals in C.A.-G.R. SP. No. 50341
promulgated December 23, 1999, which affirmed an Order issued by the Regional Trial Court, Branch 112, Pasay City,
in Civil Case No. 9011 dated December 9, 1998.

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On July 19, 1983, S. Villanueva Enterprises, represented by its president, Therese Villanueva Vargas, obtained a loan of
three million pesos (P3,000,000.00) and one million pesos (P1,000,000.00) from the respondent PAIC Savings and
Mortgage Bank and the Philippine American Investments Corporation (PAIC), respectively. To secure payment of
both debts, Vargas executed in favor of the respondent and PAIC a Joint First Mortgage[1] over two parcels of land
registered under her name. One of the lots, located in Pasay City with an area of nine hundred nineteen square
meters (919 sq.m.) and covered by TCT No. 6076, is the subject of the present case. Section 2 of the mortgage
contract states that the properties mortgaged therein shall include all buildings and improvements existing on the
mortgaged property at the time of the execution of the mortgage contract and thereafter.[2]

S. Villanueva Enterprises defaulted in paying the amortizations due. Despite repeated demands from the respondent,
it failed to settle its loan obligation. Accordingly, respondent instituted extrajudicial foreclosure proceedings over
the mortgaged lots. On August 22, 1984, the Pasay City property was sold at a public auction to the respondent itself,
after tendering the highest bid. The respondent then caused the annotation of the corresponding Sheriffs Certificate
of Sale[3] on the title of the land on December 4, 1984. After the lapse of one year, or the statutory period extended
by law to a mortgagor to exercise his/her right of redemption, title was consolidated in respondents name for failure
of Vargas to redeem.

On October 29, 1986, the Central Bank of the Philippines filed a Petition[4] for assistance in the liquidation of the
respondent with the Regional Trial Court. The petition was given due course in an Order[5] dated May 19, 1987.

It appears that from the years 1986 to 1991, Vargas negotiated with the respondent (through its then liquidator, the
Central Bank) for the repurchase of the foreclosed property. The negotiations, however, fizzled out as Vargas cannot
afford the repurchase price fixed by the respondent based on the appraised value of the land at that time. On
October 4, 1991, Vargas filed a case for annulment of mortgage and extra-judicial foreclosure sale before Branch 116
of the Pasay City Regional Trial Court. On July 22, 1993, the court rendered a decision[6] dismissing the complaint and
upholding the validity of the mortgage and foreclosure sale. On appeal, the appellate court upheld the assailed
judgment and declared the said mortgage and foreclosure proceedings to be in accord with law.[7] This decision of
the Court of Appeals subsequently became final and executory when we summarily dismissed Vargass Petition for
Review on Certiorari for having been filed beyond the reglementary period.[8]

In the meantime, on June 22, 1992, respondent petitioned the Regional Trial Court, Branch 112, of Pasay City, herein
court a quo, for the issuance of a writ of possession for the subject property in Civil Case No. 9011. This is in view of
the consolidation of its ownership over the same as mentioned earlier. Vargas and S. Villanueva Enterprises, Inc. filed
their opposition thereto. After which, trial ensued.

During the pendency of Civil Case No. 9011 (for the issuance of a writ of possession), Vargas, on December 23, 1992,
executed a Deed of Absolute Sale[9] selling, transferring, and conveying ownership of the disputed lot in favor of a
certain Armando Angsico. Notwithstanding this sale, Vargas, still representing herself to be the lawful owner of the
property, leased the same to petitioner Domingo R. Manalo on August 25, 1994. Pertinent provisions of the lease
agreement[10] state:

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3. (a) The lease is for a period of ten year lease (sic), involving 450 square meters, a portion of the above 919 square
meter property.

x x x (d) The LESSEE has to introduce into the said 450 square meter premises improvements thereon (sic) consisting
of one story building to house a Karaoke Music Restaurant Business, which improvements constructed therof (sic),
upon the termination of the lease contract, by said LESSEE be surrendered in favor of the LESSOR (sic).[11]

Later, on June 29, 1997, Armando Angsico, as buyer of the property, assigned his rights therein to petitioner.[12]

On April 21, 1998, the court a quo granted the petition for the issuance of the Writ of Possession.[13] The writ was
subsequently issued on April 24, 1998, the pertinent portion of which reads:[14]

NOW THEREFORE you are hereby commanded that you cause oppositors THERESE VILLANUEVA VARGAS and S.
VILLANUEVA ENTERPRISES, INC. and any and all persons claiming rights or title under them, to forthwith vacate and
surrender the possession of subject premises in question known as that parcel of land and improvements covered by
TCT No. 6076 of the Registry of Deeds of Pasay City; you are hereby further ordered to take possession and deliver to
the petitioner PAIC SAVINGS AND MORTGAGE BANK the subject parcel of land and improvements.

Shortly, on May 8, 1998, S. Villanueva Enterprises and Vargas moved for its quashal.[15] Thereafter on June 25, 1998,
petitioner, on the strength of the lease contract and Deed of Assignment made in his favor, submitted a Permission
to File an Ex-parte Motion to Intervene.[16] It bears mentioning, however, that before petitioner sought intervention
in the present case, he had separately instituted a Complaint for Mandamus, docketed as Civil Case No. 98-0868
before another branch[17] of the Pasay City RTC to compel PAIC Bank to allow him to repurchase the subject
property.

On October 7, 1998, the court a quo denied the Motion to Quash and Motion to Intervene filed respectively by
Vargas and petitioner.[18] A Motion for Reconsideration and a Supplemental Motion for Reconsideration were filed
by the petitioner which, however, were similarly denied on December 9, 1998.

Petitioner then sought relief with the Court of Appeals, filing therein a Petition for Certiorari. While this was awaiting
resolution, he entered into another lease agreement,[19] this time with the respondent, represented by its
liquidator, over the same 450 sq.m. portion of the lot. The contract fixed a period of one month beginning January
28, 1999, renewable for another month at the exclusive option of the lessor, respondent PAIC Bank.

On December 23, 1999, the appellate court rendered the impugned Decision, dismissing the petition, thus:

369
All told, WE find the Order, subject of the instant Petition for Certiorari and Prohibition, to be not without rational
bases and we observe that the court a quo, in issuing its questioned Order, committed no grave abuse of discretion
amounting to lack of jurisdiction.

WHEREFORE, the Petition for Certiorari and Prohibition is hereby DISMISSED and the assailed December 9, 1998
Order is AFFIRMED in all respects.

SO ORDERED.[20]

Hence, this appeal, where petitioner raises and argues the following legal issues:

I. Whether or not public respondent acted without or in excess of its jurisdiction and/or was patently in error when it
affirmed the denial of petitioners motion for intervention, despite the fact that he has a legal interest, being a lessee
and an assignee of the property subject matter of this case.

II. Whether or not the public respondent committed grave abuse of discretion when it held that what are required to
be instituted before the liquidation court are those claims against the insolvent banks only considering that the
private respondent bank is legally dead due to insolvency and considering further that there is already a liquidation
court (Regional Trial Court of Makati, Branch 57, docketed as Spec. Pro. No. M-1280) which is exclusively vested with
jurisdiction to hear all matters and incidents on liquidation pursuant to Section 29, Republic Act No. 265, otherwise
known as The Central Bank Act, as amended.

III. Whether or not the public respondent committed grave abuse of discretion and/or was patently in error in
affirming the ruling of the trial court, totally disregarding the arguments raised in petitioners supplemental motion
for reconsideration only through a minute order and without taking into consideration the fact that there is a
pending action in another court (RTC, Pasay City, Branch 231) which presents a prejudicial question to the case at bar.

IV. Whether or not the petitioner is estopped from questioning private respondents ownership when it entered into
a contract of lease involving the property in question.[21]

We will first resolve the jurisdictional and procedural questions raised by the petitioner.

370
I.

Petitioner postulates that the lower court should have dismissed respondents Ex-Parte Petition for Issuance of Writ
of Possession in Civil Case No. P-9011 for want of jurisdiction over the subject matter of the claim. The power to hear
the same, he insists, exclusively vests with the Liquidation Court pursuant to Section 29 of Republic Act No. 265,
otherwise known as The Central Bank Act.[22] He then cites our decision in Valenzuela v. Court of Appeals,[23] where
we held that if there is a judicial liquidation of an insolvent bank, all claims against the bank should be filed in the
liquidation proceeding. For going to another court, the respondent, he accuses, is guilty of forum shopping.

These contentions can not pass judicial muster. The pertinent portion of Section 29 states:

x x x The liquidator designated as hereunder provided shall, by the Solicitor General, file a petition in the Regional
Trial Court reciting the proceedings which have been taken and praying the assistance of the court in the liquidation
of such institution. The court shall have jurisdiction in the same proceedings to assist in the adjudication of disputed
claims against the bank or non-bank financial intermediary performing quasi-banking functions and the enforcement
of individual liabilites of the stockholders and do all that is necessary to preserve the assets of such institution and to
implement the liquidation plan approved by the Monetary Board. x x x[24] (emphasis supplied.)

Petitioner apparently failed to appreciate the correct meaning and import of the above-quoted law. The legal
provision only finds operation in cases where there are claims against an insolvent bank. In fine, the exclusive
jurisdiction of the liquidation court pertains only to the adjudication of claims against the bank. It does not cover the
reverse situation where it is the bank which files a claim against another person or legal entity.

This interpretation of Section 29 becomes more obvious in the light of its intent. The requirement that all claims
against the bank be pursued in the liquidation proceedings filed by the Central Bank is intended to prevent
multiplicity of actions against the insolvent bank and designed to establish due process and orderliness in the
liquidation of the bank, to obviate the proliferation of litigations and to avoid injustice and arbitrariness.[25] The
lawmaking body contemplated that for convenience, only one court, if possible, should pass upon the claims against
the insolvent bank and that the liquidation court should assist the Superintendents of Banks and regulate his
operations.[26]

It then ought to follow that petitioners reliance on Section 29 and the Valenzuela case is misplaced. The Petition for
the Issuance of a Writ of Possession in Civil Case No. 9011 is not in the nature of a disputed claim against the bank. On
the contrary, it is an action instituted by the respondent bank itself for the preservation of its asset and protection of
its property. It was filed upon the instance of the respondents liquidator in order to take possession of a tract of land
over which it has ownership claims.

371
To be sure, the liquidator took the proper course of action when it applied for a writ in the Pasay City RTC. Act 3135,
[27] entitled An Act to Regulate the Sale of Property Under Special Powers Inserted In or Annexed To Real Estate
Mortgages, mandates that jurisdiction over a Petition for Writ of Possession lies with the court of the province, city,
or municipality where the property subject thereof is situated. This is sanctioned by Section 7 of the said Act, thus:

Section 7. In any sale made under the provisions of this Act, the purchaser may petition the Court of First Instance of
the province or place where the property or any part thereof is situated, to give him possession thereof during the
redemption period, furnishing bond in an amount equivalent to the use of the property for a period of twelve
months, to indemnify the debtor in case it be shown that the sale was made without violating the mortgage or
without complying with the requirements of this Act. x x x[28] (emphasis supplied)

Since the land subject of this controversy is located in Pasay City, then the citys RTC should rightly take cognizance of
the case, to the exclusion of other courts.

Anent petitioners auxiliary contention that respondent should be held guilty of forum shopping for not filing the case
in the liquidation court, suffice it to state here that the doctrine only ponders situations where two (or more) cases
are pending before different tribunals.[29] Well to point, we have laid down the yardstick to determine whether a
party violated the rule against forum shopping as where the elements of litis pendentia are present or where a final
judgment in one case will amount to res judicata in the other.[30] Inasmuch as the case at bar is the only one filed by
the respondent for the issuance of a writ of possession over the subject property, there is no occasion for the
doctrine to apply.

Petitioner next casts doubt on the capacity of the respondent to continue litigating the petition for the issuance of
the writ. He asserts that, being under liquidation, respondent bank is already a dead corporation that cannot
maintain the suit in the RTC. Hence, no writ may be issued in its favor.

The argument is devoid of merit. A bank which had been ordered closed by the monetary board retains its juridical
personality which can sue and be sued through its liquidator. The only limitation being that the prosecution or
defense of the action must be done through the liquidator.[31] Otherwise, no suit for or against an insolvent entity
would prosper. In such situation, banks in liquidation would lose what justly belongs to them through a mere
technicality.[32]

That the law allows a bank under liquidation to participate in an action can be clearly inferred from the third
paragraph of the same Section 29 of The Central Bank Act earlier quoted, which authorizes or empowers a liquidator
to institute actions, thus:

x x x and he (liquidator) may in the name of the bank or non-bank financial intermediary performing quasi-banking
functions and with the assistance of counsel as he may retain, institute such actions as may be necessary in the

372
appropriate court to collect and recover accounts and assests of such institution or defend any action filed against
the institution.[33] (emphasis supplied.)

It is therefore beyond dispute that respondent was legally capacitated to petition the court a quo for the issuance of
the writ.

II.

Petitioner likewise proffers one other procedural obstacle, which is the pendency of Civil Case No. 98-0868 in Branch
231 of Pasay City RTC. The said action is the complaint he filed against the respondent for the latter to receive and
accept the redemption price of eighteen million pesos for the subject property. He argues that the primary issue
therein constitutes a prejudicial question in relation to the present case in that if the Court therein will grant
petitioners prayer, then this will necessarily negate the possessory writ issued by the court a quo.

Again, we are not persuaded. A prejudicial question is one which arises in a case the resolution of which is a logical
antecedent of the issue involved therein, and the cognizance of which pertains to another tribunal.[34] It generally
comes into play in a situation where a civil action and a criminal action are both pending and there exists in the
former an issue which must be preemptively resolved before the criminal action may proceed, because howsoever
the issue raised in the civil action is resolved would be determinative juris et de jure of the guilt or innocence of the
accused in the criminal case. The rationale behind the principle of prejudicial question is to avoid two conflicting
decisions.[35]

Here, aside from the fact that Civil Case No. 98-0868 and the present one are both civil in nature and therefore no
prejudicial question can arise from the existence of the two actions,[36] it is apparent that the former action was
instituted merely to frustrate the Courts ruling in the case at bar granting the respondent the right to possess the
subject property. It is but a canny and preemptive maneuver on the part of the petitioner to delay, if not prevent, the
execution of a judgment adverse to his interests. It bears stressing that the complaint for mandamus was filed only
on May 7, 1998, sixteen days after the lower court granted respondents petition and thirteen days after it issued the
writ. It cannot then possibly prejudice a decided case.

At any rate, it taxes our imagination why the questions raised in Case No. 98-0868 must be considered determinative
of Case No. 9011. The basic issue in the former is whether the respondent, as the purchaser in the extra-judicial
foreclosure proceedings, may be compelled to have the property repurchased or resold to a mortgagors successor-
in-interest (petitioner); while that in the latter is merely whether the respondent, as the purchaser in the extra-
judicial foreclosure proceedings, is entitled to a writ of possession after the statutory period for redemption has
expired. The two cases, assuming both are pending, can proceed separately and take their own direction
independent of each other.

373
III.

Having disposed of the jurisdictional and procedural issues, we now come to the merits of the case. Petitioner seeks
intervention in this case by virtue of the lease agreement and the deed of assignment executed in his favor by the
mortgagor (Vargas) and an alleged buyer (Angsico) of the land, respectively. He posits that as a lessee and assignee
in possession of the foreclosed real estate, he automatically acquires interest over the subject matter of the
litigation. This interest is coupled with the fact that he introduced improvements thereon, consisting of a one-storey
building which houses a karaoke-music restaurant, allegedly to the tune of fifteen million pesos (P15,000,000.00).
Enforcing the writ, he adds, without hearing his side would be an injustice to him.

Intervention is a remedy by which a third party, not originally impleaded in the proceeding, becomes a litigant
therein to enable him to protect or preserve a right or interest which may be affected by such proceeding.[37] The
pertinent provision is stated in Section 1, Rule 19 of the 1997 Rules of Civil Procedure, thus:

Section 1. Who may intervene. - A person who has a legal interest in the matter in litigation, or in the success of either
of the parties, or an interest against both, or is so situated as to be adversely affected by a distribution or other
disposition of property in the custody of the court or of an officer thereof may, with leave of court, be allowed to
intervene in the action. The court shall consider whether or not the intervention will unduly delay or prejudice the
adjudication of the rights of the original parties, and whether or not the intervenors rights may be fully protected in a
separate proceeding.[38]

Intervention is not a matter of right but may be permitted by the courts only when the statutory conditions for the
right to intervene is shown.[39] Thus, the allowance or disallowance of a motion to intervene is addressed to the
sound discretion of the court.[40] In determining the propriety of letting a party intervene in a case, the tribunal
should not limit itself to inquiring whether a person (1) has a legal interest in the matter in litigation; (2) or in the
success of either of the parties; (3) or an interest against both; (4) or when is so situated as to be adversely affected
by a distribution or other disposition of property in the custody of the court or of an officer thereof.[41] Just as
important, as we have stated in Big Country Ranch Corporation v. Court of Appeals,[42] is the function to consider
whether or not the intervention will unduly delay or prejudice the adjudication of the rights of the original parties,
and whether or not the intervenors rights may be fully protected in a separate proceeding.

The period within which a person may intervene is also restricted. Section 2, Rule 19 of the 1997 Rules of Civil
Procedure requires:

Section 2. Time to intervene. - The motion to intervene may be filed at any time before the rendition of judgment by
the trial court. x x x

374
After the lapse of this period, it will not be warranted anymore. This is because, basically, intervention is not an
independent action but is ancillary and supplemental to an existing litigation.[43]

Taking into account these fundamental precepts, we rule that the petitioner may not properly intervene in the case
at bar. His insistence to participate in the proceeding is an unfortunate case of too little, too late.

In the first place, petitioners Ex-parte Permission to File a Motion to Intervene was submitted to the RTC only on
June 25, 1998. At that stage, the lower court had already granted respondents petition for the writ in an Order dated
April 21, 1998. It had issued the Writ of Possession on April 24, 1998. Petitioners motion then was clearly out of time,
having been filed only at the execution stage. For that reason alone, it must meet the consequence of denial. While it
is true that on May 8, 1998, Vargas and S. Villanueva Enterprises moved to quash the writ, that did not in any way
affect the nature of the RTCs Order as an adjudication on the merits. The issuance of the Order is in essence a
rendition of judgment within the purview of Section 2, Rule 19.

Allowing petitioner to intervene, furthermore, will serve no other purpose but to unduly delay the execution of the
writ, to the prejudice of the respondent. This cannot be countenanced considering that after the consolidation of
title in the buyers name, for failure of the mortgagor to redeem, the writ of possession becomes a matter of right.
[44] Its issuance to a purchaser in an extra-judicial foreclosure is merely a ministerial function.[45] As such, the court
neither exercises its official discretion nor judgment.[46] If only to stress the writs ministerial character, we have, in
previous cases, disallowed injunction to prohibit its issuance,[47] just as we have held that issuance of the same may
not be stayed by a pending action for annulment of mortgage or the foreclosure itself.[48]

Even if he anchors his intervention on the purported interest he has over the land and the improvements thereon,
petitioner, still, should not be allowed to do so. He admits that he is a mere lessee and assignee. Whatever
possessory rights he holds only emanate from that of Vargas, from whom he leased the lot, and from whom his
assignor/predecessor-in-interest bought it. Therein lies the precariousness of his title. Petitioner cannot validly
predicate his supposed interest over the property in litigation on that of Vargas, for the simple reason that as early as
December 4, 1985, the latter has already been stripped of all her rights over the land when she, as mortgagor, failed
to redeem it. A mortgagor has only one year within which to redeem her foreclosed real estate.[49] After that
period, she loses all her interests over it. This is in consonance with Section 78 of the General Banking Act,[50] viz.:

x x x In the event of foreclosure, whether judicially or extrajudicially, of any mortgage on real estate which is security
for any loan granted before the passage of this Act or the provisions of this Act, the mortgagor or debtor whose real
property has been sold at public auction, judicially or extrajudicially, for the full or partial payment of an obligation to
any bank, banking or credit institution, within the purview of this Act shall have the right, within one year after the
sale of the real estate mortgage as a result of the foreclosure of the respective mortgage, to redeem the property by
paying the amount fixed by the court in the order or execution x x x.[51] (emphasis supplied.)

Being herself bereft of valid title and rights, Vargas can not legitimately convey any to some other person. She could
not have lawfully sold the land to Angsico nor leased it to petitioner for her own account. It is axiomatic that one can

375
not transmit what one does not have.[52] It ought to follow that petitioner could not have acquired any right or
interest from Vargas.

Withal, all is not lost for the petitioner. He can still fully protect his rights in Civil Case No. 98-0868 or the complaint
for mandamus he filed before Branch 231 of the Pasay City RTC. There, he can ventilate his side to a fuller extent as
that would be the more appropriate venue for elucidating whatever legal basis he alleges in compelling the
respondent to sell to him the currently disputed land.

IV.

This brings us to petitioners final point. He briefly asserts that his act of entering into a lease contract with the
respondent should not affect his right to redeem the subject property.

The possible legal implication of the lease on the petitioners act of trying to redeem the disputed lot is a question
which, in our opinion, can best be resolved in the mandamus complaint. Whether the agreement must be construed
as a waiver on his part of exercising his purported right of redemption is an issue best left for the court therein to
decide. Whether by acknowledging the legality of the respondents claim and title over the land at the time of the
execution of the contract, he likewise perpetually barred himself from redeeming the same is a matter which can be
addressed most aptly in that pending action. Hence, there is presently no need for us to squarely rule on this
ultimate point.

IN VIEW WHEREOF, finding no cogent reason to disturb the assailed Decision, the instant petition is hereby DENIED.

G.R. No. 91494 July 14, 1995

THE CONSOLIDATED BANK AND TRUST CORPORATION (SOLIDBANK), petitioner,

vs.

THE HONORABLE COURT OF APPEALS, GEORGE AND GEORGE TRADE, INC., GEORGE KING TIM PUA and PUA KE
SENG, respondents.

376
QUIASON, J.:

This is a petition for review on certiorari under Rule 45 of the Revised Rules of Court of the Decision of the Court of
Appeals in CA-G.R. CV No. 00922.

The factual antecedents, as found by the trial court and adopted by the Court of Appeals, are as follows:

On April 22, 1977, defendant George King Tim Pua, in his personal capacity, applied for, and was granted, by plaintiff
bank a loan for the sum of P500,000.00 for which he executed a promissory note (Exhibit 1) for the same amount,
payable on August 22, 1977.

On April 29, 1977, defendant George King Tim Pua, in his personal capacity applied for, and was granted, by the
plaintiff bank a loan for the sum of P400,000.00, for which he executed a promissory note (Exhibit 1-A) for the same
amount, payable on August 29, 1979.

On May 6, 1977, defendant George King Tim Pua, in his personal capacity, gain secured a loan from the plaintiff for
the sum of P400,000.00, for which he executed a promissory note (Exhibit 1-B) for the same amount, payable on
September 5, 1977.

On February 21, 1977, defendant George King Tim Pua, in his personal capacity, applied for, and was granted, by the
plaintiff bank three (3) separate loans in the amounts of P220,000.00, P450,000.00 and P65,000.00, for which he
executed three separate promissory notes (Exhibits 1-C to 1-E), payable on May 23, 1977.

On January 23, 1979, defendant George and George Trade Inc., through defendant George King Tim Pua, obtained a
loan of P300,000.00 from the plaintiff, for which defendant George King Tim Pua executed a promissory note
(Exhibit A) on behalf of defendant corporation, with defendants George King Tim Pua and Pua Ke Seng as co-makers,
which loan bears an interest of 13.23% per annum and is payable on June 22, 1979.

On April 19, 1979, defendant George and George Trade Inc., through defendant George King Tim Pua, applied for, and
was granted, another loan of P200,000.00 from the plaintiff bank, for which defendant George King Tim Pua
executed a promissory note (Exhibit B) on behalf of defendant corporation, with defendants George King Tim Pua
and Pua Ke Seng as co-makers, which loan bears an interest of 14% per annum and is payable on May 21, 1979.

377
On August 2, 1979, defendant George and George Trade Inc., through defendant George King Tim Pua, once more
secured a loan for P150,000.00, for which defendant George King Tim Pua executed a promissory note (Exhibit C) on
behalf of defendant corporation, with defendants George King Tim Pua and Pua Ke Seng as co-makers, which loan
bears an interest of 14% per annum and is payable on September 17, 1979.

The three promissory notes (Exhibits A, B and C) covering loans in the corporate account of defendant George and
George Trade Inc. provides (sic) also that in case of default of payment, the defendants agree to pay interest at an
increased rate of 14% per annum on the amount due, compounded monthly, until fully paid, as well as an additional
sum equivalent to 10% of the total amount due as and for attorney's fees in addition to expenses and costs of suit,
such amount to bear interest at the rate of 1% per month until paid.

Under the two promissory notes (Exhibits B and C), the defendants further bound themselves to pay a penalty at the
rate of 3% per annum on the amount due until fully paid.

In order to secure the payment of defendant George King Tim Pua's obligation with the plaintiff, he assigned unto
the latter the proceeds of a fire insurance policy issued by the Kerr Insurance Company in the amount of
P2,908,485.00

The proceeds of the insurance policy were subsequently paid to the plaintiff which applied the same to the personal
account of defendant George King Tim Pua. The personal account of defendant George King Tim Pua was fully
satisfied through the remittances of the fire insurance proceeds (Rollo, pp. 53-55).

According to petitioner bank, after it had deducted from the insurance proceeds the entirety of respondent George
King Tim Pua's personal account, there remained of the insurance proceeds the amount of P383,302.42. It then
proceeded to apply said amount to the unpaid loans of respondent George and George Trade, Inc. which amounted
to P671,772.22 as of September 7, 1979, thus leaving a balance of P288,469.80 of the loans.

Petitioner instituted on April 7, 1980 an action (Civil Case No. 130915) against private respondents before the then
Court of First Instance of Manila for the recovery of the unpaid balances on the three promissory notes, including
attorney's fees equivalent to 10% of the amount recoverable.

In their Answer with Special and Affirmative Defenses and Counterclaim, private respondents claimed that the loans
had been extinguished by way of payment through the assignment by respondent George King Tim Pua of the fire
insurance proceeds and that it was in fact petitioner which owed them by reason of its failure to return to the latter
the balance of said insurance proceeds.

378
No amicable settlement having been reached between the parties, trial ensued. On November 4, 1982, the trial court
rendered judgment, finding for petitioner. The dispositive portion of the decision reads:

PREMISES CONSIDERED, judgment is hereby rendered ordering defendants George and George Trade, Inc., George
King Tim Pua and Pua Ke Seng, jointly and severally, to pay plaintiff, The Consolidated Bank and Trust Corporation
(Solidbank) the sum of P228,469.80, with interest thereon at the legal rate from March 28, 1980, until the same is
fully paid, and attorney's fees in the sum of P25,000.00, with costs of suit.

For lack of merit, the counterclaim filed by the defendants is dismissed (Rollo, p. 174).

On appeal by private respondents, the Court of Appeals reversed the decision of the trial court, decreeing as follows:

WHEREFORE, the decision appealed from herein is REVERSED, and plaintiff-appellee Consolidated Bank and Trust
Corporation (Solidbank) is instead ordered to pay appellant George King Tim Pua the amount of P466,182.39, with
legal interest thereon per annum from September 8, 1979 until said amount is fully paid, plus P10,000.00 attorney's
fees and the costs of this suit (Rollo, p. 14).

Failing to secure a reconsideration of said decision, petitioner is now before the Court on a petition for review on
certiorari.

Simply stated, the issue in this petition is whether private respondents are indebted to petitioners in the amount of
P288,469.80 as held by the then Court of First Instance of Manila or whether said private respondents are entitled to
reimbursement from petitioner in the amount of P466,182.39 as decreed by the Court of Appeals?

The issues raised are factual. As a general rule, the findings of the Court of Appeals upon factual questions are
conclusive and ought not to be disturbed. There are, however, exceptions to the rule. One of the exceptions is when
the findings of fact of the Court of Appeals are contrary to those of the trial court (Massive Construction, Inc. v.
Intermediate Appellate Court, 223 SCRA 1 [1993]).

In the instant case, the findings of fact of the Court of Appeals are contrary to the findings of the trial court. Under
such circumstance, this Court may review the findings of fact of the Court of Appeals and may scrutinize the
evidence on record.

379
The records show that respondent George King Tim Pua had two sets of accounts with petitioner bank: his personal
account and his account for George and George Trade, Inc. For his personal account, he obtained from petitioner on
different dates six separate loans with different due dates, viz:

Loan I

22-Apr-77

500,000.00

Payable August 22, 1977

Loan II

29-Apr-77

400,000.00

380
Payable August 29, 1977

Loan III

5/6/77

400000.00

Payable September 5, 1977

Loan IV

(a) 2/21/1977

220,000.00

(b)

381
—

450,000.00

(c)

65,000.00

—————

Payable on May 3, 1977

735,000.00

TOTAL

2,035,000.00

382
============

All of these loans bore a 14% rate of interest, which was to be compounded monthly, in case of failure on the part of
respondent George King Tim Pua to pay on maturity. In which case, he further undertook to pay an additional sum
equivalent to 10% of the total amount due but in no case less than P200.00 as attorney's fees. The maturity dates of
the loans were extended up to either December 1 or December 5, 1977 and all interests were paid up to March 5,
1978.

Under the account of George and George Trade, Inc., respondent George King Tim Pua, together with his co-maker,
respondent Pua Ke Seng, obtained the following loans:

Loan A

23-Jan-79

300,000.00

Payable June 22, 1979

Loan B

383
19-Apr-79

200,000.00

Payable May 21, 1979

Loan C

8/2/79

150,000.00

Payable Sept. 17, 1979

——————

TOTAL

384
P

650,000.00

============

The first loan bore an annual interest of 13.23%, which was to be increased to 14% in case of failure to pay on due date,
compounded monthly, until fully paid. An additional amount equivalent to 10% of the total amount but not less than
P200.00 was to be imposed in case of failure to pay on due date as attorney's fees. The second and third loans bore
an interest rate of 14% per annum and carried a penalty of 3% per annum on the amount due in case of failure to pay
on the date of maturity. An additional sum equivalent to 10% of the total amount due, but not less than P200.00, was
to be imposed as and for attorney's fees. Interest were paid on the loans up to their date of maturity.

The records further show that payments were made as follows:

September 12, 1978

230,000.00

October 28, 1978

149,000.00

November 28, 1978

100,000.00

385
June 8, 1979

525,000.00

September 6, 1979

2,383,485.00

——————

TOTAL PAYMENTS

3,387,985.00

===========

Based on the foregoing figures, the accounts of respondents George King Tim Pua and George and George Trade,
Inc. with petitioner Bank should stand as of September 6, 1979, thus:

GEORGE KING TIM PUA

Loan I (Promissory Note No. 55658) — P 500,000.00

14% interest, compounded monthly

386
Interest paid up to March 5, 1978

Add:

Interest, March 6 to Sept. 12, 1978 37,219.46

——————

Total P 537,219.46

Less: Payment September 12, 1978 230,000.00

——————

Balance, September 12, 1978 P 307,219.46

Add:

Interest September 13 to Oct. 28, 1978

14%, compounded monthly 5,492.63

——————

Total P 312,712.09

Less: Payment, October 28, 1978 149,500.00

——————

Balance, October 28, 1978 P 163,212.09

Add:

Interest October 29 to Nov. 28, 1978

14%, compounded monthly 1,904.68

——————

Total P 165,116.77

Less: Payment November 28, 1978 100,000.00

387
——————

Balance, November 28, 1978 P 65,116.77

Add:

Interest November 29, 1978 to June 8,

1979, 14%, compounded monthly 4,962.35

——————

Total P 70,079.12

Loan II (Promissory Note No. 55828) — P 400,000.00

14% Interest, compounded monthly

Interest paid up to March 5, 1978

Add:

Interest March 6, 1978 to June 8, 1979 76,587.34

——————

Total P 476,587.34

LOANS I and II, as of June 8, 1979

Loan I P 70,079.12

Loan II 476,587.34

P 546,666.46

Less: Payment, June 8, 1979 525,000.00

———————

Balance, June 8, 1979 P 21,666.46

388
Loan III (Promissory Note No. 55991) — P 400,000.00

14% Interest, compounded monthly

Interest paid up to March 7, 1978

Add:

Interest March 8, 1978 to Sept. 6, 1979 92,634.60

———————

Total P 492,634.60

Loan IV (Promissory Note No. 54221) — P 220,000.00

(Promissory Note No. 54222) — 450,000.00

(Promissory Note No. 54223) — 65,000.00

P 735,000.00

14% Interest, compounded monthly

Interest paid up to March 7, 1978

Add:

Interest March 8, 1978 to Sept. 6, 1979 170,216.17

———————

Total P 905,216.17

LOANS II, III and IV, as of Sept. 6, 1979

389
Loan II P 21,666.46

Loan III 492,634.60

Loan IV 905,216.17 P 1,419,517.23

Less: Payment, September 6, 1979 2,383,485.00

———————

BALANCE OF INSURANCE PROCEEDS P 963,967.77

GEORGE AND GEORGE TRADE, INC

Loan A (Promissory Note No. 790591) — P 300,000.00

14% Interest, compounded monthly

Interest paid up to June 22, 1979

Add:

Interest from June 23, 1979 to

Sept. 6, 1979 8,691.63

———————

Total P 308,691.63

Balance of Insurance Proceeds

after payment of Loan A P 655,276.14

Loan B (Promissory Note No. 792805) — P 200,000.00

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14% Interest per annum

Interest paid up to May 21, 1979

Add:

Interest from May 22, 1979 to

Sept. 6, 1979 8,208.22

Penalty of 3% per annum 1,831.07

———————

Total P 210,039.29

Balance of Insurance Proceeds

after payment of Loan B P 445,236.85

Loan C (Promissory Note No. 794730) — P 150,000.00

14% Interest per annum

Interest paid up to Sept. 17, 1979

Balance of Insurance Proceeds

after payment of all loans P 295,236.85

Less: Trust Receipts Obligations 291,620.00

———————

Amount Refundable to

Respondent George King Tim Pua P 3,616.85

============

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The 14% interest rate charged by petitioner was within the limits set by Section 3 of the Usury Law, as amended.

The charging of compounded interest has been held as proper as long as the payment thereof has been agreed upon
by the parties. In Mambulao Lumber Company v. Philippine National Bank, 22 SCRA 359 (1968), we ruled that the
parties may, by stipulation, capitalize the interest due and unpaid, which as added principal shall earn new interest. In
the instant case, private respondents agreed to the payment of 14% interest per annum, compounded monthly,
should they fail to pay the principal loan on the date of maturity.

As to handling charges, banks are authorized under Central Bank Circular

No. 504 to collect such charges on loans over P500,000.00 with a maturity of 730 days or less at the rate of 2% per
annum, on the principal or the outstanding balance thereof, whichever is lower; 1.75% on loans over P500,000.00 but
not over P1,000,000.00; 1.50% on loans over P1,000,000.00 but not over 2,000,000.00, etc. Section 7 of the same
Circular, however, provides that all banks and non-bank financial intermediaries authorized to engage in quasi-
banking functions are required to strictly adhere to the provisions of Republic Act No. 3765 otherwise known as the
"Truth in Lending Act" and shall make the true and effective cost of borrowing an integral part of every loan
contract. The promissory notes signed by private respondents do not contain any stipulation on the payment of
handling charges. Petitioner bank cannot, therefore, charge private respondents such handling charges.

The payment of penalty is sanctioned by law, although the penalty may be reduced by the courts if it is iniquitous or
unconscionable (Equitable Banking Corporation v. Liwanag, 32 SCRA 293 [1970]). The payment of penalty was
provided for under the terms and conditions of the promissory notes for Loans B and C of George and George Trade,
Inc. The penalty actually imposed, being only 3% per annum of the unpaid balance of the principal of said Loan B, is
considered reasonable and proper.

The same cannot, however, be said of the payment being insisted upon by petitioner of the attorney's fees
stipulated in all the promissory notes, consisting of 10% of the total amount due and payable. A stipulation regarding
the payment of attorney's fees is neither illegal nor immoral and is enforceable as the law between the parties as
long as such stipulation does not contravene law, good morals, good customs, public order or public policy (Social
Security Commission v. Almeda, 168 SCRA 474 [1988]; Reparations Commission v. Visayan Packing Corporation, 193
SCRA 531 [1991]). As stated in the promissory notes, respondent George King Tim Pua agreed to pay attorney's fees
only "in addition to expenses and costs of suit." In other words, petitioner is entitled to collect from respondent
George King Tim Pua the attorney's fees agreed upon only in case it was compelled to litigate with third persons or
to incur expenses to protect its interest (China Airlines, Ltd. v. Intermediate Appellate Court, 169 SCRA 226 [1989];
Songcuan v. Intermediate Appellate Court, 191 SCRA 28 [1990]). These conditions are not obtaining in the case at
bench. There was no need for petitioner to litigate to protect its interest inasmuch as private respondents had fully
paid their obligations months before it filed the complaint for recovery of sum of money. Neither has it been shown
by competent proof that petitioner had to engage the services of a lawyer or incur expenses in collecting the fire
insurance proceeds from Kerr and Company.

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The "Tentative Computation" to which respondent George King Tim Pua allegedly affixed his initials to the item
"Attorney's Fees, 10%" cannot be taken as amending the stipulation contained in the promissory notes on the
payment of attorney's fees. The failure of said Tentative Computation to express the true intent and agreement of
the parties thereto was put in issue in the Amended Answer with Special and Affirmative Defenses and Counterclaim
filed by private respondents before the trial court. The corresponding testimony of respondent George King Tim Pua
that he did not understand the import of this item in the Tentative Computation remains unrebutted.

The award of attorney's fees lies within the discretion of the court and depends upon the circumstances of each
case. However, the discretion of the court to award attorney's fees under Article 2208 of the Civil Code of the
Philippines demands factual, legal and equitable justification, without which the award is a conclusion without a
premise and improperly left to speculation and conjecture. It becomes a violation of the proscription against the
imposition of a penalty on the right to litigate (Universal Shipping Lines, Inc. v. Intermediate Appellate Court, 188
SCRA 170 [1990]). The reason for the award must be stated in the text of the court's decision. If it is stated only in the
dispositive portion of the decision, the same shall be disallowed. As to the award of attorney's fees being an
exception rather than the rule, it is necessary for the court to make findings of fact and law that would bring the case
within the exception and justify the grant of the award (Refractories Corporation of the Philippines v. Intermediate
Appellate Court, 176 SCRA 539 [1989]).

In this case, the Court of Appeals strictly followed the above-stated standard set by this Court. The award of
P10,000.00 as attorney's fees to private respondents was reasonable and justified as they were compelled to litigate
and incur expenses to protect their interest.

WHEREFORE, the Decision of the Court of Appeals is AFFIRMED with the MODIFICATION that the amount which
petitioner is ordered to reimburse respondent George King Tim Pua is reduced to THREE THOUSAND SIX HUNDRED
SIXTEEN & 65/100 PESOS (P3,616.65), with legal interest thereon from September 8, 1979 until said amount is fully
paid. No pronouncement as to costs.

SO ORDERED.

Padilla, Davide, Jr., Bellosillo and Kapunan, JJ., concur.

393