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JAPRL DEVELOPMENT CORPORATION, RAPID FORMING CORPORATION AND JOSE U. AROLLADO, RESPONDENTS. DECISION CORONA, J.: This petition for review on certiorari[1] seeks to set aside the decision[2] of the Court of Appeals (CA) in CA-G.R. SP No. 95659 and its resolution[3] denying reconsideration. After evaluating the financial statements of respondent JAPRL Development Corporation (JAPRL) for fiscal years 1998, 1999 and 2000,[4] petitioner Banco de Oro-EPCI, Inc. extended credit facilities to it amounting to P230,000,000[5] on March 28, 2003. Respondents Rapid Forming Corporation (RFC) and Jose U. Arollado acted as JAPRL's sureties. Despite its seemingly strong financial position, JAPRL defaulted in the payment of four trust receipts soon after the approval of its loan.[6] Petitioner later learned from MRM Management, JAPRL's financial adviser, that JAPRL had altered and falsified its financial statements. It allegedly bloated its sales revenues to post a big income from operations for the concerned fiscal years to project itself as a viable investment.[7] The information alarmed petitioner. Citing relevant provisions of the Trust Receipt Agreement,[8] it demanded immediate payment of JAPRL's outstanding obligations amounting to P194,493,388.98.[9] SP Proc. No. Q-03-064 On August 30, 2003, JAPRL (and its subsidiary, RFC) filed a petition for rehabilitation in the Regional Trial Court (RTC) of Quezon City, Branch 90 (Quezon City RTC).[10] It disclosed that it had been experiencing a decline in sales

for the three preceding years and a staggering loss in 2002.[11] Because the petition was sufficient in form and substance, a stay order[12] was issued on September 28, 2003.[13] However, the proposed rehabilitation plan for JAPRL and RFC was eventually rejected by the Quezon City RTC in an order dated May 9, 2005.[14] Civil Case No. 03-991 Because JAPRL ignored its demand for payment, petitioner filed a complaint for sum of money with an application for the issuance of a writ of preliminary attachment against respondents in the RTC of Makati City, Branch 145 (Makati RTC) on August 21, 2003.[15] Petitioner essentially asserted that JAPRL was guilty of fraud because it (JAPRL) altered and falsified its financial statements.[16] The Makati RTC subsequently denied the application (for the issuance of a writ of preliminary attachment) for lack of merit as petitioner was unable to substantiate its allegations. Nevertheless, it ordered the service of summons on respondents.[17] Pursuant to the said order, summonses were issued against respondents and were served upon them. Respondents moved to dismiss the complaint due to an allegedly invalid service of summons.[18] Because the officer's return stated that an "administrative assistant" had received the summons,[19] JAPRL and RFC argued that Section 11, Rule 14 of the Rules of Court[20] contained an exclusive list of persons on whom summons against a corporation must be served. [21] An "administrative assistant" was not one of them. Arollado, on the other hand, cited Section 6, Rule 14 thereof[22] which mandated personal service of summons on an individual defendant.

The Makati RTC, in its October 10, 2005 order, [24] noted that because corporate officers are often busy, summonses to corporations are usually received only by administrative assistants or secretaries of corporate officers in the regular

course of business. Hence, it denied the motion for lack of merit. Respondents moved for reconsideration[25] but withdrew it before the Makati RTC could resolve the matter.[26] RTC SEC Case No. 68-2008-C On February 20, 2006, JAPRL (and its subsidiary, RFC) filed a petition for rehabilitation in the RTC of Calamba, Laguna, Branch 34 (Calamba RTC). Finding JAPRL's petition sufficient in form and in substance, the Calamba RTC issued a stay order[27] on March 13, 2006. In view of the said order, respondents hastily moved to suspend the proceedings in Civil Case No. 03-991 pending in the Makati RTC.[28] On July 7, 2006, the Makati RTC granted the motion with regard to JAPRL and RFC but ordered Arollado to file an answer. It ruled that, because he was jointly and solidarily liable with JAPRL and RFC, the proceedings against him should continue.[29] Respondents moved for reconsideration[30] but it was denied.[31] On August 11, 2006, respondents filed a petition for certiorari[32] in the CA alleging that the Makati RTC committed grave abuse of discretion in issuing the October 10, 2005 and July 7, 2006 orders.[33] They asserted that the court did not acquire jurisdiction over their persons due to defective service of summons. Thus, the Makati RTC could not hear the complaint for sum of money.[34] In its June 7, 2007 decision, the CA held that because the summonses were served on a mere administrative assistant, the Makati RTC never acquired jurisdiction over respondents. Thus, it granted the petition.[35] Petitioner moved for reconsideration but it was denied.[36] Hence, this petition. Petitioner asserts that respondents maliciously evaded the service of summonses to prevent the

Makati RTC from acquiring jurisdiction over their persons. Furthermore, they employed bad faith to delay proceedings by cunningly exploiting procedural technicalities to avoid the payment of their obligations.[37] We grant the petition. Respondents, in their petition for certiorari in the CA, questioned the jurisdiction of the Makati RTC over their persons (i.e., whether or not the service of summons was validly made). Therefore, it was only the October 10, 2005 order of the said trial court which they in effect assailed.[38] However, because they withdrew their motion for reconsideration of the said order, it became final. Moreover, the petition was filed 10 months and 1 day after the assailed order was issued by the Makati RTC,[39] way past the 60 days allowed by the Rules of Court. For these reasons, the said petition should have been dismissed outright by the CA. More importantly, when respondents moved for the suspension of proceedings in Civil Case No. 03-991 before the Makati RTC (on the basis of the March 13, 2006 order of the Calamba RTC), they waived whatever defect there was in the service of summons and were deemed to have submitted themselves voluntarily to the jurisdiction of the Makati RTC.[40] We withhold judgment for the moment on the July 7, 2006 order of the Makati RTC suspending the proceedings in Civil Case No. 03-991 insofar as JAPRL and RFC are concerned. Under the Interim Rules of Procedure on Corporate Rehabilitation, a stay order defers all actions or claims against the corporation seeking rehabilitation[41] from the date of its issuance until the dismissal of the petition or termination of the rehabilitation proceedings.[42] The Makati RTC may proceed to hear Civil Case No. 03-991 only against Arollado if there is no ground to go after JAPRL and RFC (as will later be discussed). A creditor can demand payment from the surety solidarily liable with the corporation seeking rehabilitation.[43]

Respondents abused procedural technicalities (albeit unsuccessfully) for the sole purpose of preventing, or at least delaying, the collection of their legitimate obligations. Their reprehensible scheme impeded the speedy dispensation of justice. More importantly, however, considering the amount involved, respondents utterly disregarded the significance of a stable and efficient banking system to the national economy.[44] Banks are entities engaged in the lending of funds obtained through deposits[45] from the public.[46] They borrow the public's excess money (i.e., deposits) and lend out the same.[47] Banks therefore redistribute wealth in the economy by channeling idle savings to profitable investments. Banks operate (and earn income) by extending credit facilities financed primarily by deposits from the public.[48] They plough back the bulk of said deposits into the economy in the form of loans.[49] Since banks deal with the public's money, their viability depends largely on their ability to return those deposits on demand. For this reason, banking is undeniably imbued with public interest. Consequently, much importance is given to sound lending practices and good corporate governance.[50] Protecting the integrity of the banking system has become, by large, the responsibility of banks. The role of the public, particularly individual borrowers, has not been emphasized. Nevertheless, we are not unaware of the rampant and unscrupulous practice of obtaining loans without intending to pay the same. In this case, petitioner alleged that JAPRL fraudulently altered and falsified its financial statements in order to obtain its credit facilities. Considering the amount of petitioner's exposure in JAPRL, justice and fairness dictate that the Makati RTC hear whether or not respondents indeed committed fraud in securing the credit accomodation. A finding of fraud will change the whole picture. In this event, petitioner can use the finding of

fraud to move for the dismissal of the rehabilitation case in the Calamba RTC. The protective remedy of rehabilitation was never intended to be a refuge of a debtor guilty of fraud. Meanwhile, the Makati RTC should proceed to hear Civil Case No. 03-991 against the three respondents guided by Section 40 of the General Banking Law which states: Section 40. Requirement for Grant of Loans or Other Credit Accommodations. Before granting a loan or other credit accommodation, a bank must ascertain that the debtor is capable of fulfilling his commitments to the bank. Towards this end, a bank may demand from its credit applicants a statement of their assets and liabilities and of their income and expenditures and such information as may be prescribed by law or by rules and regulations of the Monetary Board to enable the bank to properly evaluate the credit application which includes the corresponding financial statements submitted for taxation purposes to the Bureau of Internal Revenue. Should such statements prove to be false or incorrect in any material detail, the bank may terminate any loan or credit accommodation granted on the basis of said statements and shall have the right to demand immediate repayment or liquidation of the obligation. In formulating the rules and regulations under this Section, the Monetary Board shall recognize the peculiar characteristics of microfinancing, such as cash flow-based lending to the basic sectors that are not covered by traditional collateral. (emphasis supplied) Under this provision, banks have the right to annul any credit accommodation or loan, and demand the immediate payment thereof, from borrowers proven to be guilty of fraud. Petitioner would then be entitled to the immediate payment of P194,493,388.98 and other appropriate damages.[51] Finally, considering that respondents failed to pay the four trust receipts, the Makati City

Prosecutor should investigate whether or not there is probable cause to indict respondents for violation of Section 13 of the Trust Receipts Law.[52] ACCORDINGLY, the petition is hereby GRANTED. The June 7, 2007 decision and August 31, 2007 resolution of the Court of Appeals in CA-G.R. SP No. 95659 are REVERSED and SET ASIDE. The Regional Trial Court of Makati City, Branch 145 is ordered to proceed expeditiously with the trial of Civil Case No. 03-991 with regard to respondent Jose U. Arollado, and the other respondents if warranted. SO ORDERED. Puno, C.J., (Chairperson), Carpio, and Leonardo-De Castro, JJ., concur. Azcuna, J., on official leave. * Formerly Equitable PCI Bank, Inc.

16. If any of the following Events of Default shall have occurred: xxx xxx xxx b. The Entrustee shall default in the due performance or observance of any other covenant contained herein on in any agreement under which the Entruster issued the letter of credit under the terms of which the Trust Property was purchased, and such default shall remain unremedied for a period of five (5) calendar days after the Entrustee shall have received written notice thereof from the Entruster; or, c. Any statement, representation or warranty made by the Entrustee, hereunder, in its application with the Entruster or in other document delivered or made pursuant thereto shall prove to be incorrect or untrue in the any material respect; or, d. The Entrustee/ any of its subsidiary or affiliate fails to pay or default in the payment of any installment of the principal or interests relative to, or fails to comply with or to perform, any other obligation or commits a breach or violation of any of the terms, conditions or stipulations, of any agreement, contract or document with Entruster or any third person or persons to which the Entruster or any of its subsidiary or affiliate is a party or privy, whether executed prior to or after the date hereof under which credit has or may have been extended to such Entrustee/ subsidisiary or affiliate by the Entruster or such third person or persons or under which the Entrustee has agreed to act as guarantor, surety or accommodation party, which, under the terms of such agreement, contract, document, guaranty or suretyship, including any agreement similar or analogous thereto, shall constitute a default or is defined as an event of default thereunder; or, xxx xxx xxx

Under Rule 45 of the Rules of Court.


Penned by Associate Justice Jose L. Sabio, Jr. and concurred in by Associate Justices Jose C. Reyes, Jr. and Myrna Dimaranan-Vidal of the Tenth Division of the Court of Appeals. Dated June 7, 2007. Rollo, pp. 49-59.

Dated August 31, 2007. Id., p. 60. Id., pp. 62-63. Id., p. 63.




JAPRL failed to pay the value of trust receipt nos. 114505, 1000006285, 1000006305 and 1000006325. Id.

Id., pp. 62-66.


Paragraph 16 of the Trust Receipt Agreement provided:

j. Any adverse circumstance occurs, which in the reasonable opinion of the Entruster, materially or adversely affects the ability of

the Entrustee to perform its obligation hereunder; or xxx Id., pp. 65-66.




JAPRL's outstanding liabilities were broken down as follows: LETTER OF CREDIT TRUST RECEIPT OUTSTANDING BALANCE P 4,818,784.50 10,002,405.35 24,421,786.32 17,742,002.53 7,718,059.80 1,734.837.50 3,235,780.00 2,809,031.24 3,739,312.50 4,142,952.24 7,080,696.00 4,889,034.00 5,104,317.50 10,129,035.00 7,183,010.00 6,730,310.00 3,481,760.00 6,353,342.50 10,781,095.00 9,043,803.00 8,974,180.00

100000678 5,344,652.00 1 15387 100000680 10,545,120.00 1 100000680 6,454,320.00 8 100000680 5,837,680.00 9 15413 100000682 6,196,080.00 4 TOTAL P194,493,388.98 Id., p. 64. Id., pp. 83-84. Id., p. 63.

9185863 114505 9186617 115613 9186263 115099 9188618 115612 9187128 116067 14913 100000628 5 14927 100000630 5 14952 100000632 5 14969 100000633 0 14982 100000633 9 15144 100000653 2 15168 100000655 8 15181 100000657 1 15186 100000657 4 15207 100000659 9 15236 100000664 6 15244 100000664 8 15251 100000665 2 15273 100000667 0 15320 100000672 3 15340 100000674 9


According to the affidavit of general financial condition executed by Peter Paul Limson, concurrent chairman and chief executive officer of JAPRL and RFC, both corporations have been suffering staggering losses since the year 2000: 2002 SALES JAPRL RFC 284,828,24 294,940,65 248,013,11 6 6 8 PROFIT/LOS SES JAPRL (P14,536,9 P 269,958 P 516,359 76) RFC 327,462 503,112 215,747 See Interim Rules of Procedure on Corporate Rehabilitation (A.M. No. 00-8-10-SC), Sec. 6 which provides: Section 6. Stay Order. - If the court finds the petition to be sufficient in form and substance, it shall, not later than five (5) days from the filing of the petition, issue an Order: (a) applying a Rehabilitation Receiver and fixing his bond; (b) staying enforcement of all claims, whether for money or otherwise and whether



P210,570,9 P233,064, P303,661, 62 377 262

such enforcement is by court action or otherwise, against the debtor, its guarantors and sureties not solidarily liable with the debtor; (c) prohibiting the debtor from selling, encumbering, transferring, or disposing in any manner any of its properties except in the ordinary course of business; (d) prohibiting the debtor from making any payment of its liabilities outstanding as at the date of filing of the petition; (e) prohibiting the debtor's suppliers of goods or services from withholding supply of goods and services in the ordinary course of business for as long as the debtor makes payments for the services and goods supplied after the issuance of the stay order; (f) directing the payment in full of all administrative expenses incurred after the issuance of the stay order; (g) fixing the initial hearing on the petition not earlier than forty-five (45) days but not later than sixty (60) days from the filing thereof; (h) directing the petitioner to publish the Order in a newspaper of general circulation in the Philippines once a week for two (2) consecutive weeks; (i) directing all creditors and all interested parties (including the Securities and Exchange Commission) to file and serve on the debtor a verified comment on or opposition to the petition, with supporting affidavits and documents, not later than ten (10) days before the date of the initial hearing and putting them on notice that their failure to do so will bar them from participating in the proceedings; and (j) directing the creditors and interested parties to secure from the court copies of the petition and its annexes within such time as to enable themselves to file their comment on or opposition to the petition and to prepare for the initial hearing of the petition. (emphasis supplied)


Issued by Presiding Judge Cesar D. Santamaria. Dated September 23, 2003. Annex "G," id., pp. 73-74.

Annex "K," id., pp. 92-94. Annex "J," id., p. 91. It stated:


I HEREBY CERTIFY that on July 9, 2004 a copy of summons dated May 5, 2004 issued by the Honorable Court in connection with [Civil Case No. 03-991], the undersigned served upon [JAPRL], 2/F Vasquez Madrigal Plaza, 51 Annapolis St., Greenhills, San Juan, Metro Manila, [RFC and Arollado]; thru Ms. GRACE CANO, administrative assistant who acknowledged receipt as evidenced by her signature at the original copy of summons. DULY SERVED. City of Makati, 12 July 2004. (emphasis supplied)

Rules of Court, Rule 14, Sec. 11 provides:

Section 11. Service upon domestic private juridical entity. When the defendant is a corporation, partnership or association organized under the laws of the Philippines with a juridical personality, service may be made on the president, managing partner, general manager, corporate secretary, treasurer, or in-house counsel. (emphasis supplied)

Annex "K," rollo, pp. 92-94. See Mason v. Court of Appeals, 459 Phil. 689, 698-699 (2003).

Rules of Court, Sec. 6, Rule 14 provides:

Issued by Presiding Judge Reynaldo B. Daway. Rollo, pp. 83-84.


Id., p. 127. Annex "F," id., pp. 61-71.

Section 6. Service in person on defendant. Whenever practicable, the summons shall be served by handing a copy thereof to the defendant in person, or if he refuses to receive and sign for it, by tendering it to him. (emphasis supplied)


Rollo, p. 93. Annex "M," id., pp. 102-103.


Id., p. 67.




Annex "N," id., pp. 104-112.



Annex, "O," id., pp. 113-115.

See Orosa v. Court of Appeals, 330 Phil. 67 (1996).



Issued by Judge Jesus A. Santiago. Dated September 11, 2006. Id., pp. 126-129.

Philippine Airlines v. Kurangking, 438 Phil. 375, 381 (2002).


Annex "Q," id., pp. 124-125. Annex "R," id., p. 130. Annex "S," id., pp. 131-134. Annex "T," id., p. 135. Under Rule 65 of the Rules of Court.



See A.M. No. 00-8-10-SC, Sec. 11 provides: Section 11. Period of Stay Order. The stay order shall be effective from the date of its issuance until the dismissal of the petition or termination of the rehabilitation proceedings. The petition shall be dismissed if no rehabilitation is approved by the court upon the lapse of one hundred eighty (180) days from the date of the initial hearing. The court may grant an extension beyond this period only if it appears by convincing and compelling evidence that the debtor may successfully be rehabilitated. In no instance, however, shall the period for approving or disapproving a rehabilitation plan exceed eighteen (18) months from the date of filing of the petition. (emphasis supplied)





Respondents' motion for reconsideration was pending in the Makati RTC when they filed the petition for certiorari in the CA. It (petition) should have been dismissed for being filed prematurely.

Annex "U," rollo, pp. 136-149. Supra note 2. Supra note 3. Id., pp. 10-35.





The July 7, 2006 and September 11, 2006 orders of the Makati RTC resolved whether or not the proceedings in Civil Case No. 03-991 should be suspended in view of the March 13, 2006 order of the Calamba RTC in RTC SEC Case No. 68-2008-C.

Philippine Blooming Mills v. Court of Appeals, 459 Phil. 875, 892 (2003) citing Traders Royal Bank v. Court of Appeals, G.R. No. 78412, 26 September 1989, 177 SCRA 788, 792.

GEN. BANKING LAW, Sec. 2 provides:

See RULES OF COURT, Sec. 4, Rule 65 which provides: Section 4. When and where petition filed. The petition shall be filed not later than sixty (60) days from notice of judgment, order or resolution. In case a motion for reconsideration is filed on time, whether such motion is required or not, the sixty (60) day period shall be counted for the notice of said motion.

Section 2. Declaration of Policy. The State recognizes the vital role of banks providing an environment conducive to the sustained development of the national economy and the fiduciary nature of banking that requires high standards of integrity and performance. In furtherance thereof, the State shall promote a stable and efficient banking and financial system that is globally competitive, dynamic and responsive to the demands of a developing economy. (emphasis supplied)





Frederic Mishkin, THE ECONOMICS OF MONEY, BANKING AND FINANCIAL MATTERS, 5th ed., pp. 231-238. See also Vicente Valdepeas, Jr., THE BANGKO SENTRAL AND THE PHILIPPINE ECONOMY, pp. 123-124.

Valdepeas, id., p. 125.


The Bangko Sentral ng Pilipinas (BSP) controls bank lending by imposing reserve requirements which may be increased or reduced, subject to the financing needs of the economy.

or to return said goods, documents or instruments if they were not sold or disposed of in accordance with terms of the trust receipt shall constitute the crime of estafa, punishable under the provisions of Article Three hundred and fifteen, paragraph one (b) of Act Numbered Three thousand eight hundred and fifteen, as amended, otherwise known as the Revised Penal Code. If the violation or offense is committed by a corporation, partnership, association or other juridical entities, the penalty provided for in this Decree shall be imposed upon the directors, officers, employees or other officials or persons therein responsible for the offense, without prejudice to civil liabilities arising from the criminal offense. (emphasis supplied)

Valdepeas, supra note 47 at 125-126.

EN BANC G.R. No. L-20583 January 23, 1967


Paragraph 28 of the Trust Receipt Agreement provides: 28. In all cases where the Entruster is compelled to resort to the cancellation of this Trust Receipt or any take legal action to protect its interests, the Entrustee shall pay attorney fees fixed at 15% of the total obligation of the Entrustee, which shall in case be less than P20,000 exclusive of costs and fees allowed by law and the other expenses of collection incurred by the Entruster, and liquidated damages equal to fifteen percent (15%) of the total amount due but in no case less than P20,000. Any deficiency resulting within 24 hours from such sale, failing which the Entruster may take such legal action, without further notice to the Entrustee, as it may deem necessary to collect such deficiency from the Entrustee. Id., pp. 66-67.

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TRUST RECEIPTS LAW, Sec. 13 provides:

Section 13. Penalty Clause. - The failure of an entrustee to turn over the proceeds of the sale of the goods, documents or instruments covered by a trust receipt to the extent of the amount owing to the entruster or as appears in the trust receipt

This is an original quo warranto proceeding, initiated by the Solicitor General, to dissolve the Security and Acceptance Corporation for allegedly engaging in banking operations without the authority required therefor by the General Banking Act (Republic Act No. 337). Named as respondents in the petition are, in addition to said corporation, the following, as alleged members of its Board of Directors and/or Executive Officers, namely: NAME POSITION

Rosendo T. Resuello Pablo Tanjutco Arturo Soriano Ruben Beltran Bienvenido V. Zapa Pilar G. Resuello Ricardo D. Balatbat Jose R. Sebastian Vito Tanjutco Jr.

President & Chairman of the Board Director Director Director Director & Vice-President Director & SecretaryTreasurer Director & Auditor Director & Legal Counsel Director & Personnel Manager

The record shows that the Articles of Incorporation of defendant corporation1 were registered with the Securities and Exchange Commission on March 27, 1961; that the next day, the Board of Directors of the corporation adopted a set of by-laws,2 which were filed with said Commission on April 5, 1961; that on September 19, 1961, the Superintendent of Banks of the Central Bank of the Philippines asked its legal counsel an opinion on whether or not said corporation is a banking institution, within the purview of Republic Act No. 337; that, acting upon this request, on October 11, 1961, said legal counsel rendered an opinion resolving the query in the affirmative; that in a letter, dated January 15, 1962, addressed to said Superintendent of Banks, the corporation through its president, Rosendo T. Resuello, one of defendants herein, sought a reconsideration of the aforementioned opinion, which reconsideration was denied on March 16, 1962; that, prior thereto, or on March 9, 1961, the corporation had applied with the Securities and Exchange Commission for the registration and licensing of its securities under the Securities Act; that, before acting on this application, the Commission referred it to the Central Bank, which, in turn, gave the former a copy of the above-mentioned opinion, in line with which, the Commission advised the corporation on

December 5, 1961, to comply with the requirements of the General Banking Act; that, upon application of members of the Manila Police Department and an agent of the Central Bank, on May 18, 1962, the Municipal Court of Manila issued Search Warrant No. A-1019; that, pursuant thereto, members of the intelligence division of the Central Bank and of the Manila Police Department searched the premises of the corporation and seized documents and records thereof relative to its business operations; that, upon the return of said warrant, the seized documents and records were, with the authority of the court, placed under the custody of the Central Bank of the Philippines; that, upon examination and evaluation of said documents and records, the intelligence division of the Central Bank submitted, to the Acting Deputy Governor thereof, a memorandum dated September 10, 1962, finding that the corporation is: 1. Performing banking functions, without requisite certificate of authority from the Monetary Board of the Central Bank, in violation of Secs. 2 and 6 of Republic Act 337, in that it is soliciting and accepting deposit from the public and lending out the funds so received;
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2. Soliciting and accepting savings deposits from the general public when the company's articles of incorporation authorize it only to engage primarily in financing agricultural, commercial and industrial projects, and secondarily, in buying and selling stocks and bonds of any corporation, thereby exceeding the scope of its powers and authority as granted under its charter; consequently such acts are ultra-vires:
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3. Soliciting subscriptions to the corporate shares of stock and accepting deposits on account thereof, without prior registration and/or licensing of such shares or securing exemption therefor, in violation of the Securities Act; and
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4. That being a private credit and financial institution, it should come under the supervision of the Monetary Board of the Central Bank, by virtue of the transfer of the authority, power,

duties and functions of the Secretary of Finance, Bank Commissioner and the defunct Bureau of Banking, to the said Board, pursuant to Secs. 139 and 140 of Republic Act 265 and Secs. 88 and 89 of Republic Act 337." (Emphasis Supplied.) that upon examination and evaluation of the same records of the corporation, as well as of other documents and pertinent pipers obtained elsewhere, the Superintendent of Banks, submitted to the Monetary Board of the Central Bank a memorandum dated August 28, 1962, stating inter alia.
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12. Section 2 of Republic Act No. 337, otherwise known as the General Banking Act, defines the term, "banking institution" as follows: Sec. 2. Only duly authorized persons and entities may engage in the lending of funds obtained from the public through the receipts of deposits or the sale of bonds, securities, or obligations of any kind and all entities regularly conducting operations shall be considered as banking institutions and shall be subject to the provisions of this Act, of the Central Bank Act, and of other pertinent laws. ... 13. Premises considered, the examination disclosed that the Security Credit and Acceptance Corporation is regularly lending funds obtained from the receipt of deposits and/or the sale of securities. The Corporation therefore is performing 'banking functions' as contemplated in Republic Act No. 337, without having first complied with the provisions of said Act.

11. Pursuant to the request for assistance by the Chief, Intelligence Division, contained in his Memorandum to the Governor dated May 23, 1962 and in accordance with the written instructions of Governor Castillo dated May 31, 1962, an examination of the books and records of the Security Credit and Loans Organizations, Inc. seized by the combined MPD-CB team was conducted by this Department. The examination disclosed the following findings: a. Considering the extent of its operations, the Security Credit and Acceptance Corporation, Inc., receives deposits from the public regularly. Such deposits are treated in the Corporation's financial statements as conditional subscription to capital stock. Accumulated deposits of P5,000 of an individual depositor may be converted into stock subscription to the capital stock of the Security Credit and Acceptance Corporation at the option of the depositor. Sale of its shares of stock or subscriptions to its capital stock are offered to the public as part of its regular operations.
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b. That out of the funds obtained from the public through the receipt of deposits and/or the sale of securities, loans are made regularly to any person by the Security Credit and Acceptance Corporation. A copy of the Memorandum Report dated July 30, 1962 of the examination made by Examiners of this Department of the seized books and records of the Corporation is attached hereto.

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C. G. DIZON CONSTRUCTION INC. and CENEN DIZON in this petition for review seek the reversal of the 24 July 1996 Decision of the Court of Appeals dismissing their appeal for lack of merit and affirming in toto the decision of the trial court holding them liable to Asia Pacific Finance Corporation in the amount of P87,637.50 at 14% interest per annum in

addition to attorney's fees and costs of suit, as well as its 21 March 1997 Resolution denying reconsideration thereof. On 20 March 1981 Asia Pacific Finance Corporation (ASIA PACIFIC for short) filed a complaint for a sum of money with prayer for a writ of replevin against Teodoro Baas, C. G. Dizon Construction and Cenen Dizon. Sometime in August 1980 Teodoro Baas executed a Promissory Note in favor of C. G. Dizon Construction whereby for value received he promised to pay to the order of C. G. Dizon Construction the sum of P390,000.00 in installments of "P32,500.00 every 25th day of the month starting from September 25, 1980 up to August 25, 1981." Later, C. G. Dizon Construction endorsed with recourse the Promissory Note to ASIA PACIFIC, and to secure payment thereof, C. G. Dizon Construction, through its corporate officers, Cenen Dizon, President, and Juliette B. Dizon, Vice President and Treasurer, executed a Deed of Chattel Mortgage covering three (3) heavy equipment units of Caterpillar Bulldozer Crawler Tractors with Model Nos. D8-14A, D82U and D8H in favor of ASIA PACIFIC. Moreover, Cenen Dizon executed on 25 August 1980 a Continuing Undertaking wherein he bound himself to pay the obligation jointly and severally with C. G. Dizon Construction. In compliance with the provisions of the Promissory Note, C. G. Dizon Construction made the following installment payments to ASIA PACIFIC: P32,500.00 on 25 September 1980, P32,500.00 on 27 October 1980 and P65,000.00 on 27 February 1981, or a total of P130,000.00. Thereafter, however, C. G. Dizon Construction defaulted in the payment of the remaining installments, prompting ASIA PACIFIC to send a Statement of Account to Cenen Dizon for the unpaid balance of P267,737.50 inclusive of interests and charges, and P66,909.38 representing attorney's fees. As the demand was unheeded, ASIA PACIFIC sued Teodoro Baas, C. G. Dizon Construction and Cenen Dizon.

While defendants (herein petitioners) admitted the genuineness and due execution of the Promissory Note, the Deed of Chattel Mortgage and the Continuing Undertaking, they nevertheless maintained that these documents were never intended by the parties to be legal, valid and binding but a mere subterfuge to conceal the loan of P390,000.00 with usurious interests. Defendants claimed that since ASIA PACIFIC could not directly engage in banking business, it proposed to them a scheme wherein plaintiff ASIA PACIFIC could extend a loan to them without violating banking laws: first, Cenen Dizon would secure a promissory note from Teodoro Baas with a face value of P390,000.00 payable in installments; second, ASIA PACIFIC would then make it appear that the promissory note was sold to it by Cenen Dizon with the 14% usurious interest on the loan or P54,000.00 discounted and collected in advance by ASIA PACIFIC; and, lastly, Cenen Dizon would provide sufficient collateral to answer for the loan in case of default in payment and execute a continuing guaranty to assure continuous and prompt payment of the loan. Defendants also alleged that out of the loan of P390,000.00 defendants actually received only P329,185.00 after ASIA PACIFIC deducted the discounted interest, service handling charges, insurance premium, registration and notarial fees. Sometime in October 1980 Cenen Dizon informed ASIA PACIFIC that he would be delayed in meeting his monthly amortization on account of business reverses and promised to pay instead in February 1981. Cenen Dizon made good his promise and tendered payment to ASIA PACIFIC in an amount equivalent to two (2) monthly amortizations. But ASIA PACIFIC attempted to impose a 3% interest for every month of delay, which he flatly refused to pay for being usurious. Afterwards, ASIA PACIFIC allegedly made a verbal proposal to Cenen Dizon to surrender to it the ownership of the two (2) bulldozer crawler tractors and, in turn, the latter would treat the former's account as closed and the loan fully

paid. Cenen Dizon supposedly agreed and accepted the offer. Defendants averred that the value of the bulldozer crawler tractors was more than adequate to cover their obligation to ASIA PACIFIC. Meanwhile, on 21 April 1981 the trial court issued a writ of replevin against defendant C. G. Dizon Construction for the surrender of the bulldozer crawler tractors subject of the Deed of Chattel Mortgage. Of the three (3) bulldozer crawler tractors, only two (2) were actually turned over by defendants - D8-14A and D8-2U - which units were subsequently foreclosed by ASIA PACIFIC to satisfy the obligation. D814A was sold for P120,000.00 and D8-2U for P60,000.00 both to ASIA PACIFIC as the highest bidder. During the pendency of the case, defendant Teodoro Baas passed away, and on motion of the remaining defendants, the trial court dismissed the case against him. On the other hand, ASIA PACIFIC was substituted as party plaintiff by International Corporate Bank after the disputed Promissory Note was assigned and/or transferred by ASIA PACIFIC to International Corporate Bank. Later, International Corporate Bank merged with Union Bank of the Philippines. As the surviving entity after the merger, and having succeeded to all the rights and interests of International Corporate Bank in this case, Union Bank of the Philippines was substituted as a party in lieu of International Corporate Bank. On 25 September 1992 the Regional Trial Court ruled in favor of ASIA PACIFIC holding the defendants jointly and severally liable for the unpaid balance of the obligation under the Promissory Note in the amount of P87,637.50 at 14% interest per annum, and attorney's fees equivalent to 25% of the monetary award. On 24 July 1996 the Court of Appeals affirmed in toto the decision of the trial court thus Defendant-appellants' contention that the instruments were executed merely as a subterfuge to skirt banking laws is an untenable

defense. If that were so then they too were parties to the illegal scheme. Why should they now be allowed to take advantage of their own knavery to escape the liabilities that their own chicanery created? Defendant-appellants also want us to believe their story that there was an agreement between them and the plaintiff-appellee that if the former would deliver their 2 bulldozer crawler tractors to the latter, the defendant-appellants' obligation would fully be extinguished. Again, nothing but the word that comes out between the teeth supports such story. Why did they not write down such an important agreement? Is it believable that seasoned businessmen such as the defendant-appellant Cenen G. Dizon and the other officers of the appellant corporation would deliver the bulldozers without a receipt of acquittance from the plaintiff-appellee x x x x In our book, that is not credible. The pivotal issues raised are: (a) Whether the disputed transaction between petitioners and ASIA PACIFIC violated banking laws, hence, null and void; and (b) Whether the surrender of the bulldozer crawler tractors to respondent resulted in the extinguishment of petitioners' obligation. On the first issue, petitioners insist that ASIA PACIFIC was organized as an investment house which could not engage in the lending of funds obtained from the public through receipt of deposits. The disputed Promissory Note, Deed of Chattel Mortgage and Continuing Undertaking were not intended to be valid and binding on the parties as they were merely devices to conceal their real intention which was to enter into a contract of loan in violation of banking laws. We reject the argument. An investment company refers to any issuer which is or holds itself out as being engaged or proposes to engage primarily in the business of investing, reinvesting or trading in securities. As defined in Sec. 2, par. (a), of the Revised Securities Act, securities "shall include x x x x commercial papers evidencing indebtedness of any person, financial or nonfinancial entity, irrespective of maturity, issued,

endorsed, sold, transferred or in any manner conveyed to another with or without recourse, such as promissory notes x x x x" Clearly, the transaction between petitioners and respondent was one involving not a loan but purchase of receivables at a discount, well within the purview of "investing, reinvesting or trading in securities" which an investment company, like ASIA PACIFIC, is authorized to perform and does not constitute a violation of the General Banking Act. Moreover, Sec. 2 of the General Banking Act provides in part Sec. 2. Only entities duly authorized by the Monetary Board of the Central Bank may engage in the lending of funds obtained from the public through the receipt of deposits of any kind, and all entities regularly conducting such operations shall be considered as banking institutions and shall be subject to the provisions of this Act, of the Central Bank Act, and of other pertinent laws (underscoring supplied). Indubitably, what is prohibited by law is for investment companies to lend funds obtained from the public through receipts of deposit, which is a function of banking institutions. But here, the funds supposedly "lent" to petitioners have not been shown to have been obtained from the public by way of deposits, hence, the inapplicability of banking laws. On petitioners' submission that the true intention of the parties was to enter into a contract of loan, we have examined the Promissory Note and failed to discern anything therein that would support such theory. On the contrary, we find the terms and conditions of the instrument clear, free from any ambiguity, and expressive of the real intent and agreement of the parties. We quote the pertinent portions of the Promissory Note FOR VALUE RECEIVED, I/We, hereby promise to pay to the order of C.G. Dizon Construction, Inc. the sum of THREE HUNDRED NINETY THOUSAND ONLY (P390,000.00), Philippine Currency in the following manner:

P32,500.00 due every 25th of the month starting from September 25, 1980 up to August 25, 1981. I/We agree that if any of the said installments is not paid as and when it respectively falls due, all the installments covered hereby and not paid as yet shall forthwith become due and payable at the option of the holder of this note with interest at the rate of 14% per annum on each unpaid installment until fully paid. If any amount due on this note is not paid at its maturity and this note is placed in the hands of an attorney for collection, I/We agree to pay in addition to the aggregate of the principal amount and interest due, a sum equivalent to TEN PERCENT (10%) thereof as Attorney's fees, in case no action is filed, otherwise, the sum will be equivalent to TWENTY FIVE (25%) of the said principal amount and interest due x x x x Makati, Metro Manila, August 25, 1980. (Sgd) Teodoro Baas ENDORSED TO ASIA PACIFIC FINANCE CORPORATION WITH RECOURSE, C.G. DIZON CONSTRUCTION, INC. By: (Sgd.) Cenen Dizon (Sgd.) Juliette B. Dizon President VP/Treasurer Likewise, the Deed of Chattel Mortgage and Continuing Undertaking were duly acknowledged before a notary public and, as such, have in their favor the presumption of regularity. To contradict them there must be clear, convincing and more than merely preponderant evidence. In the instant case, the records do not show even a preponderance of evidence in favor of petitioners' claim that the Deed of Chattel Mortgage and Continuing Undertaking were never intended by the parties to be legal, valid and binding. Notarial documents are evidence of the facts in clear and unequivocal manner therein expressed. Interestingly, petitioners' assertions were based mainly on the self-serving testimony of Cenen

Dizon, and not on any other independent evidence. His testimony is not only unconvincing, as found by the trial court and the Court of Appeals, but also self-defeating in light of the documents presented by respondent, i.e., Promissory Note, Deed of Chattel Mortgage and Continuing Undertaking, the accuracy, correctness and due execution of which were admitted by petitioners. Oral evidence certainly cannot prevail over the written agreements of the parties. The courts need only rely on the faces of the written contracts to determine their true intention on the principle that when the parties have reduced their agreements in writing, it is presumed that they have made the writings the only repositories and memorials of their true agreement. The second issue deals with a question of fact. We have ruled often enough that it is not the function of this Court to analyze and weigh the evidence all over again, its jurisdiction being limited to reviewing errors of law that might have been committed by the lower court. At any rate, while we are not a trier of facts, hence, not required as a rule to look into the factual bases of the assailed decision of the Court of Appeals, we did so just the same in this case if only to satisfy petitioners that we have carefully studied and evaluated the case, all too mindful of the tenacity and vigor with which the parties, through their respective counsel, have pursued this case for nineteen (19) years. Petitioners contend that the parties already had a verbal understanding wherein ASIA PACIFIC actually agreed to consider petitioners' account closed and the principal obligation fully paid in exchange for the ownership of the two (2) bulldozer crawler tractors. We are not persuaded. Again, other than the bare allegations of petitioners, the records are bereft of any evidence of the supposed agreement. As correctly observed by the Court of Appeals, it is unbelievable that the parties entirely neglected to write down such an important agreement. Equally incredulous is the fact that petitioner Cenen Dizon, a seasoned businessman, readily consented to deliver the bulldozers to respondent

without a corresponding receipt of acquittance. Indeed, even the testimony of petitioner Cenen Dizon himself negates the supposed verbal understanding between the parties Q: You said and is it not a fact that you surrendered the bulldozers to APCOR by virtue of the seizure order? A: There was no seizure order. Atty. Carag during that time said if I surrender the two equipment, we might finally close a deal if the equipment would come up to the balance of the loan. So I voluntarily surrendered, I pulled them from the job site and returned them to APCOR x xxx Q: You mentioned a certain Atty. Carag, who is he? A: He was the former legal counsel of APCOR. They were handling cases. In fact, I talked with Atty. Carag, we have a verbal agreement if I surrender the equipment it might suffice to pay off the debt so I did just that (underscoring ours). In other words, there was no binding and perfected contract between petitioners and respondent regarding the settlement of the obligation, but only a conditional one, a mere conjecture in fact, depending on whether the value of the tractors to be surrendered would equal the balance of the loan plus interests. And since the bulldozer crawler tractors were sold at the foreclosure sale for only P180,000.00, which was not enough to cover the unpaid balance of P267,637.50, petitioners are still liable for the deficiency. Barring therefore a showing that the findings complained of are totally devoid of support in the records, or that they are so glaringly erroneous as to constitute serious abuse of discretion, we see no valid reason to discard them. More so in this case where the findings of both the trial court and the appellate court coincide with each other on the matter.

With regard to the computation of petitioners' liability, the records show that petitioners actually paid to respondent a total sum of P130,000.00 in addition to the P180,000.00 proceeds realized from the sale of the bulldozer crawler tractors at public auction. Deducting these amounts from the principal obligation of P390,000.00 leaves a balance of P80,000.00, to which must be added P7,637.50 accrued interests and charges as of 20 March 1981, or a total unpaid balance of P87,637.50 for which petitioners are jointly and severally liable. Furthermore, the unpaid balance should earn 14% interest per annum as stipulated in the Promissory Note, computed from 20 March 1981 until fully paid. On the amount of attorney's fees which under the Promissory Note is equivalent to 25% of the principal obligation and interests due, it is not, strictly speaking, the attorney's fees recoverable as between the attorney and his client regulated by the Rules of Court. Rather, the attorney's fees here are in the nature of liquidated damages and the stipulation therefor is aptly called a penal clause. It has been said that so long as such stipulation does not contravene the law, morals and public order, it is strictly binding upon the obligor. It is the litigant, not the counsel, who is the judgment creditor entitled to enforce the judgment by execution. Nevertheless, it appears that petitioners' failure to fully comply with their part of the bargain was not motivated by ill will or malice, but due to financial distress occasioned by legitimate business reverses. Petitioners in fact paid a total of P130,000.00 in three (3) installments, and even went to the extent of voluntarily turning over to respondent their heavy equipment consisting of two (2) bulldozer crawler tractors, all in a bona fide effort to settle their indebtedness in full. Article 1229 of the New Civil Code specifically empowers the judge to equitably reduce the civil penalty when the principal obligation has been partly or irregularly complied with. Upon the foregoing premise, we hold that the reduction of the attorney's fees from 25% to 15% of the unpaid principal plus interests is in order.

Finally, while we empathize with petitioners, we cannot close our eyes to the overriding considerations of the law on obligations and contracts which must be upheld and honored at all times. Petitioners have undoubtedly benefited from the transaction; they cannot now be allowed to impugn its validity and legality to escape the fulfillment of a valid and binding obligation. WHEREFORE, no reversible error having been committed by the Court of Appeals, its assailed Decision of 24 July 1996 and its Resolution of 21 March 1997 are AFFIRMED. Accordingly, petitioners C.G. Construction Inc. and Cenen Dizon are ordered jointly and severally to pay respondent Asia Pacific Finance Corporation, substituted by International Corporate Bank (now known as Union Bank of the Philippines), P87,637.50 representing the unpaid balance on the Promissory Note, with interest at fourteen percent (14%) per annum computed from 20 March 1981 until fully paid, and fifteen percent (15%) of the principal obligation and interests due by way of attorney's fees. Costs against petitioners. SO ORDERED. Mendoza, Quisumbing, Buena and De Leon, Jr., JJ., concur. * Petitioner Teodoro Baas should not have been included in the caption of this case as his name was ordered excluded by the trial court on 23 October 1997 since he died during the pendency of the case thereat. This case was originally titled "Teodoro Baas, C.G. Dizon Construction, Inc., and Cenen Dizon v. Court of Appeals and Asia Pacific Finance Corporation." The Court of Appeals, which was inadvertently made party-respondent, was excluded on motion of petitioners since the court which rendered the decision appealed from is not required to be joined as party-respondent (Rule 45, 1997 Rules of Civil Procedure). Penned by Justice Hilarion L. Aquino, concurred in by Justices Jainal D. Rasul and Hector L. Hofilea.

Exh. "A." Exh. "C." Exh. "D." This case however continued to be prosecuted and defended in the names of ASIA PACIFIC and Teodoro Baas, among other defendants, respectively, notwithstanding the Orders of 22 August 1985 on substitution of party-plaintiff and of 23 October 1987 re dismissal of the case against deceased defendant Teodoro Baas, both issued by the trial court. Decision penned by Judge Domingo R. Garcia, RTC-Br. 157, Pasig City. See Sec. 4, RA 2629. B.P. Blg. 178. RA 337. Salame v. Court of Appeals, G.R. No. 104373, 22 December 1994, 239 SCRA 356. Remalante v. Tibe, G.R. No. 59514, 25 February 1988, 158 SCRA 138. TSN, 15 November 1988, pp. 7-8. Exh. "F." See South Surety and Insurance Co., Inc. v. Court of Appeals, G.R. No. 102253, 2 June 1995, 244 SCRA 744. AUSTRIA-MARTINEZ, J.: FIRST PLANTERS PAWNSHOP, INC., Petitioner, YNARESSANTIAGO, J., Chairperson, AUSTRIAMARTINEZ, CHICO-NAZARIO, NACHURA, and REYES, JJ. Promulgated: July 30, 2008 Respondent. x---------------------------------------------x G.R. No. 174134 Present:

- versus -



Republic of the Philippines Supreme Court



First Planters Pawnshop, Inc. (petitioner) contests the deficiency value-added and documentary stamp taxes imposed upon it by the Bureau of Internal Revenue (BIR) for the year 2000. The core of petitioner's argument is that it is not a lending investor within the purview of Section 108(A) of the National Internal Revenue Code (NIRC), as amended, and therefore not subject to value-added tax (VAT). Petitioner also contends that a pawn ticket is not subject to documentary stamp tax (DST) because it is not proof of the pledge transaction, and even assuming

that it is so, still, it is not subject to tax since a documentary stamp tax is levied on the document issued and not on the transaction.

merit. The assailed Decision dated May 9, 2005 and Resolution dated October 7, 2005 are hereby AFFIRMED.

The facts:


In a Pre-Assessment Notice dated July 7, 2003, petitioner was informed by the BIR that it has an existing tax deficiency on its VAT and DST liabilities for the year 2000. The deficiency assessment was at P541,102.79 for VAT and P23,646.33 for DST. Petitioner protested the assessment for lack of legal and factual bases.

Petitioner sought reconsideration but this was denied by the CTA En Banc per Resolution dated August 14, 2006.

Hence, the present petition for review under Rule 45 of the Rules of Court based on the following grounds:

Petitioner subsequently received a Formal Assessment Notice on December 29, 2003, directing payment of VAT deficiency in the amount of P541,102.79 and DST deficiency in the amount of P24,747.13, inclusive of surcharge and interest. Petitioner filed a protest, which was denied by Acting Regional Director Anselmo G. Adriano per Final Decision on Disputed Assessment dated January 29, 2004.


II Petitioner then filed a petition for review with the Court of Tax Appeals (CTA). In a Decision dated May 9, 2005, the 2nd Division of the CTA upheld the deficiency assessment. Petitioner filed a motion for reconsideration which was denied in a Resolution dated October 7, 2005. THE HONORABLE COURT OF TAX APPEALS EN BANC GRAVELY ERRED IN RULING THAT PETITIONER IS LIABLE FOR DST ON PAWN TICKETS.

Petitioner appealed to the CTA En Banc which rendered a Decision dated June 7, 2006, the dispositive portion of which reads as follows:

The determination of petitioner's tax liability depends on the tax treatment of a pawnshop business. Oddly, there has not been any definitive declaration in this regard despite the fact that pawnshops have long been in existence. All that has been stated is what pawnshops are not, but not what pawnshops are.

WHEREFORE, premises considered, the Petition for Review is hereby DENIED for lack of

The BIR itself has maintained an ambivalent stance on this issue. Initially, in Revenue Memorandum Order No. 15-91 issued on March 11, 1991, a pawnshop business was considered as akin to lending investors business activity and subject to 5% percentage tax beginning January 1, 1991, under Section 116 of the Tax Code of 1977, as amended by E.O. No. 273.

pawnshops to be treated in the same way as lending investors; third, Section 116 of the NIRC of 1977 subjects to percentage tax dealers in securities and lending investors only; and lastly, the BIR had ruled several times prior to the issuance of RMO No. 15-91 and RMC 43-91 that pawnshops were not subject to the 5% percentage tax on lending investors imposed by Section 116 of the NIRC of 1977, as amended by Executive Order No. 273.

With the passage of Republic Act (R.A.) No. 7716 or the EVAT Law in 1994, the BIR abandoned its earlier position and maintained that pawnshops are subject to 10% VAT, as implemented by Revenue Regulations No. 7-95. This was complemented by Revenue Memorandum Circular No. 45-01 dated October 12, 2001, which provided that pawnshop operators are liable to the 10% VAT based on gross receipts beginning January 1, 1996, while pawnshops whose gross annual receipts do not exceed P550,000.00 are liable for percentage tax, pursuant to Section 109(z) of the Tax Code of 1997.

In view of said ruling, the BIR issued Revenue Memorandum Circular No. 36-2004 dated June 16, 2004, canceling the previous lending investor's tax assessments on pawnshops. Said Circular stated, inter alia:

CTA decisions affirmed the BIR's position that pawnshops are subject to VAT. In H. Tambunting Pawnshop, Inc. v. Commissioner of Internal Revenue, the CTA ruled that the petitioner therein was subject to 10% VAT under Section 108 of the Tax Code of 1997. Antam Pawnshop Corporation v. Commissioner of Internal Revenue reiterates said ruling. It was the CTA's view that the services rendered by pawnshops fall under the general definition of sale or exchange of services under Section 108(A) of the Tax Code of 1997.

In view of the said Supreme Court decision, all assessments on pawnshops for percentage taxes as lending investors are hereby cancelled. This Circular is being issued for the sole purpose of resolving the tax liability of pawnshops to the 5% lending investors tax provided under the then Section 116 of the NIRC of 1977, as amended, and shall not cover issues relating to their other tax liabilities. All internal revenue officials are enjoined from issuing assessments on pawnshops for percentage taxes on lending investors, under the then Section 116 of the NIRC of 1977, as amended. For purposes of the gross receipt tax provided for under Republic Act No. 9294, the pawnshops are now subject thereof. This shall however, be covered by another issuance.

On July 15, 2003, the Court rendered Commissioner of Internal Revenue v. Michel J. Lhuillier Pawnshop, Inc. in which it was categorically ruled that while pawnshops are engaged in the business of lending money, they are not considered lending investors for the purpose of imposing percentage taxes. The Court gave the following reasons: first, under the 1997 Tax Code, pawnshops and lending investors were subjected to different tax treatments; second, Congress never intended

Revenue Memorandum Circular No. 37-2004 was issued on the same date whereby pawnshop businesses were allowed to settle their VAT liabilities for the tax years 1996-2002 pursuant to a memorandum of agreement entered into by the Commissioner of Internal Revenue and the Chambers of Pawnbrokers of the Philippines, Inc. The Circular likewise instructed all revenue officers to ensure that all VAT due from pawnshops beginning January 1,

2003, including increments thereto, if any, are assessed and collected from pawnshops under its jurisdiction.

finally classified pawnshops as Other Non-bank Financial Intermediaries.

In the interim, however, Congress passed Republic Act (R.A.) No. 9238 on February 5, 2004 entitled, An Act Amending Certain Sections of the National Internal Revenue Code of 1997, as amended, by Excluding Several Services from the Coverage of the Value-added Tax and Re-imposing the Gross Receipts Tax on Banks and Non-bank Financial Intermediaries Performing Quasi-banking Functions and Other Non-bank Financial Intermediaries beginning January 01, 2004.

The Court finds that pawnshops should have been treated as non-bank financial intermediaries from the very beginning, subject to the appropriate taxes provided by law, thus

Under the National Internal Revenue Code of 1977, pawnshops should have been levied the 5% percentage tax on gross receipts imposed on bank and nonbank financial intermediaries under Section 119 (now Section 121 of the Tax Code of 1997); With the imposition of the VAT under R.A. No. 7716 or the EVAT Law, pawnshops should have been subjected to the 10% VAT imposed on banks and non-bank financial intermediaries and financial institutions under Section 102 of the Tax Code of 1977 (now Section 108 of the Tax Code of 1997); This was restated by R.A. No. 8241, which amended R.A. No. 7716, although the levy, collection and assessment of the 10% VAT on services rendered by banks, non-bank financial intermediaries, finance companies, and other financial intermediaries not performing quasibanking functions, were made effective January 1, 1998; R.A. No. 8424 or the Tax Reform Act of 1997 likewise imposed a 10% VAT under Section 108 but the levy, collection and assessment thereof were again deferred until December 31, 1999; The levy, collection and assessment of the 10% VAT was further deferred by R.A. No. 8761 until December 31, 2000, and by R.A. No. 9010, until December 31, 2002;

Pending publication of R.A. No. 9238, the BIR issued Bank Bulletin No. 2004-01 on February 10, 2004 advising all banks and non-bank financial intermediaries that they shall remain liable under the VAT system.

When R.A. No. 9238 took effect on February 16, 2004, the Department of Finance issued Revenue Regulations No. 10-2004 dated October 18, 2004, classifying pawnshops as Other Non-bank Financial Intermediaries. The BIR then issued Revenue Memorandum Circular No. 73-2004 on November 25, 2004, prescribing the guidelines and policies on the assessment and collection of 10% VAT for gross annual sales/receipts exceeding P550,000.00 or 3% percentage tax for gross annual sales/receipts not exceeding P550,000.00 of pawnshops prior to January 1, 2005.

In fine, prior to the EVAT Law, pawnshops were treated as lending investors subject to lending investor's tax. Subsequently, with the Court's ruling in Lhuillier, pawnshops were then treated as VAT-able enterprises under the general classification of sale or exchange of services under Section 108(A) of the Tax Code of 1997, as amended. R.A. No. 9238

With no further deferments given by law, the levy, collection and assessment of the 10% VAT on banks, non-bank financial intermediaries, finance companies, and other financial intermediaries not performing quasibanking functions were finally made effective beginning January 1, 2003; Finally, with the enactment of R.A. No. 9238, the services of banks, non-bank financial intermediaries, finance companies, and other financial intermediaries not performing quasibanking functions were specifically exempted from VAT, and the 0% to 5% percentage tax on gross receipts on other non-bank financial intermediaries was reimposed under Section 122 of the Tax Code of 1997.

consideration, including x x x services of banks, non-bank financial intermediaries and finance companies; and non-life insurance companies (except their crop insurances), including surety, fidelity, indemnity and bonding companies; and similar services regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental faculties. The phrase 'sale or exchange of services' shall likewise include: x x x (Emphasis and underscoring supplied)

The tax treatment of pawnshops as non-bank financial intermediaries is not without basis.

At the time of the disputed assessment, that is, for the year 2000, pawnshops were not subject to 10% VAT under the general provision on sale or exchange of services as defined under Section 108(A) of the Tax Code of 1997, which states: 'sale or exchange of services' means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration x x x. Instead, due to the specific nature of its business, pawnshops were then subject to 10% VAT under the category of nonbank financial intermediaries, as provided in the same Section 108(A), which reads:

R.A. No. 337, as amended, or the General Banking Act characterizes the terms banking institution and bank as synonymous and interchangeable and specifically include commercial banks, savings bank, mortgage banks, development banks, rural banks, stock savings and loan associations, and branches and agencies in the Philippines of foreign banks. R.A. No. 8791 or the General Banking Law of 2000, meanwhile, provided that banks shall refer to entities engaged in the lending of funds obtained in the form of deposits. R.A. No. 8791 also included cooperative banks, Islamic banks and other banks as determined by the Monetary Board of the Bangko Sentral ng Pilipinas in the classification of banks.

SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. (A) Rate and Base of Tax. - There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties. The phrase "sale or exchange of services" means the performance of all kinds or services in the Philippines for others for a fee, remuneration or

Financial intermediaries, on the other hand, are defined as persons or entities whose principal functions include the lending, investing or placement of funds or evidences of indebtedness or equity deposited with them, acquired by them, or otherwise coursed through them, either for their own account or for the account of others.

It need not be elaborated that pawnshops are non-banks/banking institutions. Moreover, the nature

of their business activities partakes that of a financial intermediary in that its principal function is lending.

A pawnshop's business and operations are governed by Presidential Decree (P.D.) No. 114 or the Pawnshop Regulation Act and Central Bank Circular No. 374 (Rules and Regulations for Pawnshops). Section 3 of P.D. No. 114 defines pawnshop as a person or entity engaged in the business of lending money on personal property delivered as security for loans and shall be synonymous, and may be used interchangeably, with pawnbroker or pawn brokerage.

SEC. 2. BASES OF QUALIFYING PAWNSHOPS AS NON-BANK FINANCIAL INTERMEDIARIES. - Whereas, in relation to Sec. 2.3 of Rev. Regs No. 9-2004 defining Non-bank Financial Intermediaries, the term pawnshop as defined under Presidential Decree No. 114 which authorized its creation, to be a person or entity engaged in the business of lending money, all fall within the classification of Non-bank Financial Intermediaries and therefore, covered by Sec. 4 of R.A. No. 9238. This classification is equally supported by Subsection 4101Q.1 of the BSP Manual of Regulations for Non-Bank Financial Intermediaries and reiterated in BSP Circular No. 204-99, classifying pawnshops as one of Non-bank Financial Intermediaries within the supervision of the Bangko Sentral ng Pilipinas.

That pawnshops are to be treated as non-bank financial intermediaries is further bolstered by the fact that pawnshops are under the regulatory supervision of the Bangko Sentral ng Pilipinas and covered by its Manual of Regulations for Non-Bank Financial Institutions. The Manual includes pawnshops in the list of non-bank financial intermediaries, viz.:

Ultimately, R.A. No. 9238 categorically confirmed the classification of pawnshops as nonbank financial intermediaries.

4101Q.1 Financial Intermediaries xxx Non-bank financial intermediaries shall include the following: (1) A person or entity licensed and/or registered with any government regulatory body as a non-bank financial intermediary, such as investment house, investment company, financing company, securities dealer/broker, lending investor, pawnshop, money broker x x x. (Emphasis supplied)

Coming now to the issue at hand - Since petitioner is a non-bank financial intermediary, it is subject to 10% VAT for the tax years 1996 to 2002; however, with the levy, assessment and collection of VAT from non-bank financial intermediaries being specifically deferred by law, then petitioner is not liable for VAT during these tax years. But with the full implementation of the VAT system on non-bank financial intermediaries starting January 1, 2003, petitioner is liable for 10% VAT for said tax year. And beginning 2004 up to the present, by virtue of R.A. No. 9238, petitioner is no longer liable for VAT but it is subject to percentage tax on gross receipts from 0% to 5 %, as the case may be.

Revenue Regulations No. 10-2004, in fact, recognized these bases, to wit:

Lastly, petitioner is liable for documentary stamp taxes.

The Court has settled this issue in Michel J. Lhuillier Pawnshop, Inc. v. Commissioner of Internal Revenue, in which it was ruled that the subject of DST is not limited to the document alone. Pledge, which is an exercise of a privilege to transfer obligations, rights or properties incident thereto, is also subject to DST, thus x x x the subject of a DST is not limited to the document embodying the enumerated transactions. A DST is an excise tax on the exercise of a right or privilege to transfer obligations, rights or properties incident thereto. In Philippine Home Assurance Corporation v. Court of Appeals, it was held that: xxxx Pledge is among the privileges, the exercise of which is subject to DST. A pledge may be defined as an accessory, real and unilateral contract by virtue of which the debtor or a third person delivers to the creditor or to a third person movable property as security for the performance of the principal obligation, upon the fulfillment of which the thing pledged, with all its accessions and accessories, shall be returned to the debtor or to the third person. This is essentially the business of pawnshops which are defined under Section 3 of Presidential Decree No. 114, or the Pawnshop Regulation Act, as persons or entities engaged in lending money on personal property delivered as security for loans. Section 12 of the Pawnshop Regulation Act and Section 21 of the Rules and Regulations For Pawnshops issued by the Central Bank to implement the Act, require every pawnshop or pawnbroker to issue, at the time of every such loan or pledge, a memorandum or ticket signed by the pawnbroker and containing the following details: (1) name and residence of the pawner; (2) date the loan is granted; (3) amount of principal loan; (4) interest rate in percent; (5) period of maturity; (6) description of pawn; (7) signature of pawnbroker or his authorized agent; (8) signature or thumb mark of pawner or his authorized agent; and (9) such other terms and conditions as may be agreed upon between the pawnbroker and the pawner. In addition, Central Bank Circular No. 445, prescribed a standard form of pawn tickets with entries for the required details on its face

and the mandated terms and conditions of the pledge at the dorsal portion thereof. Section 3 of the Pawnshop Regulation Act defines a pawn ticket as follows: xxxx True, the law does not consider said ticket as an evidence of security or indebtedness. However, for purposes of taxation, the same pawn ticket is proof of an exercise of a taxable privilege of concluding a contract of pledge. At any rate, it is not said ticket that creates the pawnshops obligation to pay DST but the exercise of the privilege to enter into a contract of pledge. There is therefore no basis in petitioners assertion that a DST is literally a tax on a document and that no tax may be imposed on a pawn ticket. The settled rule is that tax laws must be construed in favor of the taxpayer and strictly against the government; and that a tax cannot be imposed without clear and express words for that purpose. Taking our bearing from the foregoing doctrines, we scrutinized Section 195 of the NIRC, but there is no way that said provision may be interpreted in favor of petitioner. Section 195 unqualifiedly subjects all pledges to DST. It states that [o]n every x x x pledge x x x there shall be collected a documentary stamp tax x x x. It is clear, categorical, and needs no further interpretation or construction. The explicit tenor thereof requires hardly anything than a simple application. xxxx In the instant case, there is no law specifically and expressly exempting pledges entered into by pawnshops from the payment of DST. Section 199 of the NIRC enumerated certain documents which are not subject to stamp tax; but a pawnshop ticket is not one of them. Hence, petitioners nebulous claim that it is not subject to DST is without merit. It cannot be over-emphasized that tax exemption represents a loss of revenue to the government and must, therefore, not rest on vague inference. Exemption from taxation is never presumed. For tax exemption to be recognized, the grant must be clear and express; it cannot be made to rest on doubtful implications.

Under the principle of stare decisis et non quieta movere (follow past precedents and do not disturb what has been settled), once a case has been decided one way, any other case involving exactly the same point at issue, as in the case at bar, should be decided in the same manner.

CONSUELO YNARES-SANTIAGO Associate Justice Chairperson

WHEREFORE, the petition is PARTIALLY GRANTED. The Decision dated June 7, 2006 and Resolution dated August 14, 2006 of the Court of Tax Appeals En Banc is MODIFIED to the effect that the Bureau of Internal Revenue assessment for VAT deficiency in the amount of P541,102.79 for the year 2000 is REVERSED and SET ASIDE, while its assessment for DST deficiency in the amount of P24,747.13, inclusive of surcharge and interest, is UPHELD.





I attest that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Courts Division. WE CONCUR:

Id., Annex H, pp. 109-122. Id., Annex I, pp. 150-168. CONSUELO YNARES-SANTIAGO Associate Justice Chairperson, Third Division Id., Annex J, pp. 169-183. Id., Annex K, pp. 184-188. Id. at 80. Rollo, pp. 82-83. Id. at 34. As clarified by BIR Revenue Memorandum Circular No. 43-91 issued on May 27, 1991. CERTIFICATION Entitled, An Act Restructuring the Value-Added Tax (VAT) System, Widening its Tax Base and Enhancing its Administration, and for these purposes Amending and Repealing the Relevant Provisions of the National Internal Revenue Code, as amended, and for Other Purposes. C.T.A. Case No. 6915, April 11, 2004. C.T.A. Case No. 7069, June 17, 2005. G.R. No. 150947, July 15, 2003, 406 SCRA 178. Penned by Chief Justice Hilario G. Davide, Jr. with the concurrence of Associate Justices Jose Vitug, Consuelo Ynares-Santiago, Antonio T. Carpio and Adolfo S. Azcuna. Id. at 185. ftp://ftp.bir.gov.ph/webadmin1/pdf/1887rmc36_04.pd f. Republic Act (R.A.) No. 9238 lapsed into law on February 05, 2004 without the signature of the President, in accordance with Article VI, Section 27 (1) of the Constitution. Presidential Decree No. 1158. Effective May 28, 1994.

Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairpersons Attestation, it is hereby certified that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Courts Division.

Chief Justice Rollo, Annex C, p. 84. Id., Annex D, pp. 85-90. Id., Annex E, pp. 91-95. Id., Annex F, pp. 96-107. Id., Annex G, p. 108.

The implementation of the VAT system under R.A. No. 7716 was made effective January 1, 1996 (see Commissioner of Internal Revenue v. Philippine Global Communications, Inc., G.R. No. 144696, August 16, 2006, 499 SCRA 53). Approved on December 20, 1996. R.A. No. 8241, Section 11 provides:

SEC. 2. Section 109 of the same Code is hereby amended by rewording paragraph (1) and inserting additional paragraphs after (z) which shall now read as follows: "SEC. 109. Exempt Transactions. The following shall be exempt from the value-added tax: xxxx

SEC. 11. Section 17 of Republic Act No. 7716 is hereby amended to read as follows: EC. 17. Effectivity of the Imposition of VAT on Certain Goods, Properties and Services. The value-added tax shall be levied, assessed and collected on the following transactions, starting January 1, 1998: xxxx (b) Services rendered by banks, non-bank financial intermediaries, finance companies and other financial intermediaries not performing quasi-banking functions; x x x x:

(aa) Services of banks, non-bank financial intermediaries performing quasi-banking functions, and other non-bank financial intermediaries; xxxx The foregoing exemptions to the contrary notwithstanding, any person whose sale of goods or properties or services which are otherwise not subject to VAT, but who issue a VAT invoice or receipt therefor shall, in additional to his liability to other applicable percentage tax, if any, be liable to the tax imposed in Section 106 or 108 without the benefit of input tax credit, and such tax shall also be recognized as input tax credit to the purchaser under Section 110, all of this Code." R.A. No. 9238, Section 4 reads: Section 4. Section 122 of the National Internal Revenue Code of 1997, as amended, is hereby restored with amendments to read as follows: "Sec. 122. Tax on Other Non-Bank Financial Intermediaries. There shall be collected a tax of five percent (5%) on the gross receipts derived by other non-bank financial intermediaries doing business in the Philippines, from interest, commissions, discounts and all other items treated as gross income under this code: Provided, that interests, commissions and discounts from lending activities, as well as income from financial leasing, shall be taxed on the basis of

R.A. No. 8424 renamed the National Internal Revenue Code of 1977 to National Internal Revenue Code of 1997, or the Tax Code of 1997, and took effect on January 1, 1998. R.A. No. 8428, Section 5 provides: SEC. 5. Transitory Provisions. - Deferment of the Effectivity of the Imposition of VAT on Certain Services. - The effectivity of the imposition of the value-added tax on services as prescribed in Section 17(a) and (b) of Republic Act No. 7616, as amended by Republic Act. 8241, is hereby further deferred until December 31, 1999, unless Congress deems otherwise: Provided, That the said services shall continue to pay the applicable tax prescribed under the present provisions of the National Internal Revenue Code, as amended. R.A. No. 9238, Section 2 provides:

remaining maturities of the instruments from which such receipts are derived, in accordance with the following schedule: maturity period is five (5) years or less....................... 5% maturity period is more than five (5) years..................1% Provided, however, that in case the maturity period is shortened thru pretermination, then the maturity period shall be reckoned to end as of the date of pretermination for purposes of classifying the transaction and the correct rate shall be applied accordingly. Provided, finally, that the generally accepted accounting principles as may be prescribed by the Securities and Exchange Commission for other non-bank financial intermediaries shall likewise be the basis for the calculation of gross receipts. Nothing in this code shall preclude the Commissioner from imposing the same tax herein provided on persons performing similar financing activities." Section 2. Section 3.1. Section 3.1 (e), (f), and (g). General Banking Act, Section 2-D(c); Manual of Regulations for Non-Bank Financial Institutions, 4101Q.1. See pages 7-8 of this Decision. G.R. No. 166786, May 3, 2006, 489 SCRA 147. Commissioner of Internal Revenue v. Trustworthy Pawnshop, Inc., G.R. No. 149834, May 2, 2006, 488 SCRA 538, 545.