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# 33 Tan, Tiong, Tick vs. American Hypothecary Co., G.R. No. L-43682
March 31, 1938 - DINGLASAN
In Re Liquidation of Mercantile Bank of China.
G.R. No. L-43682 March 31, 1938
1.The bank can make use as its own the money deposited.
2.Current account and savings deposts are not preferred credits in case of
insolvency and liquidation.
3.The bank can offset the deposit of the client who has a debt with the bank.
4.Deposits should not earn interest from the time the bank cease to do business.
In the proceedings for the liquidation of the Mercantile Bank of China, the appellant
presented a written claim alleging: that when this bank ceased to operate on
September 19, 1931, his current account in said bank showed a balance of
P9,657.50 in his favor; that on the same date his savings account in the said bank
also showed a balance in his favor of P20,000 plus interest then due amounting to
P194.78; that on the other hand, he owed the bank in the amount of P13,262.58,
the amount of the trust receipts which he signed because of his withdrawal from the
bank of certain merchandise consigned to him without paying the drafts drawn upon
him by the remittors thereof; that the credits thus described should be set off
against each other according to law, and on such set off being made it appeared
that he was still the creditor of the bank in the sum of P16,589.70. And he asked
that the court order the Bank Commissioner to pay him the aforesaid balance and
that the same be declared as preferred credit. The claim was referred to the
commissioner appointed by the court, who at the same time acted as referee, and
this officer recommended that the balance claimed be paid without interest and as
an ordinary credit. The court approved the recommendation and entered judgment
in the accordance therewith. The claimant took an appeal.
1.Whether or not the current account and savings deposits are preferred credits in
cases involving insolvency and liquidation of the bank.
2.Whether or not the deposits could be offset with the debt of the depositor with the
3.Whether or not the deposits should earn interest from the time the bank ceased to

1.The SC ruled that, these deposits are essentially merchantile contracts and
should, therefore, be governed by the provisions of the Code of Commerce. In
accordance with article 309, the so-called current account and savings deposits
have lost the character of deposits properly so-called, and are converted into simple
commercial loans, because the bank disposed of the funds deposited by the
claimant for its ordinary transactions and for the banking business in which it was
engaged. That the bank had the authority of the claimant to make use of the money
deposited on current and savings account is deducible from the fact that the bank
has been paying interest on both deposits, and the claimant himself asks that he be
allowed interest up to the time when the bank ceased its operations. Moreover,
according to section 125 of the Corporation Law and 9 of Act No. 3154, said bank is
authorized to make use of the current account, savings, and fixed deposits provided
it retains in its treasury a certain percentage of the amounts of said deposits.
2.It appears that even after the enactment of the Insolvency Law there was no law
in this jurisdiction governing the order or preference of credits in case of insolvency
and liquidation of a bank. But the Philippine Legislature subsequently enacted Act
No. 3519, amended various sections of the Revised Administrative Code, which took
effect on February 20, 1929, and section 1641 of this latter Code. as amended by
said Act provides:
SEC. 1641. Distribution of assets. In the case of the liquidation of a bank or
banking institution, after payment of the costs of the proceeding, including
reasonable expenses, commissions and fees of the Bank Commissioner, to be
allowed by the court, the Bank Commissioner shall pay the debts of the institution,
under of the court in the order of their legal priority.
From this section 1641 we deduce that the intention of the Philippine Legislature, in
providing that the Bank Commissioner shall pay the debts of the company by virtue
of an order of the court in the order of their priority, was to enforce the provisions of
section 48, 49 and 50 of the Insolvency Law in the sense that they are made
applicable to cases of insolvency or bankruptcy and liquidation of banks. No other
deduction can be made from the phrase in the order of their legal priority
employed by the law, for there being no law establishing any priority in the order of
payment of credits, the legislature could not reasonably refer to any legislation
upon the subject, unless the interpretation above stated is accepted.
Examining now the claims of the appellant, it appears that none of them falls under
any of the cases specified by section 48, 49 and 50 of the Insolvency Law;
wherefore, we conclude that the appellants claims, consisting of his current and
savings account, are not preferred credits.
3. It may be stated as a general rule that when a depositor is indebted to a bank,
and the debts are mutual that is, between the same parties and in the same right

the bank may apply the deposit, or such portion thereof as may be necessary, to
the payment of the debt due it by the depositor, provided there is no express
agreement to the contrary and the deposit is not specially applicable to some other
particular purposes. (7 Am. Jur., par. 629, p.455; United States vs. ButterworthJudson Corp., 267 U.S., 387; National Bank vs. Morgan, 207 Ala.., 65; Bank of
Guntersville vs. Crayter, 199 Ala., 699; Tatum vs. Commercial Bank & T. Co., 193
Ala., 120; Desha Bank & T. Co. vs. Quilling, 118 Ark., 114; Holloway vs. First Nat.
Bank, 45 Idaho, 746; Wyman vs. Ft. Dearborn Nat Bank, 181 Ill., 279; Niblack vs.
Park Nat. Bank, 169 Ill., 517; First Nat Bank vs. Stapf., 165 Ind., 162; Bedford Bank
vs. Acoam, 125 Ind., 584.) The situation referred to by the appellees is inevitable
because section 1639 of the Revised Administrative Code, as amended by Act No.
3519, provides that the Bank Commissioner shall reduce the assets of the bank into
cash and this cannot be done without first liquidating individually the accounts of
the debtors of said bank, and in making this individual liquidation the debtors are
entitled to set off, by way of compensation, their claims against the bank.
4. Upon this point a distinction must be made between the interest which the
deposits should earn from their existence until the bank ceased to operate, and that
which they may earn from the time the banks operations were stopped until the
date of payment of the deposits. As to the first class, it should be paid because such
interest has been earned in the ordinary course of the banks business and before
the latter has been declared in a state or liquidation. Moreover, the bank being
authorized by law to make us of the deposits, with the limitation stated, to invest
the same in its business and other operations, it may be presumed that it bound
itself to pay interest to the depositors as in fact it paid interest prior to the date of
the said claims.
As to the interest which may be charged from the date the bank ceased to do
business because it was declared in a state of liquidation, SC held that the said
interest should not be paid. Under articles 1101 and 1108 of the Civil Code, interest
is allowed by way of indemnity for damages suffered, in the cases wherein the
obligation consists in the payment of money. In view of this, SC held that in the
absence of any express law or any applicable provision of the Code of Commerce, it
is not proper to pay this last kind of interest to the appellant upon his deposits in
the bank, for this would be anomalous and unjustified in a liquidation or insolvency
of a bank. This rule should be strictly observed in the instant case because it is
understood that the assets should be prorated among all the creditors as they are
insufficient to pay all the obligations of the bank.
In view of all the foregoing considerations, SC affirmed the part of the appealed
decision for the reasons stated herein, and it is ordered that the net claim of the
appellant, amounting to P13,611.21, is an ordinary and not a preferred credit, and
that he is entitled to charge interest on said amount up to September 19, 1931.


No 45 ! LOL

A dragnet clause operates as a convenience and accommodation to the borrowers
as it makes available additional funds without their having to execute additional
security documents.

Traders Royal Bank vs Norberto Castaares and Milagros Castaares

G.R. No. 172020 (Dec. 6m, 2010)
Ponente: J. Villarama

Spouses Castanares are exporters of shell crafts and handicrafts. To sustain their
business, they obtained loans and credit accommodations from Traders Royal Bank,
mortgaging their real estates (REMs). As evidenced by a promissory note, petitioner
released only the amount of P35,000.00 although the mortgage deeds indicated the
principal amounts asP 86,000.00 andP 60,000.00. Respondents were further
granted additional funds on various dates under promissory notes they executed in
favor of the petitioner.
Petitioner transferred the amount of P1,150.00 from respondents current account to
their savings account. The loans began to mature and the letters of credit against
which the packing advances were granted started to expire. Petitioner, without
notifying the respondents, applied to the payment of respondents outstanding
obligations the sum of P30,930.49 which was remitted to the respondents thru
telegraphic transfer from AMROBANK, Amsterdam.
For failure of the respondents to pay their outstanding loans with petitioner, the
latter proceeded with the extrajudicial foreclosure of the real estate mortgages.
Thereafter, a Certificate of Sale covering all the mortgaged properties was issued by
in favor of petitioner as the lone bidder.
Petitioner instituted a Civil Case for deficiency judgment, claiming that after
applying the proceeds of foreclosure sale to the total unpaid obligations of
respondents (P200,397.78), respondents were still indebted to petitioner for the
sum ofP83,397.68. Respondents filed a Civil Case for the recovery of the sum
debited from their savings account passbook and the equivalent amount of
telegraphic transfer, and in addition, the damage suffered by the respondents from
letters of credit left un-negotiated.
The RTC consolidated the cases and ruled in favor of the petitioner but was
overturned by the CA.

Whether or not the payment of $4,220.00 by the Bank by way of compensation is
Yes. Agreements for compensation of debts or any obligations when the parties are
mutually creditors and debtors are allowed under Art. 1282 of the Civil Code even
though not all the legal requisites for legal compensation are present. Voluntary or
conventional compensation is not limited to obligations which are not yet due. The
only requirements for conventional compensation are (1) that each of the parties
can fully dispose of the credit he seeks to compensate, and (2) that they agree to
the extinguishment of their mutual credits. Consequently, no error was committed
by the trial court in holding that petitioner validly applied, by way of compensation,
the $4,220.00 telegraphic transfer remitted by respondents foreign client through
the petitioner.

COL. FRANCISCO DELA MERCED, substituted by his heirs namely, LUIS
MANLONGAT, Respondents.
This case involves five registered parcels of land located within the Antonio
Subdivision, Pasig City Lots 6, 7, 8, and 10 of Block 2 and Lot 8 of Block 8 (subject
properties). These lots were originally owned by, and titled in the name of, Jose C.
Zulueta (Zulueta), as evidenced by Transfer Certificate of Title (TCT) No. 26105
which contains several lots other than the subject properties within the Antonio
Later, the Zulueta spouses mortgaged several lots contained in TCT No. 26105 to
the GSIS, which eventually foreclosed on the mortgaged properties, including the
subject properties. Upon consolidation of GSISs ownership, TCT No. 26105 in
Zuluetas name was cancelled, and TCT No. 23554 was issued in GSISs name.
Upon learning of the foreclosure, petitioners predecessor, Francisco Dela Merced
(Dela Merced), later on substituted by his heirs, filed a complaint praying for the
nullity of the GSIS foreclosure on the subject properties (Lots 6, 7, 8, and 10 of Block

2 and Lot 8 of Block 8) on the ground that he, not the Zuluetas, was the owner of
these lots at the time of the foreclosure. Dela Merced also impleaded Victor and
Milagros Manlongat, who were claiming Lot 6, Block 2 by virtue of a sale executed
by the GSIS in their daughters (Elizabeth Manlongat) favor. Dela Merced argued
that, due to the nullity of GSISs foreclosure over the subject properties, it had no
ownership right that could be transferred to Elizabeth Manlongat.
After a protracted litigation, the SC rendered a Decision in the petitioners favor and
nullified GSISs foreclosure of the subject properties because these lots were never
part of its mortgage agreement with the Zulueta spouses. Pursuant to the finality of
the Decision, petitioners filed a Motion for Execution which GSIS opposed on the
basis of Section 39 of the GSIS Act of 1997 (RA 8291 which allegedly exempts GSIS
funds and properties from attachment, garnishment, execution, levy and other court
processes. A writ of execution was finally issued, however, first by the RTC and then
by the CA. The GSIS filed a petition for review before the SC which was denied by
the latter.
After the resolution of the issue of GSISs exemption, petitioners encountered more
problems with the execution of the Decision. According to the RD of Pasig City,
Policarpio Espenesin, he could not cancel the titles of GSIS over Lots 7 and 8
because it no longer had title over these two lots and had already conveyed the
same to two other persons. Hence, the RD claimed that the writ of execution must
first be modified to include the cancellation of derivative titles of the GSIS title.
I. Whether the GSIS can still raise the issue of exemption
II. Whether a final and executory judgment against GSIS and Manlongat can be
enforced against their successors-in-interest or holders of derivative titles
III. Whether an order to cancel title to a particular property includes an order to
provide technical descriptions and segregate it from its mother title
(1) The issue of GSISs alleged exemption under RA 8291 had been finally
decided against when this Court denied GSISs petition for review. GSISs
attempt to resurrect the same issue by interjecting the same in this proceeding is
barred by the principle of "law of the case," which states that "determinations of
questions of law will generally be held to govern a case throughout all its
subsequent stages where such determination has already been made on a prior
appeal to a court of last resort."
(2) A notice of lis pendens is an announcement to the whole world that a
particular real property is in litigation, serving as a warning that one who
acquires an interest over said property does so at his own risk, or that he

gambles on the result of the litigation over the said property. It is not
disputed that petitioners caused the annotation of lis pendens on TCT No. 23554 of
the lots in question. The current holders of the derivative titles to these lots were
aware of such annotation when the individual titles were issued to them.
Ineluctably, both were bound by the outcome of the litigation.
(3) The order contained in the Decision in G.R. No. 140398 is for the RD to
cancel GSISs titles over Lot 10, Block 2 and Lot 8, Block 8, inter
alia. Whether these titles are individual or contained in a mother title is of no
consequence. The RD has to cause their cancellation. If the cancellation can only be
carried out by requiring GSIS or the Bureau of Lands to provide the necessary
information, then they can be compelled to do so. Otherwise, the Courts decision
would be rendered inefficacious, and GSIS would retain ostensible ownership over
the lots by the simple expedience that they are included in a mother title, instead of
individual titles. That result is manifestly contrary to the Courts ruling and would
subvert the very purpose of bringing this case for a complete resolution.