RA 8791

Deposits, Loans, and Other Operations

SECOND DIVISION directly or indirectly, for himself or

as the representative of his other
JOSE C. GO, G.R. related companies, the deposits or
Petition No. 178429 funds of the said banking
er, institution and/or become a
Present: guarantor, indorser or obligor for
loans from the said bank to others, by
QUISUMBING, then and there using said borrowed
J., Chairperson, deposits/funds of the said bank in
*CARPIO, facilitating and granting and/or
CARPIO caused the facilitating and granting
MORALES, of credit lines/loans and, among
- versus -
BRION, and others, to the New Zealand Accounts
ABAD, JJ. loans in the total amount of TWO
BILLION AND SEVEN HUNDRED FIFTY-
FOUR MILLION NINE HUNDRED
Promulgated: FIVE THOUSAND AND EIGHT
HUNDRED FIFTY-SEVEN AND 0/100
October 23, PESOS, Philippine Currency, said
2009 accused knowing fully well that the
same has been done by him without
BANGKO SENTRAL NG PILIPINAS, the written approval of the majority
of the Board of Directors of said
Respondent. Orient Bank and which approval the
said accused deliberately failed to
x ----------------------------------------------------------------------- obtain and enter the same upon the
-------------------x records of said banking institution and
to transmit a copy of which to the
supervising department of the said
bank, as required by the General
Banking Act.
DECISION
CONTRARY TO LAW.
[Emphasis supplied.]

On May 28, 2001, Go pleaded not guilty to the offense

BRION, J.: charged.

After the arraignment, both the prosecution and

Through the present petition for review
on certiorari,[1] petitioner Jose C. Go (Go) assails the October
26, 2006 decision[2] of the Court of Appeals (CA) in CA-G.R. SP
No. 79149, as well as its June 4, 2007 resolution.[3] The CA
decision and resolution annulled and set aside the May 20,
2003[4] and June 30, 2003[5] orders of the Regional Trial Court
(RTC), Branch 26, Manila which granted Gos motion to quash
the Information filed against him.
THE FACTS
accused Go took part in the pre-trial conference where the
marking of the voluminous evidence for the parties was
accomplished. After the completion of the marking, the trial
court ordered the parties to proceed to trial on the merits.
Before the trial could commence, however, Go filed
on February 26, 2003[7] a motion to quash the Information,
which motion Go amended on March 1, 2003.[8] Go claimed
that the Information was defective, as the facts charged
therein do not constitute an offense under Section 83 of
RA 337 which states:

No director or officer of any banking

On August 20, 1999, an Information[6] for violation of Section institution shall either directly or
83 of Republic Act No. 337 (RA 337) or the General Banking indirectly, for himself or as the
Act, as amended by Presidential Decree No. 1795, was filed representative or agent of
against Go before the RTC. The charge reads: another, borrow any of the deposits of
funds of such banks, nor shall
That on or about and during he become a guarantor, indorser, or
the period comprised between June 27, surety for loans from such bank, to
1996 and September 15, 1997, others, or in any manner be an
inclusive, in the City of Manila, obligor for money borrowed from the
Philippines, the said accused, being bank or loaned by it, except with the
then the Director and the President written approval of the majority of the
and Chief Executive Officer of the directors of the bank, excluding the
Orient Commercial Banking director concerned. Any such approval
Corporation (Orient Bank), a shall be entered upon the records of the
commercial banking institution created, corporation and a copy of such entry
organized and existing under shall be transmitted forthwith to the
Philippines laws, with its main branch appropriate supervising
located at C.M. Recto Avenue, this City, department. The office of any director
and taking advantage of his position as or officer of a bank who violates the
such officer/director of the said bank, provisions of this section shall
did then and there wilfully, unlawfully immediately become vacant and the
and knowingly borrow, either director or officer shall be punished by

Page 1 of 48
RA 8791
Deposits, Loans, and Other Operations
imprisonment of not less than one year
nor more than ten years and by a fine of
not less than one thousand nor more
than ten thousand pesos.
The Monetary Board may regulate the
amount of credit accommodations that
may be extended, directly or indirectly,
by banking institutions to their
directors, officers, or
stockholders. However, the outstanding
credit accommodations which a bank
may extend to each of its stockholders
owning two percent (2%) or more of the
subscribed capital stock, its directors, or
its officers, shall be limited to an amount
equivalent to the respective outstanding
deposits and book value of the paid-in
capital contribution in the
bank. Provided, however, that loans and
advances to officers in the form of fringe
benefits granted in accordance with
rules and regulations as may be
prescribed by Monetary Board shall not
be subject to the preceding limitation.
(As amended by PD 1795)
In addition to the conditions established
in the preceding paragraph, no director
or a building and loan association shall
engage in any of the operations
mentioned in said paragraphs, except
upon the pledge of shares of the
association having a total withdrawal
value greater than the amount
borrowed. (As amended by PD 1795)
In support of his motion to quash, Go averred that
based on the facts alleged in the Information, he was being
prosecuted for borrowing the deposits or funds of the Orient
Bank and/or acting as a guarantor, indorser or obligor for
the banks loans to other persons. The use of the word and/or
meant that he was charged for being either a borrower or a
guarantor, or for being both a borrower and guarantor. Go
claimed that the charge was not only vague, but also did not
constitute an offense. He posited that Section 83 of RA 337
penalized only directors and officers of banking institutions
who acted either as borrower or as guarantor, but not as both.
Go further pointed out that the Information failed
to state that his alleged act of borrowing and/or guarantying
was not among the exceptions provided for in the
law. According to Go, the second paragraph of Section 83
allowed banks to extend credit accommodations to their
directors, officers, and stockholders, provided it is limited to
an amount equivalent to the respective outstanding deposits
and book value of the paid-in capital contribution in the
bank. Extending credit accommodations to bank directors,
officers, and stockholders is not per se prohibited, unless the
amount exceeds the legal limit. Since the Information failed to
state that the amount he purportedly borrowed and/or
guarantied was beyond the limit set by law, Go insisted that
the acts so charged did not constitute an offense.
Finding Gos contentions persuasive, the RTC
granted Gos motion to quash the Information on May 20,
2003. It denied on June 30, 2003 the motion for
reconsideration filed by the prosecution.
The prosecution did not accept the RTC ruling and
filed a petition for certiorari to question it before the CA. The
Information, the prosecution claimed, was sufficient. The
word and/or did not materially affect the validity of the
Information, as it merely stated a mode of committing the
Page 2 of 48
crime penalized under Section 83 of RA 337. Moreover, the
prosecution asserted that the second paragraph of Section 83
(referring to the credit accommodation limit) cannot be
interpreted as an exception to what the first paragraph
provided. The second paragraph only sets borrowing limits
that, if violated, render the bank, not the director-borrower,
liable. A violation of the second paragraph of Section 83 under
which Go is being prosecuted is therefore separate and
distinct from a violation of the first paragraph. Thus, the
prosecution prayed that the orders of the RTC quashing the
Information be set aside and the criminal case against Go be
reinstated.
On October 26, 2006, the CA rendered the assailed
decision granting the prosecutions petition
for certiorari.[9] The CA declared that the RTC misread the law
when it decided to quash the Information against Go. It
explained that the allegation that Go acted either as a
borrower or a guarantor or as both borrower and guarantor
merely set forth the different modes by which the offense was
committed. It did not necessarily mean that Go acted both as
borrower and guarantor for the same loan at the same time. It
agreed with the prosecutions stand that the second
paragraph of Section 83 of RA 337 is not an exception to the
first paragraph. Thus, the failure of the Information to state
that the amount of the loan Go borrowed or guaranteed
exceeded the legal limits was, to the CA, an irrelevant
issue. For these reasons, the CA annulled and set aside the
RTCs orders and ordered the reinstatement of the criminal
charge against Go. After the CAs denial of his motion for
reconsideration,[10]Go filed the present appeal by certiorari.
THE PETITION
In his petition, Go alleges that the appellate court
legally erred in overturning the trial courts orders. He insists
that the Information failed to allege the acts or omissions
complained of with sufficient particularity to enable him to
know the offense being charged; to allow him to properly
prepare his defense; and likewise to allow the court to render
proper judgment.
Repeating his arguments in his motion to quash, Go
reads Section 83 of RA 337 as penalizing a director or officer
of a banking institution for either borrowing the deposits or
funds of the bank, or guaranteeing or indorsing loans to
others, but not for assuming both capacities. He claimed that
the prosecutions shotgun approach in alleging that he acted
as borrower and/or guarantor rendered the Information
highly defective for failure to specify with certainty the
specific act or omission complained of. To petitioner Go, the
prosecutions approach was a clear violation of his
constitutional right to be informed of the nature and cause of
the accusation against him.
Additionally, Go reiterates his claim that credit
accommodations by banks to their directors and officers are
legal and valid, provided that these are limited to their
outstanding deposits and book value of the paid-in capital
contribution in the bank.The failure to state that he borrowed
deposits and/or guaranteed loans beyond this limit rendered
the Information defective. He thus asks the Court to reverse
the CA decision to reinstate the criminal charge.
In its Comment,[11] the prosecution raises the same
defenses against Gos contentions. It insists on the sufficiency
of the allegations in the Information and prays for the denial
of Gos petition.
THE COURTS RULING
The Court does not find the petition meritorious and
accordingly denies it.
RA 8791
Deposits, Loans, and Other Operations
The Accuseds Right to be Informed
Under the Constitution, a person who stands
charged of a criminal offense has the right to be informed of
the nature and cause of the accusation against him. [12] The
Rules of Court, in implementing the right, specifically require
that the acts or omissions complained of as constituting the
offense, including the qualifying and aggravating
circumstances, must be stated in ordinary and concise
language, not necessarily in the language used in the statute,
but in terms sufficient to enable a person of common
understanding to know what offense is being charged and the
attendant qualifying and aggravating circumstances present,
so that the accused can properly defend himself and the court
can pronounce judgment.[13] To broaden the scope of the
right, the Rules authorize the quashal, upon motion of the
accused, of an Information that fails to allege the acts
constituting the offense.[14] Jurisprudence has laid down the
fundamental test in appreciating a motion to quash an
Information grounded on the insufficiency of the facts alleged
therein. We stated in People v. Romualdez[15] that:
The determinative test in appreciating a
motion to quash xxx is the sufficiency of
the averments in the information, that
is, whether the facts alleged, if
hypothetically admitted, would
establish the essential elements of the
offense as defined by law without
considering matters aliunde. As Section
6, Rule 110 of the Rules of Criminal
Procedure requires, the information
only needs to state the ultimate facts;
the evidentiary and other details can
be provided during the trial.
To restate the rule, an Information
only needs to state the ultimate facts
constituting the offense, not the finer
details of why and how the illegal acts
alleged amounted to undue injury or
damage matters that are appropriate
for the trial. [Emphasis supplied]
The facts and circumstances necessary to be included in the
Information are determined by reference to the definition
and elements of the specific crimes. The Information must
allege clearly and accurately the elements of the crime
charged.[16]
Elements of Violation of
Section 83 of RA 337
Under Section 83, RA 337, the following elements must be
present to constitute a violation of its first paragraph:
1. the offender is a director or officer of any banking
institution;
2. the offender, either directly or indirectly, for
himself or as representative or agent of another,
performs any of the following acts:
a. he borrows any of the deposits or funds
of such bank; or
b. he becomes a guarantor, indorser, or
surety for loans from such bank to
others, or
c. he becomes in any manner an obligor
for money borrowed from bank or
loaned by it;
Page 3 of 48
3. the offender has performed any of such acts without
the written approval of the majority of the
directors of the bank, excluding the offender, as the
director concerned.
A simple reading of the above elements easily
rejects Gos contention that the law penalizes a bank director
or officer only either for borrowing the banks deposits or
funds or for guarantying loans by the bank, but not for acting
in both capacities.The essence of the crime is becoming an
obligor of the bank without securing the necessary
written approval of the majority of the banks directors.
The second element merely lists down the various
modes of committing the offense. The third mode, by
declaring that [no director or officer of any banking institution
shall xxx] in any manner be an obligor for money borrowed
from the bank or loaned by it, in fact serves a catch-all
phrase that covers any situation when a director or officer of
the bank becomes its obligor. The prohibition is directed
against a bank director or officer who becomes in any
manner an obligor for money borrowed from or loaned
by the bank without the written approval of the majority
of the banks board of directors. To make a distinction
between the act of borrowing and guarantying is therefore
unnecessary because in either situation, the director or
officer concerned becomes an obligor of the bank against
whom the obligation is juridically demandable.
The language of the law is broad enough to
encompass either act of borrowing or guaranteeing, or
both. While the first paragraph of Section 83 is penal in
nature, and by principle should be strictly construed in favor
of the accused, the Court is unwilling to adopt a liberal
construction that would defeat the legislatures intent in
enacting the statute. The objective of the law should allow for
a reasonable flexibility in its construction. Section 83 of RA
337, as well as other banking laws adopting the same
prohibition,[17] was enacted to ensure that loans by banks and
similar financial institutions to their own directors, officers,
and stockholders are above board.[18] Banks were not created
for the benefit of their directors and officers; they cannot use
the assets of the bank for their own benefit, except as may be
permitted by law. Congress has thus deemed it essential to
impose restrictions on borrowings by bank directors and
officers in order to protect the public, especially the
depositors.[19]Hence, when the law prohibits directors and
officers of banking institutions from becoming in any manner
an obligor of the bank (unless with the approval of the board),
the terms of the prohibition shall be the standards to be
applied to directors transactions such as those involved in the
present case.
Credit accommodation limit is not an
exception nor is it an element of the
offense
Contrary to Gos claims, the second paragraph of
Section 83, RA 337 does not provide for an exception to a
violation of the first paragraph thereof, nor does it constitute
as an element of the offense charged. Section 83 of RA 337
actually imposes three restrictions: approval, reportorial, and
ceiling requirements.
The approval requirement (found in the first
sentence of the first paragraph of the law) refers to the
written approval of the majority of the banks board of
directors required before bank directors and officers can in
any manner be an obligor for money borrowed from or
loaned by the bank. Failure to secure the approval renders the
bank director or officer concerned liable for prosecution and,
RA 8791
Deposits, Loans, and Other Operations

upon conviction, subjects him to the penalty provided in the

third sentence of first paragraph of Section 83.
The reportorial requirement, on the other hand,
mandates that any such approval should be entered upon the
records of the corporation, and a copy of the entry be
transmitted to the appropriate supervising department. The
reportorial requirement is addressed to the bank itself,
which, upon its failure to do so, subjects it to quo
warranto proceedings under Section 87 of RA 337.[20]
WHEREFORE, we DENY the petitioners petition for review
on certiorari and AFFIRM the decision of the Court of
Appeals in CA-G.R. SP No. 79149, promulgated on October 26,
2006, as well as its resolution of June 4, 2007. The Regional
Trial Court, Branch 26, Manila is directed to PROCEED with
the hearing of Criminal Case No. 99-178551. Costs against the
petitioner.
SO ORDERED.

The ceiling requirement under the second

paragraph of Section 83 regulates the amount of credit
accommodations that banks may extend to their directors or
officers by limiting these to an amount equivalent to the
respective outstanding deposits and book value of the paid-in
capital contribution in the bank. Again, this is a requirement
directed at the bank. In this light, a prosecution for violation
of the first paragraph of Section 83, such as the one involved
here, does not require an allegation that the loan exceeded the
legal limit. Even if the loan involved is below the legal limit, a
written approval by the majority of the banks directors is still
required; otherwise, the bank director or officer who
becomes an obligor of the bank is liable. Compliance with the
ceiling requirement does not dispense with the approval
requirement.

Evidently, the failure to observe the three

requirements under Section 83 paves the way for the
prosecution of three different offenses, each with its own set
of elements. A successful indictment for failing to comply with
the approval requirement will not necessitate proof that the
other two were likewise not observed.

Rules of Court allow amendment of

insufficient Information
Assuming that the facts charged in the Information do not
constitute an offense, we find it erroneous for the RTC to
immediately order the dismissal of the Information, without
giving the prosecution a chance to amend it. Section 4 of Rule
117 states:

SEC. 4. Amendment of complaint or

information.If the motion to quash is based
on an alleged defect of the complaint or
information which can be cured by
amendment, the court shall order that an
amendment be made.

If it is based on the ground that the

facts charged do not constitute an
offense, the prosecution shall be given by
the court an opportunity to correct the
defect by amendment. The motion shall
be granted if the prosecution fails to
make the amendment, or the complaint
or information still suffers from the same
defect despite the amendment. [Emphasis
supplied]

Although an Information may be defective because the facts

charged do not constitute an offense, the dismissal of the case
will not necessarily follow. The Rules specifically require that
the prosecution should be given a chance to correct the
defect; the court can order the dismissal only upon the
prosecutions failure to do so. The RTCs failure to provide the
prosecution this opportunity twice[21] constitutes an arbitrary
exercise of power that was correctly addressed by the CA
through the certioraripetition. This defect in the RTCs action
on the case, while not central to the issue before us,
strengthens our conclusion that this criminal case should be
resolved through full-blown trial on the merits.

Page 4 of 48
RA 8791
Deposits, Loans, and Other Operations

HILARIO P. SORIANO, G.R. No. 162336 received the proceeds of the loan; and that the P8 million loan had
never been authorized by RBSM's Board of Directors and no report
Petitioner, thereof had ever been submitted to the Department of Rural Banks,
Supervision and Examination Sector of the BSP. The letter of the OSI,
which was not subscribed under oath, ended with a request that a
preliminary investigation be conducted and the corresponding
- versus - Present:
criminal charges be filed against petitioner at his last known address.

Acting on the letter-request and its annexes, State Prosecutor Albert

PEOPLE OF CARPIO, J., Chairperson, R. Fonacier proceeded with the preliminary investigation. He issued a
THE PHILIPPINES, subpoena with the witnesses affidavits and supporting documents
attached, and required petitioner to file his counter-affidavit. In due
BANGKO SENTRAL NG CORONA,* course, the investigating officer issued a Resolution finding probable
cause and correspondingly filed two separate informations against
PILIPINAS (BSP), BRION, petitioner before the Regional Trial Court (RTC) of Malolos,
PHILIPPINE Bulacan.[13]

DEPOSIT INSURANCE DEL CASTILLO, and The first Information,[14] dated November 14, 2000 and docketed as
Criminal Case No. 237-M-2001, was for estafa through falsification of
CORPORATION (PDIC), PEREZ, JJ. commercial documents, under Article 315, paragraph 1(b), of the
PUBLIC Revised Penal Code (RPC), in relation to Article 172 of the RPC and PD
1689. It basically alleged that petitioner and his co-accused, in abuse
PROSECUTOR ANTONIO
of the confidence reposed in them as RBSM officers, caused the
C.
falsification of a number of loan documents, making it appear that one
BUAN, and STATE Enrico Carlos filled up the same, and thereby succeeded in securing a
loan and converting the loan proceeds for their personal gain and
PROSECUTOR ALBERTO Promulgated: benefit.[15] The information reads:
R.
That in or about the month of
FONACIER, April, 1997, and thereafter, in San Miguel,
Bulacan, and within the jurisdiction of this
Respondents.[1] February 1, 2010 Honorable Court, the said accused HILARIO
P. SORIANO and ROSALINDA ILAGAN, as
x-------------------------------------------------------- principals by direct participation, with
-----------x unfaithfulness or abuse of confidence and
taking advantage of their position as
President of the Rural Bank of San Miguel
(Bulacan), Inc. and Branch Manager of the
DECISION Rural Bank of San Miguel San Miguel Branch
[sic], a duly organized banking institution
DEL CASTILLO, J.: under Philippine Laws, conspiring,
confederating and mutually helping one
another, did then and there, willfully and
A bank officer violates the DOSRI[2] law when he acquires bank funds feloniously falsify loan documents consisting
for his personal benefit, even if such acquisition was facilitated by a of undated loan application/information
fraudulent loan application. Directors, officers, stockholders, and their sheet, credit proposal dated April 14, 1997,
related interests cannot be allowed to interpose the fraudulent nature credit proposal dated April 22, 1997, credit
of the loan as a defense to escape culpability for their circumvention investigation report dated April 15, 1997,
of Section 83 of Republic Act (RA) No. 337.[3] promissory note dated April 23, 1997,
Before us is a Petition for Review on Certiorari[4] under disclosure statement on loan/credit
Rule 45 of the Rules of Court, assailing the September 26, transaction dated April 23, 1997, and other
2003 Decision[5] and the February 5, 2004 Resolution[6] of the Court related documents, by making it appear that
of Appeals (CA) in CA-G.R. SP No. 67657. The challenged Decision one Enrico Carlos filled up the
disposed as follows: application/information sheet and filed the
WHEREFORE, premises aforementioned loan documents when in
considered, the instant petition for certiorari truth and in fact Enrico Carlos did not
is hereby DENIED.[7] participate in the execution of said loan
documents and that by virtue of said
Factual Antecedents falsification and with deceit and intent to
cause damage, the accused succeeded in
Sometime in 2000, the Office of Special Investigation (OSI) of securing a loan in the amount of eight million
the Bangko Sentral ng Pilipinas (BSP), through its pesos (PhP8,000,000.00) from the Rural
officers,[8] transmitted a letter[9] dated March 27, 2000 to Jovencito Bank of San Miguel San Ildefonso branch in
Zuo, Chief State Prosecutor of the Department of Justice (DOJ). The the name of Enrico Carlos which amount of
letter attached as annexes five affidavits,[10] which would allegedly PhP8 million representing the loan proceeds
serve as bases for filing criminal charges for Estafa thru Falsification the accused thereafter converted the same
of Commercial Documents, in relation to Presidential Decree (PD) No. amount to their own personal gain and
1689,[11] and for Violation of Section 83 of RA 337, as amended by PD benefit, to the damage and prejudice of the
1795,[12] against, inter alia, petitioner herein Hilario P. Soriano. These Rural Bank of San Miguel San Ildefonso
five affidavits, along with other documents, stated that spouses Enrico branch, its creditors, the Bangko Sentral ng
and Amalia Carlos appeared to have an outstanding loan of P8 million Pilipinas, and the Philippine Deposit
with the Rural Bank of San Miguel (Bulacan), Inc. (RBSM), but had Insurance Corporation.
never applied for nor received such loan; that it was petitioner, who
was then president of RBSM, who had ordered, facilitated, and CONTRARY TO LAW.[16]

Page 5 of 48
RA 8791
Deposits, Loans, and Other Operations
The other Information[17] dated November 10, 2000 and docketed as
Criminal Case No. 238-M-2001, was for violation of Section 83 of RA
337, as amended by PD 1795. The said provision refers to the
prohibition against the so-called DOSRI loans. The information
alleged that, in his capacity as President of RBSM, petitioner indirectly
secured an P8 million loan with RBSM, for his personal use and
benefit, without the written consent and approval of the bank's Board
of Directors, without entering the said transaction in the bank's
records, and without transmitting a copy of the transaction to the
supervising department of the bank. His ruse was facilitated by
placing the loan in the name of an unsuspecting RBSM depositor, one
Enrico Carlos.[18] The information reads:
That in or about the month of
April, 1997, and thereafter, and within the
jurisdiction of this Honorable Court, the said
accused, in his capacity as President of the
Rural Bank of San Miguel (Bulacan), Inc., did
then and there, willfully and feloniously
indirectly borrow or secure a loan with the
Rural Bank of San Miguel San Ildefonso
branch, a domestic rural banking institution
created, organized and existing under
Philippine laws, amounting to eight million
pesos (PhP8,000,000.00), knowing fully well
that the same has been done by him without
the written consent and approval of the
majority of the board of directors of the said
bank, and which consent and approval the
said accused deliberately failed to obtain and
enter the same upon the records of said
banking institution and to transmit a copy
thereof to the supervising department of the
said bank, as required by the General Banking
Act, by using the name of one depositor
Enrico Carlos of San Miguel, Bulacan, the
latter having no knowledge of the said loan,
and one in possession of the said amount of
eight million pesos (PhP8,000,000.00),
accused converted the same to his own
personal use and benefit, in flagrant violation
of the said law.
CONTRARY TO LAW.[19]
Both cases were raffled to Branch 79 of the RTC of
Malolos, Bulacan.[20]
On June 8, 2001, petitioner moved to quash[21] these informations on
two grounds: that the court had no jurisdiction over the offense
charged, and that the facts charged do not constitute an offense.
On the first ground, petitioner argued that the letter transmitted by
the BSP to the DOJ constituted the complaint and hence was defective
for failure to comply with the mandatory requirements of Section
3(a), Rule 112 of the Rules of Court, such as the statement of address
of petitioner and oath and subscription.[22] Moreover, petitioner
argued that the officers of OSI, who were the signatories to the letter-
complaint, were not authorized by the BSP Governor, much less by
the Monetary Board, to file the complaint. According to petitioner, this
alleged fatal oversight violated Section 18, pars. (c) and (d) of the New
Central Bank Act (RA 7653).
On the second ground, petitioner contended that the commission of
estafa under paragraph 1(b) of Article 315 of the RPC is inherently
incompatible with the violation of DOSRI law (as set out in Section
83[23] of RA 337, as amended by PD 1795),[24] hence a person cannot
be charged for both offenses. He argued that a violation of DOSRI law
requires the offender to obtain a loan from his bank, without
complying with procedural, reportorial, or ceiling requirements. On
the other hand, estafa under par. 1(b), Article 315 of the RPC requires
the offender to misappropriate or convert something that he holds in
trust, or on commission, or for administration, or under any other
obligation involving the duty to return the same.[25]
Page 6 of 48
Essentially, the petitioner theorized that the
characterization of possession is different in the two offenses. If
petitioner acquired the loan as DOSRI, he owned the loaned money
and therefore, cannot misappropriate or convert it as contemplated
in the offense of estafa. Conversely, if petitioner committed estafa,
then he merely held the money in trust for someone else and
therefore, did not acquire a loan in violation of DOSRI rules.
Ruling of the Regional Trial Court
In an Order[26] dated August 8, 2001, the trial court denied petitioner's
Motion to Quash for lack of merit. The lower court agreed with the
prosecution that the assailed OSI letter was not the complaint-
affidavit itself; thus, it need not comply with the requirements under
the Rules of Court. The trial court held that the affidavits, which were
attached to the OSI letter, comprised the complaint-affidavit in the
case. Since these affidavits were duly subscribed and sworn to before
a notary public, there was adequate compliance with the Rules. The
trial court further held that the two offenses were separate and
distinct violations, hence the prosecution of one did not pose a bar to
the other.[27]
Petitioners Motion for Reconsideration was likewise
denied in an Order dated September 5, 2001.[28]
Aggrieved, petitioner filed a Petition for Certiorari[29] with the CA,
reiterating his arguments before the trial court.
Ruling of the Court of Appeals
The CA denied the petition on both issues presented by petitioner.
On the first issue, the CA determined that the BSP letter, which
petitioner characterized to be a fatally infirm complaint, was not
actually a complaint, but a transmittal or cover letter only. This
transmittal letter merely contained a summary of the affidavits which
were attached to it. It did not contain any averment of personal
knowledge of the events and transactions that constitute the
elements of the offenses charged. Being a mere transmittal letter, it
need not comply with the requirements of Section 3(a) of Rule 112 of
the Rules of Court.[30]
The CA further determined that the five affidavits attached to the
transmittal letter should be considered as the complaint-affidavits
that charged petitioner with violation of Section 83 of RA 337 and for
Estafa thru Falsification of Commercial Documents. These complaint-
affidavits complied with the mandatory requirements set out in the
Rules of Court they were subscribed and sworn to before a notary
public and subsequently certified by State Prosecutor Fonacier, who
personally examined the affiants and was convinced that the affiants
fully understood their sworn statements.[31]
Anent the second ground, the CA found no merit in petitioner's
argument that the violation of the DOSRI law and the commission of
estafa thru falsification of commercial documents are inherently
inconsistent with each other. It explained that the test in considering
a motion to quash on the ground that the facts charged do not
constitute an offense, is whether the facts alleged, when
hypothetically admitted, constitute the elements of the offense
charged. The appellate court held that this test was sufficiently met
because the allegations in the assailed informations, when
hypothetically admitted, clearly constitute the elements of Estafa thru
Falsification of Commercial Documents and Violation of DOSRI law.[32]
Petitioners Motion for Reconsideration[33] was likewise denied for
lack of merit.
Hence, this petition.
Issues
Restated, petitioner raises the following issues[34] for our
consideration:
RA 8791
Deposits, Loans, and Other Operations

I BSP letter subject of this case are similar in the sense that they are all
Whether the complaint complied with the
mandatory requirements provided under
Section 3(a), Rule 112 of the Rules of Court
and Section 18, paragraphs (c) and (d) of RA
7653.
II
Whether a loan transaction within the ambit
of the DOSRI law (violation of Section 83 of
RA 337, as amended) could also be the
subject of Estafa under Article 315 (1) (b) of
the Revised Penal Code.
III
Is a petition for certiorari under Rule 65 the
proper remedy against an Order denying a
Motion to Quash?
IV
Whether petitioner is entitled to a writ of
injunction.
signed by the OSI officers of the BSP, they were not sworn to by the
said officers, they all contained summaries of their attached affidavits,
and they all requested the conduct of a preliminary investigation and
the filing of corresponding criminal charges against petitioner
Soriano. Thus, the principle of stare decisis dictates that the ruling
in Soriano v. Hon. Casanova be applied in the instant case once a
question of law has been examined and decided, it should be deemed
settled and closed to further argument.[40]
We held in Soriano v. Hon. Casanova, after a close scrutiny
of the letters transmitted by the BSP to the DOJ, that these were not
intended to be the complaint, as envisioned under the Rules. They did
not contain averments of personal knowledge of the events and
transactions constitutive of any offense. The letters merely
transmitted for preliminary investigation the affidavits of people who
had personal knowledge of the acts of petitioner. We ruled that these
affidavits, not the letters transmitting them, initiated the preliminary
investigation. Since these affidavits were subscribed under oath by
the witnesses who executed them before a notary public, then there
was substantial compliance with Section 3(a), Rule 112 of the Rules of
Court.

Our Ruling
The petition lacks merit.
First Issue:
Whether the complaint complied with the
mandatory requirements provided
under Section 3(a), Rule 112 of the Rules
of Court and Section 18, paragraphs (c)
and (d) of
Republic Act No. 7653
Petitioner moved to withdraw the first issue
from the instant petition
On March 5, 2007, the Court noted[35] petitioner's Manifestation and
Motion for Partial Withdrawal of the Petition[36] dated February 7,
2007. In the said motion, petitioner informed the Court of the
promulgation of a Decision entitled Soriano v. Hon. Casanova,[37]which
also involved petitioner and similar BSP letters to the DOJ. According
to petitioner, the said Decision allegedly ruled squarely on the nature
of the BSP letters and the validity of the sworn affidavits attached
thereto. For this reason, petitioner moved for the partial withdrawal
of the instant petition insofar as it involved the issue of whether or not
a court can legally acquire jurisdiction over a complaint which failed
to comply with the mandatory requirements provided under Section
3(a), Rule 112 of the Rules of Court and Section 18, paragraphs (c) and
(d) of RA 7653.[38]
Given that the case had already been submitted for resolution of the
Court when petitioner filed his latest motion, and that all respondents
had presented their positions and arguments on the first issue, the
Court deems it proper to rule on the same.
In Soriano v. Hon. Casanova, the Court held
that the affidavits attached to the BSP
transmittal letter complied with the
mandatory requirements under the Rules of
Court.
To be sure, the BSP letters involved in Soriano v. Hon.
Casanova[39] are not the same as the BSP letter involved in the instant
case. However, the BSP letters in Soriano v. Hon. Casanova and the
Anent the contention that there was no authority from the BSP
Governor or the Monetary Board to file a criminal case against
Soriano, we held that the requirements of Section 18, paragraphs (c)
and (d) of RA 7653 did not apply because the BSP did not institute the
complaint but merely transmitted the affidavits of the complainants
to the DOJ.
We further held that since the offenses for which Soriano was charged
were public crimes, authority holds that it can be initiated by any
competent person with personal knowledge of the acts committed by
the offender. Thus, the witnesses who executed the affidavits clearly
fell within the purview of any competent person who may institute
the complaint for a public crime.
The ruling in Soriano v. Hon. Casanova has been adopted
and elaborated upon in the recent case of Santos-Concio v. Department
of Justice.[41] Instead of a transmittal letter from the BSP, the Court
in Santos-Concio was faced with an NBI-NCR Report, likewise with
affidavits of witnesses as attachments. Ruling on the validity of the
witnesses sworn affidavits as bases for a preliminary investigation,
we held:
The Court is not unaware of the
practice of incorporating all allegations in one
document denominated as complaint-
affidavit. It does not pronounce strict
adherence to only one approach, however,
for there are cases where the extent of ones
personal knowledge may not cover the entire
gamut of details material to the alleged
offense. The private offended party or
relative of the deceased may not even have
witnessed the fatality, in which case the peace
officer or law enforcer has to rely chiefly on
affidavits of witnesses. The Rules do not in
fact preclude the attachment of a referral or
transmittal letter similar to that of the NBI-
NCR. Thus, in Soriano v. Casanova, the Court
held:
A close
scrutiny of the letters
transmitted by the
BSP and PDIC to the
DOJ shows that
these were not inten
ded to
be the complaint
envisioned under the
Rules. It may be
clearly inferred from
the tenor of the

Page 7 of 48
RA 8791
Deposits, Loans, and Other Operations

letters that the person. The crime of

officers merely estafa is a public
intended to transmit crime which can be
the affidavits of the initiated by any
bank employees to competent
the DOJ. Nowhere in person. The
the transmittal witnesses who
letters is there any executed the
averment on the part affidavits based on
of the BSP and PDIC their personal
officers of personal knowledge of the
knowledge of the acts committed by
events and the petitioner fall
transactions within the purview
constitutive of the of any competent
criminal violations person who may
alleged to have been institute the
made by the complaint for a
accused. In fact, the public crime. x x
letters clearly stated x (Emphasis and
that what the OSI of italics supplied)
the BSP and the LIS
of the PDIC did was A preliminary investigation can thus
to respectfully validly proceed on the basis of an affidavit of
transmit to the DOJ any competent person, without the referral
for preliminary document, like the NBI-NCR Report, having
investigation the been sworn to by the law enforcer as the
affidavits and nominal complainant. To require otherwise
personal knowledge is a needless exercise. The cited case
of the acts of the of Oporto, Jr. v. Judge Monserate does not
petitioner. These appear to dent this proposition. After all,
affidavits were what is required is to reduce the evidence
subscribed under into affidavits, for while reports and even
oath by the raw information may justify the initiation of
witnesses who an investigation, the preliminary
executed them investigation stage can be held only after
before a notary sufficient evidence has been gathered and
public. Since evaluated which may warrant the eventual
the affidavits, not t prosecution of the case in court.[42]
he letters transmitti
ng them, were Following the foregoing rulings in Soriano v. Hon.
intended Casanova and Santos-Concio v. Department of Justice, we hold that the
to initiate the BSP letter, taken together with the affidavits attached thereto, comply
preliminary with the requirements provided under Section 3(a), Rule 112 of the
investigation, we hold Rules of Court and Section 18, paragraphs (c) and (d) of RA 7653.
that Section 3(a), Second Issue:
Rule 112 of the Rules
of Court was Whether a loan transaction within the
substantially ambit of the DOSRI law (violation of
complied with. Section 83 of RA 337, as amended) could
be the subject of Estafa under Article 315
Citing the (1) (b) of the
ruling of this Court Revised Penal Code
in Ebarle v. Sucaldito,
the Court of Appeals The second issue was raised by petitioner in the context
correctly held of his Motion to Quash Information on the ground that the facts
that a complaint for charged do not constitute an offense.[43] It is settled that in considering
purposes of a motion to quash on such ground, the test is whether the facts
preliminary alleged, if hypothetically admitted, would establish the essential
investigation by the elements of the offense charged as defined by law. The trial court may
fiscal need not be filed not consider a situation contrary to that set forth in the criminal
by the offended complaint or information. Facts that constitute the defense of the
party. The rule has petitioner[s] against the charge under the information must be
been that, unless the proved by [him] during trial. Such facts or circumstances do not
offense subject constitute proper grounds for a motion to quash the information on
thereof is one that the ground that the material averments do not constitute the
cannot be offense. [44]
prosecuted de We have examined the two informations against petitioner and we
oficio, the same may find that they contain allegations which, if hypothetically admitted,
be filed, for would establish the essential elements of the crime of DOSRI violation
preliminary and estafa thru falsification of commercial documents.
investigation
purposes, by any In Criminal Case No. 238-M-2001 for violation of DOSRI rules, the
competent information alleged that petitioner Soriano was the president of

Page 8 of 48
RA 8791
Deposits, Loans, and Other Operations
RBSM; that he was able to indirectly obtain a loan from RBSM by
putting the loan in the name of depositor Enrico Carlos; and that he
did this without complying with the requisite board approval,
reportorial, and ceiling requirements.
In Criminal Case No. 237-M-2001 for estafa thru falsification of
commercial documents, the information alleged that petitioner, by
taking advantage of his position as president of RBSM, falsified
various loan documents to make it appear that an Enrico Carlos
secured a loan of P8 million from RBSM; that petitioner succeeded in
obtaining the loan proceeds; that he later converted the loan proceeds
to his own personal gain and benefit; and that his action caused
damage and prejudice to RBSM, its creditors, the BSP, and the PDIC.
Significantly, this is not the first occasion that we adjudge the
sufficiency of similarly worded informations. In Soriano v.
People,[45] involving the same petitioner in this case (but different
transactions), we also reviewed the sufficiency of informations for
DOSRI violation and estafa thru falsification of commercial
documents, which were almost identical, mutatis mutandis, with the
subject informations herein. We held in Soriano v. People that there is
no basis for the quashal of the informations as they contain material
allegations charging Soriano with violation of DOSRI rules and estafa
thru falsification of commercial documents.
Petitioner raises the theory that he could not possibly be
held liable for estafa in concurrence with the charge for DOSRI
violation. According to him, the DOSRI charge presupposes that he
acquired a loan, which would make the loan proceeds his own money
and which he could neither possibly misappropriate nor convert to
the prejudice of another, as required by the statutory definition of
estafa.[46] On the other hand, if petitioner did not acquire any loan,
there can be no DOSRI violation to speak of. Thus, petitioner posits
that the two offenses cannot co-exist. This theory does not persuade
us.
Petitioners theory is based on the false premises that the
loan was extended to him by the bank in his own name, and that he
became the owner of the loan proceeds. Both premises are wrong.
The bank money (amounting to P8 million) which came
to the possession of petitioner was money held in trust or
administration by him for the bank, in his
fiduciary capacity as the President of said bank.[47] It is not accurate to
say that petitioner became the owner of the P8 million because it was
the proceeds of a loan. That would have been correct if the
bank knowingly extended the loan to petitioner himself. But that is
not the case here. According to the information for estafa, the loan was
supposed to be for another person, a certain Enrico Carlos; petitioner,
through falsification, made it appear that said Enrico Carlos applied
for the loan when in fact he (Enrico Carlos) did not. Through such
fraudulent device, petitioner obtained the loan proceeds and
converted the same. Under these circumstances, it cannot be said that
petitioner became the legal owner of the P8 million. Thus, petitioner
remained the banks fiduciary with respect to that money, which
makes it capable of misappropriation or conversion in his hands.
The next question is whether there can also be, at the
same time, a charge for DOSRI violation in such a situation wherein
the accused bank officer did not secure a loan in his own name, but
was alleged to have used the name of another person in order to
indirectly secure a loan from the bank. We answer this in the
affirmative. Section 83 of RA 337 reads:
Section 83. No director or officer
of any banking institution shall, either
directly or indirectly, for himself or as the
representative or agent of others, borrow any
of the deposits of funds of such bank, nor shall
he become a guarantor, indorser, or surety for
loans from such bank to others, or in any
manner be an obligor for moneys borrowed
from the bank or loaned by it, except with the
Page 9 of 48
written approval of the majority of the
directors of the bank, excluding the director
concerned. Any such approval shall be
entered upon the records of the corporation
and a copy of such entry shall be transmitted
forthwith to the Superintendent of
Banks. The office of any director or officer of a
bank who violates the provisions of this
section shall immediately become vacant and
the director or officer shall be punished by
imprisonment of not less than one year nor
more than ten years and by a fine of not less
than one thousand nor more than ten
thousand pesos. x x x
The prohibition in Section 83 is broad enough to cover various modes
of borrowing.[48] It covers loans by a bank director or officer (like
herein petitioner) which are made either: (1) directly, (2) indirectly,
(3) for himself, (4) or as the representative or agent of others. It
applies even if the director or officer is a mere guarantor, indorser or
surety for someone else's loan or is in any manner an obligor for
money borrowed from the bank or loaned by it. The covered
transactions are prohibited unless the approval, reportorial and
ceiling requirements under Section 83 are complied with. The
prohibition is intended to protect the public, especially the
depositors,[49] from the overborrowing of bank funds by bank officers,
directors, stockholders and related interests, as such overborrowing
may lead to bank failures.[50] It has been said that banking institutions
are not created for the benefit of the directors [or officers]. While
directors have great powers as directors, they have no special
privileges as individuals. They cannot use the assets of the bank for
their own benefit except as permitted by law. Stringent restrictions
are placed about them so that when acting both for the bank and for
one of themselves at the same time, they must keep within certain
prescribed lines regarded by the legislature as essential to safety in
the banking business.[51]
A direct borrowing is obviously one that is made in the
name of the DOSRI himself or where the DOSRI is a named party,
while an indirect borrowing includes one that is made by a third party,
but the DOSRI has a stake in the transaction.[52] The latter type indirect
borrowing applies here. The information in Criminal Case 238-M-
2001 alleges that petitioner in his capacity as President of Rural Bank
of San Miguel San Ildefonso branch x x x indirectly borrow[ed] or
secure[d] a loan with [RBSM] x x x knowing fully well that the same
has been done by him without the written consent and approval of
the majority of the board of directors x x x, and which consent and
approval the said accused deliberately failed to obtain and enter the
same upon the records of said banking institution and to transmit a
copy thereof to the supervising department of the said bank x x x by
using the name of one depositor Enrico Carlos x x x, the latter having no
knowledge of the said loan, and once in possession of the said amount
of eight million pesos (P8 million), [petitioner] converted the same to
his own personal use and benefit.[53]
The foregoing information describes the manner of
securing the loan as indirect; names petitioner as the benefactor of the
indirect loan; and states that the requirements of the law were not
complied with. It contains all the required elements[54] for a violation
of Section 83, even if petitioner did not secure the loan in his own
name.
The broad interpretation of the prohibition in Section 83
is justified by the fact that it even expressly covers loans to third parties
where the third parties are aware of the transaction (such as
principals represented by the DOSRI), and where the DOSRIs interest
does not appear to be beneficial but even burdensome (such as in
cases when the DOSRI acts as a mere guarantor or surety). If the law
finds it necessary to protect the bank and the banking system in such
situations, it will surely be illogical for it to exclude a case like this
where the DOSRI acted for his own benefit, using the name of an
unsuspecting person. A contrary interpretation will effectively allow a
DOSRI to use dummies to circumvent the requirements of the law.
RA 8791
Deposits, Loans, and Other Operations

In sum, the informations filed against petitioner do not of Appeals in CA-G.R. SP No. 67657 are AFFIRMED. Costs against
negate each other. petitioner.

Third Issue: SO ORDERED.

Is a Rule 65 petition for certiorari the proper remedy against

an Order denying a Motion to Quash?

This issue may be speedily resolved by adopting our ruling in Soriano

v. People,[55] where we held:

In fine, the Court has consistently

held that a special civil action for certiorari is
not the proper remedy to assail the denial of
a motion to quash an information. The proper
procedure in such a case is for the accused to
enter a plea, go to trial without prejudice on
his part to present the special defenses he had
invoked in his motion to quash and if after
trial on the merits, an adverse decision is
rendered, to appeal therefrom in the manner
authorized by law. Thus, petitioners should
not have forthwith filed a special civil action
for certiorari with the CA and instead, they
should have gone to trial and reiterated the
special defenses contained in their motion to
quash. There are no special or exceptional
circumstances in the present case that would
justify immediate resort to a filing of a
petition for certiorari. Clearly, the CA did not
commit any reversible error, much less, grave
abuse of discretion in dismissing the
petition.[56]

Fourth Issue:

Whether petitioner is entitled to a writ of

injunction
The requisites to justify an injunctive relief are: (1) the right of the
complainant is clear and unmistakable; (2) the invasion of the right
sought to be protected is material and substantial; and (3) there is an
urgent and paramount necessity for the writ to prevent serious
damage. A clear legal right means one clearly founded in or granted
by law or is enforceable as a matter of law. Absent any clear and
unquestioned legal right, the issuance of an injunctive writ would
constitute grave abuse of discretion.[57] Caution and prudence must, at
all times, attend the issuance of an injunctive writ because it
effectively disposes of the main case without trial and/or due
process.[58] In Olalia v. Hizon,[59] the Court held as follows:

It has been consistently held that

there is no power the exercise of which is
more delicate, which requires greater
caution, deliberation and sound discretion, or
more dangerous in a doubtful case, than the
issuance of an injunction. It is the strong arm
of equity that should never be extended
unless to cases of great injury, where courts
of law cannot afford an adequate or
commensurate remedy in damages.
Every court should remember
that an injunction is a limitation upon the
freedom of action of the [complainant] and
should not be granted lightly or
precipitately. It should be granted only when
the court is fully satisfied that the law permits
it and the emergency demands it.

Given this Court's findings in the earlier issues of the instant case, we
find no compelling reason to grant the injunctive relief sought by
petitioner.

WHEREFORE, the petition is DENIED. The assailed September 26,

2003 Decision as well as the February 5, 2004 Resolution of the Court

Page 10 of 48
RA 8791
Deposits, Loans, and Other Operations
G.R. No. L-26649 July 13, 1927
THE GOVERNMENT OF THE PHILIPPINE ISLANDS (on
relation of the Attorney-General), plaintiff,
vs.
EL HOGAR FILIPINO, defendant.
Attorney-General Jaranilla and Solicitor-General Reyes for
plaintiff.
Fisher, DeWitt, Perkins and Brady; Camus, Delgado and Recto
and Antonio Sanz for defendant.
Wm. J. Rohde as amicus curiae.
STREET, J.:
This is a quo warranto proceeding instituted originally in this
court by the Government of the Philippine Islands on the
relation of the Attorney-General against the building and loan
association known as El Hogar Filipino, for the purpose of
depriving it of its corporate franchise, excluding it from all
corporate rights and privileges, and effecting a final
dissolution of said corporation. The complaint enumerates
seventeen distinct causes of action, to all of which the
defendant has answered upon the merits, first admitting the
averments of the first paragraph in the statement of the first
cause of action, wherein it is alleged that the defendant was
organized in the year 1911 as a building and loan association
under the laws of the Philippine Islands, and that, since its
organization, the corporation has been doing business in the
Philippine Islands, with its principal office in the City of
Manila. Other facts alleged in the various causes of action in
the complaint are either denied in the answer or controverted
in legal effect by other facts.
After issue had been thus joined upon the merits, the
attorneys entered into an elaborate agreement as to the fact,
thereby removing from the field of dispute such matters of
fact as are necessary to the solution of the controversy. It
follows that we are here confronted only with the legal
questions arising upon the agreed statement.
On March 1, 1906, the Philippine Commission enacted what is
known as the Corporation Law (Act No. 1459) effective upon
April 1 of the same year. Section 171 to 190, inclusive, of this
Act are devoted to the subject of building and loan
associations, defining their objects making various provisions
governing their organization and administration, and
providing for the supervision to be exercised over them.
These provisions appear to be adopted from American
statutes governing building and loan associations and they of
course reflect the ideals and principles found in American law
relative to such associations. The respondent, El Hogar
Filipino, was apparently the first corporation organized in the
Philippine Islands under the provisions cited, and the
association has been favored with extraordinary success. The
articles of incorporation bear the date of December 28, 1910,
at which time capital stock in the association had been
subscribed to the amount of P150,000 of which the sum of
P10,620 had been paid in. Under the law as it then stood, the
capital of the Association was not permitted to exceed
P3,000,000, but by Act No. 2092, passed December 23, 1911,
the statute was so amended as to permit the capitalization of
building and loan associations to the amount of ten millions.
Soon thereafter the association took advantage of this
enactment by amending its articles so as to provide that the
capital should be in an amount not exceeding the then lawful
limit. From the time of its first organization the number of
shareholders has constantly increased, with the result that on
December 31, 1925, the association had 5,826 shareholders
holding 125,750 shares, with a total paid-up value of
P8,703,602.25. During the period of its existence prior to the
Page 11 of 48
date last above-mentioned the association paid to
withdrawing stockholders the amount of P7,618,257,.72; and
in the same period it distributed in the form of dividends
among its stockholders the sum of P7,621,565.81.
First cause of action. — The first cause of action is based upon
the alleged illegal holding by the respondent of the title to real
property for a period in excess of five years after the property
had been bought in by the respondent at one of its own
foreclosure sales. The provision of law relevant to the matter
is found in section 75 of Act of Congress of July 1, 1902
(repeated in subsection 5 of section 13 of the Corporation
Law.) In both of these provisions it is in substance declared
that while corporations may loan funds upon real estate
security and purchase real estate when necessary for the
collection of loans, they shall dispose of real estate so
obtained within five years after receiving the title.
In this connection it appears that in the year 1920 El Hogar
Filipino was the holder of a recorded mortgage upon a tract
of land in the municipality of San Clemente, Province of
Tarlac, as security for a loan of P24,000 to the shareholders of
El Hogar Filipino who were the owners of said property. The
borrowers having defaulted in their payments, El Hogar
Filipino foreclosed the mortgage and purchased the land at
the foreclosure sale for the net amount of the indebtedness,
namely, the sum of P23,744.18. The auction sale of the
mortgaged property took place November 18, 1920, and the
deed conveying the property to El Hogar Filipino was
executed and delivered December 22, 1920. On December 27,
1920, the deed conveying the property to El Hogar Filipino
was sent to the register of deeds of the Province of Tarlac,
with the request that the certificate of title then standing in
the name of the former owners be cancelled and that a new
certificate of title be issued in the name of El Hogar Filipino.
Said deed was received in the office of the register of deeds of
Tarlac on December 28, 1920, together with the old certificate
of title, and thereupon the register made upon the said deed
the following annotation:
The foregoing document was received in this office
at 4.10 p. m., December 28, 1920, according to
entry 1898, page 50 of Book One of the Day Book
and registered on the back of certificate of title No.
2211 and its duplicate, folio 193 of Book A-10 of
the register of original certificate. Tarlac, Tarlac,
January 12, 1921. (Sgd.) SILVINO LOPEZ DE
JESUS, Register of Deeds.
For months no reply was received by El Hogar Filipino from
the register of deeds of Tarlac, and letters were written to him
by El Hogar Filipino on the subject in March and April, 1921,
requesting action. No answer having been received to these
letters, a complaint was made by El Hogar Filipino to the Chief
of the General Land Registration Office; and on May 7, 1921,
the certificate of title to the San Clemente land was received
by El Hogar Filipino from the register of deeds of Tarlac.
On March 10, 1921, the board of directors of El Hogar Filipino
adopted a resolution authorizing Vicente Bengzon, an agent
of the corporation, to endeavor to find a buyer for the San
Clemente land. On July 27, 1921, El Hogar Filipino authorized
one Jose Laguardia to endeavor to find a purchaser for the San
Clemente land for the sum of P23,000 undertaking to pay the
said Laguardia a commission of 5 per centum of the selling
price for his services, but no offers to purchase were obtained
through this agent or through the agent Bengzon. In July,
1923, plans of the San Clemente land were sent to Mr. Luis
Gomez, Mr. J. Gonzalez and Mr. Alfonso de Castelvi, as
prospective purchasers, but no offers were received from
them. In January, 1926, the agent not having succeeded in
RA 8791
Deposits, Loans, and Other Operations
finding a buyer, the San Clemente land was advertised for sale
by El Hogar Filipino in El Debate, La Vanguardia and Taliba,
three newspapers of general circulation in the Philippine
Islands published in the City of Manila. On March 16, 1926,
the first offer for the purchase of the San Clemente land was
received by El Hogar Filipino. This offer was made to it in
writing by one Alcantara, who offered to buy it for the sum of
P4,000, Philippine currency, payable P500 in cash, and the
remainder within thirty days. Alcantara's offer having been
reported by the manager of El Hogar Filipino to its board of
directors, it was decided, by a resolution adopted at a meeting
of the board held on March 25, 1926, to accept the offer, and
this acceptance was communicated to the prospective buyer.
Alcantara was given successive extensions of the time, the last
of which expired April 30, 1926, within which to make the
payment agreed upon; and upon his failure to do so El Hogar
Filipino treated the contract with him as rescinded, and
efforts were made at once to find another buyer. Finally the
land was sold to Doña Felipa Alberto for P6,000 by a public
instrument executed before a notary public at Manila, P. I., on
July 30, 1926.
Upon consideration of the facts above set forth it is evident
that the strict letter of the law was violated by the respondent;
but it is equally obvious that its conduct has not been
characterized by obduracy or pertinacity in contempt of the
law. Moreover, several facts connected with the incident tend
to mitigate the offense. The Attorney-General points out that
the respondent acquired title on December 22, 1920, when
the deed was executed and delivered, by which the property
was conveyed to it as purchaser at its foreclosure sale, and
this title remained in it until July 30, 1926, when the property
was finally sold to Felipa Alberto. The interval between these
two conveyances is thus more than five years; and it is
contended that the five year period did not begin to run
against the respondent until May 7, 1921, when the register
of deeds of Tarlac delivered the new certificate of title to the
respondent pursuant to the deed by which the property was
acquired. As an equitable consideration affecting the case this
contention, though not decisive, is in our opinion more than
respectable. It has been held by this court that a purchaser of
land registered under the Torrens system cannot acquire the
status of an innocent purchaser for value unless his vendor is
able to place in his hands an owner's duplicate showing the
title of such land to be in the vendor (Director of
Lands vs. Addison, 49, Phil., 19; Rodriguez vs. Llorente, G. R.
No. 266151). It results that prior to May 7, 1921, El Hogar
Filipino was not really in a position to pass an indefeasible
title to any purchaser. In this connection it will be noted that
section 75 of the Act of Congress of July 1, 1902, and the
similar provision in section 13 of the Corporation Law, allow
the corporation "five years after receiving the title," within
which to dispose of the property. A fair interpretation of these
provisions would seem to indicate that the date of the
receiving of the title in this case was the date when the
respondent received the owner's certificate, or May 7, 1921,
for it was only after that date that the respondent had an
unequivocal and unquestionable power to pass a complete
title. The failure of the respondent to receive the certificate
sooner was not due in any wise to its fault, but to unexplained
delay on the part of the register of deeds. For this delay the
respondent cannot be held accountable.
Again, it is urged for the respondent that the period between
March 25, 1926, and April 30, 1926, should not be counted as
part of the five-year period. This was the period during which
the respondent was under obligation to sell the property to
Alcantara, prior to the rescission of the contract by reason of
Alcantara's failure to make the stipulated first payment. Upon
this point the contention of the respondent is, in our opinion,
well founded. The acceptance by it of Alcantara's offer
obligated the respondent to Alcantara; and if it had not been
for the default of Alcantara, the effective sale of the property
Page 12 of 48
would have resulted. The respondent was not at all
chargeable with the collapse of these negotiations; and hence
in any equitable application of the law this period should be
deducted from the five-year period within which the
respondent ought to have made the sale. Another
circumstance explanatory of the respondent's delay in selling
the property is found in the fact that it purchased the property
for the full amount of the indebtedness due to it from the
former owner, which was nearly P24,000. It was
subsequently found that the property was not salable for
anything like that amount and in the end it had to be sold for
P6,000, notwithstanding energetic efforts on the part of the
respondent to find a purchaser upon better terms.
The question then arises whether the failure of the
respondent to get rid of the San Clemente property within five
years after it first acquired the deed thereto, even supposing
the five-year period to be properly counted from that date, is
such a violation of law as should work a forfeiture of its
franchise and require a judgment to be entered for its
dissolution in this action of quo warranto. Upon this point we
do not hesitate to say that in our opinion the corporation has
not been shown to have offended against the law in a manner
that should entail a forfeiture of its charter. Certainly no court
with any discretion to use in the matter would visit upon the
respondent and its thousands of shareholders the extreme
penalty of the law as a consequence of the delinquency here
shown to have been committed.
The law applicable to the case is in our opinion found in
section 212 of the Code of Civil Procedure, as applied by this
court in Government of the Philippine Islands vs. Philippine
Sugar Estates Development Co. (38 Phil., 15). This section
(212), in prescribing the judgment to be rendered against a
corporation in an action of quo warranto, among other things
says:
. . . When it is found and adjudged that a
corporation has offended in any matter or manner
which does not by law work as a surrender or
forfeiture, or has misused a franchise or exercised
a power not conferred by law, but not of such a
character as to work a surrender or forfeiture of its
franchise, judgment shall be rendered that it be
outset from the continuance of such offense or the
exercise of such power.
This provision clearly shows that the court has a discretion
with respect to the infliction of capital punishment upon
corporation and that there are certain misdemeanors and
misuses of franchises which should not be recognized as
requiring their dissolution. In Government of the Philippine
Islands vs. Philippine Sugar Estates Development Co.(38 Phil.,
15), it was found that the offending corporation had been
largely (though indirectly) engaged in the buying and holding
or real property for speculative purposes in contravention of
its charter and contrary to the express provisions of law.
Moreover, in that case the offending corporation was found to
be still interested in the properties so purchased for
speculative at the time the action was brought. Nevertheless,
instead of making an absolute and unconditional order for the
dissolution of the corporation, the judgment of ouster was
made conditional upon the failure of the corporation to
discontinue its unlawful conduct within six months after final
decision. In the case before us the respondent appears to have
rid itself of the San Clemente property many months prior to
the institution of this action. It is evident from this that the
dissolution of the respondent would not be an appropriate
remedy in this case. We do not of course undertake to say that
a corporation might not be dissolved for offenses of this
nature perpetrated in the past, especially if its conduct had
exhibited a willful obduracy and contempt of law. We content
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ourselves with holding that upon the facts here before us the
penalty of dissolution would be excessively severe and
fraught with consequences altogether disproportionate to the
offense committed.
The evident purpose behind the law restricting the rights of
corporations with respect to the tenure of land was to prevent
the revival of the entail (mayorazgo) or other similar
institution by which land could be fettered and its alienation
hampered over long periods of time. In the case before us the
respondent corporation has in good faith disposed of the
piece of property which appears to have been in its hands at
the expiration of the period fixed by law, and a fair
explanation is given of its failure to dispose of it sooner. Under
these circumstances the destruction of the corporation would
bring irreparable loss upon the thousand of innocent
shareholders of the corporation without any corresponding
benefit to the public. The discretion permitted to this court in
the application of the remedy of quo warranto forbids so
radical a use of the remedy.
But the case for the plaintiff supposes that the discretion of
this court in matters like that now before us has been
expressly taken away by the third section of Act No. 2792, and
that the dissolution of the corporation is obligatory upon the
court a mere finding that the respondent has violated the
provision of the Corporation Law in any respect. This makes
necessary to examine the Act last above-mentioned with
some care. Upon referring thereto, we find that it consists of
three sections under the following style:
No. 2792. — An Act to amend certain sections of
the Corporation Law, Act Numbered Fourteen
hundred and fifty-nine, providing for the
publication of the assets and liabilities of
corporations registering in the Bureau of
Commerce and Industry, determining the liability
of the officers of corporations with regard to the
issuance of stock or bonus, establishing penalties
for certain things, and for other purposes.
The first two section contain amendments to the Corporation
Law with respect to matters with which we are not here
concurred. The third section contains anew enactment to be
inserted as section 190 (A) in the corporation Law
immediately following section 190. This new section reads as
follows:
SEC. 190. (A). Penalties. — The violation of any of
the provisions of this Act and its amendments not
otherwise penalized therein, shall be punished by
a fine of not more than one thousand pesos, or by
imprisonment for not more than five years, or
both, in the discretion of the court. If the violation
being proved, be dissolved by quo
warranto proceedings instituted by the Attorney-
General or by any provincial fiscal, by order of said
Attorney-General: Provided, That nothing in this
section provided shall be construed to repeal the
other causes for the dissolution of corporation
prescribed by existing law, and the remedy
provided for in this section shall be considered as
additional to the remedies already existing.
The contention for the plaintiff is to the effect that the second
sentence in this enactment has entirely abrogated the
discretion of this court with respect to the application of the
remedy of qou warranto, as expressed in section 212 of the
Code of Civil Procedure, and that it is now mandatory upon us
to dissolved any corporation whenever we find that it has
committed any violation of the Corporation Law, however
Page 13 of 48
trivial. In our opinion in this radical view of the meaning of
the enactment is untenable. When the statute says, "If the
violation is committed by a corporation, the same shall, upon
such violation being proved, be dissolved by quo
warranto proceedings . . .," the intention was to indicate that
the remedy against the corporation shall be by action of quo
warranto. There was no intention to define the principles
governing said remedy, and it must be understood that in
applying the remedy the court is still controlled by the
principles established in immemorial jurisprudence. The
interpretation placed upon this language in the brief of the
Attorney-General would be dangerous in the extreme, since it
would actually place the life of all corporate investments in
the official. No corporate enterprise of any moment can be
conducted perpetually without some trivial misdemeanor
against corporate law being committed by some one or other
of its numerous employees. As illustrations of the
preposterous effects of the provision, in the sense contended
for by the Attorney-General, the attorneys for the respondent
have called attention to the fact that under section 52 of the
Corporation Law, a business corporation is required to keep
a stock book and a transfer book in which the names of
stockholders shall kept in alphabetical order. Again, under
section 94, railroad corporations are required to cause all
employees working on passenger trains or at a station for
passengers to wear a badge on his cap or hat which will
indicate his office. Can it be supposed that the Legislature
intended to penalize the violation of such provisions as these
by dissolution of the corporation involved? Evidently such
could not have been the intention; and the only way to avoid
the consequence suggested is to hold, as we now hold, that the
provision now under consideration has not impaired the
discretion of this court in applying the writ of quo warranto.
Another way to put the same conclusion is to say that the
expression "shall be dissolved by quo warrantoproceedings"
means in effect, "may be dissolved by quo
warranto proceedings in the discretion of the court." The
proposition that the word "shall" may be construed as "may",
when addressed by the Legislature to the courts, is well
supported in jurisprudence. In the case of Becker vs. Lebanon
and M. St. Ry. Co., (188 Pa., 484), the Supreme Court of
Pennsylvania had under consideration a statute providing as
follows:
It shall be the duty of the court . . . to examine,
inquire and ascertain whether such corporation
does in fact posses the right or franchise to do the
act from which such alleged injury to private rights
or to the rights and franchises of other
corporations results; and if such rights or
franchises have not been conferred upon such
corporations, such courts, it exercising equitable
power, shall, by injunction, at suit of the private
parties or other corporations, restrain such
injurious acts.
In an action based on this statute the plaintiff claimed
injunctive relief as a matter of right. But this was denied the
court saying:
Notwithstanding, therefore, the use of the
imperative "shall" the injunction is not to be
granted unless a proper case for injunction be
made out, in accordance with the principles and
practice of equity. The word "shall" when used by
the legislature to a court, is usually a grant of
authority and means "may", and even if it be
intended to be mandatory it must be subject to the
necessary limitation that a proper case has been
made out for the exercise of the power.
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Other authorities amply sustain this view
(People vs. Nusebaum, 66 N. Y. Supp., 129, 133; West
Wisconsin R. Co. vs. Foley, 94 U. S., 100, 103; 24 Law. Ed., 71;
Clancy vs. McElroy, 30 Wash., 567; 70 Pac., 1095;
State vs. West, 3 Ohio State, 509, 511; In re Lent, 40 N. Y.
Supp., 570, 572; 16 Misc. Rep., 606; Ludlow vs. Ludlow's
Executors, 4 N. J. Law [1 Sothard], 387, 394; Whipple vs. Eddy,
161 Ill., 114;43 N. E., 789, 790; Borkheim vs. Fireman's Fund
Ins. Co., 38 Cal., 505, 506; Beasley vs. People, 89 Ill., 571, 575;
Donnelly vs. Smith, 128 Iowa, 257; 103 N. W., 776).
But section 3 of Act No. 2792 is challenged by the respondent
on the ground that the subject-matter of this section is not
expressed in the title of the Act, with the result that the
section is invalid. This criticism is in our opinion well
founded. Section 3 of our organic law (Jones Bill) declares,
among other things, that "No bill which may be enacted into
law shall embrace more than one subject, and that subject
shall be expressed in the title of the bill." Any law or part of a
law passed by the Philippine Legislature since this provision
went into effect and offending against its requirement is
necessarily void.
Upon examining the entire Act (No. 2792), we find that it is
directed to three ends which are successively dealt with in the
first three sections of the Act. But it will be noted that these
three matters all relate to the Corporation Law; and it is at
once apparent that they might properly have been embodied
in a single Act if a title of sufficient unity and generality had
been prefixed thereto. Furthermore, it is obvious, even upon
casual inspection, that the subject-matter of each of the first
two sections is expressed and defined with sufficient
precision in the title. With respect to the subject-matter of
section 3 the only words in the title which can be taken to
refer to the subject-matter of said section are these, "An Act .
. . establishing penalties for certain things, and for other
purposes." These words undoubtedly have sufficient
generality to cover the subject-matter of section 3 of the Act.
But this is not enough. The Jones Law requires that the
subject-matter of the bill "shall be expressed in the title of the
bill."
When reference is had to the expression "establishing
penalties for certain things," it is obvious that these words
express nothing. The constitutional provision was
undoubtedly adopted in order that the public might be
informed as to what the Legislature is about while bills are in
process of passage. The expression "establishing penalties for
certain things" would give no definite information to anybody
as to the project of legislation intended under this expression.
An examination of the decided cases shows that courts have
always been indulgent of the practices of the Legislature with
respect to the form and generality of title, for if extreme
refinements were indulged by the courts, the work of
legislation would be unnecessarily hampered. But, as has
been observed by the California court, there must be some
reasonable limit to the generality of titles that will be allowed.
The measure of legality is whether the title is sufficient to give
notice of the general subject of the proposed legislation to the
persons and interests likely to be affected.
In Lewis vs. Dunne (134 Cal., 291), the court had before it a
statute entitled "An Act to revise the Code of Civil Procedure
of the State of California, by amending certain sections,
repealing others, and adding certain new sections." This title
was held to embrace more than one subject, which were not
sufficiently expressed in the title. In discussing the question
the court said:
* * * It is apparent that the language of the title of
the act in question, in and of itself, express no
Page 14 of 48
subject whatever. No one could tell from the title
alone what subject of legislation was dealt with in
the body of the act; such subject so far as the title
of the act informs us, might have been entirely
different from anything to be found in the act itself.
We cannot agree with the contention of some of
respondent's counsel — apparently to some extent
countenanced by a few authorities — that the
provision of the constitution in question can be
entirely avoided by the simple device of putting
into the title of an act words which denote a subject
"broad" enough to cover everything. Under that
view, the title, "An act concerning the laws of the
state," would be good, and the convention and
people who framed and adopted the constitution
would be convicted of the folly of elaborately
constructing a grave constitutional limitation of
legislative power upon a most important subject,
which the legislature could at once circumvent by
a mere verbal trick. The word "subject" is used in
the constitution embrace but "one subject" it
necessarily implies — what everybody knows —
that there are numerous subjects of the legislation,
and declares that only one of these subjects shall
embraced in any one act. All subjects cannot be
conjured into one subject by the mere magic of a
word in a title.
In Rader vs. Township of Union (39 N. J. L., 509, 515), the
Supreme Court of New Jersey made the following
observation:
* * * It is true, that it may be difficult to indicate, by
a formula, how specialized the title of a statute
must be; but it is not difficult to conclude that it
must mean something in the way of being a notice
of what is doing. Unless it does not enough that it
embraces the legislative purpose — it must
express it; and where the language is too general,
it will accomplish the former, but not the latter.
Thus, a law entitled "An act for a certain purpose,"
would embrace any subject, but would express
none, and, consequently, it would not stand the
constitutional test.
The doctrine properly applicable in matters of this kind is, we
think, fairly summed up in a current repository of
jurisprudence in the following language:
* * * While it may be difficult to formulate a rule by
which to determine the extent to which the title of
a bill must specialize its object, it may be safely
assumed that the title must not only embrace the
subject of proposed legislation, but also express it
clearly and fully enough to give notice of the
legislative purpose. (25 R. C. L., p. 853.)
In dealing with the problem now before us the words "and for
other purposes "found at the end of the caption of Act No.
2792, must be laid completely out of consideration. They
express nothing, and amount to nothing as a compliance with
the constitutional requirement to which attention has been
directed. This expression "(for other purposes") is frequently
found in the title of acts adopted by the Philippine Legislature;
and its presence in our laws is due to the adoption by our
Legislature of the style used in Congression allegation. But it
must be remembered that the legislation of Congress is
subject to no constitutional restriction with respect to the
title of bills. Consequently, in Congressional legislation the
words "and for other purposes" at least serve the purpose of
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admonishing the public that the bill whose heading contains
these words contains legislation upon other subjects than
that expressed in the title. Now, so long as the Philippine
Legislature was subject to no restriction with respect to the
title of bills intended for enactment into general laws, the
expression "for other purposes" could be appropriately used
in titles, not precisely for the purpose of conveying
information as to the matter legislated upon, but for the
purpose ad admonishing the public that any bill containing
such words in the title might contain other subjects than that
expressed in the definitive part of the title. But, when
congress adopted the Jones Law, the restriction with which
we are now dealing became effective here and the words "for
other purposes" could no longer be appropriately used in the
title of legislative bills. Nevertheless, the custom of using
these words has still been followed, although they can no
longer serve to cover matter not germane to the bill in the title
of which they are used. But the futility of adding these words
to the style of any act is now obvious (Cooley, Const. Lims., 8th
ed., p. 302)
In the brief for the plaintiff it is intimated that the
constitutional restriction which we have been discussing is
more or less of a dead letter in this jurisdiction; and it seems
to be taken for granted that no court would ever presume to
hold a legislative act or part of a legislative act invalid for non-
compliance with the requirement. This is a mistake; and no
utterance of this court can be cited as giving currency to any
such notion. On the contrary the discussion contained
in Central Capiz vs. Ramirez (40 Phil., 883), shows that when
a case arises where a violation of the restriction is apparent,
the court has no alternative but to declare the legislation
affected thereby to be invalid.
Second cause of action. — The second cause of action is based
upon a charge that the respondent is owning and holding a
business lot, with the structure thereon, in the financial
district of the City of Manila is excess of its reasonable
requirements and in contravention of subsection 5 of section
13 of the corporation Law. The facts on which this charge is
based appear to be these:
On August 28, 1913, the respondent purchased 1,413 square
meters of land at the corner of Juan Luna Street and the
Muelle de la Industria, in the City of Manila, immediately
adjacent to the building then occupied by the Hongkong and
Shanghai Banking Corporation. At the time the respondent
acquired this lot there stood upon it a building, then nearly
fifty years old, which was occupied in part by the offices of an
importing firm and in part by warehouses of the same firm.
The material used in the construction was Guadalupe stone
and hewn timber, and the building contained none of the
facilities usually found in a modern office building.
In purchase of a design which had been formed prior to the
purchase of the property, the directors of the El Hogar
Filipino caused the old building to be demolished; and they
erected thereon a modern reinforced concrete office building.
As at first constructed the new building was three stories high
in the main, but in 1920, in order to obtain greater advantage
from the use of the land, an additional story was added to the
building, making a structure of four stories except in one
corner where an additional story was place, making it five
stories high over an area of 117.52 square meters. It is
admitted in the plaintiffs brief that this "noble and imposing
structure" — to use the words of the Attorney-General — "has
greatly improved the aspect of the banking and commercial
district of Manila and has greatly contributed to the
movement and campaign for the Manila Beautiful." It is also
admitted that the competed building is reasonably
proportionate in value and revenue producing capacity to the
value of the land upon which it stands. The total outlay of the
Page 15 of 48
respondent for the land and the improvements thereon was
P690,000 and at this valuation the property is carried on the
books of the company, while the assessed valuation of the
land and improvements is at P786,478.
Since the new building was completed the respondent has
used about 324 square meters of floor space for its own
offices and has rented the remainder of the office space in said
building, consisting of about 3,175 square meters, to other
persons and entities. In the second cause of action of the
complaint it is supposed that the acquisition of this lot, the
construction of the new office building thereon, and the
subsequent renting of the same in great part to third persons,
are ultra vires acts on the part of the corporation, and that the
proper penalty to be enforced against it in this action is that if
dissolution.
With this contention we are unable to agree. Under
subsection 5 of section 13 of the Corporation Law, every
corporation has the power to purchase, hold and lease such
real property as the transaction of the lawful business of the
corporation may reasonably and necessarily require. When
this property was acquired in 1916, the business of El Hogar
Filipino had developed to such an extent, and its prospects for
the future were such as to justify its directors in acquiring a
lot in the financial district of the City of Manila and in
constructing thereon a suitable building as the site of its
offices; and it cannot be fairly said that the area of the lot —
1,413 square meters — was in excess of its reasonable
requirements. The law expressly declares that corporations
may acquire such real estate as is reasonably necessary to
enable them to carry out the purposes for which they were
created; and we are of the opinion that the owning of a
business lot upon which to construct and maintain its offices
is reasonably necessary to a building and loan association
such as the respondent was at the time this property was
acquired. A different ruling on this point would compel
important enterprises to conduct their business exclusively in
leased offices — a result which could serve no useful end but
would retard industrial growth and be inimical to the best
interests of society.
We are furthermore of the opinion that, inasmuch as the lot
referred to was lawfully acquired by the respondent, it is
entitled to the full beneficial use thereof. No legitimate
principle can discovered which would deny to one owner the
right to enjoy his (or its) property to the same extent that is
conceded to any other owner; and an intention to
discriminate between owners in this respect is not lightly to
be imputed to the Legislature. The point here involved has
been the subject of consideration in many decisions of
American courts under statutes even more restrictive than
that which prevails in this jurisdiction; and the conclusion has
uniformly been that a corporations whose business may
properly be conducted in a populous center may acquire an
appropriate lot and construct thereon an edifice with facilities
in excess of its own immediate requirements.
Thus in People vs. Pullman's Palace-Car Co. (175 Ill., 125; 64 L.
R. A., 366), it appeared that the respondent corporation
owned and controlled a large ten-story business block in the
City of Chicago, worth $2,000,000, and that it occupied only
about one-fourth thereof for its own purposes, leasing the
remainder to others at heavy rentals. The corporate charter
merely permitted the holding of such real estate by the
respondent as might be necessary for the successful
prosecution of its business. An attempt was made to obtain
the dissolution of the corporation in a quo
warranto proceeding similar to that now before us, but the
remedy was denied.
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In Rector vs. Hartford Deposit Co., a question was raised as to
the power of the Deposit Company to erect and own a
fourteen-story building — containing eight storerooms, one
hundred suites of offices, and one safety deposit vault, under
a statute authorizing the corporation to possess so much real
estate "as shall be necessary for the transaction of their
business." The court said:
That the appellee company possessed ample
power to acquire real property and construct a
building thereon for the purpose of transacting
therein the legitimate business of the corporation
is beyond the range of debate. Nor is the contrary
contended, but the insistence is that, under the
guise of erecting a building for corporate purposes,
the appellee company purposely constructed a
much larger building than its business required,
containing many rooms intended to be rented to
others for offices and business purposes, — among
them, the basement rooms contracted to be leased
to the appellant, — and that in so doing it
designedly exceeded its corporate powers. The
position off appellant therefore is that the appellee
corporation has flagrantly abused its general
power to acquire real estate and construct a
building thereon . . . It was within the general scope
of the express powers of the appellee corporation
to own and possess a building necessary for its
proper corporate purposes. In planning and
constructing such a building, as was said in People
vs. Pullman's Palace Car Co., supra, the corporation
should not necessarily be restricted to a building
containing the precise number of rooms its then
business might require, and no more, but that the
future probable growth and volume of its business
might be considered and anticipated, and a larger
building, and one containing more rooms than the
present volume of business required be erected,
and the rooms not needed might be rented by the
corporation, — provided, of course, such course
should be taken in good faith, and not as a mere
evasion of the public law and the policy of the state
relative to the ownership of real estate by
corporations. In such state of case the question is
whether the corporation has abused or excessively
and unjustifiably used the power and authority
granted it by the state to construct buildings and
own real estate necessary for its corporate
purposes.
In Home savings building Association vs. Driver (129 Ky.,
754), one of the questions before the court was precisely the
same as that now before us. Upon this the Supreme Court of
Kentucky said:
The third question is, has the association the right
to erect, remodel, or own a building of more than
sufficient capacity to accommodate its own
business and to rent out the excess? There is
nothing in the Constitution, charter of the
association, or statutes placing any limitation upon
the character of a building which a corporation
may erect as a home in which to conduct its
business. A corporation conducting a business of
the character of that in which appellant is engaged
naturally expects its business to grow and expand
from time to time, and, in building a home it would
be exercising but a short-sighted judgment if it did
not make provision for the future by building a
home large enough to take care of its expanding
business, and hence, even if it should build a house
larger and roomier than its present needs or
Page 16 of 48
interests require, it would be acting clearly with
the exercise of its corporate right and power. The
limitation which the statute imposes is that proper
conduct of its business, but it does not attempt to
place any restriction or limitation upon the right of
the corporation or association as to the character
of building it shall erect on said real estate; and,
while the Constitution and the statutes provide
that no corporation shall engage in any business
other than that expressly authorized by its charter,
we are of opinion that, in renting out the
unoccupied and unused portions of the building so
erected, the association could not be said to
engaged in any other business than that authorized
by its charter. The renting of the unused portions
of the building is a mere incident in the conduct of
its real business. We would not say that a building
association might embark in the business of
building houses and renting or leasing them, but
there is quite a difference in building or renting a
house in which to conduct its own business and
leasing the unused portion thereof for the time
being, or until such time as they may be needed by
the association, and in building houses for the
purpose of renting or leasing them. The one might
properly be said to be the proper exercise of a
power incident to the conduct of its legitimate
business, whereas the other would be a clear
violation of that provision of the statute which
denies to any corporation the right to conduct any
business other than that authorized by its charter.
To hold otherwise would be to charge most of the
banking institutions, trust companies and other
corporations, such as title guaranty companies,
etc., doing with violating the law; for it is known
that there are few of such institutions that do not,
at times, rent out or lease the unneeded portions of
the building occupied by them as homes. We do not
think that in so doing they are violating any
provisions of the law, but that the renting out of the
unused or unoccupied portions of their buildings is
but an incident in the conduct of their business.
In Wingert vs. First National Bank of Hagerstown, Md. (175
Fed., 739, 741), a stockholder sought to enjoin the bank from
building a six-story building owned by the bank in the
commercial district of Hagerstown of which only the first
story was to be used by the bank, the remaining stories to be
rented out for offices and places of business, on the theory
that such action was ultra vires and in violation of the
provisions of the national banking act confining such
corporations to the holding, only, of such real estate "as shall
be necessary for its immediate accommodation in the
transaction of its business."
The injunction was denied, the court adopting the opinion of
the lower court in which the following was said:
'The other ground urged by the complainant is that
the proposed action is violative of the restriction
which permits a national bank to hold only such
real estate as shall be necessary for its immediate
accommodation in the transaction of its business,
and that, therefore, the erection of a building which
will contain offices not necessary for the business
of the bank is not permitted by the law, although
that method of improving the lot may be the most
beneficial use that can be made of it. It is matter of
common knowledge that the actual practice of
national banks is to the contrary. Where ground is
valuable, it may probably be truly said that the
majority of national bank buildings are built with
RA 8791
Deposits, Loans, and Other Operations
accommodations in excess of the needs of the bank
for the purpose of lessening the bank's expense by
renting out the unused portion. If that were not
allowable, many smaller banks in cities would be
driven to become tenants as the great cost of the
lot would be prohibitive of using it exclusively for
the banking accommodation of a single bank. As
indicative of the interpretation of the law
commonly received and acted upon, reference may
be made to the reply of the Comptroller of the
Currency to the injury by the bank in this case
asking whether the law forbids the bank
constructing such a building as was contemplated.
'The reply was follows: "Your letter of the 9th
instant received, stating that the directors
contemplate making improvements in the bank
building and inquiring if there is anything in the
national banking laws prohibiting the construction
of a building which will contain floors for offices to
be rented out by the bank as well as the banking
room. Your attention is called to the case of Brown
vs. Schleier, 118 Fed., 981 [55 C. C. A, 475], in which
the court held that: 'If the land which a national
bank purchases or leases for the accommodation of
its business is very valuable it may exercise the
same rights that belong to other landowners of
improving it in a way that will yield the largest
income, lessen its own rent, and render that part of
its funds which are invested in realty most
productive.'" This seems to be the common sense
interpretation of the act of Congress and is the one
which prevails.'
It would seem to be unnecessary to extend the opinion by
lengthy citations upon the point under consideration,
butBrown vs. Schleier (118 Fed., 981), may be cited as being in
harmony with the foregoing authorities. In dealing with the
powers of a national bank the court, in this case, said:
When an occasion arises for an investment in real
property for either of the purposes specified in the
statute the national bank act permits banking
associations to act as any prudent person would
act in making an investment in real estate, and to
exercise the same measure of judgment and
discretion. The act ought not to be construed in
such as way as to compel a national bank, when it
acquires real property for a legitimate purpose, to
deal with it otherwise than a prudent land owner
would ordinarily deal with such property.
In the brief of the Attorney-General reliance is place almost
entirely upon two Illinois cases, namely Africani Home
Purchase and Loan Association vs. Carroll (267 Ill., 380),
and First Methodist Episcopal Church of Chicago vs. Dixon (178
Ill., 260). In our opinion these cases are either distinguishable
from that now before us, or they reflect a view of the law
which is incorrect. At any rate the weight of judicial opinion
is so overwhelmingly in favor of sustaining the validity of the
acts alleged in the second cause of action to have been done
by the respondent in excess of its powers that we refrain from
commenting at any length upon said cases. The ground stated
in the second cause of action is in our opinion without merit.
Third cause of action. — Under the third cause of action the
respondent is charged with engaging in activities foreign to
the purposes for which the corporation was created and not
reasonable necessary to its legitimate ends. The
specifications under this cause of action relate to three
different sorts of activities. The first consist of the
Page 17 of 48
administration of the offices in the El Hogar building not used
by the respondent itself and the renting of such offices to the
public. As stated in the discussion connected with the second
cause of action, the respondent uses only about ten per cent
of the office space in the El Hogar building for its own
purposes, and it leases the remainder to strangers. In the
years 1924 and 1925 the respondent received as rent for the
leased portions of the building the sums of P75,395.06 and
P58,259.27, respectively. The activities here criticized clearly
fall within the legitimate powers of the respondent, as shown
in what we have said above relative to the second cause of
action. This matter will therefore no longer detain us. If the
respondent had the power to acquire the lot, construct the
edifice and hold it beneficially, as there decided, the beneficial
administration by it of such parts of the building as are let to
others must necessarily be lawful.
The second specification under the third cause of action has
reference to the administration and management of
properties belonging to delinquent shareholders of the
association. In this connection it appears that in case of
delinquency on the part of its shareholders in the payment of
interest, premium, and dues, the association has been
accustomed (pursuant to clause 8 of its standard mortgage)
to take over and manage the mortgaged property for the
purpose of applying the income to the obligations of the
debtor party. For these services the respondent charges a
commission at the rate of 2½ per centum on sums collected.
The case for the government supposes that the only remedy
which the respondent has in case of default on the part of its
shareholders is to proceed to enforce collection of the whole
loan in the manner contemplated in section 185 of the
Corporation Law. It will be noted, however, that, according to
said section, the association may treat the whole
indebtedness as due, "at the option of the board of directors,"
and this remedy is not made exclusive. We see no reason to
doubt the validity of the clause giving the association the right
to take over the property which constitutes the security for
the delinquent debt and to manage it with a view to the
satisfaction of the obligations due to the debtor than the
immediate enforcement of the entire obligation, and the
validity of the clause allowing this course to be taken appears
to us to be not open to doubt. The second specification under
this cause of action is therefore without merit, as was true of
the first.
The third specification under this cause of action relates to
certain activities which are described in the following
paragraphs contained in the agreed statements of facts:.
El Hogar Filipino has undertaken the management
of some parcels of improved real estate situated in
Manila not under mortgage to it, but owned by
shareholders, and has held itself out by
advertisement as prepared to do so. The number of
properties so managed during the years 1921 to
1925, inclusive, was as follows:
1921 eight properties
1922 six properties
1923 ten properties
1924 fourteen properties
1925 fourteen properties.
RA 8791
Deposits, Loans, and Other Operations

This service is limited to shareholders; but some of shall not have the power to force the surrender and
the persons whose properties are so managed for withdrawal of unmatured stock except in case of liquidation
them became shareholders only to enable them to of the corporation or of forfeiture of the stock for
take advantage thereof. delinquency. It is agreed that this provision of the by-laws has
never been enforced, and in fact no attempt has ever been
made by the board of directors to make use of the power
The services rendered in the management of such
therein conferred. In November, 1923, the Acting Insular
improved real estate by El Hogar Filipino consist in
Treasurer addressed a letter to El Hogar Filipino, calling
the renting of the same, the payment of real estate
attention to article 10 of its by-laws and expressing the view
taxes and insurance for the account of the owner,
that said article was invalid. It was therefore suggested that
causing the necessary repairs for upkeep to be
the article in question should be eliminated from the by-laws.
made, and collecting rents due from tenants. For
At the next meeting of the board of directors the matter was
the services so rendered in the management of
called to their attention and it was resolved to recommend to
such properties El Hogar Filipino receives
the shareholders that in their next annual meeting the article
compensation in the form of commissions upon the
in question be abrogated. It appears, however, that no annual
gross receipts from such properties at rates
meeting of the shareholders called since that date has been
varying from two and one-half per centum to five
attended by a sufficient number of shareholders to constitute
per centum of the sums so collected, according to
a quorum, with the result that the provision referred to has
the location of the property and the effort involved
no been eliminated from the by-laws, and it still stands among
in its management.
the by-laws of the association, notwithstanding its patent
conflict with the law.
The work of managing real estate belonging to
non-borrowing shareholders administered by El
It is supposed, in the fourth cause of action, that the existence
Hogar Filipino is carried on by the same members
of this article among the by-laws of the association is a
of the staff who attend to the details of the
misdemeanor on the part of the respondent which justifies its
management of properties administered by the
dissolution. In this view we are unable to concur. The
manager of El Hogar Filipino under the provisions
obnoxious by-law, as it stands, is a mere nullity, and could not
of paragraph 8 of the standard mortgage form, and
be enforced even if the directors were to attempt to do so.
of properties bought in on foreclosure of mortgage.
There is no provision of law making it a misdemeanor to
incorporate an invalid provision in the by-laws of a
The practice described in the passage above quoted from the corporation; and if there were such, the hazards incident to
agreed facts is in our opinion unauthorized by law. Such was corporate effort would certainly be largely increased. There
the view taken by the bank examiner of the Treasury Bureau is no merit in this cause of action.
in his report to the Insular Treasurer on December 21, 1925,
wherein the practice in question was criticized. The
Fifth cause of action. — In section 31 of the Corporation Law
administration of property in the manner described is more
it is declared that, "at all elections of directors there must be
befitting to the business of a real estate agent or trust
present, either in person or by representative authorized to
company than to the business of a building and loan
act by written proxy, the owners of the majority of the
association. The practice to which this criticism is directed
subscribed capital stock entitled to vote. . . ." Conformably
relates of course solely to the management and
with this requirement it is declared in article 61 of the by-
administration of properties which are not mortgaged to the
laws of El Hogar Filipino that, "the attendance in person or by
association. The circumstance that the owner of the property
proxy of shareholders owning one-half plus one of the
may have been required to subscribe to one or more shares
shareholders shall be necessary to constitute a quorum for
of the association with a view to qualifying him to receive this
the election of directors. At the general annual meetings of the
service is of no significance. It is a general rule of law that
El Hogar Filipino held in the years 1911 and 1912, there was
corporations possess only such express powers. The
a quorum of shares present or represented at the meetings
management and administration of the property of the
and directors were duly elected accordingly. As the
shareholders of the corporation is not expressly authorized
corporation has grown, however, it has been fond
by law, and we are unable to see that, upon any fair
increasingly difficult to get together a quorum of the
construction of the law, these activities are necessary to the
shareholders, or their proxies, at the annual meetings; and
exercise of any of the granted powers. The corporation, upon
with the exception of the annual meeting held in 1917, when
the point now under the criticism, has clearly extended itself
a new directorate was elected, the meetings have failed for
beyond the legitimate range of its powers. But it does not
lack of quorum. It has been foreseen by the officials in charge
result that the dissolution of the corporation is in order, and
of the respondent that this condition of affairs would lead to
it will merely be enjoined from further activities of this sort.
embarrassment, and a special effort was made by the
management to induce a sufficient number of shareholders to
Fourth cause of action. — It appears that among the by laws attend the annual meeting for February, 1923. In addition to
of the association there is an article (No. 10) which reads as the publication of notices in the newspapers, as required by
follows: the by-laws, a letter of notification was sent to every
shareholder at his last known address, together with a blank
form of proxy to be used in the event the shareholder could
The board of directors of the association, by the
not personally attend the meeting. Notwithstanding these
vote of an absolute majority of its members, is
special efforts the meeting was attended only by
empowered to cancel shares and to return to the
shareholders, in person and by proxy, representing 3,889
owner thereof the balance resulting from the
shares, out of a total of 106,491 then outstanding and entitled
liquidation thereof whenever, by reason of their
to vote.
conduct, or for any other motive, the continuation
as members of the owners of such shares is not
desirable. Owing to the failure of a quorum at most of the general
meetings since the respondent has been in existence, it has
been the practice of the directors to fill vacancies in the
This by-law is of course a patent nullity, since it is in direct
directorate by choosing suitable persons from among the
conflict with the latter part of section 187 of the Corporation
Law, which expressly declares that the board of directors

Page 18 of 48
RA 8791
Deposits, Loans, and Other Operations

stockholders. This custom finds its sanction in article 71 of salary, — as the complaint supposes would be proper, — have
the by-laws, which reads as follows: been receiving large compensation, varying in amount from
time to time, out of the profits of the respondent. The facts
relating to this cause of action are in substance these:
ART. 71. The directors shall elect from among the
shareholders members to fill the vacancies that
may occur in the board of directors until the Under section 92 of the by-laws of El Hogar Filipino 5 per
election at the general meeting. centum of the net profit shown by the annual balance sheet is
distributed to the directors in proportion to their attendance
at meetings of the board. The compensation paid to the
The person thus chosen to fill vacancies in the directorate
directors from time to time since the organization was
have, it is admitted, uniformly been experienced and
organized in 1910 to the end of the year 1925, together with
successful business and professional men of means, enjoying
the number of meetings of the board held each year, is
earned incomes of from P12,000 to P50,000 per annum, with
exhibited in the following table:
an annual average of P30,000 in addition to such income as
they derive from their properties. Moreover, it appears that
several of the individuals constituting the original directorate
Rate
and persons chosen to supply vacancies therein belong to Compensati Numbe
per
prominent Filipino families, and that they are more or less on r of
meetin
related to each other by blood or marriage. In addition to this Year paid meetin
g
it appears that it has been the policy of the directorate to keep directors gs
as a
thereon some member or another of a single prominent as a whole held
American law firm in the city. whole

1911
P
It is supposed in the statement of the fifth cause of action in ........................... P 4,167.96 25
166.71
the complaint that the failure of the corporation to hold .......
annual meetings and the filling of vacancies in the directorate
in the manner described constitute misdemeanors on the part 1912
of the respondent which justify the resumption of the ........................... 10,511.87 29 362.47
franchise by the Government and dissolution of the .......
corporation; and in this connection it is charge that the board
of directors of the respondent has become a permanent and 1913
self perpetuating body composed of wealthy men instead of ........................... 15,479.29 27 573.30
wage earners and persons of moderate means. We are unable .......
to see the slightest merit in the charge. No fault can be
imputed to the corporation on account of the failure of the 1914
shareholders to attend the annual meetings; and their non- ........................... 19,164.72 27 709.80
attendance at such meetings is doubtless to be interpreted in .......
part as expressing their satisfaction of the way in which
things have been conducted. Upon failure of a quorum at any 1915
annual meeting the directorate naturally holds over and ........................... 24,032.85 25 961.31
continues to function until another directorate is chosen and .......
qualified. Unless the law or the charter of a corporation
expressly provides that an office shall become vacant at the 1916
expiration of the term of office for which the officer was ........................... 27,539.50 28 983.55
elected, the general rule is to allow the officer to holdover .......
until his successor is duly qualified. Mere failure of a
corporation to elect officers does not terminate the terms of 1917
1,204.
existing officers nor dissolve the corporation (Quitman Oil ........................... 31,327.00 26
88
Company vs. Peacock, 14 Ga. App., 550; Jenkins vs. Baxter, 160 .......
Pa. State, 199; New York B. & E. Ry. Co. vs. Motil, 81 Conn., 466;
Hatch vs. Lucky Bill Mining Company, 71 Pac., 865; 1918
1,642.
Youree vs. Home Town Matual Ins. Company, 180 Missouri, ........................... 32,858.35 20
91
153; Cassell vs. Lexington, H. and P. Turnpike Road Co., 10 Ky. .......
L. R., 486). The doctrine above stated finds expressions in
article 66 of the by-laws of the respondent which declares in 1919
1,729.
so many words that directors shall hold office "for the term of ........................... 36,318.78 21
46
one year on until their successors shall have been elected and .......
taken possession of their offices."
1920
2,268.
........................... 63,517.01 28
It result that the practice of the directorate of filling vacancies 46
.......
by the action of the directors themselves is valid. Nor can any
exception be taken to then personality of the individuals 1921
chosen by the directors to fill vacancies in the body. Certainly 1,472.
........................... 36,815.33 25
it is no fair criticism to say that they have chosen competent 61
.......
businessmen of financial responsibility instead of electing
poor persons to so responsible a position. The possession of 1922
means does not disqualify a man for filling positions of 1,725.
........................... 43,133.73 25
responsibility in corporate affairs. 34
.......

1923
Sixth cause of action. — Under the sixth cause of action it is 1,473.
........................... 39,773.61 27
alleged that the directors of El Hogar Filipino, instead of 09
.......
serving without pay, or receiving nominal pay or a fixed

Page 19 of 48
RA 8791
Deposits, Loans, and Other Operations
1924
1,486.
........................... 38,651.92 26
61
.......
1925
1,373.
........................... 35,719.27 26
81
.......
It will be note that the compensation above indicated as
accruing to the directorate as a whole has been divided
among the members actually present at the different
meetings. As a result of this practice, and the liberal measure
of compensation adopted, we find that the attendance of the
membership at the board meetings has been extraordinarily
good. Thus, during the years 1920 to 1925, inclusive, when
the board was composed of nine members, the attendance has
regularly been eight meeting with the exception of two years
when the average attendance was seven. It is insisted in the
brief for the Attorney-General that the payment of the
compensation indicated is excessive and prejudicial to he
interests of the shareholders at large. For the respondent,
attention is directed to the fact that the liberal policy adopted
by the association with respect to the compensation of the
directors has had highly beneficial results, not only in
securing a constant attendance on the part of the
membership, but in obtaining their intelligent attention to the
affairs of the association. Certainly, in this connection, the
following words from the report of the government
examiners for 1918 to the Insular Treasurer contain matter
worthy of consideration:
The management of the association is entrusted to men of
recognized ability in financial affairs and it is believed that
they have long foreseen all possible future contingencies and
that under such men the interests of the stockholders are duly
protected. The steps taken by the directorate to curtail the
influx of unnecessary capital into the association's coffers, as
mentioned above, reveals how the men at grasp the situation
and to apply the necessary remedy as the circumstances were
found in the same excellent condition as in the previous
examination.
In so far as this court is concerned the question here before
us is not one concerning the propriety and wisdom of the
measure of compensation adopted by the respondent but
rather the question of the validity of the measure. Upon this
point there can, it seems to us, be no difference of intelligent
opinion. The Corporation Law does not undertake to
prescribe the rate of compensation for the directors of
corporations. The power to fixed the compensation they shall
receive, if any, is left to the corporation, to be determined in
its by-laws(Act No. 1459, sec. 21). Pursuant to this authority
the compensation for the directors of El Hogar Filipino has
been fixed in section 92 of its by-laws, as already stated. The
justice and property of this provision was a proper matter for
the shareholders when the by-laws were framed; and the
circumstance that, with the growth of the corporation, the
amount paid as compensation to the directors has increased
beyond what would probably be necessary to secure
adequate service from them is matter that cannot be
corrected in this action; nor can it properly be made a basis
for depriving the respondent of its franchise, or even for
enjoining it from compliance with the provisions of its own
by-laws. If a mistake has been made, or the rule adopted in
the by-laws meeting to change the rule. The remedy, if any,
seems to lie rather in publicity and competition, rather than
in a court proceeding. The sixth cause of action is in our
opinion without merit.
Seventh cause of action. — It appears that the promoter and
organizer of El Hogar Filipino was Mr. Antonio Melian, and in
Page 20 of 48
the early stages of the organization of the association the
board of directors authorized the association to make a
contract with him with regard to the services him therefor.
Pursuant to this authority the president of the corporation, on
January 11, 1911, entered into a written agreement with Mr.
Melian, which is reproduced in the agreed statement of facts
and of which the important clauses are these:
1. The corporation "El Hogar Filipino Sociedad
Mutua de Construccion y Prestamos," and on its
behalf its president, Don Antonio R. Roxas, hereby
confers on Don Antonio Melian the office of
manager of said association for the period of one
year from the date of this contract.
2. Don Antonio Melian accepts said office and
undertakes to render the services thereto
corresponding for the period of one year, as
prescribed by the by-laws of the corporation,
without salary.
3. Don Antonio Melian furthermore undertakes to
pay for his own account, all the expenses incurred
in the organization of the corporation.
4. Don Antonio Melian further undertakes to lend
to the corporation, without interest the sum of six
thousand pesos (P6,000), Philippine Currency, for
the purpose of meeting the expense of rent, office
supplies, etcetera, until such time as the
association has sufficient funds of its own with
which to return this loan: Provided, nevertheless,
That the maximum period thereof shall not exceed
three (3) years.
5. Don Antonio Melian undertakes that the capital
of the association shall amount to the sum of four
hundred thousand pesos (P400,000), Philippine
currency, par value, during the first year of its
duration.
6. In compensation of the studies made and
services rendered by Don Antonio Melian for its
organization, the expenses incurred by him to that
end, and in further consideration of the said loan of
six thousand pesos (P6,000), and of the services to
be rendered by him as manager, and of the
obligation assumed by him that the nominal value
of the capital of the association shall reach the sum
of four hundred thousand pesos (P400,000) during
the first year of its duration, the corporation 'El
Hogar Filipino Sociedad Mutua de Construccion y
Prestamos' hereby grants him five per centum
(5%) of the net profits to be earned by it in each
year during the period fixed for the duration of the
association by its articles of
incorporation; Provided, that this participation in
the profits shall be transmitted to the heirs of
Señor Melian in the event of his death; And
provided further, that the performance of all the
obligations assumed by Señor Melian in favor of
the association, in accordance with this contract,
shall and does constitute a condition precedent to
the acquisition by Señor Melian of the right to the
said participation in the profits of the association,
unless the non-performance of such obligations
shall be due to a fortuitous event or force majeure.
In conformity with this agreement there was inserted in
section 92 of the by-laws of the association a provision
RA 8791
Deposits, Loans, and Other Operations
recognizing the rights of Melian, as founder, to 5 per centum
of the net profits shown by the annual balance sheet, payment
of the same to be made to him or his heirs during the life of
the association. It is declared in said article that this portion
of the earnings of the association is conceded to him in
compensation for the studies, work and contributions made
by him for the organization of El Hogar Filipino and the
performance on his part of the contract of January 11, 1911,
above quoted. During the whole life of the association, thus
far, it has complied with the obligations assumed by it in the
contract above- mentioned; and during the years 1911 to
1925, inclusive, it paid to him as founder's royalty the sum of
P459,011.19, in addition to compensation received from the
association by him in to remuneration of services to the
association in various official capacities.
As a seventh cause of action it is alleged in the complaint that
this royalty of the founder is "unconscionable, excessive and
out of all proportion to the services rendered, besides being
contrary to and incompatible with the spirit and purpose of
building and loan associations." It is not alleged that the
making of this contract was beyond the powers of the
association (ultra vires); nor it alleged that it is vitiated by
fraud of any kind in its procurement. Nevertheless, it is
pretended that in making and observing said contract the
respondent committed an offense requiring its dissolution,
or, as is otherwise suggested, that the association should be
enjoined from performing the agreement.
It is our opinion that this contention is entirely without merit.
Stated in its true simplicity, the primary question here is
whether the making of a (possibly) indiscreet contract is a
capital offense in a corporation, — a question which answers
itself. No possible doubt exists as to the power of a
corporation to contract for services rendered and to be
rendered by a promoter in connection with organizing and
maintaining the corporation. It is true that contracts with
promoters must be characterized by good faith; but could it
be said with certainty, in the light of facts existing at the time
this contract was made, that the compensation therein
provided was excessive? If the amount of the compensation
now appears to be a subject of legitimate criticism, this must
be due to the extraordinary development of the association in
recent years.
If the Melian contract had been clearly ultra vires — which is
not charged and is certainly untrue — its continued
performance might conceivably be enjoined in such a
proceeding as this; but if the defect from which it suffers is
mere matter for an action because Melian is not a party. It is
rudimentary in law that an action to annul a contract cannot
be maintained without joining both the contracting parties as
defendants. Moreover, the proper party to bring such an
action is either the corporation itself, or some shareholder
who has an interest to protect.
The mere fact that the compensation paid under this contract
is in excess of what, in the full light of history, may be
considered appropriate is not a proper consideration for this
court, and supplies no ground for interfering with its
performance. In the case of El Hogar Filipino vs. Rafferty (37
Phil., 995), which was before this court nearly ten years ago,
this court held that the El Hogar Filipino is contract with Mr.
Melian did not affect the association's legal character. The
inference is that the contract under consideration was then
considered binding, and it occurred to no one that it was
invalid. It would be a radical step indeed for a court to attempt
to substitute its judgment for the judgment of the contracting
parties and to hold, as we are invited to hold under this cause
of action, that the making of such a contract as this removes
the respondent association from the pale of the law. The
majority of the court is of the opinion that our traditional
Page 21 of 48
respect for the sanctity of the contract obligation should
prevail over the radical and innovating tendencies which find
acceptance with some and which, if given full rein, would go
far to sink legitimate enterprise in the Islands into the pit of
populism and bolshevism. The seventh count is not
sustainable.
Eight cause of action. — Under the fourth cause of action we
had case where the alleged ground for the revocation of the
respondent's charter was based upon the presence in the by-
laws of article 10 that was found to be inconsistent with the
express provisions of law. Under the eight cause of action the
alleged ground for putting an end to the corporate life of the
respondent is found in the presence of other articles in the by-
laws, namely, articles 70 and 76, which are alleged to be
unlawful but which, as will presently be seen, are entirely
valid. Article 70 of the by-laws in effect requires that persons
elected to the board of directors must be holders of shares of
the paid up value of P5,000 which shall be held as security
may be put up in the behalf of any director by some other
holder of shares in the amount stated. Article 76 of the by-
laws declares that the directors waive their right as
shareholders to receive loans from the association.
It is asserted, under the eight cause of action, that article 70 is
objectionable in that, under the requirement for security, a
poor member, or wage-earner, cannot serve as director,
irrespective of other qualifications and that as a matter of fact
only men of means actually sit on the board. Article 76 is
criticized on the ground that the provision requiring directors
to renounce their right to loans unreasonably limits their
rights and privileges as members. There is nothing of value in
either of theses suggestions. Section 21 of the Corporation
Law expressly gives the power to the corporation to provide
in its by-laws for the qualifications of directors; and the
requirement of security from them for the proper discharge
of the duties of their office, in the manner prescribed in article
70, is highly prudent and in conformity with good practice.
Article 76, prohibiting directors from making loans to
themselves, is of course designed to prevent the possibility of
the looting of the corporation by unscrupulous directors. A
more discreet provision to insert in the by-laws of a building
and loan association would be hard to imagine. Clearly, the
eighth cause of action cannot be sustained.
Ninth cause of action. — The specification under this head is
in effect that the respondent has abused its franchise in
issuing "special" shares. The issuance of these shares is allege
to be illegal and inconsistent with the plan and purposes of
building and loan associations; and in particular, it is alleged
and inconsistent with the plan and purposes of building and
loan associations; and in particular, it is alleged that they are,
in the main, held by well-to-wage-earners for accumulating
their modest savings for the building of homes.
In the articles of incorporation we find the special shares
described as follows:
"Special" shares shall be issued upon the payment
of 80 per cent of their par value in cash, or in
monthly dues of P10. The 20 per cent remaining of
the par value of such shares shall be completed by
the accumulation thereto of their proportionate
part of the profits of the corporation. At the end of
each quarter the holders of special shares shall be
entitled to receive in cash such part of the net
profits of the corporation corresponding to the
amount on such date paid in by the holders of
special shares, on account thereof, as shall be
determined by the directors, and at the end of each
year the full amount of the net profits available for
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Deposits, Loans, and Other Operations
distribution corresponding to the special shares.
The directors shall apply such part as they deem
advisable to the amortization of the subscription to
capital with respect to shares not fully paid up, and
the remainder of the profits, if any, corresponding
to such shares, shall be delivered to the holders
thereof in accordance with the provision of the by-
laws.
The ground for supposing the issuance of the "special" shares
to be unlawful is that special shares are not mentioned in the
Corporation Law as one of the forms of security which may be
issued by the association. In the agreed statement of facts it is
said that special shares are issued upon two plans. By the
second, the shareholder, upon subscribing, pays in cash P10
for each share taken, and undertakes to pay P10 a month, as
dues, until the total so paid in amounts to P160 per share. On
December 31, 1925, there were outstanding 20,844 special
shares of a total paid value (including accumulations ) of
P3,680,162.51. The practice of El Hogar Filipino, since 1915,
has been to accumulate to each special share, at the end of the
year, one-tenth of the divident declared and to pay the
remainder of the divident in cash to the holders of shares.
Since the same year dividend have been declared on the
special and common shares at the rate of 10 per centum per
annum. When the amount paid in upon any special share plus
the accumulated dividends accruing to it, amounts to the par
value of the share (P200), such share matures and ceases to
participate further in the earning. The amount of the par value
of the share (P200) is then returned to the shareholder and
the share cancelled. Holders of special and ordinary shares
participate ratably in the dividends declared and distributed,
the part pertaining to each share being computed on the basis
of the capital paid in, plus the accumulated dividends
pertaining to each share at the end of the year. The total
number of shares of El Hogar Filipino outstanding on
December 31, 1925, was 125,750, owned by 5,826
shareholders, and dividend into classes as follows:
Preferred shares ..................................
Special shares .....................................
Ordinary shares ..................................
The matter of the propriety of the issuance of special shares
by El Hogar Filipino has been before this court in two earlier
cases, in both of which the question has received the fullest
consideration from this court. In El Hogar Filipino vs.
Rafferty (37 Phil., 995), it was insisted that the issuance of
such shares constituted a departure on the part of the
association from the principle of mutuality; and it was
claimed by the Collector of Internal Revenue that this
rendered the association liable for the income tax to which
other corporate entities are subject. It was held that this
contention was untenable and that El Hogar Filipino was a
legitimate building and loan association notwithstanding the
issuance of said shares. In Sevireno vs. El Hogar Filipino (G. R.
No. 24926),2 and the related cases of Gervasio Miraflores and
Gil Lopes against the same entity, it was asserted by the
plaintiffs that the emission of special shares deprived the
herein responded of the privileges and immunities of a
building and loan association and that as a consequence the
loans that had been made to the plaintiffs in those cases were
usurious. Upon an elaborate review of the authorities, the
court, though divided, adhered to the principle announced in
the earlier case and held that the issuance of the special
shares did not affect the respondent's character as a building
and loan association nor make its loans usurious. In view of
the lengthy discussion contained in the decisions above-
mentioned, it would appear to be an act of supererogation on
our part to go over the same ground again. The discussion will
therefore not be repeated, and what is now to be said should
be considered supplemental thereto.
Upon examination of the nature of the special shares in the
light of American usage, it will be found that said shares are
precisely the same kind of shares that, in some American
jurisdictions, are generally known as advance payment
shares; in if close attention be paid to the language used in the
last sentence of section 178 of the Corporation Law, it will be
found that special shares where evidently created for the
purpose of meeting the condition cause by the prepayment of
dues that is there permitted. The language of this provision is
as follow "payment of dues or interest may be made in
advance, but the corporation shall not allow interest on such
advance payment at a greater rate than six per centum per
annum nor for a longer period than one year." In one sort of
special shares the dues are prepaid to the extent of P160 per
share; in the other sort prepayment is made in the amount of
P10 per share, and the subscribers assume the obligation to
pay P10 monthly until P160 shall have been paid.
It will escape notice that the provision quoted say that
interest shall not be allowed on the advance payments at a
greater rate than six per centum per annum nor for a longer
period than one year. The word "interest " as there used must
be taken in its true sense of compensation for the used of
money loaned, and it not must not be confused with the dues
upon which it is contemplated that the interest may be paid.
Now, in the absence of any showing to the contrary, we infer
that no interest is ever paid by the association in any amount
for the advance payments made on these shares; and the
reason is to be found in the fact that the participation of the
special shares in the earnings of the corporation, in
accordance with section 188 of the Corporation Law,
sufficiently compensates the shareholder for the advance
payments made by him; and no other incentive is necessary
to induce inventors to purchase the stock.
1,503 It will be observed that the final 20 per centum of the par
value of each special share is not paid for by the shareholder
20,884 with funds out of the pocket. The amount is satisfied by
applying a portion of the shareholder's participation in the
103,363 annual earnings. But as the right of every shareholder to such
participation in the earnings is undeniable, the portion thus
annually applied is as much the property of the shareholder
as if it were in fact taken out of his pocket. It follows that the
mission of the special shares does not involve any violation of
the principle that the shares must be sold at par.
From what has been said it will be seen that there is express
authority, even in the very letter of the law, for the emission
of advance-payment or "special" shares, and the argument
that these shares are invalid is seen to be baseless. In addition
to this it is satisfactorily demonstrated in Severino vs. El Hogar
Filipino, supra, that even assuming that the statute has not
expressly authorized such shares, yet the association has
implied authority to issue them. The complaint consequently
fails also as regards the stated in the ninth cause of action.
Tenth cause of action. — Under this head of the complaint it is
alleged that the defendant is pursuing a policy of depreciating,
at the rate of 10 per centum per annum, the value of the real
properties acquired by it at its sales; and it is alleged that this
rate is excessive. From the agreed statement it appears that
since its organization in 1910 El Hogar Filipino, prior to the
end of the year 1925, had made 1,373 loans to its
shareholders secured by first mortgages on real estate as well
as by the pledge of the shares of the borrowers. In the same
period the association has purchased at foreclosure sales the
real estate constituting the security for 54 of the aforesaid
Page 22 of 48
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Deposits, Loans, and Other Operations
loans. In making these purchases the association has always
bid the full amount due to it from the debtor, after deducting
the withdrawal value of the shares pledged as collateral, with
the result that in no case has the shareholder been called
upon to pay a deficiency judgement on foreclosure.
El Hogar Filipino places real estate so purchased in its
inventory at actual cost, as determined by the amount bid on
foreclosure sale; and thereafter until sold the book value of
such real estate is depreciated at the rate fixed by the
directors in accordance with their judgment as to each parcel,
the annual average depreciation having varied from nothing
to a maximum of 14.138 per cent. The sales thereof, but sales
are made for the best prices obtainable, whether greater or
less than the book value.
It is alleged in the complaint that depreciation is charged by
the association at the rate of 10 per centum per annum. The
agreed statement of facts on this point shows that the annual
average varies from nothing to a maximum of something over
14 per centum. We are thus left in the dark as to the precise
depreciation allowed from year to year. It is not claimed for
the Government that the association is without power to
allow some depreciation; and it is quite clear that the board
of directors possesses a discretion in this matter. There is no
positive provision of law prohibiting the association from
writing off a reasonable amount for depreciation on its assets
for the purpose of determining its real profits; and article 74
of its by-laws expressly authorizes the board of directors to
determine each year the amount to be written down upon the
expenses of installation and the property of the corporation.
There can be no question that the power to adopt such a by-
law is embraced within the power to make by-laws for the
administration of the corporate affairs of the association and
for the management of its business, as well as the care, control
and disposition of its property (Act No. 1459, sec. 13 [7]). But
the Attorney-General questions the exercise of the direction
confided to the board; and it is insisted that the excessive
depreciation of the property of the association is
objectionable in several respects, but mainly because it tends
to increase unduly the reserves of the association, thereby
frustrating the right of the shareholders to participate
annually and equally in the earnings of the association.
This count for the complaint proceeds, in our opinion, upon
an erroneous notion as to what a court may do in determining
the internal policy of a business corporation. If the criticism
contained in the brief of the Attorney-General upon the
practice of the respondent association with respect to
depreciation be well founded, the Legislature should supply
the remedy by defining the extent to which depreciation may
be allowed by building and loan associations. Certainly this
court cannot undertake to control the discretion of the board
of directors of the association about an administrative matter
as to which they have legitimate power of action. The tenth
cause of action is therefore not well founded.
Eleventh and twelfth causes of action. — The same comment is
appropriate with respect to the eleventh and twelfth causes
of action, which are treated together in the briefs, and will be
here combined. The specification in the eleventh cause of
action is that the respondent maintains excessive reserve
funds, and in the twelfth cause of action that the board of
directors has settled upon the unlawful policy of paying a
straight annual dividend of 10 per centum, regardless of
losses suffered and profits made by the corporation and in
contravention of the requirements of section 188 of the
Corporation Law. The facts relating to these two counts in the
complaint, as set forth in the stipulation, are these:
Page 23 of 48
In article 92 of the by-laws of El Hogar Filipino it is provided
that 5 per centum of the net profits earned each year, as
shown by the annual balance sheet shall be carried to a
reserve fund. The fund so created is called the General
Reserve. Article 93 of the by-laws authorizes the directors to
carry funds to a special reserve, whenever in their judgment
it is advisable to do so, provided that the annual dividend in
the year in which funds are carried to special reserve exceeds
8 per centum. It appears to have been the policy of the board
of directors for several years past to place in the special
reserve any balance in the profit and loss account after the
satisfaction of preferential charges and the payment of a
dividend of 10 per centum to all special and ordinary shares
(with accumulated dividends). As things stood in 1926 the
general reserve contained an amount equivalent to about 5
per centum of the paid-in value of shared. This fund has never
been drawn upon for the purpose of maintaining the regular
annual dividend; but recourse has been had to the special
reserve on three different occasions to make good the amount
necessary to pay dividends. It appears that in the last five
years the reserves have declined from something over 9 per
cent to something over 7.
It is insisted in the brief of the Attorney-General that the
maintenance of reserve funds is unnecessary in the case of
building and loan associations, and at any rate the keeping of
reserves is inconsistent with section 188 of the Corporation
Law. Moreover, it is said that the practice of the association in
declaring regularly a 10 per cent dividend is in effect a
guaranty by the association of a fixed dividend which is
contrary to the intention of the statute.
Upon careful consideration of the questions involved we find
no reason to doubt the right of the respondent to maintain
these reserves. It is true that the corporation law does not
expressly grant this power, but we think it is to be implied. It
is a fact of common observation that all commercial
enterprises encounter periods when earnings fall below the
average, and the prudent manager makes provision for such
contingencies. To regard all surplus as profit is to neglect one
of the primary canons of good business practice. Building and
loan associations, though among the most solid of financial
institutions, are nevertheless subject to vicissitudes.
Fluctuations in the dividend rate are highly detrimental to
any fiscal institutions, while uniformity in the payments of
dividends, continued over long periods, supplies the surest
foundations of public confidence.
The question now under consideration is not new in
jurisprudence, for the American courts have been called upon
more than once to consider the legality of the maintenance of
reserves by institutions of this or similar character.
In Greeff vs. Equitable Life Assurance Society, the court had
under consideration a charter provision of a life insurance
company, organized on the mutual plan, in its relation to the
power of the company to provide reserves. There the statute
provided that "the officers of the company, within sixty days
from the expiration of the first five years, from December 31,
1859, and within the first sixty days of every subsequent
period of five years, shall cause a balance to be struck of the
affairs of the company, which shall exhibit its assets and
liabilities, both present and contingent, and also the net
surplus, after deducting a sufficient amount to cover all
outstanding risks and other obligations. Each policy holder
shall be credited with an equitable share of the said surplus."
The court said:
No prudent person would be inclined to take a
policy in a company which had so improvidently
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Deposits, Loans, and Other Operations
conducted its affairs that it only retained a fund
barely sufficient to pay its present liabilities, and,
therefore, was in a condition where any change by
the reduction of interest upon, or depreciation in,
the value of its securities, or any increase of
mortality, would render it insolvent and subject to
be placed in the hands of a receiver. The evident
purpose of the provisions of the defendant's
charter and policy relating to this subject was to
vest in the directors of the corporation a discretion
to determine the proportion of its surplus which
should be dividend each year.
In a friendly suit tried in a circuit court of Wisconsin in 1916,
entitled Boheman Bldg. and Loan Association vs. Knolt, the
court, in commenting on the nature of these reserves, said:
The apparent function of this fund is to insure the
stockholders against losses. Its purpose is not
unlike that of the various forms of insurance now
in such common use. This contribution is as
legitimate an item of expense as are the premiums
paid on any insurance policy. (See Clarks and
Chase, Building and Loan Association, footnote,
page 344.)
In commenting on the necessity of such funds, Sundheim says:
It is optional with the association whether to
maintain such a fund or not, but justice and good
business policy seem to require it. The retiring
stockholder must be paid the value of his stock in
cash and leave for those remaining a large number
of securities and perhaps some real estate
purchased to protect the associations interest.
How much will be realized on these securities, or
real estate, no human foresight can tell. Further,
the realizing on these securities may entail
considerable litigation and expense. There are
many other contingencies which might cause a
shrinkage in the association's assets, such as
defective titles, undisclosed defalcations on the
part of an officer, a miscalculation of assets and
liabilities, and many other errors and omissions
which must always be reckoned within the conduct
of human affairs.
The contingent fund is merely insurance against
possible loss. That losses may occur from time to
time seems almost inevitable and it is, therefore,
inequitable that the remaining stockholders
should be compelled to accept all securities at par,
so, to say the least, the maintenance of this fund is
justified. The association teaches the duty of
providing for the proverbial rainy day. Why should
it not provide for the hour of adversity? The
reserve fund has protected the maturing or
withdrawing member during the period of his
membership. In case of loss it has or would have
reimbursed him and, at all times, it has protected
him and given strength and standing to the
association. Losses may occur, after his
membership ceases, that arose from some mistake
or mismanagement committed during the period
of his membership, and in fairness and equity the
remaining members should have some protection
against this. (Sundheim, Law of Building and Loan
Association, sec. 53.)
The government insists, we thing, upon an interpretation of
section 188 of the Corporation Law that is altogether too
Page 24 of 48
strict and literal. From the fact that the statute provides that
profits and losses shall be annually apportioned among the
shareholders it is argued that all earnings should be
distributed without carrying anything to the reserve. But it
will be noted that it is provided in the same section that the
profits and losses shall be determined by the board of
directors: and this means that they shall exercise the usual
discretion of good businessmen in allocating a portion of the
annual profits to purposes needful to the welfare of the
association. The law contemplates the distribution of
earnings and losses after other legitimate obligations have
been met.
Our conclusion is that the respondent has the power to
maintain the reserves criticized in the eleventh and twelfth
counts of the complaint; and at any rate, if it be supposed that
the reserves referred to have become excessive, the remedy
is in the hands of the Legislature. It is no proper function of
the court to arrogate to itself the control of administrative
matters which have been confided to the discretion of the
board of directors. The causes of action under discussion
must be pronounced to be without merit.
Thirteenth cause of action. — The specification under this
head is, in effect, that the respondent association has made
loans which, to the knowledge of the associations officers
were intended to be used by the borrowers for other
purposes than the building of homes. In this connection it
appears that, though loans have been made by the association
exclusively to its shareholders, no attempt has been made by
it to control the borrowers with respect to the use made of the
borrowed funds, the association being content to see that the
security given for the loan in each case is sufficient. On
December 31, 1925, the respondent had five hundred forty-
four loans outstanding secured by mortgages upon real estate
and by the pledge of the borrowers' shares in an amount
sufficient at maturity to amortize the loans. With respect to
the nature of the real estate upon which these loans were
made it appears that three hundred fifty-one loans were
secured by mortgages upon city residences, seven by
mortgages upon commercial building in cities, and three
mortgages upon unimproved city lots. At the same time one
hundred eighty-three of the loans were secured by mortgages
upon groves, sugar land, and rice land, with a total area of
about 7,558 hectares. From information gathered by the
association from voluntary statements of borrowers given at
the time of application with respect to the use intended to be
made of the borrowed funds, it appears that the amount of
P693,200 was borrowed to redeem real property from
existing mortgages or pactos de retro, P280,800 to buy real
estate, P449,100 to erect buildings, P24,000 to improve and
repair buildings, P1,480,900 for agricultural purposes, while
the amount of P5,763,700 was borrowed for purposes not
disclosed.
Upon these facts an elaborate argument has been constructed
in behalf of the plaintiff to the effect that in making loans for
other purposes than the building of residential houses the
association has illegally departed from its character and made
itself amenable to the penalty of dissolution. Aside from being
directly opposed to the decision of this court in Lopez and
Javelona vs. El Hogar Filipino and Registrar of Deeds of
Occidental Negros (47 Phil., 249), this contention finds no
substantial support in the prevailing decisions made in
American courts; and our attention has not been directed to a
single case wherein the dissolution of a building and loan
association has been decreed in a quo warranto proceeding
because the association allowed its borrowers to use the
loans for other purposes than the acquisition of homes.
The case principally relied upon for the Government appears
to be Pfeister vs. Wheeling Building Association (19 W. Va.,
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Deposits, Loans, and Other Operations
676, 716),which involved the question whether a building
and loan association could recover the full amount of a note
given to it by a member and secured by a mortgage from a
stranger. At the time the case arose there was a statute in
force in the State of West Virginia expressly forbidding
building and loan associations to use or direct their funds for
or to any other object or purpose than the buying of lots or
houses or in building and repairing houses, and it was
declared that in case the funds should be improperly directed
to other objects, the offending association should forfeit all
rights and privileges as a corporation. Under the statute so
worded the court held that the plaintiff could only recover the
amount actually advanced by it with lawful interest and fines,
without premium; and judgment was given accordingly. The
suggestion in that case that the result would have been the
same even in the absence of statute was mere dictum and is
not supported by respectable authority.
Reliance is also placed in the plaintiff's brief upon McCauley
vs. Building & Saving Association. The statute in force in the
State of Tennessee at the time this action arose provided that
all loans should be made to the members of the association at
open stated meetings and that the money should be lent to the
highest bidder. Inconsistently with this provision, there was
inserted in the by-laws of the association a provision to the
effect that no loan should be made at a greater premium than
30 per cent, nor at a less premium than 29 7/8 per cent. It was
held that this by-law made free and open competition
impossible and that it in effect established a fixed premium. It
was accordingly held, in the case cited, that an association
could not recover such part of the loan as had been applied by
it to the satisfaction of a premium of 30 per centum.
We have no criticism to make upon the result reached in
either of the two decisions cited, but it is apparent that much
of the discussion contained in the opinions in those cases does
not reflect the doctrine now prevailing in the United States;
and much less are those decisions applicable in this
jurisdiction. There is no statute here expressly declaring that
loans may be made by these associations solely for the
purpose of building homes. On the contrary, the building of
homes is mentioned in section 171 of the Corporation Law as
only one among several ends which building and loan
associations are designed to promote. Furthermore, section
181 of the Corporation Law expressly authorities the Board
of directors of the association from time to time to fix the
premium to be charged.
In the brief of the plaintiff a number of excerpts from
textbooks and decisions have been collated in which the idea
is developed that the primary design of building and loan
associations should be to help poor people to procure homes
of their own. This beneficent end is undoubtedly served by
these associations, and it is not to be denied that they have
been generally fostered with this end in view. But in this
jurisdiction at least the lawmaker has taken care not to limit
the activities of building and loan associations in an exclusive
manner, and the exercise of the broader powers must in the
end approve itself to the business community. Judging from
the past history of these institutions it can be truly said that
they have done more to encourage thrift, economy and saving
among the people at large than any other institution of
modern times, not excepting even the saving banks. In this
connection Mr. Sundheim, in a late treatise upon the subject
of the law of building and loan associations, makes the
following comment:
They have grown to such an extent in recent years
that they no longer restrict their money to the
home buyer, but loan their money to the mere
investor or dealer in real estate. They are the
holder of large mortgages secured upon farms,
Page 25 of 48
factories and other business properties and rows
of stores and dwellings. This is not an abuse of their
powers or departure from their main purposes, but
only a natural and proper expansion along healthy
and legitimate lines. (Sundheim, Building and Loan
Associations, sec. 7.)
Speaking of the purpose for which loans may be made, the
same author adds:
Loans are made for the purpose of purchasing a
homestead, or other real estate, or for any lawful
purpose or business, but there is no duty or
obligation of the association to inquire for what
purpose the loan is obtained, or to require any
stipulation from the borrower as to what use he
will make of the money, or in any manner to
supervise or control its disbursement. (Sundheim,
Building and Loan Association, sec. 111.)
In Lopez and Javelona vs. El Hogar Filipino and Registrar of
Deeds of Occidental Negros, this court had before it the
question whether a loan made by the respondent association
upon the security of a mortgage upon agricultural land, —
where the loan was doubtless used for agricultural purposes,
— was usurious or not; and the case turned upon the point
whether, in making such loans, the association had violated
the law and departed from its fundamental purposes. The
conclusion of the court was that the loan was valid and could
be lawfully enforced by a nonjudicial foreclosure in
conformity with the terms of the contract between the
association and the borrowing member. We now find no
reason to depart from the conclusion reached in that case, and
it is unnecessary to repeat what was then said. The thirteenth
cause of action must therefore be pronounced unfounded.
Fourteenth cause of action. — The specification under this
head is that the loans made by the defendant for purposes
other than building or acquiring homes have been extended
in extremely large amounts and to wealthy persons and large
companies. In this connection attention is directed to eight
loans made at different times in the last several years to
different persons or entities, ranging in amounts from
P120,000 to P390,000 and to two large loans made to the
Roxas Estate and to the Pacific Warehouse Company in the
amounts of P1,122,000 and P2,320,000, respectively. In
connection with the larger of the two after this loan was made
the available funds of El Hogar Filipino were reduced to the
point that the association was compelled to take advantage of
certain provisions of its by-laws authorizing the
postponement of the payment of claims resulting from
withdrawals, whereas previously the association had always
settled these claims promptly from current funds. At no time
was there apparently any delay in the payment of matured
shares; but in four or five cases there was as much as ten
months delay in the payment of withdrawal applications.
There is little that can be said upon the legal aspects of this
cause of action. In so far, as it relates to the purposes for which
these loans were made, the matter is covered by what was
said above with reference to the thirteenth cause of action;
and in so far as it relates to the personality of the borrowers,
the question belongs more directly to the discussion under
the sixteenth cause of action, which will be found below. The
point, then, which remains for consideration here is whether
it is a suicidal act on the part of a building and loan association
to make loans in large amount. If the loans which are here the
subject of criticism had been made upon inadequate security,
especially in case of the largest two, the consequences
certainly would have been disastrous to the association in the
extreme; but no such fact is alleged; and it is to be assumed
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Deposits, Loans, and Other Operations
that none of the ten borrowers have defaulted in their
contracts.
Now, it must be admitted that two of these loans at least are
of a very large size, considering the average range of financial
transaction in this country; and the making of the largest loan
was followed, as we have already see, with unpleasant
consequences to the association in dealing with current
claims. Nevertheless the agreed statement of facts shoes that
all of the loan referred to are only ten out of a total of five
hundred forty-four outstanding on December 31, 1925; and
the average of all the loans taken together is modest enough.
It appears that the chief examiner of banks and corporations
of the Philippine Treasury, after his examination of El Hogar
Filipino at the end of the year 1925, made a report concerning
this association as of January 31, 1926, in which he criticized
the Pacific Warehouse Company loan as being so large that it
temporarily crippled the lending power of the association for
some time. This criticism was apparently justified as proper
comment on the activities of the association; but the question
for use here to decide is whether the making of this and the
other large loans constitutes such a misuser of the franchise
as would justify us in depriving the association of its
corporate life. This question appears to us to be so simple as
almost to answer itself. The law states no limit with respect to
the size of the loans to be made by the association. That
matter is confided to the discretion of the board of directors;
and this court cannot arrogate to itself a control over the
discretion of the chosen officials of the company. If it should
be thought wise in the future to put a limit upon the amount
of loans to be made to a single person or entity, resort should
be had to the Legislature; it is not a matter amenable to
judicial control. The fourteenth cause of action is therefore
obviously without merit.
Fifteenth cause of action. — The criticism here comes back to
the supposed misdemeanor of the respondent in maintaining
its reserve funds, — a matter already discussed under the
eleventh and twelfth causes of action. Under the fifteenth
cause of action it is claimed that upon the expiration of the
franchise of the association through the effluxion of time, or
earlier liquidation of its business, the accumulated reserves
and other properties will accrue to the founder, or his heirs,
and the then directors of the corporation and to those persons
who may at that time to be holders of the ordinary and special
shares of the corporation. In this connection we note that
article 95 of the by-laws reads as follows:
ART. 95. The funds obtained by the liquidation of
the association shall be applied in the first place to
the repayment of shares and the balance, if any,
shall be distribute in accordance with the system
established for the distribution of annual profits.
It will be noted that the cause of action with which we are now
concerned is not directed to any positive misdemeanor
supposed to have been committed by the association. It has
exclusive relation to what may happen some thirty-five years
hence when the franchise expires, supposing of course that
the corporation should not be reorganized and continued
after that date. There is nothing in article 95 of the by-laws
which is, in our opinion, subject to criticism. The real point of
criticism is that upon the final liquidation of the corporation
years hence there may be in existence a reserve fund out of all
proportion to the requirements that may then fall upon it in
the liquidation of the company. It seems to us that this is
matter that may be left to the prevision of the directors or to
legislative action if it should be deemed expedient to require
the gradual suppression of the reserve funds as the time for
dissolution approaches. It is no matter for judicial
interference, and much less could the resumption of the
Page 26 of 48
franchise on this ground be justified. There is no merit in the
fifteenth cause of action.
Sixteenth cause of action. — This part of the complaint assigns
as cause of action that various loans now outstanding have
been made by the respondent to corporations and
partnerships, and that these entities have in some instances
subscribed to shares in the respondent for the sole purpose
of obtaining such loans. In this connection it appears from the
stipulation of facts that of the 5,826 shareholders of El Hogar
Filipino, which composed its membership on December 31,
1925, twenty-eight are juridical entities, comprising sixteen
corporations and fourteen partnerships; while of the five
hundred forty-four loans of the association outstanding on
the same date, nine had been made to corporations an five to
partnerships. It is also admitted that some of these juridical
entities became shareholders merely for the purpose of
qualifying themselves to take loans from the association, and
the same is said with respect to many natural persons who
have taken shares in the association. Nothing is said in the
agreed statement of facts on the point whether the
corporations and partnerships that have taken loans from the
respondent are qualified by law governing their own
organization to enter into these contracts with the
respondent.
In section 173 of the Corporation Law it is declared that "any
person" may become a stockholder in building and loan
associations. The word "person" appears to be here used in
its general sense, and there is nothing in the context to
indicate that the expression is used in the restricted sense of
both natural and artificial persons, as indicated in section 2 of
the Administrative Code. We would not say that the word
"person" or persons," is to be taken in this broad sense in
every part of the Corporation Law. For instance, it would
seem reasonable to say that the incorporators of a
corporation ought to be natural persons, although in section
6 it is said that five or more "persons", although in section 6 it
is said that five or more "persons," not exceeding fifteen, may
form a private corporation. But the context there, as well as
the common sense of the situation, suggests that natural
persons are meant. When it is said, however, in section 173,
that "any person" may become a stockholder in a building and
loan association, no reason is seen why the phrase may not be
taken in its proper broad sense of either a natural or artificial
person. At any rate the question whether these loans and the
attendant subscriptions were properly made involves a
consideration of the power of the subscribing corporations
and partnerships to own the stock and take the loans; and it
is not alleged in the complaint that they were without power
in the premises. Of course the mere motive with which
subscriptions are made, whether to qualify the stockholders
to take a loan or for some other reason, is of no moment in
determining whether the subscribers were competent to
make the contracts. The result is that we find nothing in the
allegations of the sixteenth cause of action, or in the facts
developed in connection therewith, that would justify us in
granting the relief.
Seventeenth cause of action. — Under the seventeenth cause
of action, it is charged that in disposing of real estates
purchased by it in the collection of its loans, the defendant has
no various occasions sold some of the said real estate on
credit, transferring the title thereto to the purchaser; that the
properties sold are then mortgaged to the defendant to secure
the payment of the purchase price, said amount being
considered as a loan, and carried as such in the books of the
defendant, and that several such obligations are still
outstanding. It is further charged that the persons and entities
to which said properties are sold under the condition charged
are not members or shareholders nor are they made
members or shareholders of the defendant.
RA 8791
Deposits, Loans, and Other Operations

This part of the complaint is based upon a mere technicality

of bookkeeping. The central idea involved in the discussion is
the provision of the Corporation Law requiring loans to be
stockholders only and on the security of real estate and
shares in the corporation, or of shares alone. It seems to be
supposed that, when the respondent sells property acquired
at its own foreclosure sales and takes a mortgage to secure
the deferred payments, the obligation of the purchaser is a
true loan, and hence prohibited. But in requiring the
respondent to sell real estate which it acquires in connection
with the collection of its loans within five years after receiving
title to the same, the law does not prescribe that the property
must be sold for cash or that the purchaser shall be a
shareholder in the corporation. Such sales can of course be
made upon terms and conditions approved by the parties;
and when the association takes a mortgage to secure the
deferred payments, the obligation of the purchaser cannot be
fairly described as arising out of a loan. Nor does the fact that
it is carried as a loan on the books of the respondent make it
a loan on the books of the respondent make it a loan in law.
The contention of the Government under this head is
untenable.

In conclusion, the respondent is enjoined in the future from

administering real property not owned by itself, except as
may be permitted to it by contract when a borrowing
shareholder defaults in his obligation. In all other respects the
complaint is dismissed, without costs. So ordered.

Avanceña, C. J., Johnson, Villamor and Vila-Real, JJ., concur.

Page 27 of 48
RA 8791
Deposits, Loans, and Other Operations

G.R. No. L-43682 March 31, 1938
In Re Liquidation of Mercantile Bank of China.
TAN TIONG TICK, claimant-appellant,
vs.
AMERICAN APOTHECARIES CO., ET AL., claimants-
appellees.
Cirilo Lim and Antonio Gonzalez for appellant.
Eusebio Orense and Carmelino G. Alvendia for appellees Chinese
Grocers Asso., et al.
Marcelo Nubla for appellees Ang Cheng Lian, et al.
IMPERIAL, J.:
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.
In his report the commissioner classified the claims
presented under the following six groups: "(First) Current
accounts, savings and fixed deposits. (Second) Checks or
drafts sold by the Mercantile Bank of China and not paid by
the correspondents or banks against which they were drawn.
(Third) Checks or drafts issued by the Mercantile Bank of
China in payment or reimbursement of drafts or goods sent to
it for collection by banks and foreign commercial houses
against merchants or commercial entities of Manila. (Fourth)
Drafts for collection received by the Mercantile Bank of China
to be collected from merchants and commercial entities in
Manila and which were pending collection on the date of the
suspension of payments. (Fifth) Claims of depositors who are
at the same time debtor of the Mercantile Bank of China.(Sixth
Various claims." And referring to the claims of the appellant,
he states:
Mr. Tan Tiong Tick claims from the Mercantile Bank of China
the amount of P 27,597.80, the total amount of the following
sums which he has in his favor in said bank including the
corresponding interest:
Balance on the current account . . . . . . . . . . . P7,390.11
Balance of savings account No. 2266 . . . . . 20,000.00
Total . . . . . . . . . . . . . . . . . . 27,390.11
Adding to this total the interest also claimed by Mr. Tan Tiong
Tick, that is, P194.78 on the saving account and P12.91 on the
current account, the amount claimed makes a total of
P27,597.80.
Notwithstanding the fact that the Bank Commissioner found
the claim in accordance with the books of the Mercantile Bank
of China, he declined to issue the corresponding certificate of
proof of claim because the said claimant has pending in the
said bank obligations for accepting draft amounting to a total
of $6 631.29.
At the hearing of this claim, the claimant admitted such
pending obligations, alleging at the same time that to
guarantee the payment of drafts accepted by him, he pledged
his bank book No. 2266, which also answered for the payment
of any credit which the said bank may extend to him.
In Exhibit A presented by the claimant as evidence, consisting
of a letter dated November 4, 1931 addressed by Mr. H. J.
Belden to the then Bank Commissioner, Mr. Leo. H. Martin it
appears that the said savings account was constituted for the
sole purpose of securing the payment of drafts against the
claimants, the bill of lading of where delivered to him upon
trust-receipts and that according to the records of that bank
Mr. Tan Tiong Tick did not obtain any other accomodation
from the bank except the trust-receipts.
RECOMMENDATION
Having established the existence of such deposits in the name
of the bank alleged by the Bank Commissioner, for the
securities of which he constituted the savings deposit in the
amount of P20,000, it is recommended that from this amount
there be deducted the amount of the obligation of P13,778.90
which the claimant acknowledge in favor of the Mercantile
Bank of China, and that the difference, plus the other current
account deposit of P7,390.11, be considered as ordinary
credits subject to the equal division of the funds of the said
bank.
As to the interest on said deposits also claimed by Mr. Tan
Tiong Tick, the rejection thereof is recommended in view of
the fact that the Bank Commissioner has not credited any
interest to the current and savings account of the Merchantile
Bank of China, and would be unfair that interest, not credited
to the others, be allowed to this claimant.
It will be noted that in the report of the commissioner the
credit of the claimant for the balance of his deposit on current
account has been reduced to P7,390.11, instead of P9,657.50
alleged in his claim, the total balance recommended in favor
of the appellant being P13,611.21, without including interest,
instead of P16,589.70. In his brief the appellant admits the
figures appearing in the report, with the exception of the
interest on which we shall presently dwell.
1. Resolving the claims under the first group the
recommendation of this official to the effect that they
declared ordinary credits only, and approved them as
preferred credits. However, in considering the other claims
among them that of that of the appellant, classified under the
fifth group, the court approved the recommendation of the
commissioner that they be declared ordinary credits; in
otherwords, the court considered and declared the claim of
the appellant as an ordinary credit just because the latter is at
the same time a debtor of the bank, notwithstanding the fact
that his claim is of the same kind as those classified under the
first group, inasmuch as they are also current account and

Page 28 of 48
RA 8791
Deposits, Loans, and Other Operations
savings deposits. To this part of the decision is addressed the
appellant's first assignment of error.
In truth if the current account, savings, and fixed deposits are
preferred credits for the reason states by the court in its
decision, we see no reason why the preference should
disappear when the depositors are at the same time debtors
of the bank less than their credits. If the ground to declare
them preferred credits is sound, the balances resulting after
the set should likewise be preferred, unless there be a law
providing that a set off, when it take place, produces such an
effect, a law which does not exist as far as we know.
But we are of the opinion, for the reason presently to be
stated, that current account and savings deposits are not
preferred credits in the cases, like the present, involving the
insolvency and liquidation of a bank, where there are various
creditors and it becomes necessary to ascertain the
preference of various credits.
The court held that these deposits should be governed by the
Civil Code, and applying articles 1758 and 1868 of the said
Code, ruled that the so-called irregular deposits being still in
vogue, as Manresa, the commentator, maintain and as held by
this court in the case Rogers vs. Smith, Bell & Co. (10 Phil.,
319), the former are preferred credits because partaking of
the nature of the irregular deposits.
In our opinion, these deposits are essentially merchantile
contracts and should, therefore, be governed by the
provisions of the Code of Commerce, pursuant to its article 2
reading:
ART. 2 Commercial transactions, be they
performed by merchants or not, whether they are
specified in this Code or not, shall be governed by
the provisions contained in the same; in the
absence of such provisions, by the commercial
customs generally observed in each place; and in
the absence of such provisions, by the commercial
customs generally observed in each place; and in
the absence of both, by those of the common law.
Commercial transactions shall be considered those
enumerated in this Code and any others of a similar
character.
There is cited in support of the application of the Civil Code to
these deposits article 310 of the Code of Commerce providing:
ART. 310. Notwithstanding the provisions of the
foregoing articles, deposits made banks, with
general warehouse, with loan or any other
associations, shall be governed in the place by the
by-laws of the same in the second by the provisions
of this Code, and finally by the rules of common
law, which are applicable to all deposits.
But apparently there was a failure to consider that, according
to the order established by the article, the Civil Code or the
common law is mentioned after Code of Commerce, which
means that the provisions of the latter Code should first be
applied before resorting to those of the Civil Code which are
supplementary in character.
The Code of Commerce contains express provisions
regulating deposits of the nature under consideration, and
they are articles 303 to 310. The first and the second to the
last of the said articles are as follows:
Page 29 of 48
ART. 303. In order that a deposit may be
considered commercial, it is necessary —
1. That the depositary, at least, be a merchant.
2. That the things deposited be commercial objects.
3. That the deposit constitute in itself a commercial
transaction, or be made by reason or as a
consequently of commercial transaction.
ART. 309. Whatever, with the consent of the
depositor, the depositary disposes of the articles
on deposit either for himself or for his business, or
for transactions intrusted to him by the former, the
rights and obligations of the depositary and of the
depositor shall cease, and the rules and provisions
applicable to the commercial loans, commissions,
or contract which took the place of the deposit
shall be observed.
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.
Said sections read:
SEC. 125. Every such commercial banking
corporation shall at all times have on hand in
lawful money of the Philippines Islands or of the
United States, an amount equal to at least eighteen
per centum of the aggregate amount of its deposits
in current which are payable on demand and of its
fixed deposits coming due within thirty days. Such
commercial banking corporations shall also at all
times maintain equal in amount to at least five per
centum of its total savings deposits. The said
reserve may be maintained in the form of lawful
money of the Philippines Islands of the United
States, or in bonds issued or guaranteed by the
Government of the Philippines Islands or to the
United States. . . .
The percentage of reserve to deposits in the case of
the Philippine National Bank and Bank of the
Philippine Islands is hereby fixed at eighteen per
centum of demand deposits and fixed deposits
payable within thirty days and five per centum of
savings deposits, in the same manner as is
prescribed in this section for commercial banking
corporations in general, which reserve against
savings deposit may consists of Philippine
Government of United States Government Bonds.
SEC. 9. Every bank organized under this Act shall at
all times have on hand, in lawful money of the
Philippine Islands of the United States, an amount
equal to at least twenty per centum of the
aggregate amount of its deposits. The Treasury
RA 8791
Deposits, Loans, and Other Operations

certificates authorized by Act Numbered Three
thousand and fifty-eight, and the term lawful
money of the United States shall include gold and
silver certificates of the United States and bank
notes issued by the Federal Reserve Bank.
Therefore, the bank, without the necessity of the claimant
consent, was by law authorized to dispose of the deposits,
subject to the limitations indicated.
We, therefore, conclude that the law applicable to the
appellant's claim is the Code of Commerce and that his
current and savings account have converted into simple
commercial loans.
2. The next point to decide is the applicable law, if any, to
determine the preference of the appellant's credits,
considering that there happens to be other creditors. Section
V of Title I Book IV of the Code of Commerce contains
provisions relative to the rights of creditors in case of
bankruptcy and their respective gradations, but these
provisions have been repealed by section 524 of the Code of
Civil Procedure reading as follows:
SEC. 524. No new proceedings to be instituted. — No
new bankrupt proceedings shall be instituted until
a new bankruptcy law shall come into force in the
Islands. All existing laws and other relating to
bankruptcy and proceedings therein are hereby
repealed: Provided, That nothing in this section
shall be deemed in any manner to affect pending
litigation in bankruptcy proceedings.
The Philippine Legislature subsequently enacted Act No.
1956, also known as the Insolvency Law, which took effect on
May 20, 1909, containing provisions regarding preference of
credits; but its section 52 provides that all the provisions of
the law shall not apply to corporations engaged principally in
the banking business, and among them should be understood
included the Merchantile Bank of China. Said section provide:
SEC. 48. Merchantile, effect, and any other kind of
property found among the property of the
insolvent, the ownership of which has not been
conveyed to him by a legal and irrevocable title,
shall be considered to be the property of other
persons shall be placed at the disposal of its lawful
owners on order of the court made at the hearing
in section forty-three or at any ordinary hearing, if
the assignee or any creditor whose right in the
estate of the insolvent has been established shall
petition in writing for such hearing and the court
in its discretion shall so order, the creditors,
however, retaining such rights in said property as
belong to the insolvent, and subrogating him
whenever they shall have with all obligations
concerning said property.
The following shall be included in this section:
1. Drowy property inestimado and such
property estimado which may remain in
the possession of the husband where
the receipt thereof is matter of record in
a public instrument registered under
the provisions of section twenty-one
and twenty-seven of the Code of
Commerce in force.
2. Paraphernal property which the wife
may have acquired by inheritance,
legacy, or donation whether remaining
in the form in which it was received or
subrogated or invested in other
property, provided that such
investment or subrogation has been
registered in the registro mercantile in
accordance with the provisions of the
sections of the Code of Commerce
mentioned in the next preceding
paragraph.
3. Property and effects deposited with
the bankrupt, or administered, least,
rented, or held in usufruct by him.
4. Merchandise in the possession of the
bankrupt, on commission, for purchase,
sale, forwarding, or delivery.
5. Bills of exchange or promissory notes
without indorsement or other
expression transferring ownership
remitted to the insolvent for collection
and all other acquired by him for the
account of another person, drawn or
indorsed to the remitter direct.
6. Money remitted to the insolvent,
otherwise than on current account, and
which is in his possession for delivery to
a definite person in the name and for the
account of the remitter or for the
settlement of claims which are to be met
at the insolvent domicile.
7. Amounts due the insolvent for sales of
merchandise on commission, and bills
of exchange and promissory notes
delivered therefrom in his possession,
even when the same are not made
payable to the owner of the
merchandise sold, provided it is proven
that the obligation to the insolvent is
derived therefrom and that said bills of
exchange and promissory notes were in
the possession of the insolvent for
account of the owner of the
merchandise to be cashed and remitted,
in due time, to the said owners; all of
which shall be a legal presumption
when the amount involved in any such
shall not been credited on the book of
both the owner of the merchantile and
of the insolvent.
8. Merchandise bought on credit by the
insolvent so long as the actual thereof
has not been made to him at his store at
any other place stipulated for such
delivery, and merchandise the bills of
lading or shipping receipts of which
have been sent him after the same has
been loaded by order of the purchaser
and for his account and risk.
In all cases arising under this paragraph
assignees may retain the merchandise
so purchased or claim it for the creditors

Page 30 of 48
RA 8791
Deposits, Loans, and Other Operations
by paying the price thereof to the
vendor.
9. Goods or chattels wrongfully taken,
converted, or withheld by the insolvent
if still existing in his possession or the
amount of the value thereof.
SEC. 49. All creditors, except those whose debts are
duly proved and allowed shall be entitled to share
in the property and estate pro rata, after the
property belonging to other persons referred to in
the last preceding section has been deducted
therefrom, without priority or preference
whatever: Provided, That any debt proved by any
person liable as bail, surety, guarantor, or
otherwise, for the debtor, shall not be paid to the
person so providing the same until satisfactory
evidence shall be produced of the payment of such
debt by such person so liable, and the share to
which such debt would be entitled may be paid into
court, or otherwise held, for the benefit of the party
entitled thereto, as the court may direct.
SEC. 50. The following are preferred claims which
shall be paid in the order named:
(a) Necessary funeral expenses of the
debtor, or of his wife, or children who
are under their parental authority and
have no property of their own, when
approved by the court;
(b) Debts due for personal services
rendered the insolvent by employees,
laborers, or domestic servants
immediately preceding the
commencement of proceedings in
insolvency;
(c) Compensation due the laborers or
their dependents under the provisions
of Act Numbered Thirty-four hundred
and twenty-eight, known as the
Workmen's Compensation Act, as
amended by Act Numbered Thirty-eight
hundred and twelve, and under the
provisions of Act Numbered Eighteen
hundred and seventy-four known as the
Employers' Liability Act, and of the
other laws providing for payment of
indemnity for damages in cases of labor
accidents;
(d) Legal expenses, and expenses
incurred in the administration of the
insolvent estate for the common
interest of the creditors, when properly
authorized and approved by the court;
(e) Debts, taxes and assessments due
the Insular Government;
(f ) Debts, taxes and assessments due to
any province of provinces of the
Philippines Islands;
Page 31 of 48
(g) Debts, taxes and assessment due to
any municipality or municipalities of the
Philippine Islands;
All other creditors shall be paid pro rata. (As
amended by Act No. 3962.)
ART. 52 . . . The provisions of this Act shall not
apply to corporations engaged principally in the
banking business, or to any other corporation as to
which there is any special provisions of law for its
liquidation in case of insolvency.
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 appellant's claims, consisting of his current and
savings account, are not preferred credits.
3. The commissioner set off the claims of the appellant against
what the bank had against him. The court approved this set
off over the objection of the appellant. The appellees contend
that the set off does not lie in this case because otherwise it
would prejudice them and the other creditors in the
liquidation. We hold that the court's ruling is not error. "It
may be stated as a general rule that when a depositor is
indebted to a bank, and the debts are mutual — that is,
between the same parties and in the same right — the bank
may apply the deposit, or such portion thereof as may be
necessary, to the payment of the debt due it by the depositor,
provided there is no express agreement to the contrary and
the deposit is not specially applicable to some other
particular purposes." (7 Am. Jur., par. 629, p.455; United
States vs. Butterworth-Judson Corp., 267 U.S., 387; National
Bank vs. Morgan, 207 Ala.., 65; Bank of Guntersville vs.
Crayter, 199 Ala., 699; Tatum vs. Commercial Bank & T. Co.,
193 Ala., 120; Desha Bank & T. Co. vs. Quilling, 118 Ark., 114;
Holloway vs. First Nat. Bank, 45 Idaho, 746; Wyman vs. Ft.
RA 8791
Deposits, Loans, and Other Operations

Dearborn Nat Bank, 181 Ill., 279; Niblack vs. Park Nat. Bank,
169 Ill., 517; First Nat Bank vs. Stapf., 165 Ind., 162; Bedford
Bank vs. Acoam, 125 Ind., 584.) The situation referred to by
the appellees is inevitable because section 1639 of the
Revised Administrative Code, as amended by Act No. 3519,
provides that the Bank Commissioner shall reduce the assets
of the bank into cash and this cannot be done without first
liquidating individually the accounts of the debtors of said
bank, and in making this individual liquidation the debtors
are entitled to set off, by way of compensation, their claims
against the bank.

4. The court held that the appellant is not entitled to charge

interest on the amounts of his claims, and this is the object of
the second assignment of error. Upon this point a distinction
must be made between the interest which the deposits should
ear from their existence until the bank ceased to operate, and
that which they may earn from the time the bank's operations
were stopped until the date of payment of the deposits. As to
the first class, we hold that it should be paid because such
interest has been earned in the ordinary course of the bank's
business and before the latter has been declared in a state or
liquidation. Moreover, the bank being authorized by law to
make us of the deposits, with the limitation stated, to invest
the same in its business and other operations, it may be
presumed that it bound itself to pay interest to the depositors
as in fact it paid interest prior to the date of the said claims.
As to the interest which may be charged from the date the
bank ceased to do business because it was declared in a state
of liquidation, we hold that the said interest should not be
paid. Under articles 1101 and 1108 of the Civil Code, interest
is allowed by way of indemnity for damages suffered, in the
cases wherein the obligation consists in the payment of
money. In view of this, we hold that in the absence of any
express law or any applicable provision of the Code of
Commerce, it is not proper to pay this last kind of interest to
the appellant upon his deposits in the bank, for this would be
anomalous and unjustified in a liquidation or insolvency of a
bank. This rule should be strictly observed in the instant case
because it is understood that the assets should be prorated
among all the creditors as they are insufficient to pay all the
obligations of the bank.

5. The last assignment of error has to do with the denial by

the court of the claimant's motion for new trial. No new
arguments have been made in its support and it appears that
the assigned error was inserted as a mere corollary of the
preceding ones.

In view of all the foregoing considerations, we affirm the part

of the appealed decision for the reasons stated herein, and it
is ordered that the net claim of the appellant, amounting to
P13,611.21, is an ordinary and not a preferred credit, and that
he is entitled to charge interest on said amount up to
September 19, 1931, without special pronouncement up to
September 19, 1931, without special pronouncement as to
the costs. So ordered.

Page 32 of 48
RA 8791
Deposits, Loans, and Other Operations
G.R. No. 89252 May 24, 1993
RAUL SESBREÑO, petitioner,
vs.
HON. COURT OF APPEALS, DELTA MOTORS CORPORATION
AND PILIPINAS BANK, respondents.
Salva, Villanueva & Associates for Delta Motors Corporation.
Reyes, Salazar & Associates for Pilipinas Bank.
FELICIANO, J.:
On 9 February 1981, petitioner Raul Sesbreño made a money
market placement in the amount of P300,000.00 with the
Philippine Underwriters Finance Corporation ("Philfinance"),
Cebu Branch; the placement, with a term of thirty-two (32)
days, would mature on 13 March 1981, Philfinance, also on 9
February 1981, issued the following documents to petitioner:
(a) the Certificate of Confirmation of Sale, "without recourse,"
No. 20496 of one (1) Delta Motors Corporation Promissory
Note ("DMC PN") No. 2731 for a term of 32 days at 17.0% per
annum;
(b) the Certificate of securities Delivery Receipt No. 16587
indicating the sale of DMC PN No. 2731 to petitioner, with the
notation that the said security was in custodianship of
Pilipinas Bank, as per Denominated Custodian Receipt
("DCR") No. 10805 dated 9 February 1981; and
(c) post-dated checks payable on 13 March 1981 (i.e., the
maturity date of petitioner's investment), with petitioner as
payee, Philfinance as drawer, and Insular Bank of Asia and
America as drawee, in the total amount of P304,533.33.
On 13 March 1981, petitioner sought to encash the postdated
checks issued by Philfinance. However, the checks were
dishonored for having been drawn against insufficient funds.
On 26 March 1981, Philfinance delivered to petitioner the
DCR No. 10805 issued by private respondent Pilipinas Bank
("Pilipinas"). It reads as follows:
PILIPINAS BANK
Makati Stock Exchange Bldg.,
Ayala Avenue, Makati,
Metro Manila
February 9, 1981
———————
VALUE DATE
TO Raul Sesbreño
April 6, 1981
————————
MATURITY DATE
NO. 10805
DENOMINATED CUSTODIAN RECEIPT
This confirms that as a duly Custodian Bank, and upon
instruction of PHILIPPINE UNDERWRITES FINANCE
CORPORATION, we have in our custody the following
securities to you [sic] the extent herein indicated.
SERIAL MAT. FACE ISSUED REGISTERED AMOUNT
NUMBER DATE VALUE BY HOLDER PAYEE
2731 4-6-81 2,300,833.34 DMC PHIL. 307,933.33
UNDERWRITERS
FINANCE CORP.
We further certify that these securities may be inspected by
you or your duly authorized representative at any time during
regular banking hours.
Upon your written instructions we shall undertake physical
delivery of the above securities fully assigned to you should
this Denominated Custodianship Receipt remain outstanding
in your favor thirty (30) days after its maturity.
PILIPINAS BANK
(By Elizabeth De Villa
Illegible Signature)1
On 2 April 1981, petitioner approached Ms. Elizabeth de Villa
of private respondent Pilipinas, Makati Branch, and handed
her a demand letter informing the bank that his placement
with Philfinance in the amount reflected in the DCR No. 10805
had remained unpaid and outstanding, and that he in effect
was asking for the physical delivery of the underlying
promissory note. Petitioner then examined the original of the
DMC PN No. 2731 and found: that the security had been
Page 33 of 48
issued on 10 April 1980; that it would mature on 6 April 1981;
that it had a face value of P2,300,833.33, with the Philfinance
as "payee" and private respondent Delta Motors Corporation
("Delta") as "maker;" and that on face of the promissory note
was stamped "NON NEGOTIABLE." Pilipinas did not deliver
the Note, nor any certificate of participation in respect
thereof, to petitioner.
Petitioner later made similar demand letters, dated 3 July
1981 and 3 August 1981,2 again asking private respondent
Pilipinas for physical delivery of the original of DMC PN No.
2731. Pilipinas allegedly referred all of petitioner's demand
letters to Philfinance for written instructions, as has been
supposedly agreed upon in "Securities Custodianship
Agreement" between Pilipinas and Philfinance. Philfinance
did not provide the appropriate instructions; Pilipinas never
released DMC PN No. 2731, nor any other instrument in
respect thereof, to petitioner.
Petitioner also made a written demand on 14 July 19813 upon
private respondent Delta for the partial satisfaction of DMC
PN No. 2731, explaining that Philfinance, as payee thereof,
had assigned to him said Note to the extent of P307,933.33.
Delta, however, denied any liability to petitioner on the
promissory note, and explained in turn that it had previously
agreed with Philfinance to offset its DMC PN No. 2731 (along
with DMC PN No. 2730) against Philfinance PN No. 143-A
issued in favor of Delta.
In the meantime, Philfinance, on 18 June 1981, was placed
under the joint management of the Securities and exchange
commission ("SEC") and the Central Bank. Pilipinas delivered
to the SEC DMC PN No. 2731, which to date apparently
remains in the custody of the SEC.4
As petitioner had failed to collect his investment and interest
thereon, he filed on 28 September 1982 an action for damages
with the Regional Trial Court ("RTC") of Cebu City, Branch 21,
against private respondents Delta and Pilipinas.5The trial
court, in a decision dated 5 August 1987, dismissed the
complaint and counterclaims for lack of merit and for lack of
cause of action, with costs against petitioner.
Petitioner appealed to respondent Court of Appeals in C.A.-
G.R. CV No. 15195. In a Decision dated 21 March 1989, the
Court of Appeals denied the appeal and held:6
Be that as it may, from the evidence on record, if there is
anyone that appears liable for the travails of plaintiff-
appellant, it is Philfinance. As correctly observed by the trial
court:
This act of Philfinance in accepting the investment of plaintiff
and charging it against DMC PN No. 2731 when its entire face
value was already obligated or earmarked for set-off or
compensation is difficult to comprehend and may have been
motivated with bad faith. Philfinance, therefore, is solely and
legally obligated to return the investment of plaintiff, together
with its earnings, and to answer all the damages plaintiff has
suffered incident thereto. Unfortunately for plaintiff,
Philfinance was not impleaded as one of the defendants in this
case at bar; hence, this Court is without jurisdiction to
pronounce judgement against it. (p. 11, Decision)
WHEREFORE, finding no reversible error in the decision
appealed from, the same is hereby affirmed in toto. Cost
against plaintiff-appellant.
Petitioner moved for reconsideration of the above Decision,
without success.
Hence, this Petition for Review on Certiorari.
After consideration of the allegations contained and issues
raised in the pleadings, the Court resolved to give due course
to the petition and required the parties to file their respective
memoranda.7
Petitioner reiterates the assignment of errors he directed at
the trial court decision, and contends that respondent court
of Appeals gravely erred: (i) in concluding that he cannot
recover from private respondent Delta his assigned portion of
DMC PN No. 2731; (ii) in failing to hold private respondent
Pilipinas solidarily liable on the DMC PN No. 2731 in view of
the provisions stipulated in DCR No. 10805 issued in favor r
of petitioner, and (iii) in refusing to pierce the veil of
RA 8791
Deposits, Loans, and Other Operations
corporate entity between Philfinance, and private
respondents Delta and Pilipinas, considering that the three
(3) entities belong to the "Silverio Group of Companies" under
the leadership of Mr. Ricardo Silverio, Sr.8
There are at least two (2) sets of relationships which we need
to address: firstly, the relationship of petitioner vis-a-
vis Delta; secondly, the relationship of petitioner in respect of
Pilipinas. Actually, of course, there is a third relationship that
is of critical importance: the relationship of petitioner and
Philfinance. However, since Philfinance has not been
impleaded in this case, neither the trial court nor the Court of
Appeals acquired jurisdiction over the person of Philfinance.
It is, consequently, not necessary for present purposes to deal
with this third relationship, except to the extent it necessarily
impinges upon or intersects the first and second
relationships.
I.
We consider first the relationship between petitioner and
Delta.
The Court of appeals in effect held that petitioner acquired no
rights vis-a-vis Delta in respect of the Delta promissory note
(DMC PN No. 2731) which Philfinance sold "without
recourse" to petitioner, to the extent of P304,533.33. The
Court of Appeals said on this point:
Nor could plaintiff-appellant have acquired any right over
DMC PN No. 2731 as the same is "non-negotiable" as stamped
on its face (Exhibit "6"), negotiation being defined as the
transfer of an instrument from one person to another so as to
constitute the transferee the holder of the instrument (Sec.
30, Negotiable Instruments Law). A person not a holder
cannot sue on the instrument in his own name and cannot
demand or receive payment (Section 51, id.)9
Petitioner admits that DMC PN No. 2731 was non-negotiable
but contends that the Note had been validly transferred, in
part to him by assignment and that as a result of such transfer,
Delta as debtor-maker of the Note, was obligated to pay
petitioner the portion of that Note assigned to him by the
payee Philfinance.
Delta, however, disputes petitioner's contention and argues:
(1) that DMC PN No. 2731 was not intended to be negotiated
or otherwise transferred by Philfinance as manifested by the
word "non-negotiable" stamp across the face of the
Note10 and because maker Delta and payee Philfinance
intended that this Note would be offset against the
outstanding obligation of Philfinance represented by
Philfinance PN No. 143-A issued to Delta as payee;
(2) that the assignment of DMC PN No. 2731 by Philfinance
was without Delta's consent, if not against its instructions;
and
(3) assuming (arguendo only) that the partial assignment in
favor of petitioner was valid, petitioner took the Note subject
to the defenses available to Delta, in particular, the offsetting
of DMC PN No. 2731 against Philfinance PN No. 143-A.11
We consider Delta's arguments seriatim.
Firstly, it is important to bear in mind that the negotiation of
a negotiable instrument must be distinguished from
the assignment or transfer of an instrument whether that be
negotiable or non-negotiable. Only an instrument qualifying
as a negotiable instrument under the relevant statute may
be negotiated either by indorsement thereof coupled with
delivery, or by delivery alone where the negotiable
instrument is in bearer form. A negotiable instrument may,
however, instead of being negotiated, also
be assigned or transferred. The legal consequences of
negotiation as distinguished from assignment of a negotiable
instrument are, of course, different. A non-negotiable
instrument may, obviously, not be negotiated; but it may be
assigned or transferred, absent an express prohibition
against assignment or transfer written in the face of the
instrument:
The words "not negotiable," stamped on the face of the bill of
lading, did not destroy its assignability, but the sole effect was
to exempt the bill from the statutory provisions relative
thereto, and a bill, though not negotiable, may be transferred
Page 34 of 48
by assignment; the assignee taking subject to the equities
between the original parties.12 (Emphasis added)
DMC PN No. 2731, while marked "non-negotiable," was not at
the same time stamped "non-transferable" or "non-
assignable." It contained no stipulation which prohibited
Philfinance from assigning or transferring, in whole or in part,
that Note.
Delta adduced the "Letter of Agreement" which it had entered
into with Philfinance and which should be quoted in full:
April 10, 1980
Philippine Underwriters Finance Corp.
Benavidez St., Makati,
Metro Manila.
Attention: Mr. Alfredo O. Banaria
SVP-Treasurer
GENTLEMEN:
This refers to our outstanding placement of P4,601,666.67 as
evidenced by your Promissory Note No. 143-A, dated April 10,
1980, to mature on April 6, 1981.
As agreed upon, we enclose our non-negotiable Promissory
Note No. 2730 and 2731 for P2,000,000.00 each, dated April
10, 1980, to be offsetted [sic] against your PN No. 143-A upon
co-terminal maturity.
Please deliver the proceeds of our PNs to our representative,
Mr. Eric Castillo.
Very Truly Yours,
(Sgd.)
Florencio B. Biagan
Senior Vice President 13
We find nothing in his "Letter of Agreement" which can be
reasonably construed as a prohibition upon Philfinance
assigning or transferring all or part of DMC PN No. 2731,
before the maturity thereof. It is scarcely necessary to add
that, even had this "Letter of Agreement" set forth an explicit
prohibition of transfer upon Philfinance, such a prohibition
cannot be invoked against an assignee or transferee of the
Note who parted with valuable consideration in good faith
and without notice of such prohibition. It is not disputed that
petitioner was such an assignee or transferee. Our conclusion
on this point is reinforced by the fact that what Philfinance
and Delta were doing by their exchange of their promissory
notes was this: Delta invested, by making a money market
placement with Philfinance, approximately P4,600,000.00 on
10 April 1980; but promptly, on the same day, borrowed back
the bulk of that placement, i.e., P4,000,000.00, by issuing its
two (2) promissory notes: DMC PN No. 2730 and DMC PN No.
2731, both also dated 10 April 1980. Thus, Philfinance was
left with not P4,600,000.00 but only P600,000.00 in cash and
the two (2) Delta promissory notes.
Apropos Delta's complaint that the partial assignment by
Philfinance of DMC PN No. 2731 had been effected without
the consent of Delta, we note that such consent was not
necessary for the validity and enforceability of the
assignment in favor of petitioner.14 Delta's argument that
Philfinance's sale or assignment of part of its rights to DMC
PN No. 2731 constituted conventional subrogation, which
required its (Delta's) consent, is quite mistaken. Conventional
subrogation, which in the first place is never lightly
inferred,15 must be clearly established by the unequivocal
terms of the substituting obligation or by the evident
incompatibility of the new and old obligations on every
point.16 Nothing of the sort is present in the instant case.
It is in fact difficult to be impressed with Delta's complaint,
since it released its DMC PN No. 2731 to Philfinance, an entity
engaged in the business of buying and selling debt
instruments and other securities, and more generally, in
money market transactions. In Perez v. Court of Appeals,17 the
RA 8791
Deposits, Loans, and Other Operations
Court, speaking through Mme. Justice Herrera, made the
following important statement:
There is another aspect to this case.
What is involved here is a money market
transaction. As defined by Lawrence
Smith "the money market is a market
dealing in standardized short-term
credit instruments (involving large
amounts) where lenders and borrowers
do not deal directly with each other but
through a middle manor a dealer in the
open market." It involves "commercial
papers" which are instruments
"evidencing indebtness of any person or
entity. . ., which are issued, endorsed,
sold or transferred or in any manner
conveyed to another person or entity,
with or without recourse". The
fundamental function of the money
market device in its operation is to
match and bring together in a most
impersonal manner both the "fund
users" and the "fund suppliers." The
money market is an "impersonal
market", free from personal
considerations. "The market mechanism
is intended to provide quick mobility of
money and securities."
The impersonal character of the money
market device overlooks the individuals
or entities concerned. The issuer of a
commercial paper in the money market
necessarily knows in advance that it
would be expenditiously transacted and
transferred to any investor/lender
without need of notice to said issuer. In
practice, no notification is given to the
borrower or issuer of commercial paper
of the sale or transfer to the investor.
xxx xxx xxx
There is need to individuate a money
market transaction, a relatively novel
institution in the Philippine commercial
scene. It has been intended to facilitate
the flow and acquisition of capital on an
impersonal basis. And as specifically
required by Presidential Decree No.
678, the investing public must be given
adequate and effective protection in
availing of the credit of a borrower in the
commercial paper market.18(Citations
omitted; emphasis supplied)
We turn to Delta's arguments concerning alleged
compensation or offsetting between DMC PN No. 2731 and
Philfinance PN No. 143-A. It is important to note that at the
time Philfinance sold part of its rights under DMC PN No. 2731
to petitioner on 9 February 1981, no compensation had as yet
taken place and indeed none could have taken place. The
essential requirements of compensation are listed in the Civil
Code as follows:
Art. 1279. In order that compensation
may be proper, it is necessary:
Page 35 of 48
(1) That each one of the obligors be
bound principally, and that he be at the
same time a principal creditor of the
other;
(2) That both debts consists in a sum of
money, or if the things due are
consumable, they be of the same kind,
and also of the same quality if the latter
has been stated;
(3) That the two debts are due;
(4) That they be liquidated and
demandable;
(5) That over neither of them there be
any retention or controversy,
commenced by third persons and
communicated in due time to the
debtor. (Emphasis supplied)
On 9 February 1981, neither DMC PN No. 2731 nor
Philfinance PN No. 143-A was due. This was explicitly
recognized by Delta in its 10 April 1980 "Letter of Agreement"
with Philfinance, where Delta acknowledged that the relevant
promissory notes were "to be offsetted (sic) against
[Philfinance] PN No. 143-A upon co-terminal maturity."
As noted, the assignment to petitioner was made on 9
February 1981 or from forty-nine (49) days before the "co-
terminal maturity" date, that is to say, before any
compensation had taken place. Further, the assignment to
petitioner would have prevented compensation had taken
place between Philfinance and Delta, to the extent of
P304,533.33, because upon execution of the assignment in
favor of petitioner, Philfinance and Delta would have ceased
to be creditors and debtors of each other in their own right to
the extent of the amount assigned by Philfinance to petitioner.
Thus, we conclude that the assignment effected by Philfinance
in favor of petitioner was a valid one and that petitioner
accordingly became owner of DMC PN No. 2731 to the extent
of the portion thereof assigned to him.
The record shows, however, that petitioner notified Delta of
the fact of the assignment to him only on 14 July 1981, 19 that
is, after the maturity not only of the money market placement
made by petitioner but also of both DMC PN No. 2731 and
Philfinance PN No. 143-A. In other words, petitioner notified
Delta of his rights as assignee after compensation had taken
place by operation of law because the offsetting instruments
had both reached maturity. It is a firmly settled doctrine that
the rights of an assignee are not any greater that the rights of
the assignor, since the assignee is merely substituted in the
place of the assignor 20 and that the assignee acquires his
rights subject to the equities — i.e., the defenses — which the
debtor could have set up against the original assignor before
notice of the assignment was given to the debtor. Article 1285
of the Civil Code provides that:
Art. 1285. The debtor who has
consented to the assignment of rights
made by a creditor in favor of a third
person, cannot set up against the
assignee the compensation which
would pertain to him against the
assignor, unless the assignor was
notified by the debtor at the time he
gave his consent, that he reserved his
right to the compensation.
RA 8791
Deposits, Loans, and Other Operations
If the creditor communicated the
cession to him but the debtor did not
consent thereto, the latter may set up the
compensation of debts previous to the
cession, but not of subsequent ones.
If the assignment is made without the
knowledge of the debtor, he may set up
the compensation of all credits prior to
the same and also later ones until he
had knowledge of the assignment.
(Emphasis supplied)
Article 1626 of the same code states that: "the debtor who,
before having knowledge of the assignment, pays his creditor
shall be released from the obligation." In Sison v. Yap-
Tico,21 the Court explained that:
[n]o man is bound to remain a debtor;
he may pay to him with whom he
contacted to pay; and if he pay before
notice that his debt has been assigned,
the law holds him exonerated, for the
reason that it is the duty of the person
who has acquired a title by transfer to
demand payment of the debt, to give his
debt or notice.22
At the time that Delta was first put to notice of the assignment
in petitioner's favor on 14 July 1981, DMC PN No. 2731 had
already been discharged by compensation. Since the assignor
Philfinance could not have then compelled payment anew by
Delta of DMC PN No. 2731, petitioner, as assignee of
Philfinance, is similarly disabled from collecting from Delta
the portion of the Note assigned to him.
It bears some emphasis that petitioner could have notified
Delta of the assignment or sale was effected on 9 February
1981. He could have notified Delta as soon as his money
market placement matured on 13 March 1981 without
payment thereof being made by Philfinance; at that time,
compensation had yet to set in and discharge DMC PN No.
2731. Again petitioner could have notified Delta on 26 March
1981 when petitioner received from Philfinance the
Denominated Custodianship Receipt ("DCR") No. 10805
issued by private respondent Pilipinas in favor of petitioner.
Petitioner could, in fine, have notified Delta at any time before
the maturity date of DMC PN No. 2731. Because petitioner
failed to do so, and because the record is bare of any
indication that Philfinance had itself notified Delta of the
assignment to petitioner, the Court is compelled to uphold the
defense of compensation raised by private respondent Delta.
Of course, Philfinance remains liable to petitioner under the
terms of the assignment made by Philfinance to petitioner.
II.
We turn now to the relationship between petitioner and
private respondent Pilipinas. Petitioner contends that
Pilipinas became solidarily liable with Philfinance and Delta
when Pilipinas issued DCR No. 10805 with the following
words:
Upon your written instruction, we
[Pilipinas] shall undertake physical
delivery of the above securities fully
assigned to you —.23
Page 36 of 48
The Court is not persuaded. We find nothing in the DCR that
establishes an obligation on the part of Pilipinas to pay
petitioner the amount of P307,933.33 nor any assumption of
liability in solidum with Philfinance and Delta under DMC PN
No. 2731. We read the DCR as a confirmation on the part of
Pilipinas that:
(1) it has in its custody, as duly
constituted custodian bank, DMC PN No.
2731 of a certain face value, to mature
on 6 April 1981 and payable to the order
of Philfinance;
(2) Pilipinas was, from and after said
date of the assignment by Philfinance to
petitioner (9 February 1981), holding
that Note on behalf and for the benefit of
petitioner, at least to the extent it had
been assigned to petitioner by payee
Philfinance;24
(3) petitioner may inspect the Note
either "personally or by authorized
representative", at any time during
regular bank hours; and
(4) upon written instructions of
petitioner, Pilipinas would physically
deliver the DMC PN No. 2731 (or a
participation therein to the extent of
P307,933.33) "should this Denominated
Custodianship receipt remain
outstanding in [petitioner's] favor thirty
(30) days after its maturity."
Thus, we find nothing written in printers ink on the DCR
which could reasonably be read as converting Pilipinas into
an obligor under the terms of DMC PN No. 2731 assigned to
petitioner, either upon maturity thereof or any other time. We
note that both in his complaint and in his testimony before the
trial court, petitioner referred merely to the obligation of
private respondent Pilipinas to effect the physical delivery to
him of DMC PN No. 2731.25 Accordingly, petitioner's theory
that Pilipinas had assumed a solidary obligation to pay the
amount represented by a portion of the Note assigned to him
by Philfinance, appears to be a new theory constructed only
after the trial court had ruled against him. The solidary
liability that petitioner seeks to impute Pilipinas cannot,
however, be lightly inferred. Under article 1207 of the Civil
Code, "there is a solidary liability only when the law or the
nature of the obligation requires solidarity," The record here
exhibits no express assumption of solidary liability vis-a-
vis petitioner, on the part of Pilipinas. Petitioner has not
pointed to us to any law which imposed such liability upon
Pilipinas nor has petitioner argued that the very nature of the
custodianship assumed by private respondent Pilipinas
necessarily implies solidary liability under the securities,
custody of which was taken by Pilipinas. Accordingly, we are
unable to hold Pilipinas solidarily liable with Philfinance and
private respondent Delta under DMC PN No. 2731.
We do not, however, mean to suggest that Pilipinas has no
responsibility and liability in respect of petitioner under the
terms of the DCR. To the contrary, we find, after prolonged
analysis and deliberation, that private respondent Pilipinas
had breached its undertaking under the DCR to petitioner
Sesbreño.
We believe and so hold that a contract of deposit was
constituted by the act of Philfinance in designating Pilipinas
RA 8791
Deposits, Loans, and Other Operations

as custodian or depositary bank. The depositor was initially Note held by Pilipinas as soon as petitioner's money market
Philfinance; the obligation of the depository was owed, placement matured on 13 March 1981 without payment from
however, to petitioner Sesbreño as beneficiary of the Philfinance.
custodianship or depository agreement. We do not consider
that this is a simple case of a stipulation pour autri. The
We conclude, therefore, that private respondent Pilipinas
custodianship or depositary agreement was established as an
must respond to petitioner for damages sustained by arising
integral part of the money market transaction entered into by
out of its breach of duty. By failing to deliver the Note to the
petitioner with Philfinance. Petitioner bought a portion of
petitioner as depositor-beneficiary of the thing deposited,
DMC PN No. 2731; Philfinance as assignor-vendor deposited
Pilipinas effectively and unlawfully deprived petitioner of the
that Note with Pilipinas in order that the thing sold would be
Note deposited with it. Whether or not Pilipinas itself
placed outside the control of the vendor. Indeed, the
benefitted from such conversion or unlawful deprivation
constituting of the depositary or custodianship agreement
inflicted upon petitioner, is of no moment for present
was equivalent to constructive delivery of the Note (to the
purposes. Prima facie, the damages suffered by petitioner
extent it had been sold or assigned to petitioner) to petitioner.
consisted of P304,533.33, the portion of the DMC PN No. 2731
It will be seen that custodianship agreements are designed to
assigned to petitioner but lost by him by reason of discharge
facilitate transactions in the money market by providing a
of the Note by compensation, plus legal interest of six percent
basis for confidence on the part of the investors or placers
(6%)per annum containing from 14 March 1981.
that the instruments bought by them are effectively taken out
of the pocket, as it were, of the vendors and placed safely
beyond their reach, that those instruments will be there The conclusion we have reached is, of course, without
available to the placers of funds should they have need of prejudice to such right of reimbursement as Pilipinas may
them. The depositary in a contract of deposit is obliged to have vis-a-vis Philfinance.
return the security or the thing deposited upon demand of the
depositor (or, in the presented case, of the beneficiary) of the
III.
contract, even though a term for such return may have been
established in the said contract.26 Accordingly, any stipulation
in the contract of deposit or custodianship that runs counter The third principal contention of petitioner — that
to the fundamental purpose of that agreement or which was Philfinance and private respondents Delta and Pilipinas
not brought to the notice of and accepted by the placer- should be treated as one corporate entity — need not detain
beneficiary, cannot be enforced as against such beneficiary- us for long.
placer.
In the first place, as already noted, jurisdiction over the
We believe that the position taken above is supported by person of Philfinance was never acquired either by the trial
considerations of public policy. If there is any party that needs court nor by the respondent Court of Appeals. Petitioner
the equalizing protection of the law in money market similarly did not seek to implead Philfinance in the Petition
transactions, it is the members of the general public whom before us.
place their savings in such market for the purpose of
generating interest revenues.27 The custodian bank, if it is not
Secondly, it is not disputed that Philfinance and private
related either in terms of equity ownership or management
respondents Delta and Pilipinas have been organized as
control to the borrower of the funds, or the commercial paper
separate corporate entities. Petitioner asks us to pierce their
dealer, is normally a preferred or traditional banker of such
separate corporate entities, but has been able only to cite the
borrower or dealer (here, Philfinance). The custodian bank
presence of a common Director — Mr. Ricardo Silverio, Sr.,
would have every incentive to protect the interest of its client
sitting on the Board of Directors of all three (3) companies.
the borrower or dealer as against the placer of funds. The
Petitioner has neither alleged nor proved that one or another
providers of such funds must be safeguarded from the impact
of the three (3) concededly related companies used the other
of stipulations privately made between the borrowers or
two (2) as mere alter egos or that the corporate affairs of the
dealers and the custodian banks, and disclosed to fund-
other two (2) were administered and managed for the benefit
providers only after trouble has erupted.
of one. There is simply not enough evidence of record to
justify disregarding the separate corporate personalities of
In the case at bar, the custodian-depositary bank Pilipinas delta and Pilipinas and to hold them liable for any assumed or
refused to deliver the security deposited with it when undetermined liability of Philfinance to petitioner.28
petitioner first demanded physical delivery thereof on 2 April
1981. We must again note, in this connection, that on 2 April
WHEREFORE, for all the foregoing, the Decision and
1981, DMC PN No. 2731 had not yet matured and therefore,
Resolution of the Court of Appeals in C.A.-G.R. CV No. 15195
compensation or offsetting against Philfinance PN No. 143-A
dated 21 march 1989 and 17 July 1989, respectively, are
had not yet taken place. Instead of complying with the
hereby MODIFIED and SET ASIDE, to the extent that such
demand of the petitioner, Pilipinas purported to require and
Decision and Resolution had dismissed petitioner's complaint
await the instructions of Philfinance, in obvious
against Pilipinas Bank. Private respondent Pilipinas bank is
contravention of its undertaking under the DCR to effect
hereby ORDERED to indemnify petitioner for damages in the
physical delivery of the Note upon receipt of "written
amount of P304,533.33, plus legal interest thereon at the rate
instructions" from petitioner Sesbreño. The ostensible term
of six percent (6%) per annum counted from 2 April 1981. As
written into the DCR (i.e., "should this [DCR] remain
so modified, the Decision and Resolution of the Court of
outstanding in your favor thirty [30] days after its maturity")
Appeals are hereby AFFIRMED. No pronouncement as to
was not a defense against petitioner's demand for physical
costs.
surrender of the Note on at least three grounds: firstly, such
term was never brought to the attention of petitioner
Sesbreño at the time the money market placement with SO ORDERED.
Philfinance was made; secondly, such term runs counter to
the very purpose of the custodianship or depositary
agreement as an integral part of a money market transaction;
and thirdly, it is inconsistent with the provisions of Article
1988 of the Civil Code noted above. Indeed, in principle,
petitioner became entitled to demand physical delivery of the

Page 37 of 48
RA 8791
Deposits, Loans, and Other Operations
[G.R. No. 121413. January 29, 2001]
PHILIPPINE COMMERCIAL INTERNATIONAL BANK
(formerly INSULAR BANK OF ASIA AND
AMERICA), petitioner, vs. COURT OF APPEALS
and FORD PHILIPPINES, INC. and CITIBANK,
N.A., respondents.
[G.R. No. 121479. January 29, 2001]
FORD PHILIPPINES, INC., petitioner-plaintiff, vs. COURT
OF APPEALS and CITIBANK, N.A. and
PHILIPPINE COMMERCIAL INTERNATIONAL
BANK, respondents.
[G.R. No. 128604. January 29, 2001]
FORD PHILIPPINES, INC., petitioner, vs. CITIBANK, N.A.,
PHILIPPINE COMMERCIAL INTERNATIONAL
BANK and THE COURT OF
APPEALS, respondents.
DECISION
QUISUMBING, J.:
These consolidated petitions involve several
fraudulently negotiated checks.
The original actions a quo were instituted by Ford
Philippines to recover from the drawee bank, CITIBANK, N.A.
(Citibank) and collecting bank, Philippine Commercial
International Bank (PCIBank) [formerly Insular Bank of Asia
and America], the value of several checks payable to the
Commissioner of Internal Revenue, which were embezzled
allegedly by an organized syndicate.
G.R. Nos. 121413 and 121479 are twin petitions for
review of the March 27, 1995 Decision[1] of the Court of
Appeals in CA-G.R. CV No. 25017, entitled Ford Philippines,
Inc. vs. Citibank, N.A. and Insular Bank of Asia and America
(now Philippine Commercial International Bank), and the
August 8, 1995 Resolution,[2] ordering the collecting bank,
Philippine Commercial International Bank, to pay the amount
of Citibank Check No. SN-04867.
In G.R. No. 128604, petitioner Ford Philippines assails
the October 15, 1996 Decision[3] of the Court of Appeals and
its March 5, 1997 Resolution[4] in CA-G.R. No. 28430 entitled
Ford Philippines, Inc. vs. Citibank, N.A. and Philippine
Commercial International Bank, affirming in totothe
judgment of the trial court holding the defendant drawee
bank, Citibank, N.A., solely liable to pay the amount of
P12,163,298.10 as damages for the misapplied proceeds of
the plaintiffs Citibank Check Numbers SN-10597 and 16508.
I. G.R. Nos. 121413 and 121479
Page 38 of 48
The stipulated facts submitted by the parties as
accepted by the Court of Appeals are as follows:
On October 19, 1977, the plaintiff Ford drew and issued its
Citibank Check No. SN-04867 in the amount of P4,746,114.41,
in favor of the Commissioner of Internal Revenue as payment
of plaintiffs percentage or manufacturers sales taxes for the
third quarter of 1977.
The aforesaid check was deposited with the defendant IBAA
(now PCIBank) and was subsequently cleared at the Central
Bank. Upon presentment with the defendant Citibank, the
proceeds of the check was paid to IBAA as collecting or
depository bank.
The proceeds of the same Citibank check of the plaintiff was
never paid to or received by the payee thereof, the
Commissioner of Internal Revenue.
As a consequence, upon demand of the Bureau and/or
Commissioner of Internal Revenue, the plaintiff was
compelled to make a second payment to the Bureau of
Internal Revenue of its percentage/manufacturers sales taxes
for the third quarter of 1977 and that said second payment of
plaintiff in the amount of P4,746,114.41 was duly received by
the Bureau of Internal Revenue.
It is further admitted by defendant Citibank that during the
time of the transactions in question, plaintiff had been
maintaining a checking account with defendant Citibank; that
Citibank Check No. SN-04867 which was drawn and issued by
the plaintiff in favor of the Commissioner of Internal Revenue
was a crossed check in that, on its face were two parallel lines
and written in between said lines was the phrase Payees
Account Only; and that defendant Citibank paid the full face
value of the check in the amount of P4,746,114.41 to the
defendant IBAA.
It has been duly established that for the payment of plaintiffs
percentage tax for the last quarter of 1977, the Bureau of
Internal Revenue issued Revenue Tax Receipt No. 18747002,
dated October 20, 1977, designating therein in Muntinlupa,
Metro Manila, as the authorized agent bank of Metrobank,
Alabang Branch to receive the tax payment of the plaintiff.
On December 19, 1977, plaintiffs Citibank Check No. SN-
04867, together with the Revenue Tax Receipt No. 18747002,
was deposited with defendant IBAA, through its Ermita
Branch. The latter accepted the check and sent it to the
Central Clearing House for clearing on the same day, with the
indorsement at the back all prior indorsements and/or lack of
indorsements guaranteed. Thereafter, defendant IBAA
presented the check for payment to defendant Citibank on
same date, December 19, 1977, and the latter paid the face
value of the check in the amount of
P4,746,114.41.Consequently, the amount of P4,746,114.41
was debited in plaintiffs account with the defendant Citibank
and the check was returned to the plaintiff.
Upon verification, plaintiff discovered that its Citibank Check
No. SN-04867 in the amount of P4,746,114.41 was not paid to
the Commissioner of Internal Revenue. Hence, in separate
letters dated October 26, 1979, addressed to the defendants,
the plaintiff notified the latter that in case it will be re-
assessed by the BIR for the payment of the taxes covered by
the said checks, then plaintiff shall hold the defendants liable
for reimbursement of the face value of the same. Both
defendants denied liability and refused to pay.
RA 8791
Deposits, Loans, and Other Operations
In a letter dated February 28, 1980 by the Acting
Commissioner of Internal Revenue addressed to the plaintiff
- supposed to be Exhibit D, the latter was officially informed,
among others, that its check in the amount of P4,746,114.41
was not paid to the government or its authorized agent and
instead encashed by unauthorized persons, hence, plaintiff
has to pay the said amount within fifteen days from receipt of
the letter. Upon advice of the plaintiffs lawyers, plaintiff on
March 11, 1982, paid to the Bureau of Internal Revenue, the
amount of P4,746,114.41, representing payment of plaintiffs
percentage tax for the third quarter of 1977.
As a consequence of defendants refusal to reimburse plaintiff
of the payment it had made for the second time to the BIR of
its percentage taxes, plaintiff filed on January 20, 1983 its
original complaint before this Court.
On December 24, 1985, defendant IBAA was merged with the
Philippine Commercial International Bank (PCI Bank) with
the latter as the surviving entity.
Defendant Citibank maintains that; the payment it made of
plaintiffs Citibank Check No. SN-04867 in the amount of
P4,746,114.41 was in due course; it merely relied on the
clearing stamp of the depository/collecting bank, the
defendant IBAA that all prior indorsements and/or lack of
indorsements guaranteed; and the proximate cause of
plaintiffs injury is the gross negligence of defendant IBAA in
indorsing the plaintiffs Citibank check in question.
It is admitted that on December 19, 1977 when the proceeds
of plaintiffs Citibank Check No. SN-04867 was paid to
defendant IBAA as collecting bank, plaintiff was maintaining
a checking account with defendant Citibank.[5]
Although it was not among the stipulated facts, an
investigation by the National Bureau of Investigation (NBI)
revealed that Citibank Check No. SN-04867 was recalled by
Godofredo Rivera, the General Ledger Accountant of Ford. He
purportedly needed to hold back the check because there was
an error in the computation of the tax due to the Bureau of
Internal Revenue (BIR). With Riveras instruction, PCIBank
replaced the check with two of its own Managers Checks
(MCs). Alleged members of a syndicate later deposited the
two MCs with the Pacific Banking Corporation.
Ford, with leave of court, filed a third-party complaint before
the trial court impleading Pacific Banking Corporation (PBC)
and Godofredo Rivera, as third party defendants. But the
court dismissed the complaint against PBC for lack of cause of
action. The court likewise dismissed the third-party
complaint against Godofredo Rivera because he could not be
served with summons as the NBI declared him as a fugitive
from justice.
On June 15, 1989, the trial court rendered its decision,
as follows:
Premises considered, judgment is hereby rendered as
follows:
1. Ordering the defendants Citibank and IBAA
(now PCI Bank), jointly and severally, to pay
the plaintiff the amount of P4,746,114.41
representing the face value of plaintiffs
Citibank Check No. SN-04867, with interest
thereon at the legal rate starting January 20,
1983, the date when the original complaint
Page 39 of 48
was filed until the amount is fully paid, plus
costs;
2. On defendant Citibanks cross-claim: ordering
the cross-defendant IBAA (now PCI BANK)
to reimburse defendant Citibank for
whatever amount the latter has paid or may
pay to the plaintiff in accordance with the
next preceding paragraph;
3. The counterclaims asserted by the defendants
against the plaintiff, as well as that asserted
by the cross-defendant against the cross-
claimant are dismissed, for lack of merits;
and
4. With costs against the defendants.
SO ORDERED.[6]
Not satisfied with the said decision, both defendants,
Citibank and PCIBank, elevated their respective petitions for
review on certiorari to the Court of Appeals. On March 27,
1995, the appellate court issued its judgment as follows:
WHEREFORE, in view of the foregoing, the court AFFIRMS the
appealed decision with modifications.
The court hereby renders judgment:
1. Dismissing the complaint in Civil Case No.
49287 insofar as defendant Citibank N.A. is
concerned;
2. Ordering the defendant IBAA now PCI Bank
to pay the plaintiff the amount of
P4,746,114.41 representing the face value of
plaintiffs Citibank Check No. SN-04867, with
interest thereon at the legal rate starting
January 20, 1983. the date when the original
complaint was filed until the amount is fully
paid;
3. Dismissing the counterclaims asserted by the
defendants against the plaintiff as well as
that asserted by the cross-defendant against
the cross-claimant, for lack of merits.
Costs against the defendant IBAA (now PCI Bank).
IT IS SO ORDERED.[7]
PCIBank moved to reconsider the above-quoted
decision of the Court of Appeals, while Ford filed a Motion for
Partial Reconsideration. Both motions were denied for lack of
merit.
Separately, PCIBank and Ford filed before this Court,
petitions for review by certiorari under Rule 45.
In G.R. No. 121413, PCIBank seeks the reversal of the
decision and resolution of the Twelfth Division of the Court of
Appeals contending that it merely acted on the instruction of
Ford and such cause of action had already prescribed.
PCIBank sets forth the following issues for
consideration:
I. Did the respondent court err when, after
finding that the petitioner acted on the check
drawn by respondent Ford on the said
respondents instructions, it nevertheless
RA 8791
Deposits, Loans, and Other Operations
found the petitioner liable to the said
respondent for the full amount of the said
check.
II. Did the respondent court err when it did not
find prescription in favor of the petitioner.[8]
In a counter move, Ford filed its petition docketed as
G.R. No. 121479, questioning the same decision and
resolution of the Court of Appeals, and praying for the
reinstatement in toto of the decision of the trial court which
found both PCIBank and Citibank jointly and severally liable
for the loss.
In G.R. No. 121479, appellant Ford presents the
following propositions for consideration:
I. Respondent Citibank is liable to petitioner Ford considering
that:
1. As drawee bank, respondent Citibank owes to
petitioner Ford, as the drawer of the subject
check and a depositor of respondent
Citibank, an absolute and contractual duty to
pay the proceeds of the subject check only to
the payee thereof, the Commissioner of
Internal Revenue.
2. Respondent Citibank failed to observe its duty
as banker with respect to the subject check,
which was crossed and payable to Payees
Account Only.
3. Respondent Citibank raises an issue for the
first time on appeal; thus the same should
not be considered by the Honorable Court.
4. As correctly held by the trial court, there is no
evidence of gross negligence on the part of
petitioner Ford.[9]
II. PCIBank is liable to petitioner Ford considering that:
1. There were no instructions from petitioner
Ford to deliver the proceeds of the subject
check to a person other than the payee
named therein, the Commissioner of the
Bureau of Internal Revenue; thus, PCIBanks
only obligation is to deliver the proceeds to
the Commissioner of the Bureau of Internal
Revenue.[10]
2. PCIBank which affixed its indorsement on the
subject check (All prior indorsement and/or
lack of indorsement guaranteed), is liable as
collecting bank.[11]
3. PCIBank is barred from raising issues of fact in
the instant proceedings.[12]
4. Petitioner Fords cause of action had not
prescribed.[13]
II. G.R. No. 128604
The same syndicate apparently embezzled the
proceeds of checks intended, this time, to settle Fords
percentage taxes appertaining to the second quarter of 1978
and the first quarter of 1979.
Page 40 of 48
The facts as narrated by the Court of Appeals are as
follows:
Ford drew Citibank Check No. SN-10597 on July 19,
1978 in the amount of P5,851,706.37 representing the
percentage tax due for the second quarter of 1978 payable to
the Commissioner of Internal Revenue. A BIR Revenue Tax
Receipt No. 28645385 was issued for the said purpose.
On April 20, 1979, Ford drew another Citibank Check
No. SN-16508 in the amount of P6,311,591.73, representing
the payment of percentage tax for the first quarter of 1979
and payable to the Commissioner of Internal Revenue. Again
a BIR Revenue Tax Receipt No. A-1697160 was issued for the
said purpose.
Both checks were crossed checks and contain two
diagonal lines on its upper left corner between which were
written the words payable to the payees account only.
The checks never reached the payee, CIR. Thus, in a
letter dated February 28, 1980, the BIR, Region 4-B,
demanded for the said tax payments the corresponding
periods above-mentioned.
As far as the BIR is concerned, the said two BIR
Revenue Tax Receipts were considered fake and
spurious. This anomaly was confirmed by the NBI upon the
initiative of the BIR. The findings forced Ford to pay the BIR
anew, while an action was filed against Citibank and PCIBank
for the recovery of the amount of Citibank Check Numbers
SN-10597 and 16508.
The Regional Trial Court of Makati, Branch 57, which
tried the case, made its findings on the modus operandi of the
syndicate, as follows:
A certain Mr. Godofredo Rivera was employed by the plaintiff
FORD as its General Ledger Accountant. As such, he prepared
the plaintiffs check marked Ex. A [Citibank Check No. SN-
10597] for payment to the BIR. Instead, however, of
delivering the same to the payee, he passed on the check to a
co-conspirator named Remberto Castro who was a pro-
manager of the San Andres Branch of PCIB.* In connivance
with one Winston Dulay, Castro himself subsequently opened
a Checking Account in the name of a fictitious person
denominated as Reynaldo Reyes in the Meralco Branch of
PCIBank where Dulay works as Assistant Manager.
After an initial deposit of P100.00 to validate the account,
Castro deposited a worthless Bank of America Check in
exactly the same amount as the first FORD check (Exh. A,
P5,851,706.37) while this worthless check was coursed
through PCIBs main office enroute to the Central Bank for
clearing, replaced this worthless check with FORDs Exhibit A
and accordingly tampered the accompanying documents to
cover the replacement. As a result, Exhibit A was cleared by
defendant CITIBANK, and the fictitious deposit account of
Reynaldo Reyes was credited at the PCIB Meralco Branch
with the total amount of the FORD check Exhibit A. The same
method was again utilized by the syndicate in profiting from
Exh. B [Citibank Check No. SN-16508] which was
subsequently pilfered by Alexis Marindo, Riveras Assistant at
FORD.
From this Reynaldo Reyes account, Castro drew various
checks distributing the shares of the other participating
conspirators namely (1) CRISANTO BERNABE, the
mastermind who formulated the method for the
embezzlement; (2) RODOLFO R. DE LEON a customs broker
who negotiated the initial contact between Bernabe, FORDs
Godofredo Rivera and PCIBs Remberto Castro; (3) JUAN
CASTILLO who assisted de Leon in the initial arrangements;
(4) GODOFREDO RIVERA, FORDs accountant who passed on
RA 8791
Deposits, Loans, and Other Operations
the first check (Exhibit A) to Castro; (5) REMBERTO CASTRO,
PCIBs pro-manager at San Andres who performed the
switching of checks in the clearing process and opened the
fictitious Reynaldo Reyes account at the PCIB Meralco
Branch; (6) WINSTON DULAY, PCIBs Assistant Manager at its
Meralco Branch, who assisted Castro in switching the checks
in the clearing process and facilitated the opening of the
fictitious Reynaldo Reyes bank account; (7) ALEXIS
MARINDO, Riveras Assistant at FORD, who gave the second
check (Exh. B) to Castro; (8) ELEUTERIO JIMENEZ, BIR
Collection Agent who provided the fake and spurious revenue
tax receipts to make it appear that the BIR had received
FORDs tax payments.
Several other persons and entities were utilized by the
syndicate as conduits in the disbursements of the proceeds of
the two checks, but like the aforementioned participants in
the conspiracy, have not been impleaded in the present
case. The manner by which the said funds were distributed
among them are traceable from the record of checks drawn
against the original Reynaldo Reyes account and indubitably
identify the parties who illegally benefited therefrom and
readily indicate in what amounts they did so.[14]
On December 9, 1988, Regional Trial Court of Makati,
Branch 57, held drawee-bank, Citibank, liable for the value of
the two checks while absolving PCIBank from any liability,
disposing as follows:
WHEREFORE, judgment is hereby rendered sentencing
defendant CITIBANK to reimburse plaintiff FORD the total
amount of P12,163,298.10 prayed for in its complaint, with
6% interest thereon from date of first written demand until
full payment, plus P300,000.00 attorneys fees and expenses
of litigation, and to pay the defendant, PCIB (on its
counterclaim to crossclaim) the sum of P300,000.00 as
attorneys fees and costs of litigation, and pay the costs.
SO ORDERED.[15]
Both Ford and Citibank appealed to the Court of
Appeals which affirmed, in toto, the decision of the trial
court. Hence, this petition.
Petitioner Ford prays that judgment be rendered
setting aside the portion of the Court of Appeals decision and
its resolution dated March 5, 1997, with respect to the
dismissal of the complaint against PCIBank and holding
Citibank solely responsible for the proceeds of Citibank Check
Numbers SN-10597 and 16508 for P5,851,706.73 and
P6,311,591.73 respectively.
Ford avers that the Court of Appeals erred in
dismissing the complaint against defendant PCIBank
considering that:
I. Defendant PCIBank was clearly negligent when
it failed to exercise the diligence required to
be exercised by it as a banking institution.
II. Defendant PCIBank clearly failed to observe
the diligence required in the selection and
supervision of its officers and employees.
III. Defendant PCIBank was, due to its
negligence, clearly liable for the loss or
damage resulting to the plaintiff Ford as a
consequence of the substitution of the check
consistent with Section 5 of Central Bank
Circular No. 580 series of 1977.
IV. Assuming arguendo that defendant PCIBank
did not accept, endorse or negotiate in due
Page 41 of 48
course the subject checks, it is liable, under
Article 2154 of the Civil Code, to return the
money which it admits having received, and
which was credited to it in its Central Bank
account.[16]
The main issue presented for our consideration by
these petitions could be simplified as follows: Has petitioner
Ford the right to recover from the collecting bank (PCIBank)
and the drawee bank (Citibank) the value of the checks
intended as payment to the Commissioner of Internal
Revenue? Or has Fords cause of action already prescribed?
Note that in these cases, the checks were drawn against
the drawee bank, but the title of the person negotiating the
same was allegedly defective because the instrument was
obtained by fraud and unlawful means, and the proceeds of
the checks were not remitted to the payee. It was established
that instead of paying the checks to the CIR, for the settlement
of the appropriate quarterly percentage taxes of Ford, the
checks were diverted and encashed for the eventual
distribution among the members of the syndicate. As to the
unlawful negotiation of the check the applicable law is Section
55 of the Negotiable Instruments Law (NIL), which provides:
When title defective -- The title of a person who negotiates an
instrument is defective within the meaning of this Act when
he obtained the instrument, or any signature thereto, by
fraud, duress, or force and fear, or other unlawful means, or
for an illegal consideration, or when he negotiates it in breach
of faith or under such circumstances as amount to a fraud.
Pursuant to this provision, it is vital to show that the
negotiation is made by the perpetrator in breach of faith
amounting to fraud. The person negotiating the checks must
have gone beyond the authority given by his principal. If the
principal could prove that there was no negligence in the
performance of his duties, he may set up the personal defense
to escape liability and recover from other parties who,
through their own negligence, allowed the commission of the
crime.
In this case, we note that the direct perpetrators of the
offense, namely the embezzlers belonging to a syndicate, are
now fugitives from justice. They have, even if temporarily,
escaped liability for the embezzlement of millions of
pesos. We are thus left only with the task of determining who
of the present parties before us must bear the burden of loss
of these millions. It all boils down to the question of liability
based on the degree of negligence among the parties
concerned.
Foremost, we must resolve whether the injured party,
Ford, is guilty of the imputed contributory negligence that
would defeat its claim for reimbursement, bearing in mind
that its employees, Godofredo Rivera and Alexis Marindo,
were among the members of the syndicate.
Citibank points out that Ford allowed its very own
employee, Godofredo Rivera, to negotiate the checks to his co-
conspirators, instead of delivering them to the designated
authorized collecting bank (Metrobank-Alabang) of the
payee, CIR. Citibank bewails the fact that Ford was remiss in
the supervision and control of its own employees, inasmuch
as it only discovered the syndicates activities through the
information given by the payee of the checks after an
unreasonable period of time.
PCIBank also blames Ford of negligence when it
allegedly authorized Godofredo Rivera to divert the proceeds
of Citibank Check No. SN-04867, instead of using it to pay the
BIR. As to the subsequent run-around of funds of Citibank
Check Nos. SN-10597 and 16508, PCIBank claims that the
proximate cause of the damage to Ford lies in its own officers
RA 8791
Deposits, Loans, and Other Operations
and employees who carried out the fraudulent schemes and
the transactions. These circumstances were not checked by
other officers of the company, including its comptroller or
internal auditor. PCIBank contends that the inaction of Ford
despite the enormity of the amount involved was a sheer
negligence and stated that, as between two innocent persons,
one of whom must suffer the consequences of a breach of
trust, the one who made it possible, by his act of negligence,
must bear the loss.
For its part, Ford denies any negligence in the
performance of its duties. It avers that there was no evidence
presented before the trial court showing lack of diligence on
the part of Ford. And, citing the case of Gempesaw vs. Court of
Appeals,[17] Ford argues that even if there was a finding
therein that the drawer was negligent, the drawee bank was
still ordered to pay damages.
Furthermore, Ford contends that Godofredo Rivera
was not authorized to make any representation in its behalf,
specifically, to divert the proceeds of the checks. It adds that
Citibank raised the issue of imputed negligence against Ford
for the first time on appeal. Thus, it should not be considered
by this Court.
On this point, jurisprudence regarding the imputed
negligence of employer in a master-servant relationship is
instructive. Since a master may be held for his servants
wrongful act, the law imputes to the master the act of the
servant, and if that act is negligent or wrongful and
proximately results in injury to a third person, the negligence
or wrongful conduct is the negligence or wrongful conduct of
the master, for which he is liable.[18] The general rule is that if
the master is injured by the negligence of a third person and
by the concurring contributory negligence of his own servant
or agent, the latters negligence is imputed to his superior and
will defeat the superiors action against the third person,
assuming, of course that the contributory negligence was
the proximate cause of the injury of which complaint is
made.[19]
Accordingly, we need to determine whether or not the
action of Godofredo Rivera, Fords General Ledger Accountant,
and/or Alexis Marindo, his assistant, was the proximate cause
of the loss or damage. As defined, proximate cause is that
which, in the natural and continuous sequence, unbroken by
any efficient, intervening cause produces the injury, and
without which the result would not have occurred.[20]
It appears that although the employees of Ford
initiated the transactions attributable to an organized
syndicate, in our view, their actions were not the proximate
cause of encashing the checks payable to the CIR. The degree
of Fords negligence, if any, could not be characterized as the
proximate cause of the injury to the parties.
The Board of Directors of Ford, we note, did not
confirm the request of Godofredo Rivera to recall Citibank
Check No. SN-04867. Riveras instruction to replace the said
check with PCIBanks Managers Check was not in the ordinary
course of business which could have prompted PCIBank to
validate the same.
As to the preparation of Citibank Checks Nos. SN-10597
and 16508, it was established that these checks were made
payable to the CIR. Both were crossed checks. These checks
were apparently turned around by Fords employees, who
were acting on their own personal capacity.
Given these circumstances, the mere fact that the
forgery was committed by a drawer-payors confidential
employee or agent, who by virtue of his position had unusual
facilities for perpetrating the fraud and imposing the forged
paper upon the bank, does not entitle the bank to shift the loss
to the drawer-payor, in the absence of some circumstance
raising estoppel against the drawer.[21] This rule likewise
Page 42 of 48
applies to the checks fraudulently negotiated or diverted by
the confidential employees who hold them in their
possession.
With respect to the negligence of PCIBank in the
payment of the three checks involved, separately, the trial
courts found variations between the negotiation of Citibank
Check No. SN-04867 and the misapplication of total proceeds
of Checks SN-10597 and 16508. Therefore, we have to
scrutinize, separately, PCIBanks share of negligence when the
syndicate achieved its ultimate agenda of stealing the
proceeds of these checks.
G.R. Nos. 121413 and 121479
Citibank Check No. SN-04867 was deposited at
PCIBank through its Ermita Branch. It was coursed through
the ordinary banking transaction, sent to Central Clearing
with the indorsement at the back all prior indorsements
and/or lack of indorsements guaranteed, and was presented
to Citibank for payment. Thereafter PCIBank, instead of
remitting the proceeds to the CIR, prepared two of its
Managers checks and enabled the syndicate to encash the
same.
On record, PCIBank failed to verify the authority of Mr.
Rivera to negotiate the checks. The neglect of PCIBank
employees to verify whether his letter requesting for the
replacement of the Citibank Check No. SN-04867 was duly
authorized, showed lack of care and prudence required in the
circumstances.
Furthermore, it was admitted that PCIBank is
authorized to collect the payment of taxpayers in behalf of the
BIR. As an agent of BIR, PCIBank is duty bound to consult its
principal regarding the unwarranted instructions given by
the payor or its agent. As aptly stated by the trial court, to wit:
x x x. Since the questioned crossed check was deposited with
IBAA [now PCIBank], which claimed to be a
depository/collecting bank of the BIR, it has the
responsibility to make sure that the check in question is
deposited in Payees account only.
xxxxxxxxx
As agent of the BIR (the payee of the check), defendant IBAA
should receive instructions only from its principal BIR and
not from any other person especially so when that person is
not known to the defendant. It is very imprudent on the part
of the defendant IBAA to just rely on the alleged telephone call
of one Godofredo Rivera and in his signature to the
authenticity of such signature considering that the plaintiff is
not a client of the defendant IBAA.
It is a well-settled rule that the relationship between
the payee or holder of commercial paper and the bank to
which it is sent for collection is, in the absence of an
agreement to the contrary, that of principal and agent.[22] A
bank which receives such paper for collection is the agent of
the payee or holder.[23]
Even considering arguendo, that the diversion of the
amount of a check payable to the collecting bank in behalf of
the designated payee may be allowed, still such diversion
must be properly authorized by the payor. Otherwise stated,
the diversion can be justified only by proof of authority from
the drawer, or that the drawer has clothed his agent with
apparent authority to receive the proceeds of such check.
RA 8791
Deposits, Loans, and Other Operations
Citibank further argues that PCI Banks clearing stamp
appearing at the back of the questioned checks stating that
ALL PRIOR INDORSEMENTS AND/OR LACK OF
INDORSEMENTS GUARANTEED should render PCIBank
liable because it made it pass through the clearing house and
therefore Citibank had no other option but to pay it. Thus,
Citibank asserts that the proximate cause of Fords injury is
the gross negligence of PCIBank. Since the questioned crossed
check was deposited with PCIBank, which claimed to be a
depository/collecting bank of the BIR, it had the
responsibility to make sure that the check in question is
deposited in Payees account only.
Indeed, the crossing of the check with the phrase
Payees Account Only, is a warning that the check should be
deposited only in the account of the CIR. Thus, it is the duty of
the collecting bank PCIBank to ascertain that the check be
deposited in payees account only. Therefore, it is the
collecting bank (PCIBank) which is bound to scrutinize the
check and to know its depositors before it could make the
clearing indorsement all prior indorsements and/or lack of
indorsement guaranteed.
In Banco de Oro Savings and Mortgage Bank vs.
Equitable Banking Corporation,[24] we ruled:
Anent petitioners liability on said instruments, this court is in
full accord with the ruling of the PCHCs Board of Directors
that:
In presenting the checks for clearing and for payment, the
defendant made an express guarantee on the validity of all
prior endorsements. Thus, stamped at the back of the checks
are the defendants clear warranty: ALL PRIOR
ENDORSEMENTS AND/OR LACK OF ENDORSEMENTS
GUARANTEED. Without such warranty, plaintiff would not
have paid on the checks.
No amount of legal jargon can reverse the clear meaning of
defendants warranty. As the warranty has proven to be false
and inaccurate, the defendant is liable for any damage arising
out of the falsity of its representation.[25]
Lastly, banking business requires that the one who first
cashes and negotiates the check must take some precautions
to learn whether or not it is genuine. And if the one cashing
the check through indifference or other circumstance assists
the forger in committing the fraud, he should not be
permitted to retain the proceeds of the check from the drawee
whose sole fault was that it did not discover the forgery or the
defect in the title of the person negotiating the instrument
before paying the check. For this reason, a bank which cashes
a check drawn upon another bank, without requiring proof as
to the identity of persons presenting it, or making inquiries
with regard to them, cannot hold the proceeds against the
drawee when the proceeds of the checks were afterwards
diverted to the hands of a third party. In such cases the
drawee bank has a right to believe that the cashing bank (or
the collecting bank) had, by the usual proper investigation,
satisfied itself of the authenticity of the negotiation of the
checks. Thus, one who encashed a check which had been
forged or diverted and in turn received payment thereon
from the drawee, is guilty of negligence which proximately
contributed to the success of the fraud practiced on the
drawee bank. The latter may recover from the holder the
money paid on the check.[26]
Having established that the collecting banks negligence
is the proximate cause of the loss, we conclude that PCIBank
is liable in the amount corresponding to the proceeds of
Citibank Check No. SN-04867.
Page 43 of 48
G.R. No. 128604
The trial court and the Court of Appeals found that
PCIBank had no official act in the ordinary course of business
that would attribute to it the case of the embezzlement of
Citibank Check Numbers SN-10597 and 16508, because
PCIBank did not actually receive nor hold the two Ford checks
at all. The trial court held, thus:
Neither is there any proof that defendant PCIBank
contributed any official or conscious participation in the
process of the embezzlement. This Court is convinced that the
switching operation (involving the checks while in transit for
clearing) were the clandestine or hidden actuations
performed by the members of the syndicate in their own
personal, covert and private capacity and done without the
knowledge of the defendant PCIBank.[27]
In this case, there was no evidence presented
confirming the conscious participation of PCIBank in the
embezzlement. As a general rule, however, a banking
corporation is liable for the wrongful or tortuous acts and
declarations of its officers or agents within the course and
scope of their employment.[28] A bank will be held liable for
the negligence of its officers or agents when acting within the
course and scope of their employment. It may be liable for the
tortuous acts of its officers even as regards that species of tort
of which malice is an essential element. In this case, we find a
situation where the PCIBank appears also to be the victim of
the scheme hatched by a syndicate in which its own
management employees had participated.
The pro-manager of San Andres Branch of PCIBank,
Remberto Castro, received Citibank Check Numbers SN
10597 and 16508. He passed the checks to a co-conspirator,
an Assistant Manager of PCIBanks Meralco Branch, who
helped Castro open a Checking account of a fictitious person
named Reynaldo Reyes. Castro deposited a worthless Bank of
America Check in exactly the same amount of Ford
checks. The syndicate tampered with the checks and
succeeded in replacing the worthless checks and the eventual
encashment of Citibank Check Nos. SN 10597 and 16508. The
PCIBank Pro-manager, Castro, and his co-conspirator
Assistant Manager apparently performed their activities
using facilities in their official capacity or authority but for
their personal and private gain or benefit.
A bank holding out its officers and agents as worthy of
confidence will not be permitted to profit by the frauds these
officers or agents were enabled to perpetrate in the apparent
course of their employment; nor will it be permitted to shirk
its responsibility for such frauds, even though no benefit may
accrue to the bank therefrom. For the general rule is that a
bank is liable for the fraudulent acts or representations of an
officer or agent acting within the course and apparent scope
of his employment or authority.[29] And if an officer or
employee of a bank, in his official capacity, receives money to
satisfy an evidence of indebtedness lodged with his bank for
collection, the bank is liable for his misappropriation of such
sum.[30]
Moreover, as correctly pointed out by Ford, Section
5[31] of Central Bank Circular No. 580, Series of 1977 provides
that any theft affecting items in transit for clearing, shall be
for the account of sending bank, which in this case is PCIBank.
But in this case, responsibility for negligence does not
lie on PCIBanks shoulders alone.
The evidence on record shows that Citibank as drawee
bank was likewise negligent in the performance of its
duties. Citibank failed to establish that its payment of Fords
checks were made in due course and legally in order. In its
RA 8791
Deposits, Loans, and Other Operations
defense, Citibank claims the genuineness and due execution
of said checks, considering that Citibank (1) has no
knowledge of any infirmity in the issuance of the checks in
question (2) coupled by the fact that said checks were
sufficiently funded and (3) the endorsement of the Payee or
lack thereof was guaranteed by PCI Bank (formerly IBAA),
thus, it has the obligation to honor and pay the same.
For its part, Ford contends that Citibank as the drawee
bank owes to Ford an absolute and contractual duty to pay
the proceeds of the subject check only to the payee thereof,
the CIR. Citing Section 62[32] of the Negotiable Instruments
Law, Ford argues that by accepting the instrument, the
acceptor which is Citibank engages that it will pay according
to the tenor of its acceptance, and that it will pay only to the
payee, (the CIR), considering the fact that here the check was
crossed with annotation Payees Account Only.
As ruled by the Court of Appeals, Citibank must
likewise answer for the damages incurred by Ford on
Citibank Checks Numbers SN 10597 and 16508, because of
the contractual relationship existing between the
two. Citibank, as the drawee bank breached its contractual
obligation with Ford and such degree of culpability
contributed to the damage caused to the latter. On this score,
we agree with the respondent courts ruling.
Citibank should have scrutinized Citibank Check
Numbers SN 10597 and 16508 before paying the amount of
the proceeds thereof to the collecting bank of the BIR. One
thing is clear from the record: the clearing stamps at the back
of Citibank Check Nos. SN 10597 and 16508 do not bear any
initials. Citibank failed to notice and verify the absence of the
clearing stamps. Had this been duly examined, the switching
of the worthless checks to Citibank Check Nos. 10597 and
16508 would have been discovered in time. For this reason,
Citibank had indeed failed to perform what was incumbent
upon it, which is to ensure that the amount of the checks
should be paid only to its designated payee. The fact that the
drawee bank did not discover the irregularity seasonably, in
our view, constitutes negligence in carrying out the banks
duty to its depositors. The point is that as a business affected
with public interest and because of the nature of its functions,
the bank is under obligation to treat the accounts of its
depositors with meticulous care, always having in mind the
fiduciary nature of their relationship.[33]
Thus, invoking the doctrine of comparative negligence,
we are of the view that both PCIBank and Citibank failed in
their respective obligations and both were negligent in the
selection and supervision of their employees resulting in the
encashment of Citibank Check Nos. SN 10597 and
16508. Thus, we are constrained to hold them equally liable
for the loss of the proceeds of said checks issued by Ford in
favor of the CIR.
Time and again, we have stressed that banking
business is so impressed with public interest where the trust
and confidence of the public in general is of paramount
importance such that the appropriate standard of diligence
must be very high, if not the highest, degree of diligence.[34] A
banks liability as obligor is not merely vicarious but primary,
wherein the defense of exercise of due diligence in the
selection and supervision of its employees is of no moment. [35]
Banks handle daily transactions involving millions of
pesos.[36] By the very nature of their work the degree of
responsibility, care and trustworthiness expected of their
employees and officials is far greater than those of ordinary
clerks and employees.[37] Banks are expected to exercise the
highest degree of diligence in the selection and supervision of
their employees.[38]
On the issue of prescription, PCIBank claims that the
action of Ford had prescribed because of its inability to seek
judicial relief seasonably, considering that the alleged
Page 44 of 48
negligent act took place prior to December 19, 1977 but the
relief was sought only in 1983, or seven years thereafter.
The statute of limitations begins to run when the bank
gives the depositor notice of the payment, which is ordinarily
when the check is returned to the alleged drawer as a voucher
with a statement of his account,[39] and an action upon a check
is ordinarily governed by the statutory period applicable to
instruments in writing.[40]
Our laws on the matter provide that the action upon a
written contract must be brought within ten years from the
time the right of action accrues.[41] Hence, the reckoning time
for the prescriptive period begins when the instrument was
issued and the corresponding check was returned by the bank
to its depositor (normally a month thereafter). Applying the
same rule, the cause of action for the recovery of the proceeds
of Citibank Check No. SN 04867 would normally be a month
after December 19, 1977, when Citibank paid the face value
of the check in the amount of P4,746,114.41. Since the
original complaint for the cause of action was filed on January
20, 1983, barely six years had lapsed. Thus, we conclude that
Fords cause of action to recover the amount of Citibank Check
No. SN 04867 was seasonably filed within the period
provided by law.
Finally, we also find that Ford is not completely
blameless in its failure to detect the fraud. Failure on the part
of the depositor to examine its passbook, statements of
account, and cancelled checks and to give notice within a
reasonable time (or as required by statute) of any
discrepancy which it may in the exercise of due care and
diligence find therein, serves to mitigate the banks liability by
reducing the award of interest from twelve percent (12%) to
six percent (6%) per annum. As provided in Article 1172 of
the Civil Code of the Philippines, responsibility arising from
negligence in the performance of every kind of obligation is
also demandable, but such liability may be regulated by the
courts, according to the circumstances. In quasi-delicts, the
contributory negligence of the plaintiff shall reduce the
damages that he may recover.[42]
WHEREFORE, the assailed Decision and Resolution of
the Court of Appeals in CA-G.R. CV No. 25017, are
AFFIRMED. PCIBank, known formerly as Insular Bank of Asia
and America, is declared solely responsible for the loss of the
proceeds of Citibank Check No. SN 04867 in the amount
P4,746,114.41, which shall be paid together with six percent
(6%) interest thereon to Ford Philippines Inc. from the date
when the original complaint was filed until said amount is
fully paid.
However, the Decision and Resolution of the Court of
Appeals in CA-G.R. No. 28430 are MODIFIED as follows:
PCIBank and Citibank are adjudged liable for and must share
the loss, (concerning the proceeds of Citibank Check Numbers
SN 10597 and 16508 totalling P12,163,298.10) on a fifty-fifty
ratio, and each bank is ORDERED to pay Ford Philippines Inc.
P6,081,649.05, with six percent (6%) interest thereon, from
the date the complaint was filed until full payment of said
amount.
Costs against Philippine Commercial International
Bank and Citibank, N.A.
SO ORDERED.
RA 8791
Deposits, Loans, and Other Operations
G.R. No. 90027 March 3, 1993
CA AGRO-INDUSTRIAL DEVELOPMENT CORP., petitioner,
vs.
THE HONORABLE COURT OF APPEALS and SECURITY
BANK AND TRUST COMPANY, respondents.
Dolorfino & Dominguez Law Offices for petitioner.
Danilo B. Banares for private respondent.
DAVIDE, JR., J.:
Is the contractual relation between a commercial bank and
another party in a contract of rent of a safety deposit box with
respect to its contents placed by the latter one of bailor and
bailee or one of lessor and lessee?
This is the crux of the present controversy.
On 3 July 1979, petitioner (through its President, Sergio
Aguirre) and the spouses Ramon and Paula Pugao entered
into an agreement whereby the former purchased from the
latter two (2) parcels of land for a consideration of
P350,625.00. Of this amount, P75,725.00 was paid as
downpayment while the balance was covered by three (3)
postdated checks. Among the terms and conditions of the
agreement embodied in a Memorandum of True and Actual
Agreement of Sale of Land were that the titles to the lots shall
be transferred to the petitioner upon full payment of the
purchase price and that the owner's copies of the certificates
of titles thereto, Transfer Certificates of Title (TCT) Nos.
284655 and 292434, shall be deposited in a safety deposit box
of any bank. The same could be withdrawn only upon the joint
signatures of a representative of the petitioner and the
Pugaos upon full payment of the purchase price. Petitioner,
through Sergio Aguirre, and the Pugaos then rented Safety
Deposit Box No. 1448 of private respondent Security Bank
and Trust Company, a domestic banking corporation
hereinafter referred to as the respondent Bank. For this
purpose, both signed a contract of lease (Exhibit "2") which
contains, inter alia, the following conditions:
13. The bank is not a depositary of the
contents of the safe and it has neither
the possession nor control of the same.
14. The bank has no interest whatsoever
in said contents, except herein expressly
provided, and it assumes absolutely no
liability in connection therewith.1
After the execution of the contract, two (2) renter's keys were
given to the renters — one to Aguirre (for the petitioner) and
the other to the Pugaos. A guard key remained in the
possession of the respondent Bank. The safety deposit box
has two (2) keyholes, one for the guard key and the other for
the renter's key, and can be opened only with the use of both
keys. Petitioner claims that the certificates of title were placed
inside the said box.
Thereafter, a certain Mrs. Margarita Ramos offered to buy
from the petitioner the two (2) lots at a price of P225.00 per
square meter which, as petitioner alleged in its complaint,
translates to a profit of P100.00 per square meter or a total of
P280,500.00 for the entire property. Mrs. Ramos demanded
Page 45 of 48
the execution of a deed of sale which necessarily entailed the
production of the certificates of title. In view thereof, Aguirre,
accompanied by the Pugaos, then proceeded to the
respondent Bank on 4 October 1979 to open the safety
deposit box and get the certificates of title. However, when
opened in the presence of the Bank's representative, the box
yielded no such certificates. Because of the delay in the
reconstitution of the title, Mrs. Ramos withdrew her earlier
offer to purchase the lots; as a consequence thereof, the
petitioner allegedly failed to realize the expected profit of
P280,500.00. Hence, the latter filed on 1 September 1980 a
complaint2 for damages against the respondent Bank with the
Court of First Instance (now Regional Trial Court) of Pasig,
Metro Manila which docketed the same as Civil Case No.
38382.
In its Answer with Counterclaim,3 respondent Bank alleged
that the petitioner has no cause of action because of
paragraphs 13 and 14 of the contract of lease (Exhibit "2");
corollarily, loss of any of the items or articles contained in the
box could not give rise to an action against it. It then
interposed a counterclaim for exemplary damages as well as
attorney's fees in the amount of P20,000.00. Petitioner
subsequently filed an answer to the counterclaim.4
In due course, the trial court, now designated as Branch 161
of the Regional Trial Court (RTC) of Pasig, Metro Manila,
rendered a decision5 adverse to the petitioner on 8 December
1986, the dispositive portion of which reads:
WHEREFORE, premises considered,
judgment is hereby rendered dismissing
plaintiff's complaint.
On defendant's counterclaim, judgment
is hereby rendered ordering plaintiff to
pay defendant the amount of FIVE
THOUSAND (P5,000.00) PESOS as
attorney's fees.
With costs against plaintiff.6
The unfavorable verdict is based on the trial court's
conclusion that under paragraphs 13 and 14 of the contract of
lease, the Bank has no liability for the loss of the certificates
of title. The court declared that the said provisions are
binding on the parties.
Its motion for reconsideration7 having been denied,
petitioner appealed from the adverse decision to the
respondent Court of Appeals which docketed the appeal as
CA-G.R. CV No. 15150. Petitioner urged the respondent Court
to reverse the challenged decision because the trial court
erred in (a) absolving the respondent Bank from liability from
the loss, (b) not declaring as null and void, for being contrary
to law, public order and public policy, the provisions in the
contract for lease of the safety deposit box absolving the Bank
from any liability for loss, (c) not concluding that in this
jurisdiction, as well as under American jurisprudence, the
liability of the Bank is settled and (d) awarding attorney's fees
to the Bank and denying the petitioner's prayer for nominal
and exemplary damages and attorney's fees.8
In its Decision promulgated on 4 July 1989,9 respondent
Court affirmed the appealed decision principally on the
theory that the contract (Exhibit "2") executed by the
petitioner and respondent Bank is in the nature of a contract
of lease by virtue of which the petitioner and its co-renter
were given control over the safety deposit box and its
contents while the Bank retained no right to open the said box
RA 8791
Deposits, Loans, and Other Operations
because it had neither the possession nor control over it and
its contents. As such, the contract is governed by Article 1643
of the Civil Code 10 which provides:
Art. 1643. In the lease of things, one of
the parties binds himself to give to
another the enjoyment or use of a thing
for a price certain, and for a period
which may be definite or indefinite.
However, no lease for more than ninety-
nine years shall be valid.
It invoked Tolentino vs. Gonzales 11 — which held
that the owner of the property loses his control
over the property leased during the period of the
contract — and Article 1975 of the Civil Code
which provides:
Art. 1975. The depositary holding
certificates, bonds, securities or
instruments which earn interest shall be
bound to collect the latter when it
becomes due, and to take such steps as
may be necessary in order that the
securities may preserve their value and
the rights corresponding to them
according to law.
The above provision shall not apply to
contracts for the rent of safety deposit
boxes.
and then concluded that "[c]learly, the defendant-
appellee is not under any duty to maintain the
contents of the box. The stipulation absolving the
defendant-appellee from liability is in accordance
with the nature of the contract of lease and cannot
be regarded as contrary to law, public order and
public policy." 12 The appellate court was quick to
add, however, that under the contract of lease of
the safety deposit box, respondent Bank is not
completely free from liability as it may still be
made answerable in case unauthorized persons
enter into the vault area or when the rented box is
forced open. Thus, as expressly provided for in
stipulation number 8 of the contract in question:
8. The Bank shall use due diligence that
no unauthorized person shall be
admitted to any rented safe and beyond
this, the Bank will not be responsible for
the contents of any safe rented from it. 13
Its motion for reconsideration 14 having been denied in the
respondent Court's Resolution of 28 August
1989, 15petitioner took this recourse under Rule 45 of the
Rules of Court and urges Us to review and set aside the
respondent Court's ruling. Petitioner avers that both the
respondent Court and the trial court (a) did not properly and
legally apply the correct law in this case, (b) acted with grave
abuse of discretion or in excess of jurisdiction amounting to
lack thereof and (c) set a precedent that is contrary to, or is a
departure from precedents adhered to and affirmed by
decisions of this Court and precepts in American
jurisprudence adopted in the Philippines. It reiterates the
arguments it had raised in its motion to reconsider the trial
court's decision, the brief submitted to the respondent Court
and the motion to reconsider the latter's decision. In a
nutshell, petitioner maintains that regardless of
nomenclature, the contract for the rent of the safety deposit
Page 46 of 48
box (Exhibit "2") is actually a contract of deposit governed by
Title XII, Book IV of the Civil Code of the
Philippines. 16 Accordingly, it is claimed that the respondent
Bank is liable for the loss of the certificates of title pursuant
to Article 1972 of the said Code which provides:
Art. 1972. The depositary is obliged to
keep the thing safely and to return it,
when required, to the depositor, or to
his heirs and successors, or to the
person who may have been designated
in the contract. His responsibility, with
regard to the safekeeping and the loss of
the thing, shall be governed by the
provisions of Title I of this Book.
If the deposit is gratuitous, this fact shall
be taken into account in determining the
degree of care that the depositary must
observe.
Petitioner then quotes a passage from American
Jurisprudence 17 which is supposed to expound on
the prevailing rule in the United States, to wit:
The prevailing rule appears to be that
where a safe-deposit company leases a
safe-deposit box or safe and the lessee
takes possession of the box or safe and
places therein his securities or other
valuables, the relation of bailee and bail
or is created between the parties to the
transaction as to such securities or
other valuables; the fact that the
safe-deposit company does not know,
and that it is not expected that it shall
know, the character or description of
the property which is deposited in such
safe-deposit box or safe does not change
that relation. That access to the contents
of the safe-deposit box can be had only
by the use of a key retained by the lessee
( whether it is the sole key or one to be
used in connection with one retained by
the lessor) does not operate to alter the
foregoing rule. The argument that there
is not, in such a case, a delivery of
exclusive possession and control to the
deposit company, and that therefore the
situation is entirely different from that
of ordinary bailment, has been generally
rejected by the courts, usually on the
ground that as possession must be
either in the depositor or in the
company, it should reasonably be
considered as in the latter rather than in
the former, since the company is, by the
nature of the contract, given absolute
control of access to the property, and
the depositor cannot gain access thereto
without the consent and active
participation of the company. . . .
(citations omitted).
and a segment from Words and Phrases 18 which
states that a contract for the rental of a bank safety
deposit box in consideration of a fixed amount at
stated periods is a bailment for hire.
Petitioner further argues that conditions 13 and 14 of the
questioned contract are contrary to law and public policy and
RA 8791
Deposits, Loans, and Other Operations
should be declared null and void. In support thereof, it cites
Article 1306 of the Civil Code which provides that parties to a
contract may establish such stipulations, clauses, terms and
conditions as they may deem convenient, provided they are
not contrary to law, morals, good customs, public order or
public policy.
After the respondent Bank filed its comment, this Court gave
due course to the petition and required the parties to
simultaneously submit their respective Memoranda.
The petition is partly meritorious.
We agree with the petitioner's contention that the contract
for the rent of the safety deposit box is not an ordinary
contract of lease as defined in Article 1643 of the Civil Code.
However, We do not fully subscribe to its view that the same
is a contract of deposit that is to be strictly governed by the
provisions in the Civil Code on deposit; 19 the contract in the
case at bar is a special kind of deposit. It cannot be
characterized as an ordinary contract of lease under Article
1643 because the full and absolute possession and control of
the safety deposit box was not given to the joint renters — the
petitioner and the Pugaos. The guard key of the box remained
with the respondent Bank; without this key, neither of the
renters could open the box. On the other hand, the respondent
Bank could not likewise open the box without the renter's
key. In this case, the said key had a duplicate which was made
so that both renters could have access to the box.
Hence, the authorities cited by the respondent Court 20 on this
point do not apply. Neither could Article 1975, also relied
upon by the respondent Court, be invoked as an argument
against the deposit theory. Obviously, the first paragraph of
such provision cannot apply to a depositary of certificates,
bonds, securities or instruments which earn interest if such
documents are kept in a rented safety deposit box. It is clear
that the depositary cannot open the box without the renter
being present.
We observe, however, that the deposit theory itself does not
altogether find unanimous support even in American
jurisprudence. We agree with the petitioner that under the
latter, the prevailing rule is that the relation between a bank
renting out safe-deposit boxes and its customer with respect
to the contents of the box is that of a bail or and bailee, the
bailment being for hire and mutual benefit. 21 This is just the
prevailing view because:
There is, however, some support for the
view that the relationship in question
might be more properly characterized
as that of landlord and tenant, or lessor
and lessee. It has also been suggested
that it should be characterized as that of
licensor and licensee. The relation
between a bank, safe-deposit company,
or storage company, and the renter of a
safe-deposit box therein, is often
described as contractual, express or
implied, oral or written, in whole or in
part. But there is apparently no
jurisdiction in which any rule other than
that applicable to bailments governs
questions of the liability and rights of
the parties in respect of loss of the
contents of safe-deposit
boxes. 22 (citations omitted)
Page 47 of 48
In the context of our laws which authorize banking
institutions to rent out safety deposit boxes, it is clear that in
this jurisdiction, the prevailing rule in the United States has
been adopted. Section 72 of the General Banking
Act 23pertinently provides:
Sec. 72. In addition to the operations
specifically authorized elsewhere in this
Act, banking institutions other than
building and loan associations may
perform the following services:
(a) Receive in
custody funds,
documents, and
valuable objects,
and rent safety
deposit boxes for
the safeguarding
of such effects.
xxx xxx xxx
The banks shall perform the services
permitted under subsections (a), (b)
and (c) of this section as depositories or
as agents. . . . 24 (emphasis supplied)
Note that the primary function is still found within the
parameters of a contract of deposit, i.e., the receiving in
custody of funds, documents and other valuable objects for
safekeeping. The renting out of the safety deposit boxes is not
independent from, but related to or in conjunction with, this
principal function. A contract of deposit may be entered into
orally or in writing 25 and, pursuant to Article 1306 of the Civil
Code, the parties thereto may establish such stipulations,
clauses, terms and conditions as they may deem convenient,
provided they are not contrary to law, morals, good customs,
public order or public policy. The depositary's responsibility
for the safekeeping of the objects deposited in the case at bar
is governed by Title I, Book IV of the Civil Code. Accordingly,
the depositary would be liable if, in performing its obligation,
it is found guilty of fraud, negligence, delay or contravention
of the tenor of the agreement. 26 In the absence of any
stipulation prescribing the degree of diligence required, that
of a good father of a family is to be observed. 27 Hence, any
stipulation exempting the depositary from any liability
arising from the loss of the thing deposited on account of
fraud, negligence or delay would be void for being contrary to
law and public policy. In the instant case, petitioner maintains
that conditions 13 and 14 of the questioned contract of lease
of the safety deposit box, which read:
13. The bank is not a depositary of the
contents of the safe and it has neither
the possession nor control of the same.
14. The bank has no interest whatsoever
in said contents, except herein expressly
provided, and it assumes absolutely no
liability in connection therewith. 28
are void as they are contrary to law and public
policy. We find Ourselves in agreement with this
proposition for indeed, said provisions are
inconsistent with the respondent Bank's
responsibility as a depositary under Section 72(a)
of the General Banking Act. Both exempt the latter
from any liability except as contemplated in
condition 8 thereof which limits its duty to exercise
RA 8791
Deposits, Loans, and Other Operations

reasonable diligence only with respect to who shall
be admitted to any rented safe, to wit:
8. The Bank shall use due diligence that
no unauthorized person shall be
admitted to any rented safe and beyond
this, the Bank will not be responsible for
the contents of any safe rented from it. 29
Furthermore, condition 13 stands on a wrong
premise and is contrary to the actual practice of the
Bank. It is not correct to assert that the Bank has
neither the possession nor control of the contents
of the box since in fact, the safety deposit box itself
is located in its premises and is under its absolute
control; moreover, the respondent Bank keeps the
guard key to the said box. As stated earlier, renters
cannot open their respective boxes unless the Bank
cooperates by presenting and using this guard key.
Clearly then, to the extent above stated, the
foregoing conditions in the contract in question are
void and ineffective. It has been said:
should have one (1) renter's key, it was obvious that either of
them could ask the Bank for access to the safety deposit box
and, with the use of such key and the Bank's own guard key,
could open the said box, without the other renter being
present.
Since, however, the petitioner cannot be blamed for the filing
of the complaint and no bad faith on its part had been
established, the trial court erred in condemning the petitioner
to pay the respondent Bank attorney's fees. To this extent, the
Decision (dispositive portion) of public respondent Court of
Appeals must be modified.
WHEREFORE, the Petition for Review is partially GRANTED
by deleting the award for attorney's fees from the 4 July 1989
Decision of the respondent Court of Appeals in CA-G.R. CV No.
15150. As modified, and subject to the pronouncement We
made above on the nature of the relationship between the
parties in a contract of lease of safety deposit boxes, the
dispositive portion of the said Decision is hereby AFFIRMED
and the instant Petition for Review is otherwise DENIED for
lack of merit.

With respect to property deposited in a No pronouncement as to costs.

safe-deposit box by a customer of a safe-
deposit company, the parties, since the
SO ORDERED.
relation is a contractual one, may by
special contract define their respective
duties or provide for increasing or
limiting the liability of the deposit
company, provided such contract is not
in violation of law or public policy. It
must clearly appear that there actually
was such a special contract, however, in
order to vary the ordinary obligations
implied by law from the relationship of
the parties; liability of the deposit
company will not be enlarged or
restricted by words of doubtful
meaning. The company, in renting
safe-deposit boxes, cannot exempt itself
from liability for loss of the contents by
its own fraud or negligence or that of its
agents or servants, and if a provision of
the contract may be construed as an
attempt to do so, it will be held
ineffective for the purpose. Although it
has been held that the lessor of a safe-
deposit box cannot limit its liability for
loss of the contents thereof through its
own negligence, the view has been taken
that such a lessor may limits its liability
to some extent by agreement or
stipulation. 30 (citations omitted)

Thus, we reach the same conclusion which the Court of

Appeals arrived at, that is, that the petition should be
dismissed, but on grounds quite different from those relied
upon by the Court of Appeals. In the instant case, the
respondent Bank's exoneration cannot, contrary to the
holding of the Court of Appeals, be based on or proceed from
a characterization of the impugned contract as a contract of
lease, but rather on the fact that no competent proof was
presented to show that respondent Bank was aware of the
agreement between the petitioner and the Pugaos to the
effect that the certificates of title were withdrawable from the
safety deposit box only upon both parties' joint signatures,
and that no evidence was submitted to reveal that the loss of
the certificates of title was due to the fraud or negligence of
the respondent Bank. This in turn flows from this Court's
determination that the contract involved was one of deposit.
Since both the petitioner and the Pugaos agreed that each

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