PHILIPPINE NATIONAL G.R. No.

173259
BANK,
Petitioner,

Present:

CORONA, C.J., Chairperson,

- versus - LEONARDO-DE CASTRO,
BERSAMIN,
DEL CASTILLO, and
VILLARAMA, JR., JJ.

F.F. CRUZ and CO., INC. Promulgated:

Respondent. July 25, 2011
x----------------------------------------------------------
-x

DECISION

DEL CASTILLO, J.:

As between a bank and its depositor, where the banks negligence is the proximate
cause of the loss and the depositor is guilty of contributory negligence, the greater
proportion of the loss shall be borne by the bank.

This Petition for Review on Certiorari seeks to reverse and set aside the Court of
Appeals January 31, 2006 Decision[1] in CA-G.R. CV No. 81349, which modified the
January 30, 2004 Decision[2] of the Regional Trial Court of Manila City, Branch 46 in Civil
Case No. 97-84010, and the June 26, 2006 Resolution[3] denying petitioners motion for
reconsideration.

Factual Antecedents

The antecedents are aptly summarized by the appellate court:

 In its complaint, it is alleged that [respondent F.F. Cruz & Co., Inc.]
(hereinafter FFCCI) opened savings/current or so-called combo account No.
0219-830-146 and dollar savings account No. 0219-0502-458-6 with [petitioner
Philippine National Bank] (hereinafter PNB) at its Timog Avenue Branch. Its
President Felipe Cruz (or Felipe) and Secretary-Treasurer Angelita A. Cruz (or
Angelita) were the named signatories for the said accounts.

The said signatories on separate but coeval dates left for and returned
from the Unites States of America, Felipe on March 18, 1995 until June 10,
1995 while Angelita followed him on March 29, 1995 and returned ahead on
May 9, 1995.

While they were thus out of the country, applications for cashiers and
managers [checks] bearing Felipes [signature] were presented to and both
approved by the PNB. The first was on March 27, 1995 for P9,950,000.00
payable to a certain Gene B. Sangalang and the other one was on April 24, 1995
for P3,260,500.31 payable to one Paul Bautista. The amounts of these checks
were then debited by the PNB against the combo account of [FFCCI].

When Angelita returned to the country, she had occasion to examine the
PNB statements of account of [FFCCI] for the months of February to August
1995 and she noticed the deductions of P9,950,000.00 and P3,260,500.31.
Claiming that these were unauthorized and fraudulently made, [FFCCI]
requested PNB to credit back and restore to its account the value of the checks.
PNB refused, and thus constrained [FFCCI] filed the instant suit for damages
against the PNB and its own accountant Aurea Caparas (or Caparas).

In its traverse, PNB averred lack of cause of action. It alleged that it

exercised due diligence in handling the account of [FFCCI]. The applications
for managers check have passed through the standard bank procedures and it
was only after finding no infirmity that these were given due course. In fact, it
was no less than Caparas, the accountant of [FFCCI], who confirmed the
regularity of the transaction. The delay of [FFCCI] in picking up and going over
the bank statements was the proximate cause of its self-proclaimed injury. Had
[FFCCI] been conscientious in this regard, the alleged chicanery would have
been detected early on and Caparas effectively prevented from absconding with
its millions. It prayed for the dismissal of the complaint.[4]

Regional Trial Courts Ruling

 The trial court ruled that F.F. Cruz and Company, Inc. ( FFCCI) was guilty of
negligence in clothing Aurea Caparas (Caparas) with authority to make decisions on and
dispositions of its account which paved the way for the fraudulent transactions perpetrated
by Caparas; that, in practice, FFCCI waived the two-signature requirement in transactions
involving the subject combo account so much so that Philippine National Bank (PNB)
could not be faulted for honoring the applications for managers check even if only the
signature of Felipe Cruz appeared thereon; and that FFCCI was negligent in not
immediately informing PNB of the fraud.

On the other hand, the trial court found that PNB was, likewise, negligent in not
calling or personally verifying from the authorized signatories the legitimacy of the subject
withdrawals considering that they were in huge amounts. For this reason, PNB had the last
clear chance to prevent the unauthorized debits from FFCCIs combo account. Thus, PNB
should bear the whole loss

WHEREFORE, judgment is hereby rendered ordering defendant [PNB]

to pay plaintiff [FFCCI] P13,210,500.31 representing the amounts debited
against plaintiffs account, with interest at the legal rate computed from the filing
of the complaint plus costs of suit.

IT IS SO ORDERED.[5]

Court of Appeals Ruling

On January 31, 2006, the CA rendered the assailed Decision affirming with modification
the Decision of the trial court, viz:

WHEREFORE, the appealed Decision is AFFIRMED with

the MODIFICATION that [PNB] shall pay [FFCCI] only 60% of the actual
damages awarded by the trial court while the remaining 40% shall be borne by
[FFCCI].

SO ORDERED.[6]

The appellate court ruled that PNB was negligent in not properly verifying the genuineness
of the signatures appearing on the two applications for managers check as evidenced by
the lack of the signature of the bank verifier thereon. Had this procedure been followed,
the forgery would have been detected.

Nonetheless, the appellate court found FFCCI guilty of contributory negligence

because it clothed its accountant/bookkeeper Caparas with apparent authority to transact
business with PNB. In addition, FFCCI failed to timely examine its monthly statement of
account and report the discrepancy to PNB within a reasonable period of time to prevent
or recover the loss. FFCCIs contributory negligence, thus, mitigated the banks
liability. Pursuant to the rulings in Philippine Bank of Commerce v. Court of
Appeals[7] and The Consolidated Bank & Trust Corporation v. Court of Appeals,[8] the
appellate court allocated the damages on a 60-40 ratio with the bigger share to be borne by
PNB.

From this decision, both FFCCI and PNB sought review before this Court.

On August 17, 2006, FFCCI filed its petition for review on certiorari which was docketed
as G.R. No. 173278.[9] On March 7, 2007, the Court issued a Resolution[10] denying said
petition. On June 13, 2007, the Court issued another Resolution[11] denying FFCCIs motion
for reconsideration. In denying the aforesaid petition, the Court ruled that FFCCI
essentially raises questions of fact which are, as a rule, not reviewable under a Rule 45
petition; that FFCCI failed to show that its case fell within the established exceptions to
this rule; and that FFCCI was guilty of contributory negligence. Thus, the appellate court
correctly mitigated PNBs liability.

On July 13, 2006, PNB filed its petition for review on certiorari which is the subject
matter of this case.

Issue

Whether the Court of Appeals seriously erred when it found PNB guilty of
negligence.[12]

Our Ruling

We affirm the ruling of the CA.

PNB is guilty of negligence.

Preliminarily, in G.R. No. 173278, we resolved with finality[13] that FFCCI is guilty
of contributory negligence, thus, making it partly liable for the loss (i.e., as to 40% thereof)
arising from the unauthorized withdrawal of P13,210,500.31 from its combo account. The
case before us is, thus, limited to PNBs alleged negligence in the subject transactions which
the appellate court found to be the proximate cause of the loss, thus, making it liable for
the greater part of the loss (i.e., as to 60% thereof) pursuant to our rulings in Philippine
Bank of Commerce v. Court of Appeals[14] and The Consolidated Bank & Trust
Corporation v. Court of Appeals.[15]

PNB contends that it was not negligent in verifying the genuineness of the
signatures appearing on the subject applications for managers check. It claims that it
followed the standard operating procedure in the verification process and that four bank
officers examined the signatures and found the same to be similar with those found in the
signature cards of FFCCIs authorized signatories on file with the bank.

PNB raises factual issues which are generally not proper for review under a Rule 45
petition. While there are exceptions to this rule, we find none applicable to the present
case. As correctly found by the appellate court, PNB failed to make the proper verification
because the applications for the managers check do not bear the signature of the bank
verifier. PNB concedes the absence[16] of the subject signature but argues that the same was
the result of inadvertence. It posits that the testimonies of Geronimo Gallego (Gallego),
then the branch manager of PNB Timog Branch, and Stella San Diego (San Diego), then
branch cashier, suffice to establish that the signature verification process was duly
followed.

We are not persuaded.

First, oral testimony is not as reliable as documentary evidence.[17] Second, PNBs

own witness, San Diego, testified that in the verification process, the principal duty to
determine the genuineness of the signature devolved upon the account
analyst.[18] However, PNB did not present the account analyst to explain his or her failure
to sign the box for signature and balance verification of the subject applications for
managers check, thus, casting doubt as to whether he or she did indeed verify the signatures
thereon. Third, we cannot fault the appellate court for not giving weight to the testimonies
of Gallego and San Diego considering that the latter are naturally interested in exculpating
themselves from any liability arising from the failure to detect the forgeries in the subject
transactions. Fourth, Gallego admitted that PNBs employees received training on detecting
forgeries from the National Bureau of Investigation.[19] However, Emmanuel Guzman,
then NBI senior document examiner, testified, as an expert witness, that the forged
signatures in the subject applications for managers check contained noticeable and
significant differences from the genuine signatures of FFCCIs authorized signatories and
that the forgeries should have been detected or observed by a trained signature verifier of
any bank.[20]

Given the foregoing, we find no reversible error in the findings of the appellate court
that PNB was negligent in the handling of FFCCIs combo account, specifically, with
respect to PNBs failure to detect the forgeries in the subject applications for managers
check which could have prevented the loss. As we have often ruled, the banking business
is impressed with public trust.[21] A higher degree of diligence is imposed on banks relative
to the handling of their affairs than that of an ordinary business enterprise.[22] Thus, the
degree of responsibility, care and trustworthiness expected of their officials and employees
is far greater than those of ordinary officers and employees in other enterprises.[23] In the
case at bar, PNB failed to meet the high standard of diligence required by the circumstances
to prevent the fraud. In Philippine Bank of Commerce v. Court of Appeals[24] and The
Consolidated Bank & Trust Corporation v. Court of Appeals,[25] where the banks
negligence is the proximate cause of the loss and the depositor is guilty of contributory
negligence, we allocated the damages between the bank and the depositor on a 60-40
ratio. We apply the same ruling in this case considering that, as shown above, PNBs
negligence is the proximate cause of the loss while the issue as to FFCCIs contributory
negligence has been settled with finality in G.R. No. 173278. Thus, the appellate court
properly adjudged PNB to bear the greater part of the loss consistent with these rulings.

WHEREFORE, the petition is DENIED. The January 31, 2006 Decision and
June 26, 2006 Resolution of the Court of Appeals in CA-G.R. CV No. 81349
are AFFIRMED.
Costs against petitioner.

SO ORDERED.
G.R. No. 94209 April 30, 1991

FEATI BANK & TRUST COMPANY (now CITYTRUST BANKING CORPORATION), petitioner,
vs.
THE COURT OF APPEALS, and BERNARDO E. VILLALUZ, respondents.

Pelaez, Adriano & Gregorio for petitioner.

Ezequiel S. Consulta for private respondent.

GUTIERREZ, JR., J.:

This is a petition for review seeking the reversal of the decision of the Court of Appeals dated June
29, 1990 which affirmed the decision of the Regional Trial Court of Rizal dated October 20, 1986
ordering the defendants Christiansen and the petitioner, to pay various sums to respondent Villaluz,
jointly and severally.

The facts of the case are as follows:

On June 3, 1971, Bernardo E. Villaluz agreed to sell to the then defendant Axel Christiansen 2,000
cubic meters of lauan logs at $27.00 per cubic meter FOB.

After inspecting the logs, Christiansen issued purchase order No. 76171.

On the arrangements made and upon the instructions of the consignee, Hanmi Trade Development,
Ltd., de Santa Ana, California, the Security Pacific National Bank of Los Angeles, California issued
Irrevocable Letter of Credit No. IC-46268 available at sight in favor of Villaluz for the sum of
$54,000.00, the total purchase price of the lauan logs.

The letter of credit was mailed to the Feati Bank and Trust Company (now Citytrust) with the
instruction to the latter that it "forward the enclosed letter of credit to the beneficiary." (Records, Vol.
I, p. 11)

The letter of credit further provided that the draft to be drawn is on Security Pacific National Bank
and that it be accompanied by the following documents:

1. Signed Commercial Invoice in four copies showing the number of the purchase order and
certifying that

a. All terms and conditions of the purchase order have been complied with and that
all logs are fresh cut and quality equal to or better than that described in H.A.
Christiansen's telex #201 of May 1, 1970, and that all logs have been marked "BEV-
EX."

b. One complete set of documents, including 1/3 original bills of lading was airmailed
to Consignee and Parties to be advised by Hans-Axel Christiansen, Ship and
Merchandise Broker.
 c. One set of non-negotiable documents was airmailed to Han Mi Trade
Development Company and one set to Consignee and Parties to be advised by
Hans-Axel Christiansen, Ship and Merchandise Broker.

2. Tally sheets in quadruplicate.

3. 2/3 Original Clean on Board Ocean Bills of Lading with Consignee and Parties to be
advised by Hans Axel Christiansen, showing Freight Prepaid and marked Notify:

Han Mi Trade Development Company, Ltd., Santa Ana, California.

Letter of Credit No. 46268 dated June 7, 1971

Han Mi Trade Development Company, Ltd., P.O. Box 10480, Santa Ana, California 92711
and Han Mi Trade Development Company, Ltd., Seoul, Korea.

4. Certification from Han-Axel Christiansen, Ship and Merchandise Broker, stating that logs
have been approved prior to shipment in accordance with terms and conditions of
corresponding purchase Order. (Record, Vol. 1 pp. 11-12)

Also incorporated by reference in the letter of credit is the Uniform Customs and Practice for
Documentary Credits (1962 Revision).

The logs were thereafter loaded on the vessel "Zenlin Glory" which was chartered by Christiansen.
Before its loading, the logs were inspected by custom inspectors Nelo Laurente, Alejandro Cabiao,
Estanislao Edera from the Bureau of Customs (Records, Vol. I, p. 124) and representatives Rogelio
Cantuba and Jesus Tadena of the Bureau of Forestry (Records, Vol. I, pp. 16-17) all of whom
certified to the good condition and exportability of the logs.

After the loading of the logs was completed, the Chief Mate, Shao Shu Wang issued a mate receipt
of the cargo which stated the same are in good condition (Records, Vol. I, p. 363). However,
Christiansen refused to issue the certification as required in paragraph 4 of the letter of credit,
despite several requests made by the private respondent.

Because of the absence of the certification by Christiansen, the Feati Bank and Trust Company
refused to advance the payment on the letter of credit.

The letter of credit lapsed on June 30, 1971, (extended, however up to July 31, 1971) without the
private respondent receiving any certification from Christiansen.

The persistent refusal of Christiansen to issue the certification prompted the private respondent to
bring the matter before the Central Bank. In a memorandum dated August 16, 1971, the Central
Bank ruled that:

. . . pursuant to the Monetary Board Resolution No. 1230 dated August 3, 1971, in all log
exports, the certification of the lumber inspectors of the Bureau of Forestry . . . shall be
considered final for purposes of negotiating documents. Any provision in any letter of credit
covering log exports requiring certification of buyer's agent or representative that said logs
have been approved for shipment as a condition precedent to negotiation of shipping
documents shall not be allowed. (Records, Vol. I, p. 367)
Meanwhile, the logs arrived at Inchon, Korea and were received by the consignee, Hanmi Trade
Development Company, to whom Christiansen sold the logs for the amount of $37.50 per cubic
meter, for a net profit of $10 per cubic meter. Hanmi Trade Development Company, on the other
hand sold the logs to Taisung Lumber Company at Inchon, Korea. (Rollo, p. 39)

Since the demands by the private respondent for Christiansen to execute the certification proved
futile, Villaluz, on September 1, 1971, instituted an action for mandamus and specific performance
against Christiansen and the Feati Bank and Trust Company (now Citytrust) before the then Court of
First Instance of Rizal. The petitioner was impleaded as defendant before the lower court only to
afford complete relief should the court a quo order Christiansen to execute the required certification.

The complaint prayed for the following:

1. Christiansen be ordered to issue the certification required of him under the Letter of Credit;

2. Upon issuance of such certification, or, if the court should find it unnecessary, FEATI
BANK be ordered to accept negotiation of the Letter of Credit and make payment thereon to
Villaluz;

3. Order Christiansen to pay damages to the plaintiff. (Rollo, p. 39)

On or about 1979, while the case was still pending trial, Christiansen left the Philippines without
informing the Court and his counsel. Hence, Villaluz, filed an amended complaint to make the
petitioner solidarily liable with Christiansen.

The trial court, in its order dated August 29, 1979, admitted the amended complaint.

After trial, the lower court found:

The liability of the defendant CHRISTIANSEN is beyond dispute, and the plaintiffs right to
demand payment is absolute. Defendant CHRISTIANSEN having accepted delivery of the
logs by having them loaded in his chartered vessel the "Zenlin Glory" and shipping them to
the consignee, his buyer Han Mi Trade in Inchon, South Korea (Art. 1585, Civil Code), his
obligation to pay the purchase order had clearly arisen and the plaintiff may sue and recover
the price of the goods (Art. 1595, Id).

The Court believes that the defendant CHRISTIANSEN acted in bad faith and deceit and
with intent to defraud the plaintiff, reflected in and aggravated by, not only his refusal to issue
the certification that would have enabled without question the plaintiff to negotiate the letter
of credit, but his accusing the plaintiff in his answer of fraud, intimidation, violence and
deceit. These accusations said defendant did not attempt to prove, as in fact he left the
country without even notifying his own lawyer. It was to the Court's mind a pure swindle.

The defendant Feati Bank and Trust Company, on the other hand, must be held liable
together with his (sic) co-defendant for having, by its wrongful act, i.e., its refusal to negotiate
the letter of credit in the absence of CHRISTIANSEN's certification (in spite of the Central
Bank's ruling that the requirement was illegal), prevented payment to the plaintiff. The said
letter of credit, as may be seen on its face, is irrevocable and the issuing bank, the Security
Pacific National Bank in Los Angeles, California, undertook by its terms that the same shall
be honored upon its presentment. On the other hand, the notifying bank, the defendant Feati
Bank and Trust Company, by accepting the instructions from the issuing bank, itself
 assumed the very same undertaking as the issuing bank under the terms of the letter of
credit.

xxx xxx xxx

The Court likewise agrees with the plaintiff that the defendant BANK may also be held liable
under the principles and laws on both trust and estoppel. When the defendant BANK
accepted its role as the notifying and negotiating bank for and in behalf of the issuing bank, it
in effect accepted a trust reposed on it, and became a trustee in relation to plaintiff as the
beneficiary of the letter of credit. As trustee, it was then duty bound to protect the interests of
the plaintiff under the terms of the letter of credit, and must be held liable for damages and
loss resulting to the plaintiff from its failure to perform that obligation.

Furthermore, when the defendant BANK assumed the role of a notifying and negotiating
BANK it in effect represented to the plaintiff that, if the plaintiff complied with the terms and
conditions of the letter of credit and presents the same to the BANK together with the
documents mentioned therein the said BANK will pay the plaintiff the amount of the letter of
credit. The Court is convinced that it was upon the strength of this letter of credit and this
implied representation of the defendant BANK that the plaintiff delivered the logs to
defendant CHRISTIANSEN, considering that the issuing bank is a foreign bank with whom
plaintiff had no business connections and CHRISTIANSEN had not offered any other
Security for the payment of the logs. Defendant BANK cannot now be allowed to deny its
commitment and liability under the letter of credit:

A holder of a promissory note given because of gambling who indorses the same to
an innocent holder for value and who assures said party that the note has no legal
defect, is in estoppel from asserting that there had been an illegal consideration for
the note, and so, he has to pay its value. (Rodriguez v. Martinez, 5 Phil. 67).

The defendant BANK, in insisting upon the certification of defendant CHRISTIANSEN as a

condition precedent to negotiating the letter of credit, likewise in the Court's opinion acted in
bad faith, not only because of the clear declaration of the Central Bank that such a
requirement was illegal, but because the BANK, with all the legal counsel available to it must
have known that the condition was void since it depended on the sole will of the debtor, the
defendant CHRISTIANSEN. (Art. 1182, Civil Code) (Rollo, pp. 29-31)

On the basis of the foregoing the trial court on October 20, 1986, ruled in favor of the private
respondent. The dispositive portion of its decision reads:

WHEREFORE, judgment is hereby rendered for the plaintiff, ordering the defendants to pay
the plaintiff, jointly and severally, the following sums:

a) $54,000.00 (US), or its peso equivalent at the prevailing rate as of the time payment is
actually made, representing the purchase price of the logs;

b) P17,340.00, representing government fees and charges paid by plaintiff in connection with
the logs shipment in question;

c) P10,000.00 as temperate damages (for trips made to Bacolod and Korea).

 All three foregoing sums shall be with interest thereon at 12% per annum from September 1,
1971, when the complaint was filed, until fully paid:

d) P70,000.00 as moral damages;

e) P30,000.00 as exemplary damages; and

f) P30,000.00 as attorney's fees and litigation expense.

(Rollo, p. 28)

The petitioner received a copy of the decision on November 3, 1986. Two days thereafter, or on
November 5, 1986, it filed a notice of appeal.

On November 10, 1986, the private respondent filed a motion for the immediate execution of the
judgment on the ground that the appeal of the petitioner was frivolous and dilatory.

The trial court ordered the immediate execution of its judgment upon the private respondent's filing
of a bond.

The petitioner then filed a motion for reconsideration and a motion to suspend the implementation of
the writ of execution. Both motions were, however, denied. Thus, petitioner filed before the Court of
Appeals a petition for certiorari and prohibition with preliminary injunction to enjoin the immediate
execution of the judgment.

The Court of Appeals in a decision dated April 9, 1987 granted the petition and nullified the order of
execution, the dispositive portion of the decision states:

WHEREFORE, the petition for certiorari is granted. Respondent Judge's order of execution
dated December 29, 1986, as well as his order dated January 14, 1987 denying the
petitioner's urgent motion to suspend the writ of execution against its properties are hereby
annulled and set aside insofar as they are sought to be enforced and implemented against
the petitioner Feati Bank & Trust Company, now Citytrust Banking Corporation, during the
pendency of its appeal from the adverse decision in Civil Case No. 15121. However, the
execution of the same decision against defendant Axel Christiansen did not appeal said
decision may proceed unimpeded. The Sheriff s levy on the petitioner's properties, and the
notice of sale dated January 13, 1987 (Annex M), are hereby annulled and set aside. Rollo p.
44)

A motion for reconsideration was thereafter filed by the private respondent. The Court of Appeals, in
a resolution dated June 29, 1987 denied the motion for reconsideration.

In the meantime, the appeal filed by the petitioner before the Court of Appeals was given due
course. In its decision dated June 29, 1990, the Court of Appeals affirmed the decision of the lower
court dated October 20, 1986 and ruled that:

1. Feati Bank admitted in the "special and negative defenses" section of its answer that it
was the bank to negotiate the letter of credit issued by the Security Pacific National Bank of
Los Angeles, California. (Record, pp. 156, 157). Feati Bank did notify Villaluz of such letter of
credit. In fact, as such negotiating bank, even before the letter of credit was presented for
payment, Feati Bank had already made an advance payment of P75,000.00 to Villaluz in
 anticipation of such presentment. As the negotiating bank, Feati Bank, by notifying Villaluz of
the letter of credit in behalf of the issuing bank (Security Pacific), confirmed such letter of
credit and made the same also its own obligation. This ruling finds support in the authority
cited by Villaluz:

A confirmed letter of credit is one in which the notifying bank gives its assurance also that the
opening bank's obligation will be performed. In such a case, the notifying bank will not simply
transmit but will confirm the opening bank's obligation by making it also its own undertaking,
or commitment, or guaranty or obligation. (Ward & Hatfield, 28-29, cited in Agbayani,
Commercial Laws, 1978 edition, p. 77).

Feati Bank argues further that it would be considered as the negotiating bank only upon
negotiation of the letter of credit. This stance is untenable. Assurance, commitments or
guaranties supposed to be made by notifying banks to the beneficiary of a letter of credit, as
defined above, can be relevant or meaningful only with respect to a future transaction, that
is, negotiation. Hence, even before actual negotiation, the notifying bank, by the mere act of
notifying the beneficiary of the letter of credit, assumes as of that moment the obligation of
the issuing bank.

2. Since Feati Bank acted as guarantor of the issuing bank, and in effect also of the latter's
principal or client, i.e. Hans Axel-Christiansen. (sic) Such being the case, when Christiansen
refused to issue the certification, it was as though refusal was made by Feati Bank itself.
Feati Bank should have taken steps to secure the certification from Christiansen; and, if the
latter should still refuse to comply, to hale him to court. In short, Feati Bank should have
honored Villaluz's demand for payment of his logs by virtue of the irrevocable letter of credit
issued in Villaluz's favor and guaranteed by Feati Bank.

3. The decision promulgated by this Court in CA-G.R. Sp No. 11051, which contained the
statement "Since Villaluz" draft was not drawn strictly in compliance with the terms of the
letter of credit, Feati Bank's refusal to negotiate it was justified," did not dispose of this
question on the merits. In that case, the question involved was jurisdiction or discretion, and
not judgment. The quoted pronouncement should not be taken as a preemptive judgment on
the merits of the present case on appeal.

4. The original action was for "Mandamus and/or specific performance." Feati Bank may not
be a party to the transaction between Christiansen and Security Pacific National Bank on the
one hand, and Villaluz on the other hand; still, being guarantor or agent of Christiansen
and/or Security Pacific National Bank which had directly dealt with Villaluz, Feati Bank may
be sued properly on specific performance as a procedural means by which the relief sought
by Villaluz may be entertained. (Rollo, pp. 32-33)

The dispositive portion of the decision of the Court of Appeals reads:

WHEREFORE, the decision appealed from is affirmed; and accordingly, the appeal is hereby
dismissed. Costs against the petitioner. (Rollo, p. 33)

Hence, this petition for review.

The petitioner interposes the following reasons for the allowance of the petition.

First Reason
 THE RESPONDENT COURT ERRONEOUSLY CONCLUDED FROM THE ESTABLISHED
FACTS AND INDEED, WENT AGAINST THE EVIDENCE AND DECISION OF THIS
HONORABLE COURT, THAT PETITIONER BANK IS LIABLE ON THE LETTER OF
CREDIT DESPITE PRIVATE RESPONDENTS NON-COMPLIANCE WITH THE TERMS
THEREOF,

Second Reason

THE RESPONDENT COURT COMMITTED AN ERROR OF LAW WHEN IT HELD THAT

PETITIONER BANK, BY NOTIFYING PRIVATE RESPONDENT OF THE LETTER OF
CREDIT, CONFIRMED SUCH CREDIT AND MADE THE SAME ALSO ITS OBLIGATION
AS GUARANTOR OF THE ISSUING BANK.

Third Reason

THE RESPONDENT COURT LIKEWISE COMMITTED AN ERROR OF LAW WHEN IT

AFFIRMED THE TRIAL COURT'S DECISION. (Rollo, p. 12)

The principal issue in this case is whether or not a correspondent bank is to be held liable under the
letter of credit despite non-compliance by the beneficiary with the terms thereof?

The petition is impressed with merit.

It is a settled rule in commercial transactions involving letters of credit that the documents tendered
must strictly conform to the terms of the letter of credit. The tender of documents by the beneficiary
(seller) must include all documents required by the letter. A correspondent bank which departs from
what has been stipulated under the letter of credit, as when it accepts a faulty tender, acts on its own
risks and it may not thereafter be able to recover from the buyer or the issuing bank, as the case
may be, the money thus paid to the beneficiary Thus the rule of strict compliance.

In the United States, commercial transactions involving letters of credit are governed by the rule of
strict compliance. In the Philippines, the same holds true. The same rule must also be followed.

The case of Anglo-South America Trust Co. v. Uhe et al. (184 N.E. 741 [1933]) expounded clearly
on the rule of strict compliance.

We have heretofore held that these letters of credit are to be strictly complied with which
documents, and shipping documents must be followed as stated in the letter. There is no
discretion in the bank or trust company to waive any requirements. The terms of the letter
constitutes an agreement between the purchaser and the bank. (p. 743)

Although in some American decisions, banks are granted a little discretion to accept a faulty tender
as when the other documents may be considered immaterial or superfluous, this theory could lead to
dangerous precedents. Since a bank deals only with documents, it is not in a position to determine
whether or not the documents required by the letter of credit are material or superfluous. The mere
fact that the document was specified therein readily means that the document is of vital importance
to the buyer.

Moreover, the incorporation of the Uniform Customs and Practice for Documentary Credit (U.C.P. for
short) in the letter of credit resulted in the applicability of the said rules in the governance of the
relations between the parties.
And even if the U.C.P. was not incorporated in the letter of credit, we have already ruled in the
affirmative as to the applicability of the U.C.P. in cases before us.

In Bank of P.I. v. De Nery (35 SCRA 256 [1970]), we pronounced that the observance of the U.C.P.
in this jurisdiction is justified by Article 2 of the Code of Commerce. Article 2 of the Code of
Commerce enunciates that in the absence of any particular provision in the Code of Commerce,
commercial transactions shall be governed by the usages and customs generally observed.

There being no specific provision which governs the legal complexities arising from transactions
involving letters of credit not only between the banks themselves but also between banks and seller
and/or buyer, the applicability of the U.C.P. is undeniable.

The pertinent provisions of the U.C.P. (1962 Revision) are:

Article 3.

An irrevocable credit is a definite undertaking on the part of the issuing bank and constitutes
the engagement of that bank to the beneficiary and bona fide holders of drafts drawn and/or
documents presented thereunder, that the provisions for payment, acceptance or negotiation
contained in the credit will be duly fulfilled,provided that all the terms and conditions of the
credit are complied with.

An irrevocable credit may be advised to a beneficiary through another bank (the advising
bank) without engagement on the part of that bank, but when an issuing bank authorizes or
requests another bank to confirm its irrevocable credit and the latter does so, such
confirmation constitutes a definite undertaking of the confirming bank. . . .

Article 7.

Banks must examine all documents with reasonable care to ascertain that they appear on
their face to be in accordance with the terms and conditions of the credit,"

Article 8.

Payment, acceptance or negotiation against documents which appear on their face to be in

accordance with the terms and conditions of a credit by a bank authorized to do so, binds the
party giving the authorization to take up documents and reimburse the bank which has
effected the payment, acceptance or negotiation. (Emphasis Supplied)

Under the foregoing provisions of the U.C.P., the bank may only negotiate, accept or pay, if the
documents tendered to it are on their face in accordance with the terms and conditions of the
documentary credit. And since a correspondent bank, like the petitioner, principally deals only with
documents, the absence of any document required in the documentary credit justifies the refusal by
the correspondent bank to negotiate, accept or pay the beneficiary, as it is not its obligation to look
beyond the documents. It merely has to rely on the completeness of the documents tendered by the
beneficiary.

In regard to the ruling of the lower court and affirmed by the Court of Appeals that the petitioner is
not a notifying bank but a confirming bank, we find the same erroneous.
The trial court wrongly mixed up the meaning of an irrevocable credit with that of a confirmed credit.
In its decision, the trial court ruled that the petitioner, in accepting the obligation to notify the
respondent that the irrevocable credithas been transmitted to the petitioner on behalf of the private
respondent, has confirmed the letter.

The trial court appears to have overlooked the fact that an irrevocable credit is not synonymous with
a confirmed credit. These types of letters have different meanings and the legal relations arising
from there varies. A credit may be an irrevocable credit and at the same time a confirmed credit or
vice-versa.

An irrevocable credit refers to the duration of the letter of credit. What is simply means is that the
issuing bank may not without the consent of the beneficiary (seller) and the applicant (buyer) revoke
his undertaking under the letter. The issuing bank does not reserve the right to revoke the credit. On
the other hand, a confirmed letter of credit pertains to the kind of obligation assumed by the
correspondent bank. In this case, the correspondent bank gives an absolute assurance to the
beneficiary that it will undertake the issuing bank's obligation as its own according to the terms and
conditions of the credit. (Agbayani, Commercial Laws of the Philippines, Vol. 1, pp. 81-83)

Hence, the mere fact that a letter of credit is irrevocable does not necessarily imply that the
correspondent bank in accepting the instructions of the issuing bank has also confirmed the letter of
credit. Another error which the lower court and the Court of Appeals made was to confuse the
obligation assumed by the petitioner.

In commercial transactions involving letters of credit, the functions assumed by a correspondent

bank are classified according to the obligations taken up by it. The correspondent bank may be
called a notifying bank, a negotiating bank, or a confirming bank.

In case of a notifying bank, the correspondent bank assumes no liability except to notify and/or
transmit to the beneficiary the existence of the letter of credit. (Kronman and Co., Inc. v. Public
National Bank of New York, 218 N.Y.S. 616 [1926]; Shaterian, Export-Import Banking, p. 292, cited
in Agbayani, Commercial Laws of the Philippines, Vol. 1, p. 76). A negotiating bank, on the other
hand, is a correspondent bank which buys or discounts a draft under the letter of credit. Its liability is
dependent upon the stage of the negotiation. If before negotiation, it has no liability with respect to
the seller but after negotiation, a contractual relationship will then prevail between the negotiating
bank and the seller. (Scanlon v. First National Bank of Mexico, 162 N.E. 567 [1928]; Shaterian,
Export-Import Banking, p. 293, cited in Agbayani, Commercial Laws of the Philippines, Vol. 1, p. 76)

In the case of a confirming bank, the correspondent bank assumes a direct obligation to the seller
and its liability is a primary one as if the correspondent bank itself had issued the letter of credit.
(Shaterian, Export-Import Banking, p. 294, cited in Agbayani Commercial Laws of the Philippines,
Vol. 1, p. 77)

In this case, the letter merely provided that the petitioner "forward the enclosed original credit to the
beneficiary." (Records, Vol. I, p. 11) Considering the aforesaid instruction to the petitioner by the
issuing bank, the Security Pacific National Bank, it is indubitable that the petitioner is only a notifying
bank and not a confirming bank as ruled by the courts below.

If the petitioner was a confirming bank, then a categorical declaration should have been stated in the
letter of credit that the petitioner is to honor all drafts drawn in conformity with the letter of credit.
What was simply stated therein was the instruction that the petitioner forward the original letter of
credit to the beneficiary.
Since the petitioner was only a notifying bank, its responsibility was solely to notify and/or transmit
the documentary of credit to the private respondent and its obligation ends there.

The notifying bank may suggest to the seller its willingness to negotiate, but this fact alone does not
imply that the notifying bank promises to accept the draft drawn under the documentary credit.

A notifying bank is not a privy to the contract of sale between the buyer and the seller, its
relationship is only with that of the issuing bank and not with the beneficiary to whom he assumes no
liability. It follows therefore that when the petitioner refused to negotiate with the private respondent,
the latter has no cause of action against the petitioner for the enforcement of his rights under the
letter. (See Kronman and Co., Inc. v. Public National Bank of New York, supra)

In order that the petitioner may be held liable under the letter, there should be proof that the
petitioner confirmed the letter of credit.

The records are, however, bereft of any evidence which will disclose that the petitioner has
confirmed the letter of credit. The only evidence in this case, and upon which the private respondent
premised his argument, is the P75,000.00 loan extended by the petitioner to him.

The private respondent relies on this loan to advance his contention that the letter of credit was
confirmed by the petitioner. He claims that the loan was granted by the petitioner to him, "in
anticipation of the presentment of the letter of credit."

The proposition advanced by the private respondent has no basis in fact or law. That the loan
agreement between them be construed as an act of confirmation is rather far-fetched, for it depends
principally on speculative reasoning.

As earlier stated, there must have been an absolute assurance on the part of the petitioner that it will
undertake the issuing bank's obligation as its own. Verily, the loan agreement it entered into cannot
be categorized as an emphatic assurance that it will carry out the issuing bank's obligation as its
own.

The loan agreement is more reasonably classified as an isolated transaction independent of the
documentary credit.

Of course, it may be presumed that the petitioner loaned the money to the private respondent in
anticipation that it would later be paid by the latter upon the receipt of the letter. Yet, we would have
no basis to rule definitively that such "act" should be construed as an act of confirmation.

The private respondent no doubt was in need of money in loading the logs on the ship "Zenlin Glory"
and the only way to satisfy this need was to borrow money from the petitioner which the latter
granted. From these circumstances, a logical conclusion that can be gathered is that the letter of
credit was merely to serve as a collateral.

At the most, when the petitioner extended the loan to the private respondent, it assumed the
character of a negotiating bank. Even then, the petitioner will still not be liable, for a negotiating bank
before negotiation has no contractual relationship with the seller.

The case of Scanlon v. First National Bank (supra) perspicuously explained the relationship between
the seller and the negotiating bank, viz:
 It may buy or refuse to buy as it chooses. Equally, it must be true that it owes no contractual
duty toward the person for whose benefit the letter is written to discount or purchase any
draft drawn against the credit. No relationship of agent and principal, or of trustee and cestui,
between the receiving bank and the beneficiary of the letter is established. (P.568)

Whether therefore the petitioner is a notifying bank or a negotiating bank, it cannot be held liable.
Absent any definitive proof that it has confirmed the letter of credit or has actually negotiated with the
private respondent, the refusal by the petitioner to accept the tender of the private respondent is
justified.

In regard to the finding that the petitioner became a "trustee in relation to the plaintiff (private
respondent) as the beneficiary of the letter of credit," the same has no legal basis.

A trust has been defined as the "right, enforceable solely in equity, to the beneficial enjoyment of
property the legal title to which is vested to another." (89 C.J.S. 712)

The concept of a trust presupposes the existence of a specific property which has been conferred
upon the person for the benefit of another. In order therefore for the trust theory of the private
respondent to be sustained, the petitioner should have had in its possession a sum of money as
specific fund advanced to it by the issuing bank and to be held in trust by it in favor of the private
respondent. This does not obtain in this case.

The mere opening of a letter of credit, it is to be noted, does not involve a specific appropriation of a
sum of money in favor of the beneficiary. It only signifies that the beneficiary may be able to draw
funds upon the letter of credit up to the designated amount specified in the letter. It does not convey
the notion that a particular sum of money has been specifically reserved or has been held in trust.

What actually transpires in an irrevocable credit is that the correspondent bank does not receive in
advance the sum of money from the buyer or the issuing bank. On the contrary, when the
correspondent bank accepts the tender and pays the amount stated in the letter, the money that it
doles out comes not from any particular fund that has been advanced by the issuing bank, rather it
gets the money from its own funds and then later seeks reimbursement from the issuing bank.

Granting that a trust has been created, still, the petitioner may not be considered a trustee. As the
petitioner is only a notifying bank, its acceptance of the instructions of the issuing bank will not
create estoppel on its part resulting in the acceptance of the trust. Precisely, as a notifying bank, its
only obligation is to notify the private respondent of the existence of the letter of credit. How then can
such create estoppel when that is its only duty under the law?

We also find erroneous the statement of the Court of Appeals that the petitioner "acted as a
guarantor of the issuing bank and in effect also of the latter's principal or client, i.e., Hans Axel
Christiansen."

It is a fundamental rule that an irrevocable credit is independent not only of the contract between the
buyer and the seller but also of the credit agreement between the issuing bank and the buyer.
(See Kingdom of Sweden v. New York Trust Co., 96 N.Y.S. 2d 779 [1949]). The relationship
between the buyer (Christiansen) and the issuing bank (Security Pacific National Bank) is entirely
independent from the letter of credit issued by the latter.

The contract between the two has no bearing as to the non-compliance by the buyer with the
agreement between the latter and the seller. Their contract is similar to that of a contract of services
(to open the letter of credit) and not that of agency as was intimated by the Court of Appeals. The
unjustified refusal therefore by Christiansen to issue the certification under the letter of credit should
not likewise be charged to the issuing bank.

As a mere notifying bank, not only does the petitioner not have any contractual relationship with the
buyer, it has also nothing to do with the contract between the issuing bank and the buyer regarding
the issuance of the letter of credit.

The theory of guarantee relied upon by the Court of Appeals has to necessarily fail. The concept of
guarantee vis-a-vis the concept of an irrevocable credit are inconsistent with each other.

In the first place, the guarantee theory destroys the independence of the bank's responsibility from
the contract upon which it was opened. In the second place, the nature of both contracts is mutually
in conflict with each other. In contracts of guarantee, the guarantor's obligation is merely collateral
and it arises only upon the default of the person primarily liable. On the other hand, in an irrevocable
credit the bank undertakes a primary obligation. (SeeNational Bank of Eagle Pass, Tex v. American
National Bank of San Francisco, 282 F. 73 [1922])

The relationship between the issuing bank and the notifying bank, on the contrary, is more similar to
that of an agency and not that of a guarantee. It may be observed that the notifying bank is merely to
follow the instructions of the issuing bank which is to notify or to transmit the letter of credit to the
beneficiary. (See Kronman v. Public National Bank of New York, supra). Its commitment is only to
notify the beneficiary. It does not undertake any assurance that the issuing bank will perform what
has been mandated to or expected of it. As an agent of the issuing bank, it has only to follow the
instructions of the issuing bank and to it alone is it obligated and not to buyer with whom it has no
contractual relationship.

In fact the notifying bank, even if the seller tenders all the documents required under the letter of
credit, may refuse to negotiate or accept the drafts drawn thereunder and it will still not be held liable
for its only engagement is to notify and/or transmit to the seller the letter of credit.

Finally, even if we assume that the petitioner is a confirming bank, the petitioner cannot be forced to
pay the amount under the letter. As we have previously explained, there was a failure on the part of
the private respondent to comply with the terms of the letter of credit.

The failure by him to submit the certification was fatal to his case. The U.C.P. which is incorporated
1wphi1

in the letter of credit ordains that the bank may only pay the amount specified under the letter if all
the documents tendered are on their face in compliance with the credit. It is not tasked with the duty
of ascertaining the reason or reasons why certain documents have not been submitted, as it is only
concerned with the documents. Thus, whether or not the buyer has performed his responsibility
towards the seller is not the bank's problem.

We are aware of the injustice committed by Christiansen on the private respondent but we are
deciding the controversy on the basis of what the law is, for the law is not meant to favor only those
who have been oppressed, the law is to govern future relations among people as well. Its
commitment is to all and not to a single individual. The faith of the people in our justice system may
be eroded if we are to decide not what the law states but what we believe it should declare. Dura lex
sed lex.

Considering the foregoing, the materiality of ruling upon the validity of the certificate of approval
required of the private respondent to submit under the letter of credit, has become insignificant.
In any event, we affirm the earlier ruling of the Court of Appeals dated April 9, 1987 in regard to the
petition before it for certiorari and prohibition with preliminary injunction, to wit:

There is no merit in the respondent's contention that the certification required in condition
No. 4 of the letter of credit was "patently illegal." At the time the letter of credit was issued
there was no Central Bank regulation prohibiting such a condition in the letter of credit. The
letter of credit (Exh. C) was issued on June 7, 1971, more than two months before the
issuance of the Central Bank Memorandum on August 16, 1971 disallowing such a condition
in a letter of credit. In fact the letter of credit had already expired on July 30, 1971 when the
Central Bank memorandum was issued. In any event, it is difficult to see how such a
condition could be categorized as illegal or unreasonable since all that plaintiff Villaluz, as
seller of the logs, could and should have done was to refuse to load the logs on the vessel
"Zenlin Glory", unless Christiansen first issued the required certification that the logs had
been approved by him to be in accordance with the terms and conditions of his purchase
order. Apparently, Villaluz was in too much haste to ship his logs without taking all due
precautions to assure that all the terms and conditions of the letter of credit had been strictly
complied with, so that there would be no hitch in its negotiation. (Rollo, p. 8)

WHEREFORE, the COURT RESOLVED to GRANT the petition and hereby NULLIFIES and SETS
ASIDE the decision of the Court of Appeals dated June 29, 1990. The amended complaint in Civil
Case No. 15121 is DISMISSED.

SO ORDERED.
 [G.R. No. 126911. April 30, 2003]

PHILIPPINE DEPOSIT INSURANCE CORPORATION, petitioner, vs. THE

HONORABLE COURT OF APPEALS and JOSE ABAD, LEONOR
ABAD, SABINA ABAD, JOSEPHINE JOSIE BEATA ABAD-
ORLINA, CECILIA ABAD, PIO ABAD, DOMINIC ABAD, TEODORA
ABAD, respondents.

DECISION
CARPIO-MORALES, J.:

The present petition for review assails the decision of the Court of Appeals
affirming that of the Regional Trial Court of Iloilo City, Branch 30, finding
petitioner Philippine Deposit Insurance Corporation (PDIC) liable, as statutory
insurer, for the value of 20 Golden Time Deposits belonging to respondents
Jose Abad, Leonor Abad, Sabina Abad, Josephine Josie Beata Abad-Orlina,
Cecilia Abad, Pio Abad, Dominic Abad, and Teodora Abad at the Manila
Banking Corporation (MBC), Iloilo Branch.
Prior to May 22, 1997, respondents had, individually or jointly with each
other, 71 certificates of time deposits denominated as Golden Time Deposits
(GTD) with an aggregate face value of P1,115,889.96. [1]

On May 22, 1987, a Friday, the Monetary Board (MB) of the Central Bank
of the Philippines, now Bangko Sentral ng Pilipinas, issued Resolution
505 prohibiting MBC to do business in the Philippines, and placing its assets
[2]

and affairs under receivership. The Resolution, however, was not served on
MBC until Tuesday the following week, or on May 26, 1987, when the
designated Receiver took over. [3]

On May 25, 1987, the next banking day following the issuance of the MB
Resolution, respondent Jose Abad was at the MBC at 9:00 a.m. for the purpose
of pre-terminating the 71 aforementioned GTDs and re-depositing the fund
represented thereby into 28 new GTDs in denominations of P40,000.00 or less
under the names of herein respondents individually or jointly with each
other. Of the 28 new GTDs, Jose Abad pre-terminated 8 and withdrew the
[4]

value thereof in the total amount of P320,000.00. [5]

Respondents thereafter filed their claims with the PDIC for the payment of
the remaining 20 insured GTDs. [6]
 On February 11, 1988, PDIC paid respondents the value of 3 claims in the
total amount of P120,000.00. PDIC, however, withheld payment of the 17
remaining claims after Washington Solidum, Deputy Receiver of MBC-Iloilo,
submitted a report to the PDIC that there was massive conversion and
[7]

substitution of trust and deposit accounts on May 25, 1987 at MBC-Iloilo. The [8]

pertinent portions of the report stated:

xxx

On May 25, 1987 (Monday) or a day prior to the official announcement and take-over
by CB of the assets and liabilities of The Manila Banking Corporation, the Iloilo
Branch was found to have recorded an unusually heavy movements in terms of
volume and amount for all types of deposits and trust accounts. It appears that the
impending receivership of TMBC was somehow already known to many depositors
on account of the massive withdrawals paid on this day which practically wiped out
the branchs entire cash position. . . .

xxx

. . . The intention was to maximize the availment of PDIC coverage limited

to P40,000 by spreading out big accounts to as many certificates under various
nominees. . . .
[9]

xxx

Because of the report, PDIC entertained serious reservation in recognizing

respondents GTDs as deposit liabilities of MBC-Iloilo. Thus, on August 30,
1991, it filed a petition for declaratory relief against respondents with the
Regional Trial Court (RTC) of Iloilo City, for a judicial declaration determination
of the insurability of respondents GTDs at MBC-Iloilo. [10]

In their Answer filed on October 24, 1991 and Amended Answer filed on [11]

January 9, 1992, respondents set up a counterclaim against PDIC whereby

they asked for payment of their insured deposits. [12]

In its Decision of February 22, 1994, Branch 30 of the Iloilo RTC declared
[13]

the 20 GTDs of respondents to be deposit liabilities of MBC, hence, are

liabilities of PDIC as statutory insurer. It accordingly disposed as follows:

WHEREFORE, premises considered, judgment is hereby rendered:

1. Declaring the 28 GTDs of the Abads which were issued by the TMBC-Iloilo on
May 25, 1987 as deposits or deposit liabilities of the bank as the term is defined under
Section 3 (f) of R.A. No. 3591, as amended;

2. Declaring PDIC, being the statutory insurer of bank deposits, liable to the Abads
for the value of the remaining 20 GTDs, the other 8 having been paid already by
TMBC-Iloilo on May 25, 1987;

3. Ordering PDIC to pay the Abads the value of said 20 GTDs less the value of 3
GTDs it paid on February 11, 1988, and the amounts it may have paid the Abads
pursuant to the Order of this Court dated September 8, 1992;

4. Ordering PDIC to pay immediately the Abads the balance of its admitted liability as
contained in the aforesaid Order of September 8, 1992, should there be any, subject to
liquidation when this case shall have been finally decide; and

5. Ordering PDIC to pay legal interest on the remaining insured deposits of the Abads
from February 11, 1988 until they are fully paid.

SO ORDERED.

On appeal, the Court of Appeals, by the assailed Decision of October 21,

1996, affirmed the trial courts decision except as to the award of legal interest
[14]

which it deleted.
Hence, PDICs present Petition for Review which sets forth this lone
assignment of error:

THE HONORABLE COURT OF APPEALS ERRED IN AFFIRMING THE

HOLDING OF THE TRIAL COURT THAT THE AMOUNT REPRESENTED IN
THE FACES OF THE SO CALLED GOLDEN TIME DEPOSITS WERE INSURED
DEPOSITS EVEN AS THEY WERE MERE DERIVATIVES OF RESPONDENTS
PREVIOUS ACCOUNT BALANCES WHICH WERE PRE-
TERMINATED/TERMINATED AT THE TIME THE MANILA BANKING
CORPORATION WAS ALREADY IN SERIOUS FINANCIAL DISTRESS.

In its supplement to the petition, PDIC adds the following assignment of

error:

THE HONORABLE COURT OF APPEALS ERRED IN AFFIRMING THE

HOLDING OF THE TRIAL COURT ORDERING PETITIONER TO PAY
RESPONDENTS CLAIMS FOR PAYMENT OF INSURED DEPOSITS FOR THE
REASON THAT AN ACTION FOR DECLARATORY RELIEF DOES NOT
ESSENTIALLY ENTAIL AN EXECUTORY PROCESS AS THE ONLY RELIEF
THAT SHOULD HAVE BEEN GRANTED BY THE TRIAL COURT IS A
DECLARATION OF THE RIGHTS AND DUTIES OF PETITIONER UNDER R.A.
3591, AS AMENDED, PARTICULARLY SECTION 3(F) THEREOF AS
CONSIDERED AGAINST THE SURROUNDING CIRCUMSTANCES OF THE
MATTER IN ISSUE SOUGHT TO BE CONSTRUED WITHOUT PREJUDICE TO
OTHER MATTERS THAT NEED TO BE CONSIDERED BY PETITIONER IN
THE PROCESSING OF RESPONDENTS CLAIMS.

Under its charter, PDIC (hereafter petitioner) is liable only for deposits
[15]

received by a bank in the usual course of business. Being of the firm

[16]

conviction that, as the reported May 25, 1987 bank transactions were so
massive, hence, irregular, petitioner essentially seeks a judicial declaration that
such transactions were not made in the usual course of business and, therefore,
it cannot be made liable for deposits subject thereof. [17]

Petitioner points that as MBC was prohibited from doing further business by
MB Resolution 505 as of May 22, 1987, all transactions subsequent to such
date were not done in the usual course of business.
Petitioner further posits that there was no consideration for the 20 GTDs
subject of respondents claim. In support of this submission, it states that prior
to March 25, 1987, when the 20 GTDs were made, MBC had been experiencing
liquidity problems, e.g., at the start of banking operations on March 25, 1987, it
had only P2,841,711.90 cash on hand and at the end of the day it was left
with P27,805.81 consisting mostly of mutilated bills and coins. Hence, even if
[18]

respondents had wanted to convert the face amounts of the GTDs to cash, MBC
could not have complied with it.
Petitioner theorizes that after MBC had exhausted its cash and could no
longer sustain further withdrawal transactions, it instead issued new GTDs as
payment for the pre-terminated GTDs of respondents to make sure that all the
newly-issued GTDs have face amounts which are within the statutory coverage
of deposit insurance.
Petitioner concludes that since no cash was given by respondents and none
was received by MBC when the new GTDs were transacted, there was no
consideration therefor and, thus, they were not validly transacted in the usual
course of business and no liability for deposit insurance was created. [19]

Petitioners position does not persuade.

While the MB issued Resolution 505 on May 22, 1987, a copy thereof was
served on MBC only on May 26, 1987. MBC and its clients could be given the
benefit of the doubt that they were not aware that the MB resolution had been
passed, given the necessity of confidentiality of placing a banking institution
under receivership. [20]

The evident implication of the law, therefore, is that the appointment of a receiver
may be made by the Monetary Board without notice and hearing but its action is
subject to judicial inquiry to insure the protection of the banking institution. Stated
otherwise, due process does not necessarily require a prior hearing; a hearing or an
opportunity to be heard may be subsequent to the closure. One can just imagine the
dire consequences of a prior hearing: bank runs would be the order of the day,
resulting in panic and hysteria. In the process, fortunes may be wiped out, and
disillusionment will run the gamut of the entire banking community. (Underlining
supplied).[21]

Mere conjectures that MBC had actual knowledge of its impending closure
do not suffice. The MB resolution could not thus have nullified respondents
transactions which occurred prior to May 26, 1987.
That no actual money in bills and/or coins was handed by respondents to
MBC does not mean that the transactions on the new GTDs did not involve
money and that there was no consideration therefor. For the outstanding
balance of respondents 71 GTDs in MBC prior to May 26, 1987 in the amount
[22]

of P1,115,889.15 as earlier mentioned was re-deposited by respondents under

28 new GTDs. Admittedly, MBC had P2,841,711.90 cash on hand more than
double the outstanding balance of respondents 71 GTDs at the start of the
banking day on May 25, 1987. Since respondent Jose Abad was at MBC soon
after it opened at 9:00 a.m. of that day, petitioner should not presume that MBC
had no cash to cover the new GTDs of respondents and conclude that there
was no consideration for said GTDs.
Petitioner having failed to overcome the presumption that the ordinary
course of business was followed, this Court finds that the 28 new GTDs were
[23]

deposited in the usual course of business of MBC.

In its second assignment of error, petitioner posits that the trial court erred
in ordering it to pay the balance of the deposit insurance to respondents,
maintaining that the instant petition stemmed from a petition for declaratory
relief which does not essentially entail an executory process, and the only relief
that should have been granted by the trial court is a declaration of the parties
rights and duties. As such, petitioner continues, no order of payment may arise
from the case as this is beyond the office of declaratory relief proceedings. [24]

Without doubt, a petition for declaratory relief does not essentially entail an
executory process. There is nothing in its nature, however, that prohibits a
counterclaim from being set-up in the same action. [25]
Now, there is nothing in thee nature of a special civil action for declaratory relief that
proscribes the filing of a counterclaim based on the same transaction, deed or contract
subject of the complaint. A special civil action is after all not essentially different
from an ordinary civil action, which is generally governed by Rules 1 to 56 of the
Rules of Court, except that the former deals with a special subject matter which makes
necessary some special regulation. But the identity between their fundamental nature
is such that the same rules governing ordinary civil suits may and do apply to special
civil actions if not inconsistent with or if they may serve to supplement the provisions
of the peculiar rules governing special civil actions. [26]

Petitioner additionally submits that the issue of determining the amount of

deposit insurance due respondents was never tried on the merits since the trial
dwelt only on the determination of the viability or validity of the deposits and no
evidence on record sustains the holding that the amount of deposit due
respondents had been finally determined. This issue was not raised in the
[27]

court a quo, however, hence, it cannot be raised for the first time in the petition
at bar.[28]

Finally, petitioner faults respondents for availing of the statutory limits of the
PDIC law, presupposing that, based on the conduct of respondent Jose Abad
on March 25, 1987, he and his co-respondents somehow knew of the
impending closure of MBC. Petitioner ascribes bad faith to respondent Jose
Abad in transacting the questioned deposits, and seeks to disqualify him from
availing the benefits under the law. [29]

Good faith is presumed. This, petitioner failed to overcome since it offered

mere presumptions as evidence of bad faith.
WHEREFORE, the assailed decision of the Court of Appeals is hereby
AFFIRMED.
SO ORDERED.
 [G.R. No. 95533. November 20, 2000]

REPUBLIC OF THE PHILIPPINES, petitioner, vs. COURT OF APPEALS

and PHILIPPINE COMMERCIAL AND INTERNATIONAL BANK
(Santa Ana Branch Davao City),* respondents.

DECISION
YNARES-SANTIAGO, J.:

On December 28, 1988, a complaint for escheat[1]was filed by petitioner, Republic of

the Philippines, with the Regional Trial Court of Davao City against several banks which
had branches within the jurisdiction of the said court.[2]
The complaint alleged that pursuant to Act No. 3936 as amended by P.D. 679, [3] the
respective managers of the defendant banks submitted to the Treasurer of the Republic
of the Philippines separate statements prepared under oath which listed all deposits and
credits held by them in favor of depositors or creditors either known to be dead, have not
been heard from, or have not made depositors or withdrawals for ten years or more since
December 31, 1970.
The complaint prayed that after due notice to the defendant banks, and after hearing,
judgment be rendered declaring that the deposits, credits and unpaid balances in
question be escheated to petitioner, commanding defendant banks to forthwith deposit
the same with the Treasurer of the Philippines.[4]
On April 12, 1989, the lower court issued an order directing petitioner to show cause
why the complaint should not be dismissed for failure to state a cause of action. According
to the order, the complaint contained no allegation that defendant banks have complied
with two of the conditions in Section 2 of Act No. 3936,[5] compliance with the requirements
being necessary for the complaint to prosper.[6]
On April 27, 1989, petitioner submitted its manifestation and motion to allow
amendment of the petition to allege compliance with the conditions set forth in Section 2
of Act. No. 3936 as amended by P.D. 679 (Unclaimed Balances Law).[7]
The amended complaint prayed that judgment be rendered ordering that the amount
of P97,263.38, deposited with the defendant banks by depositors who are known to be
dead or have not made further deposits or withdrawals during the preceding ten years or
more be escheated in favor of the Republic of the Philippines in accordance with Section
1, Act 3936 as amended by P.D. 679.
The trial court found the amendment sufficient and issued an order dated June 7,
1989 requiring petitioner to publish a notice in the Mindanao Forum Standard once a week
for two consecutive weeks, containing the summons, notice to the public, the amended
petition incorporated in the summons and the list of unclaimed balances. The notice was
estimated to occupy 27 pages of the said newspaper at an estimated cost of P50,000.00.[8]
 On July 11, 1989, petitioner submitted a manifestation to the lower court praying that
the publication of the list of the unclaimed balances be dispensed with. Petitioner posited
that under Section 3, Act No. 3936, only the following are required to be published: (1)
summons to respondent banks; and (2) notice to all persons other than those named
defendants therein. Petitioner submitted that to require it to publish the names and list of
unclaimed balances would only result in additional and unnecessary expense to the
government.[9]
On August 1, 1989, the trial court issued the following Order:

WHEREFORE, this Court will not dispense with the publication of the list of
unclaimed balances and, unless the plaintiff, through the Office of the Solicitor
General, agrees to the publication thereof as stated in the Order of this Court
dated June 7, 1989, and shoulder the cost thereof as also mentioned in said
Order, and manifests its agreement to this Court in writing within thirty (30)
days from receipt thereof, this case will be DISMISSED WITHOUT
PREJUDICE.

SO ORDERED.

Petitioner filed a motion for reconsideration of the above Order,[10] which was denied
by the lower court for lack of merit.[11]
Subsequently, the trial court issued an Order dated October 31, 1989 dismissing Civil
Case No. 19488-89 without prejudice for plaintiffs failure to agree to the required
publication and shoulder the costs thereof.[12]
Petitioner received a copy of the aforesaid Order on November 15, 1989. On January
10, 1990, petitioner filed with the Court of Appeals a petition for mandamus and certiorari,
alleging grave abuse of discretion on the part of respondent judge in ordering the
publication of the list of unclaimed balances.[13] The petition for certiorari and mandamus
was dismissed by the Court of Appeals, on the ground that the proper remedy was
ordinary appeal. Thus:[14]

It is axiomatic that the extraordinary remedy of certiorari is available only in

the absence of a plain, speedy and adequate remedy like appeal. The order of
the respondent court dated October 31, 1989 dismissing the case is final and
appealable (Monares vs. CWA Enterpises, 105 Phil. 1333; Vol. I, Francisco,
Rules of Court, at pp. 967-968). No timely appeal having been taken
therefrom, the same became final and executory and this petition for certiorari
filed on January 10, 1989 to review the interlocutory orders issued by the
court before the case was dismissed can no longer be entertained.

WHEREFORE, the petition for certiorari is dismissed for lack of merit.

SO ORDERED.
 Aggrieved, petitioner filed an appeal under Rule 45 of the Rules of Court raising the
following issues:[15]
(1) Whether or not respondent RTC judge committed grave abuse of discretion
tantamount to lack of jurisdiction in ordering the publication of the list of unclaimed
balances listed under annexes A to P of the complaint.
(2) Whether or not the remedy of appeal, though available, was the speedy and
adequate remedy.
(3) Whether or not respondent RTC judge in issuing the interlocutory orders dated June
7, 1989 and August 1, 1990 which are contrary to Sec. 1, Act 3936, as amended by
PD 679, otherwise known as the Unclaimed Balances Law acted in excess of and
without jurisdiction; consequently thus making the Orders of Sept. 1, 1989 (denying
the motion for reconsideration) and the Order dated October 31, 1989 dismissing the
case, patently null and void.
(4) Whether or not the decision of the Honorable Court of Appeals is in accord with law.
The petition is without merit.
The Order of the trial court dismissing the complaint, albeit without prejudice, was a
final order in the sense that it finally disposed of the case. As such, petitioners remedy
was to file an ordinary appeal to the Court of Appeals within fifteen (15) days from receipt
hereof.

This Court has previously held that an order dismissing a case without
prejudice is a final order if no motion for reconsideration or appeal therefrom is
timely filed.

In Olympia International vs. Court of Appeals, we stated thus:

[16]

The dismissal without prejudice of a complaint does not however mean that
said dismissal order was any less final. Such order of dismissal is complete in
all details, and though without prejudice, nonetheless finally disposed of the
matter. It was not merely an interlocutory order but a final disposition of the
complaint.

The law grants an aggrieved party a period of fifteen (15) days from his
receipt of the courts decision or order disposing of the action or proceeding to
appeal or move to reconsider the same.

After the lapse of the fifteen-day period, an order becomes final and executory
and is beyond the power or jurisdiction of the court which rendered it to further
amend or revoke. A final judgment or order cannot be modified in any respect,
even if the modification sought is for the purpose of correcting an erroneous
conclusion by the court which rendered the same.
 Hence, the Court of Appeals did not err when it dismissed the petition for certiorari
and mandamus, on the ground that the proper remedy was to appeal within fifteen (15)
days. The lapse of the reglementary period was of no moment. A basic requisite for the
special civil action of certiorari to lie is that there be no appeal nor plain, speedy and
adequate remedy in the ordinary course of law. Certiorari is a remedy of last recourse
and is a limited form of review. Its principal function is to keep inferior tribunals within their
jurisdiction. It cannot be used as a substitute for a lost appeal. It is not intended to correct
errors of procedure or mistakes in the judges findings or conclusions.[17]
In a more recent case,this Court held:

xxx xxx xxx. Apparently, petitioner resorted to this special civil action because
it had failed to take an appeal within the 15-day reglementary period which
expired on June 20, 1997. This, of course, cannot be done. The special civil
action of certiorari cannot be used as a substitute for an appeal which
petitioner has lost. Nor can it be contended that the only question raised in
this case is a jurisdictional question. Certiorari lies only where there is no
appeal nor any plain, speedy, and adequate remedy in the ordinary course of
law.There is no reason why the question being raised by petitioner, i.e.,
whether the appellate court committed a grave abuse of discretion in
dismissing petitions, could not have been raised by it on appeal. [18]

Admittedly, this Court, in accordance with the liberal spirit pervading the Rules of
Court and in the interest of justice, has the discretion to treat a petition for certiorari as
having been filed under Rule 45, especially if filed within the reglementary period for filing
a petition for review.[19] In the case at bar, there is no compelling reason for the Court of
Appeals to have treated the petition for certiorari and mandamus as an ordinary
appeal. Aside from being filed beyond the fifteen (15) day period, the petition failed to
show that the trial court committed grave abuse of discretion or want or excess of
jurisdiction in issuing the assailed Order dismissing the complaint. If at all, any mistake
therein was an error of judgment or procedure, which is correctible in an ordinary appeal
filed in due time.
The publication of the list of unclaimed balances is intended to safeguard the right of
the depositors, their heirs and successors to due process.[20] This was made clear by the
lower court in its assailed Order, to wit:[21]

Moreover, how would other persons who may have an interest in any of the
unclaimed balances know what this case is all about and whether they have
an interest in this case if the amended complaint and list of unclaimed
balances are not published? Such other persons may be heirs of the bank
depositors named in the list of unclaimed balances.

xxxxxxxxx
The fact that the government is in a tight financial situation is not a justification
for this Court to dispense with the elementary rule of due process.

As declared by the trial court in its Order dated August 1, 1989, the dismissal of the
petition for escheat is without prejudice. In other words, the State can refile the said
petition, notwithstanding the lapse of time. Prescription of action does not run against the
government.[22]
WHEREFORE, the petition is DENIED. The decision of the Court of Appeals dated
August 14, 1990 is AFFIRMED.
SO ORDERED.
G.R. No. L-16106 December 30, 1961

REPUBLIC OF THE PHILIPPINES, plaintiff-appellant,

vs.
PHILIPPINE NATIONAL BANK, ET AL., defendants,
THE FIRST NATIONAL CITY BANK OF NEW YORK, defendant-appellee.

Office of the Solicitor General for plaintiff-appellant.

Picazo, Lichauco and Agcaoili for defendant-appellee.

BAUTISTA ANGELO, J.:

The Republic of the Philippines filed on September 25, 1957 before the Court of First Instance of
Manila a complaint for escheat of certain unclaimed bank deposits balances under the provisions of
Act No. 3936 against several banks, among them the First National City Bank of New York. It is
alleged that pursuant to Section 2 of said Act defendant banks forwarded to the Treasurer of the
Philippines a statement under oath of their respective managing officials of all the credits and
deposits held by them in favor of persons known to be dead or who have not made further deposits
or withdrawals during the period of 10 years or more. Wherefore, it is prayed that said credits and
deposits be escheated to the Republic of the Philippines by ordering defendant banks to deposit
them to its credit with the Treasurer of the Philippines.

In its answer the First National City Bank of New York claims that, while it admits that various
savings deposits, pre-war inactive accounts, and sundry accounts contained in its report submitted
to the Treasurer of the Philippines pursuant to Act No. 3936, totalling more than P100,000.00, which
remained dormant for 10 years or more, are subject to escheat however, it has inadvertently
included in said report certain items amounting to P18,589.89 which, properly speaking, are not
credits or deposits within the contemplation of Act No. 3936. Hence, it prayed that said items be not
included in the claim of plaintiff.

After hearing the court a quo rendered judgment holding that cashier's is or manager's checks and
demand drafts as those which defendant wants excluded from the complaint come within the
purview of Act No. 3936, but not the telegraphic transfer payment which orders are of different
category. Consequently, the complaint was dismissed with regard to the latter. But, after a motion to
reconsider was filed by defendant, the court a quo changed its view and held that even said demand
drafts do not come within the purview of said Act and so amended its decision accordingly. Plaintiff
has appealed. lawphil.net

Section 1, Act No. 3936, provides:

Section 1. "Unclaimed balances" within the meaning of this Act shall include credits or
deposits of money, bullion, security or other evidence of indebtedness of any kind, and
interest thereon with banks, as hereinafter defined, in favor of any person unheard from for a
period of ten years or more. Such unclaimed balances, together with the increase and
proceeds thereof, shall be deposited with the Insular Treasure to the credit of the
Government of the Philippine Islands to be as the Philippine Legislature may direct.

It would appear that the term "unclaimed balances" that are subject to escheat include credits or
deposits money, or other evidence of indebtedness of any kind with banks, in favor of any person
unheard from for a period of 10 years or more. And as correctly stated by the trial court, the term
"credit" in its usual meaning is a sum credited on the books of a company to a person who appears
to be entitled to it. It presupposes a creditor-debtor relationship, and may be said to imply ability, by
reason of property or estates, to make a promised payment ( In re Ford, 14 F. 2d 848, 849). It is the
correlative to debt or indebtedness, and that which is due to any person, a distinguished from that
which he owes (Mountain Motor Co. vs. Solof, 124 S.E., 824, 825; Eric vs. Walsh, 61 Atl. 2d 1,
4; See also Libby vs. Hopkins, 104 U.S. 303, 309; Prudential Insurance Co. of America vs. Nelson,
101 F. 2d, 441, 443; Barnes vs. Treat, 7 Mass. 271, 274). The same is true with the term "deposits"
in banks where the relationship created between the depositor and the bank is that of creditor and
debtor (Article 1980, Civil Code; Gullas vs. National Bank, 62 Phil. 915; Gopoco Grocery, et al. vs.
Pacific Coast Biscuit Co., et al., 65 Phil. 443).

The questions that now arise are: Do demand draft and telegraphic orders come within the meaning
of the term "credits" or "deposits" employed in the law? Can their import be considered as a sum
credited on the books of the bank to a person who appears to be entitled to it? Do they create a
creditor-debtor relationship between drawee and the payee?

The answers to these questions require a digression the legal meaning of said banking
terminologies.

To begin with, we may say that a demand draft is a bill of exchange payable on demand (Arnd vs.
Aylesworth, 145 Iowa 185; Ward vs. City Trust Company, 102 N.Y.S. 50; Bank of Republic vs.
Republic State Bank, 42 S.W. 2d, 27). Considered as a bill of exchange, a draft is said to be, like the
former, an open letter of request from, and an order by, one person on another to pay a sum of
money therein mentioned to a third person, on demand or at a future time therein specified (13
Words and Phrases, 371). As a matter of fact, the term "draft" is often used, and is the common
term, for all bills of exchange. And the words "draft" and "bill of exchange" are used indiscriminately
(Ennis vs. Coshoctan Nat. Bank, 108 S.E., 811; Hinnemann vs. Rosenback, 39 N.Y. 98, 100, 101;
Wilson vs. Bechenau, 48 Supp. 272, 275).

On the other hand, a bill of exchange within the meaning of our Negotiable Instruments Law (Act No.
2031) does not operate as an assignment of funds in the hands of the drawee who is not liable on
the instrument until he accepts it. This is the clear import of Section 127. It says: "A bill of exchange
of itself does not operate as an assignment of the funds in the hands of the drawee available for the
payment thereon and the drawee is not liable on the bill unless and until he accepts the same." In
other words, in order that a drawee may be liable on the draft and then become obligated to the
payee it is necessary that he first accepts the same. In fact, our law requires that with regard to
drafts or bills of exchange there is need that they be presented either for acceptance or for payment
within a reasonable time after their issuance or after their last negotiation thereof as the case may be
(Section 71, Act 2031). Failure to make such presentment will discharge the drawer from liability or
to the extent of the loss caused by the delay (Section 186, Ibid.)

Since it is admitted that the demand drafts herein involved have not been presented either for
acceptance or for payment, the inevitable consequence is that the appellee bank never had any
chance of accepting or rejecting them. Verily, appellee bank never became a debtor of the payee
concerned and as such the aforesaid drafts cannot be considered as credits subject to escheat
within the meaning of the law.

But a demand draft is very different from a cashier's or manager's cheek, contrary to appellant's
pretense, for it has been held that the latter is a primary obligation of the bank which issues it and
constitutes its written promise to pay upon demand. Thus, a cashier's check has been clearly
characterized in In Re Bank of the United States, 277 N.Y.S. 96. 100, as follows:

A cashier's check issued by a bank, however, is not an ordinary draft. The latter is a bill of
exchange payable demand. It is an order upon a third party purporting to drawn upon a
 deposit of funds. Drinkall v. Movious State Bank, 11 N.D. 10, 88 N.W. 724, 57 L.R.A. 341, 95
Am. St. Rep. 693; State v. Tyler County State Bank (Tex. Com. App.) 277 S.W. 625, 42
A.L.R. 1347. A cashier's check is of a very different character. It is the primary obligation of
the bank which issues it (Nissenbaum v. State, 38 Ga. App. 253, S.E. 776) and constitutes
its written promise to pay upon demand (Steinmetz v. Schultz, 59 S.D. 603, 241 N.W.
734)....
law phil.net

The following definitions cited by appellant also confirm this view:

A cashier's check is a check of the bank's cashier on his or another bank. It is in effect a bill
of exchange drawn by a bank on itself and accepted in advance by the act of issuance (10
C.J.S. 409).

A cashier's check issued on request of a depositor is the substantial equivalent of a certified

check and the deposit represented by the check passes to the credit of the checkholder, who
is thereafter a depositor to that amount (Lummus Cotton Gin Co. v. Walker, 70 So. 754, 756,
195 Ala. 552).

A cashier's check, being merely a bill of exchange drawn by a bank on itself, and accepted in
advance by the act of issuance, is not subject to countermand by the payee after
indorsement, and has the same legal effects as a certificate deposit or a certified check
(Walker v. Sellers, 77 So. 715, 201 Ala. 189).

A demand draft is not therefore of the same category as a cashier's check which should come within
the purview of the law.

The case, however, is different with regard to telegraphic payment order. It is said that as the
transaction is for the establishment of a telegraphic or cable transfer the agreement to remit creates
a contractual obligation a has been termed a purchase and sale transaction (9 C.J.S. 368). The
purchaser of a telegraphic transfer upon making payment completes the transaction insofar as he is
concerned, though insofar as the remitting bank is concerned the contract is executory until the
credit is established (Ibid.) We agree with the following comment the Solicitor General: "This is so
because the drawer bank was already paid the value of the telegraphic transfer payment order. In
the particular cases under consideration it appears in the books of the defendant bank that the
amounts represented by the telegraphic payment orders appear in the names of the respective
payees. If the latter choose to demand payment of their telegraphic transfers at the time the same
was (were) received by the defendant bank, there could be no question that this bank would have to
pay them. Now, the question is, if the payees decide to have their money remain for sometime in the
defendant bank, can the latter maintain that the ownership of said telegraphic payment orders is now
with the drawer bank? The latter was already paid the value of the telegraphic payment orders
otherwise it would not have transmitted the same to the defendant bank. Hence, it is absurd to say
that the drawer banks are still the owners of said telegraphic payment orders."

WHEREFORE, the decision of the trial court is hereby modified in the sense that the items
specifically referred to and listed under paragraph 3 of appellee bank's answer representing
telegraphic transfer payment orders should be escheated in favor of the Republic of the Philippines.
No costs.
G.R. No. 113074 January 22, 1997

ALFRED HAHN, petitioner,

vs.
COURT OF APPEALS and BAYERSCHE MOTOREN WERKE AKTIENGSELLSCHAFT
(BMW), respondents.

MENDOZA, J.:

This is a petition for review of the decision1 of the Court of Appeals dismissing a complaint for
specific performance which petitioner had filed against private respondent on the ground that the
Regional Trial Court of Quezon City did not acquire jurisdiction over private respondent, a
nonresident foreign corporation, and of the appellate court's order denying petitioner's motion for
reconsideration.

The following are the facts:

Petitioner Alfred Hahn is a Filipino citizen doing business under the name and style "Hahn-Manila."
On the other hand, private respondent Bayerische Motoren Werke Aktiengesellschaft (BMW) is a
nonresident foreign corporation existing under the laws of the former Federal Republic of Germany,
with principal office at Munich, Germany.

On March 7, 1967, petitioner executed in favor of private respondent a "Deed of Assignment with
Special Power of Attorney," which reads in full as follows:

WHEREAS, the ASSIGNOR is the present owner and holder of the BMW trademark and
device in the Philippines which ASSIGNOR uses and has been using on the products
manufactured by ASSIGNEE, and for which ASSIGNOR is the authorized exclusive Dealer
of the ASSIGNEE in the Philippines, the same being evidenced by certificate of registration
issued by the Director of Patents on 12 December 1963 and is referred to as Trademark No.
10625;

WHEREAS, the ASSIGNOR has agreed to transfer and consequently record said transfer of
the said BMW trademark and device in favor of the ASSIGNEE herein with the Philippines
Patent Office;

NOW THEREFORE, in view of the foregoing and in consideration of the stipulations

hereunder stated, the ASSIGNOR hereby affirms the said assignment and transfer in favor of
the ASSIGNEE under the following terms and conditions:

1. The ASSIGNEE shall take appropriate steps against any user other than ASSIGNOR or
infringer of the BMW trademark in the Philippines; for such purpose, the ASSIGNOR shall
inform the ASSIGNEE immediately of any such use or infringement of the said trademark
which comes to his knowledge and upon such information the ASSIGNOR shall
automatically act as Attorney-In-Fact of the ASSIGNEE for such case, with full power,
authority and responsibility to prosecute unilaterally or in concert with ASSIGNEE, any such
infringer of the subject mark and for purposes hereof the ASSIGNOR is hereby named and
constituted as ASSIGNEE's Attorney-In-Fact, but any such suit without ASSIGNEE's consent
will exclusively be the responsibility and for the account of the ASSIGNOR,
 2. That the ASSIGNOR and the ASSIGNEE shall continue business relations as has been
usual in the past without a formal contract, and for that purpose, the dealership of
ASSIGNOR shall cover the ASSIGNEE's complete production program with the only
limitation that, for the present, in view of ASSIGNEE's limited production, the latter shall not
be able to supply automobiles to ASSIGNOR.

Per the agreement, the parties "continue[d] business relations as has been usual in the past without
a formal contract." But on February 16, 1993, in a meeting with a BMW representative and the
president of Columbia Motors Corporation (CMC), Jose Alvarez, petitioner was informed that BMW
was arranging to grant the exclusive dealership of BMW cars and products to CMC, which had
expressed interest in acquiring the same. On February 24, 1993, petitioner received confirmation of
the information from BMW which, in a letter, expressed dissatisfaction with various aspects of
petitioner's business, mentioning among other things, decline in sales, deteriorating services, and
inadequate showroom and warehouse facilities, and petitioner's alleged failure to comply with the
standards for an exclusive BMW dealer.2 Nonetheless, BMW expressed willingness to continue
business relations with the petitioner on the basis of a "standard BMW importer" contract, otherwise,
it said, if this was not acceptable to petitioner, BMW would have no alternative but to terminate
petitioner's exclusive dealership effective June 30, 1993.

Petitioner protested, claiming that the termination of his exclusive dealership would be a breach of
the Deed of Assignment.3 Hahn insisted that as long as the assignment of its trademark and device
subsisted, he remained BMW's exclusive dealer in the Philippines because the assignment was
made in consideration of the exclusive dealership. In the same letter petitioner explained that the
decline in sales was due to lower prices offered for BMW cars in the United States and the fact that
few customers returned for repairs and servicing because of the durability of BMW parts and the
efficiency of petitioner's service.

Because of Hahn's insistence on the former business relation, BMW withdrew on March 26, 1993 its
offer of a "standard importer contract" and terminated the exclusive dealer relationship effective June
30, 1993. 4 At a conference of BMW Regional Importers held on April 26, 1993 in Singapore, Hahn
was surprised to find Alvarez among those invited from the Asian region. On April 29, 1993, BMW
proposed that Hahn and CMC jointly import and distribute BMW cars and parts.

Hahn found the proposal unacceptable. On May 14, 1993, he filed a complaint for specific
performance and damages against BMW to compel it to continue the exclusive dealership. Later he
filed an amended complaint to include an application for temporary restraining order and for writs of
preliminary, mandatory and prohibitory injunction to enjoin BMW from terminating his exclusive
dealership. Hahn's amended complaint alleged in pertinent parts:

2. Defendant [BMW] is a foreign corporation doing business in the Philippines with principal
offices at Munich, Germany. It may be served with summons and other court processes
through the Secretary of the Department of Trade and Industry of the Philippines. . . .

xxx xxx xxx

5. On March 7, 1967, Plaintiff executed in favor of defendant BMW a Deed of Assignment

with Special Power of Attorney covering the trademark and in consideration thereof, under its
first whereas clause, Plaintiff was duly acknowledged as the "exclusive Dealer of the
Assignee in the Philippines. . . .

xxx xxx xxx

 8. From the time the trademark "BMW & DEVICE" was first used by the Plaintiff in the
Philippines up to the present, Plaintiff, through its firm name "HAHN MANILA" and without
any monetary contribution from defendant BMW, established BMW's goodwill and market
presence in the Philippines. Pursuant thereto, Plaintiff has invested a lot of money and
resources in order to single-handedly compete against other motorcycle and car companies.
. . . Moreover, Plaintiff has built buildings and other infrastructures such as service centers
and showrooms to maintain and promote the car and products of defendant BMW.

xxx xxx xxx

10. In a letter dated February 24, 1993, defendant BMW advised Plaintiff that it was willing to
maintain with Plaintiff a relationship but only "on the basis of a standard BMW importer
contract as adjusted to reflect the particular situation in the Philippines" subject to certain
conditions, otherwise, defendant BMW would terminate Plaintiffs exclusive dealership and
any relationship for cause effective June 30, 1993. . . .

xxx xxx xxx

15. The actuations of defendant BMW are in breach of the assignment agreement between
itself and plaintiff since the consideration for the assignment of the BMW trademark is the
continuance of the exclusive dealership agreement. It thus, follows that the exclusive
dealership should continue for so long as defendant BMW enjoys the use and ownership of
the trademark assigned to it by Plaintiff.

The case was docketed as Civil Case No. Q-93-15933 and raffled to Branch 104 of the Quezon City
Regional Trial Court, which on June 14, 1993 issued a temporary restraining order. Summons and
copies of the complaint and amended complaint were thereafter served on the private respondent
through the Department of Trade and Industry, pursuant to Rule 14, 14 of the Rules of Court. The
order, summons and copies of the complaint and amended complaint were later sent by the DTI to
BMW via registered mail on June 15, 19935 and received by the latter on June 24, 1993.

On June 17, 1993, without proof of service on BMW, the hearing on the application for the writ of
preliminary injunction proceeded ex parte, with petitioner Hahn testifying. On June 30, 1993, the trial
court issued an order granting the writ of preliminary injunction upon the filing of a bond of
P100,000.00. On July 13, 1993, following the posting of the required bond, a writ of preliminary
injunction was issued.

On July 1, 1993, BMW moved to dismiss the case, contending that the trial court did not acquire
jurisdiction over it through the service of summons on the Department of Trade and Industry,
because it (BMW) was a foreign corporation and it was not doing business in the Philippines. It
contended that the execution of the Deed of Assignment was an isolated transaction; that Hahn was
not its agent because the latter undertook to assemble and sell BMW cars and products without the
participation of BMW and sold other products; and that Hahn was an indentor or middleman
transacting business in his own name and for his own account.

Petitioner Alfred Hahn opposed the motion. He argued that BMW was doing business in the
Philippines through him as its agent, as shown by the fact that BMW invoices and order forms were
used to document his transactions; that he gave warranties as exclusive BMW dealer; that BMW
officials periodically inspected standards of service rendered by him; and that he was described in
service booklets and international publications of BMW as a "BMW Importer" or "BMW Trading
Company" in the Philippines.
The trial court6 deferred resolution of the motion to dismiss until after trial on the merits for the reason
that the grounds advanced by BMW in its motion did not seem to be indubitable.

Without seeking reconsideration of the aforementioned order, BMW filed a petition for certiorari with
the Court of Appeals alleging that:

I. THE RESPONDENT JUDGE ACTED WITH UNDUE HASTE OR OTHERWISE

INJUDICIOUSLY IN PROCEEDINGS LEADING TOWARD THE ISSUANCE OF THE WRIT
OF PRELIMINARY INJUNCTION, AND IN PRESCRIBING THE TERMS FOR THE
ISSUANCE THEREOF.

II. THE RESPONDENT JUDGE PATENTLY ERRED IN DEFERRING RESOLUTION OF

THE MOTION TO DISMISS ON THE GROUND OF LACK OF JURISDICTION, AND
THEREBY FAILING TO IMMEDIATELY DISMISS THE CASE A QUO.

BMW asked for the immediate issuance of a temporary restraining order and, after hearing, for a writ
of preliminary injunction, to enjoin the trial court from proceeding further in Civil Case No. Q-93-
15933. Private respondent pointed out that, unless the trial court's order was set aside, it would be
forced to submit to the jurisdiction of the court by filing its answer or to accept judgment in default,
when the very question was whether the court had jurisdiction over it.

The Court of Appeals enjoined the trial court from hearing petitioner's complaint. On December 20,
1993, it rendered judgment finding the trial court guilty of grave abuse of discretion in deferring
resolution of the motion to dismiss. It stated:

Going by the pleadings already filed with the respondent court before it came out with its
questioned order of July 26, 1993, we rule and so hold that petitioner's (BMW) motion to
dismiss could be resolved then and there, and that the respondent judge's deferment of his
action thereon until after trial on the merit constitutes, to our mind, grave abuse of discretion.

xxx xxx xxx

. . . [T]here is not much appreciable disagreement as regards the factual matters relating to
the motion to dismiss. What truly divide (sic) the parties and to which they greatly differ is the
legal conclusions they respectively draw from such facts, (sic) with Hahn maintaining that on
the basis thereof, BMW is doing business in the Philippines while the latter asserts that it is
not.

Then, after stating that any ruling which the trial court might make on the motion to dismiss would
anyway be elevated to it on appeal, the Court of Appeals itself resolved the motion. It ruled that
BMW was not doing business in the country and, therefore, jurisdiction over it could not be acquired
through service of summons on the DTI pursuant to Rule 14, 14. 'The court upheld private
respondent's contention that Hahn acted in his own name and for his own account and
independently of BMW, based on Alfred Hahn's allegations that he had invested his own money and
resources in establishing BMW's goodwill in the Philippines and on BMW's claim that Hahn sold
products other than those of BMW. It held that petitioner was a mere indentor or broker and not an
agent through whom private respondent BMW transacted business in the Philippines. Consequently,
the Court of Appeals dismissed petitioner's complaint against BMW.

Hence, this appeal. Petitioner contends that the Court of Appeals erred (1) in finding that the trial
court gravely abused its discretion in deferring action on the motion to dismiss and (2) in finding that
private respondent BMW is not doing business in the Philippines and, for this reason, dismissing
petitioner's case.

Petitioner's appeal is well taken. Rule 14, 14 provides:

14. Service upon private foreign corporations. If the defendant is a foreign corporation, or
a nonresident joint stock company or association, doing business in the Philippines, service
may be made on its resident agent designated in accordance with law for that purpose, or, if
there be no such agent, on the government official designated by law to that effect, or on any
of its officers or agents within the Philippines. (Emphasis added).

What acts are considered "doing business in the Philippines" are enumerated in 3(d) of the Foreign
Investments Act of 1991 (R.A. No. 7042) as follows:7

d) the phrase "doing business" shall include soliciting orders, service contracts, opening
offices, whether called "liaison" offices or branches; appointing representatives or distributors
domiciled in the Philippines or who in any calendar year stay in the country for a period or
periods totalling one hundred eighty (180) days or more; participating in the management,
supervision or control of any domestic business, firm, entity or corporation in the
Philippines; and any other act or acts that imply a continuity of commercial dealings or
arrangements, and contemplate to that extent the performance of acts or works, or the
exercise of some of the functions normally incident to, and in progressive prosecution of,
commercial gain or of the purpose and object of the business organization: Provided,
however, That the phrase "doing business" shall not be deemed to include mere investment
as a shareholder by a foreign entity in domestic corporations duly registered to do business,
and/or the exercise of rights as such investor; nor having a nominee director or officer to
represent its interests in such corporation; nor appointing a representative or distributor
domiciled in the Philippines which transacts business in its own name and for its own
account. (Emphasis supplied)

Thus, the phrase includes "appointing representatives or distributors in the Philippines" but not when
the representative or distributor "transacts business in its name and for its own account." In addition,
1(f)(1) of the Rules and Regulations implementing (IRR) the Omnibus Investment Code of 1987
(E.O. No. 226) provided:

(f) "Doing business" shall be any act or combination of acts, enumerated in Article 44 of the
Code. In particular, "doing business" includes:

(1) . . . A foreign firm which does business through middlemen acting in their own names,
such as indentors, commercial brokers or commission merchants, shall not be deemed doing
business in the Philippines. But such indentors, commercial brokers or commission
merchants shall be the ones deemed to be doing business in the Philippines.

The question is whether petitioner Alfred Hahn is the agent or distributor in the Philippines of private
respondent BMW. If he is, BMW may be considered doing business in the Philippines and the trial
court acquired jurisdiction over it (BMW) by virtue of the service of summons on the Department of
Trade and Industry. Otherwise, if Hahn is not the agent of BMW but an independent dealer, albeit of
BMW cars and products, BMW, a foreign corporation, is not considered doing business in the
Philippines within the meaning of the Foreign Investments Act of 1991 and the IRR, and the trial
court did not acquire jurisdiction over it (BMW).
The Court of Appeals held that petitioner Alfred Hahn acted in his own name and for his own
account and not as agent or distributor in the Philippines of BMW on the ground that "he alone had
contacts with individuals or entities interested in acquiring BMW vehicles. Independence
characterizes Hahn's undertakings, for which reason he is to be considered, under governing
statutes, as doing business." (p. 13) In support of this conclusion, the appellate court cited the
following allegations in Hahn's amended complaint:

8. From the time the trademark "BMW & DEVICE" was first used by the Plaintiff in the
Philippines up to the present, Plaintiff, through its firm name "HAHN MANILA" and without
any monetary contributions from defendant BMW, established BMW's goodwill and market
presence in the Philippines. Pursuant thereto, Plaintiff invested a lot of money and resources
in order to single-handedly compete against other motorcycle and car companies. . . .
Moreover, Plaintiff has built buildings and other infrastructures such as service centers and
showrooms to maintain and promote the car and products of defendant BMW.

As the above quoted allegations of the amended complaint show, however, there is nothing to
support the appellate court's finding that Hahn solicited orders alone and for his own account and
without "interference from, let alone direction of, BMW." (p. 13) To the contrary, Hahn claimed he
took orders for BMW cars and transmitted them to BMW. Upon receipt of the orders, BMW fixed the
downpayment and pricing charges, notified Hahn of the scheduled production month for the orders,
and reconfirmed the orders by signing and returning to Hahn the acceptance sheets. Payment was
made by the buyer directly to BMW. Title to cars purchased passed directly to the buyer and Hahn
never paid for the purchase price of BMW cars sold in the Philippines. Hahn was credited with a
commission equal to 14% of the purchase price upon the invoicing of a vehicle order by BMW. Upon
confirmation in writing that the vehicles had been registered in the Philippines and serviced by him,
Hahn received an additional 3% of the full purchase price. Hahn performed after-sale services,
including warranty services, for which he received reimbursement from BMW. All orders were on
invoices and forms of BMW.8

These allegations were substantially admitted by BMW which, in its petition for certiorari before the
Court of Appeals, stated:9

9.4. As soon as the vehicles are fully manufactured and full payment of the purchase prices
are made, the vehicles are shipped to the Philippines. (The payments may be made by the
purchasers or third-persons or even by Hahn.) The bills of lading are made up in the name of
the purchasers, but Hahn-Manila is therein indicated as the person to be notified.

9.5. It is Hahn who picks up the vehicles from the Philippine ports, for purposes of
conducting pre-delivery inspections. Thereafter, he delivers the vehicles to the purchasers.

9.6. As soon as BMW invoices the vehicle ordered, Hahn is credited with a commission of
fourteen percent (14%) of the full purchase price thereof, and as soon as he confirms in
writing that the vehicles have been registered in the Philippines and have been serviced by
him, he will receive an additional three percent (3%) of the full purchase prices as
commission.

Contrary to the appellate court's conclusion, this arrangement shows an agency. An agent receives
a commission upon the successful conclusion of a sale. On the other hand, a broker earns his pay
merely by bringing the buyer and the seller together, even if no sale is eventually made.

As to the service centers and showrooms which he said he had put up at his own expense, Hahn
said that he had to follow BMW specifications as exclusive dealer of BMW in the Philippines.
According to Hahn, BMW periodically inspected the service centers to see to it that BMW standards
were maintained. Indeed, it would seem from BMW's letter to Hahn that it was for Hahn's alleged
failure to maintain BMW standards that BMW was terminating Hahn's dealership.

The fact that Hahn invested his own money to put up these service centers and showrooms does not
necessarily prove that he is not an agent of BMW. For as already noted, there are facts in the record
which suggest that BMW exercised control over Hahn's activities as a dealer and made regular
inspections of Hahn's premises to enforce compliance with BMW standards and specifications.10 For
example, in its letter to Hahn dated February 23, 1996, BMW stated:

In the last years we have pointed out to you in several discussions and letters that we have
to tackle the Philippine market more professionally and that we are through your present
activities not adequately prepared to cope with the forthcoming challenges.11

In effect, BMW was holding Hahn accountable to it under the 1967 Agreement.

This case fits into the mould of Communications Materials, Inc. v. Court of Appeals,12 in which the
foreign corporation entered into a "Representative Agreement" and a "Licensing Agreement" with a
domestic corporation, by virtue of which the latter was appointed "exclusive representative" in the
Philippines for a stipulated commission. Pursuant to these contracts, the domestic corporation sold
products exported by the foreign corporation and put up a service center for the products sold
locally. This Court held that these acts constituted doing business in the Philippines. The
arrangement showed that the foreign corporation's purpose was to penetrate the Philippine market
and establish its presence in the Philippines.

In addition, BMW held out private respondent Hahn as its exclusive distributor in the Philippines,
even as it announced in the Asian region that Hahn was the "official BMW agent" in the Philippines.13

The Court of Appeals also found that petitioner Alfred Hahn dealt in other products, and not
exclusively in BMW products, and, on this basis, ruled that Hahn was not an agent of BMW. (p. 14)
This finding is based entirely on allegations of BMW in its motion to dismiss filed in the trial court and
in its petition for certiorari before the Court of Appeals.14 But this allegation was denied by Hahn15 and
therefore the Court of Appeals should not have cited it as if it were the fact.

Indeed this is not the only factual issue raised, which should have indicated to the Court of Appeals
the necessity of affirming the trial court's order deferring resolution of BMW's motion to dismiss.
Petitioner alleged that whether or not he is considered an agent of BMW, the fact is that BMW did
business in the Philippines because it sold cars directly to Philippine buyers. 16 This was denied by
BMW, which claimed that Hahn was not its agent and that, while it was true that it had sold cars to
Philippine buyers, this was done without solicitation on its part.17

It is not true then that the question whether BMW is doing business could have been resolved simply
by considering the parties' pleadings. There are genuine issues of facts which can only be
determined on the basis of evidence duly presented. BMW cannot short circuit the process on the
plea that to compel it to go to trial would be to deny its right not to submit to the jurisdiction of the trial
court which precisely it denies. Rule 16, 3 authorizes courts to defer the resolution of a motion to
dismiss until after the trial if the ground on which the motion is based does not appear to be
indubitable. Here the record of the case bristles with factual issues and it is not at all clear whether
some allegations correspond to the proof.

Anyway, private respondent need not apprehend that by responding to the summons it would be
waiving its objection to the trial court's jurisdiction. It is now settled that, for purposes of having
summons served on a foreign corporation in accordance with Rule 14, 14, it is sufficient that it be
alleged in the complaint that the foreign corporation is doing business in the Philippines. The court
need not go beyond the allegations of the complaint in order to determine whether it has
Jurisdiction.18 A determination that the foreign corporation is doing business is only tentative and is
made only for the purpose of enabling the local court to acquire jurisdiction over the foreign
corporation through service of summons pursuant to Rule 14, 14. Such determination does not
foreclose a contrary finding should evidence later show that it is not transacting business in the
country. As this Court has explained:

This is not to say, however, that the petitioner's right to question the jurisdiction of the court
over its person is now to be deemed a foreclosed matter. If it is true, as Signetics claims, that
its only involvement in the Philippines was through a passive investment in Sigfil, which it
even later disposed of, and that TEAM Pacific is not its agent, then it cannot really be said to
be doing business in the Philippines. It is a defense, however, that requires the contravention
of the allegations of the complaint, as well as a full ventilation, in effect, of the main merits of
the case, which should not thus be within the province of a mere motion to dismiss. So, also,
the issue posed by the petitioner as to whether a foreign corporation which has done
business in the country, but which has ceased to do business at the time of the filing of a
complaint, can still be made to answer for a cause of action which accrued while it was doing
business, is another matter that would yet have to await the reception and admission of
evidence. Since these points have seasonably been raised by the petitioner, there should be
no real cause for what may understandably be its apprehension, i.e., that by its participation
during the trial on the merits, it may, absent an invocation of separate or independent reliefs
of its own, be considered to have voluntarily submitted itself to the court's jurisdiction.19

Far from committing an abuse of discretion, the trial court properly deferred resolution of the motion
to dismiss and thus avoided prematurely deciding a question which requires a factual basis, with the
same result if it had denied the motion and conditionally assumed jurisdiction. It is the Court of
Appeals which, by ruling that BMW is not doing business on the basis merely of uncertain
allegations in the pleadings, disposed of the whole case with finality and thereby deprived petitioner
of his right to be heard on his cause of action. Nor was there justification for nullifying the writ of
preliminary injunction issued by the trial court. Although the injunction was issued ex parte, the fact
is that BMW was subsequently heard on its defense by filing a motion to dismiss.

WHEREFORE, the decision of the Court of Appeals is REVERSED and the case is REMANDED to
the trial court for further proceedings.

SO ORDERED.