1
DEPOSIT GENERAL
G.R. No. L-66826 August 19, 1988
BANK OF THE PHILIPPINE ISLANDS, petitioner,
vs.
THE INTERMEDIATE APPELLATE COURT and
ZSHORNACK respondents.
CORTES, J.:
The original parties to this case were Rizaldy T. Zshornack and
the Commercial Bank and Trust Company of the Philippines
[hereafter referred to as "COMTRUST."] In 1980, the Bank of
the Philippine Islands (hereafter referred to as BPI absorbed
COMTRUST through a corporate merger, and was substituted
as party to the case.
Rizaldy Zshornack initiated proceedings on June 28,1976 by
filing in the Court of First Instance of Rizal — Caloocan City a
complaint against COMTRUST alleging four causes of action.
Except for the third cause of action, the CFI ruled in favor of
Zshornack. The bank appealed to the Intermediate Appellate
Court which modified the CFI decision absolving the bank from
liability on the fourth cause of action. The pertinent portions of
the judgment, as modified, read:
IN VIEW OF THE FOREGOING, the Court renders judgment
as follows:
1. Ordering the defendant COMTRUST to restore to the dollar
savings account of plaintiff (No. 25-4109) the amount of U.S
$1,000.00 as of October 27, 1975 to earn interest together with
the remaining balance of the said account at the rate fixed by
the bank for dollar deposits under Central Bank Circular 343;
2. Ordering defendant COMTRUST to return to the plaintiff the
amount of U.S. $3,000.00 immediately upon the finality of this
decision, without interest for the reason that the said amount
was merely held in custody for safekeeping, but was not
actually deposited with the defendant COMTRUST because
being cash currency, it cannot by law be deposited with
plaintiffs dollar account and defendant's only obligation is to
return the same to plaintiff upon demand;
xxx xxx xxx
5. Ordering defendant COMTRUST to pay plaintiff in the
amount of P8,000.00 as damages in the concept of litigation
expenses and attorney's fees suffered by plaintiff as a result of
the failure of the defendant bank to restore to his (plaintiffs)
account the amount of U.S. $1,000.00 and to return to him
(plaintiff) the U.S. $3,000.00 cash left for safekeeping.
Costs against defendant COMTRUST.
SO ORDERED. [Rollo, pp. 47-48.]
Undaunted, the bank comes to this Court praying that it be
totally absolved from any liability to Zshornack. The latter not
having appealed the Court of Appeals decision, the issues
facing this Court are limited to the bank's liability with regard to
the first and second causes of action and its liability for
damages.
1. We first consider the first cause of action, On the dates
material to this case, Rizaldy Zshornack and his wife, Shirley
Gorospe, maintained in COMTRUST, Quezon City Branch, a
dollar savings account and a peso current account.
On October 27, 1975, an application for a dollar draft was
accomplished by Virgilio V. Garcia, Assistant Branch Manager
of COMTRUST Quezon City, payable to a certain Leovigilda D.
Dizon in the amount of $1,000.00. In the application, Garcia
indicated that the amount was to be charged to Dollar Savings
Acct. No. 25-4109, the savings account of the Zshornacks; the
charges for commission, documentary stamp tax and others
totalling P17.46 were to be charged to Current Acct. No.
210465-29, again, the current account of the Zshornacks.
There was no indication of the name of the purchaser of the
dollar draft.
On the same date, October 27,1975, COMTRUST, under the
signature of Virgilio V. Garcia, issued a check payable to the
order of Leovigilda D. Dizon in the sum of US $1,000 drawn on
the Chase Manhattan Bank, New York, with an indication that it
was to be charged to Dollar Savings Acct. No. 25-4109.
When Zshornack noticed the withdrawal of US$1,000.00 from
his account, he demanded an explanation from the bank. In
answer, COMTRUST claimed that the peso value of the
withdrawal was given to Atty. Ernesto Zshornack, Jr., brother of
Rizaldy, on October 27, 1975 when he (Ernesto) encashed with
COMTRUST a cashier's check for P8,450.00 issued by the
Manila Banking Corporation payable to Ernesto.
Upon consideration of the foregoing facts, this Court finds no
reason to disturb the ruling of both the trial court and the
Appellate Court on the first cause of action. Petitioner must be
held liable for the unauthorized withdrawal of US$1,000.00
from private respondent's dollar account.
In its desperate attempt to justify its act of withdrawing from its
depositor's savings account, the bank has adopted inconsistent
theories. First, it still maintains that the peso value of the
amount withdrawn was given to Atty. Ernesto Zshornack, Jr.
when the latter encashed the Manilabank Cashier's Check. At
the same time, the bank claims that the withdrawal was made
pursuant to an agreement where Zshornack allegedly
authorized the bank to withdraw from his dollar savings
account such amount which, when converted to pesos, would
be needed to fund his peso current account. If indeed the peso
equivalent of the amount withdrawn from the dollar account
was credited to the peso current account, why did the bank still
have to pay Ernesto?
At any rate, both explanations are unavailing. With regard to
the first explanation, petitioner bank has not shown how the
transaction involving the cashier's check is related to the
transaction involving the dollar draft in favor of Dizon financed
by the withdrawal from Rizaldy's dollar account. The two
transactions appear entirely independent of each other.
Moreover, Ernesto Zshornack, Jr., possesses a personality
distinct and separate from Rizaldy Zshornack. Payment made
to Ernesto cannot be considered payment to Rizaldy.

As to the second explanation, even if we assume that there
was such an agreement, the evidence do not show that the
withdrawal was made pursuant to it. Instead, the record reveals
that the amount withdrawn was used to finance a dollar draft in
favor of Leovigilda D. Dizon, and not to fund the current
account of the Zshornacks. There is no proof whatsoever that
peso Current Account No. 210-465-29 was ever credited with
the peso equivalent of the US$1,000.00 withdrawn on October
27, 1975 from Dollar Savings Account No. 25-4109.
2. As for the second cause of action, the complaint filed with
the trial court alleged that on December 8, 1975, Zshornack
entrusted to COMTRUST, thru Garcia, US
$3,000.00 cash (popularly known as greenbacks)
for safekeeping, and that the agreement was embodied in a
document, a copy of which was attached to and made part of
the complaint. The document reads:
Makati Cable Address:
Philippines "COMTRUST"
COMMERCIAL BANK AND TRUST COMPANY
of the Philippines
Quezon City Branch
December 8, 1975
MR. RIZALDY T. ZSHORNACK
&/OR MRS SHIRLEY E. ZSHORNACK
Sir/Madam:
We acknowledged (sic) having received from you today the
sum of US DOLLARS: THREE THOUSAND ONLY
(US$3,000.00) for safekeeping.
Received by:
(Sgd.) VIRGILIO V. GARCIA
It was also alleged in the complaint that despite demands, the
bank refused to return the money.
In its answer, COMTRUST averred that the US$3,000 was
credited to Zshornack's peso current account at prevailing
conversion rates.
It must be emphasized that COMTRUST did not deny
specifically under oath the authenticity and due execution of
the above instrument.
During trial, it was established that on December 8, 1975
Zshornack indeed delivered to the bank US $3,000 for
safekeeping. When he requested the return of the money on
May 10, 1976, COMTRUST explained that the sum was
disposed of in this manner: US$2,000.00 was sold on
December 29, 1975 and the peso proceeds amounting to
P14,920.00 were deposited to Zshornack's current account per
deposit slip accomplished by Garcia; the remaining
US$1,000.00 was sold on February 3, 1976 and the peso
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proceeds amounting to P8,350.00 were deposited to his
current account per deposit slip also accomplished by Garcia.
Aside from asserting that the US$3,000.00 was properly
credited to Zshornack's current account at prevailing
conversion rates, BPI now posits another ground to defeat
private respondent's claim. It now argues that the contract
embodied in the document is the contract of depositum (as
defined in Article 1962, New Civil Code), which banks do not
enter into. The bank alleges that Garcia exceeded his powers
when he entered into the transaction. Hence, it is claimed, the
bank cannot be liable under the contract, and the obligation is
purely personal to Garcia.
Before we go into the nature of the contract entered into, an
important point which arises on the pleadings, must be
considered.
The second cause of action is based on a document purporting
to be signed by COMTRUST, a copy of which document was
attached to the complaint. In short, the second cause of action
was based on an actionable document. It was therefore
incumbent upon the bank to specifically deny under oath the
due execution of the document, as prescribed under Rule 8,
Section 8, if it desired: (1) to question the authority of Garcia to
bind the corporation; and (2) to deny its capacity to enter into
such contract. [See, E.B. Merchant v. International Banking
Corporation, 6 Phil. 314 (1906).] No sworn answer denying the
due execution of the document in question, or questioning the
authority of Garcia to bind the bank, or denying the bank's
capacity to enter into the contract, was ever filed. Hence, the
bank is deemed to have admitted not only Garcia's authority,
but also the bank's power, to enter into the contract in question.
In the past, this Court had occasion to explain the reason
behind this procedural requirement.
The reason for the rule enunciated in the foregoing authorities
will, we think, be readily appreciated. In dealing with
corporations the public at large is bound to rely to a large
extent upon outward appearances. If a man is found acting for
a corporation with the external indicia of authority, any person,
not having notice of want of authority, may usually rely upon
those appearances; and if it be found that the directors had
permitted the agent to exercise that authority and thereby held
him out as a person competent to bind the corporation, or had
acquiesced in a contract and retained the benefit supposed to
have been conferred by it, the corporation will be bound,
notwithstanding the actual authority may never have been
granted
... Whether a particular officer actually possesses the authority
which he assumes to exercise is frequently known to very few,
and the proof of it usually is not readily accessible to the
stranger who deals with the corporation on the faith of the
ostensible authority exercised by some of the corporate
officers. It is therefore reasonable, in a case where an officer of
a corporation has made a contract in its name, that the
corporation should be required, if it denies his authority, to
state such defense in its answer. By this means the plaintiff is
apprised of the fact that the agent's authority is contested; and
he is given an opportunity to adduce evidence showing either

that the authority existed or that the contract was ratified and
approved. [Ramirez v. Orientalist Co. and Fernandez, 38 Phil.
634, 645- 646 (1918).]
Petitioner's argument must also be rejected for another reason.
The practical effect of absolving a corporation from liability
every time an officer enters into a contract which is beyond
corporate powers, even without the proper allegation or proof
that the corporation has not authorized nor ratified the officer's
act, is to cast corporations in so perfect a mold that
transgressions and wrongs by such artificial beings become
impossible [Bissell v. Michigan Southern and N.I.R. Cos 22 N.Y
258 (1860).] "To say that a corporation has no right to do
unauthorized acts is only to put forth a very plain truism but to
say that such bodies have no power or capacity to err is to
impute to them an excellence which does not belong to any
created existence with which we are acquainted. The
distinction between power and right is no more to be lost sight
of in respect to artificial than in respect to natural persons."
[Ibid.]
Having determined that Garcia's act of entering into the
contract binds the corporation, we now determine the correct
nature of the contract, and its legal consequences, including its
enforceability.
The document which embodies the contract states that the
US$3,000.00 was received by the bank for safekeeping. The
subsequent acts of the parties also show that the intent of the
parties was really for the bank to safely keep the dollars and to
return it to Zshornack at a later time, Thus, Zshornack
demanded the return of the money on May 10, 1976, or over
five months later.
The above arrangement is that contract defined under Article
1962, New Civil Code, which reads:
Art. 1962. A deposit is constituted from the moment a person
receives a thing belonging to another, with the obligation of
safely keeping it and of returning the same. If the safekeeping
of the thing delivered is not the principal purpose of the
contract, there is no deposit but some other contract.
Note that the object of the contract between Zshornack and
COMTRUST was foreign exchange. Hence, the transaction
was covered by Central Bank Circular No. 20, Restrictions on
Gold and Foreign Exchange Transactions, promulgated on
December 9, 1949, which was in force at the time the parties
entered into the transaction involved in this case. The circular
provides:
xxx xxx xxx
2. Transactions in the assets described below and all dealings
in them of whatever nature, including, where applicable their
exportation and importation, shall NOT be effected, except with
respect to deposit accounts included in sub-paragraphs (b) and
(c) of this paragraph, when such deposit accounts are owned
by and in the name of, banks.
(a) Any and all assets, provided they are held through, in, or
with banks or banking institutions located in the Philippines,
including money, checks, drafts, bullions bank drafts, deposit
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accounts (demand, time and savings), all debts, indebtedness
or obligations, financial brokers and investment houses, notes,
debentures, stocks, bonds, coupons, bank acceptances,
mortgages, pledges, liens or other rights in the nature of
security, expressed in foreign currencies, or if payable abroad,
irrespective of the currency in which they are expressed, and
belonging to any person, firm, partnership, association, branch
office, agency, company or other unincorporated body or
corporation residing or located within the Philippines;
(b) Any and all assets of the kinds included and/or described in
subparagraph (a) above, whether or not held through, in, or
with banks or banking institutions, and existent within the
Philippines, which belong to any person, firm, partnership,
association, branch office, agency, company or other
unincorporated body or corporation not residing or located
within the Philippines;
(c) Any and all assets existent within the Philippines including
money, checks, drafts, bullions, bank drafts, all debts,
indebtedness or obligations, financial securities commonly
dealt in by bankers, brokers and investment houses, notes,
debentures, stock, bonds, coupons, bank acceptances,
mortgages, pledges, liens or other rights in the nature of
security expressed in foreign currencies, or if payable abroad,
irrespective of the currency in which they are expressed, and
belonging to any person, firm, partnership, association, branch
office, agency, company or other unincorporated body or
corporation residing or located within the Philippines.
xxx xxx xxx
4. (a) All receipts of foreign exchange shall be sold daily to
the Central Bank by those authorized to deal in foreign
exchange. All receipts of foreign exchange by any person, firm,
partnership, association, branch office, agency, company or
other unincorporated body or corporation shall be sold to the
authorized agents of the Central Bank by the recipients within
one business day following the receipt of such foreign
exchange. Any person, firm, partnership, association, branch
office, agency, company or other unincorporated body or
corporation, residing or located within the Philippines, who
acquires on and after the date of this Circular foreign exchange
shall not, unless licensed by the Central Bank, dispose of such
foreign exchange in whole or in part, nor receive less than its
full value, nor delay taking ownership thereof except as such
delay is customary; Provided, further, That within one day upon
taking ownership, or receiving payment, of foreign exchange
the aforementioned persons and entities shall sell such foreign
exchange to designated agents of the Central Bank.
xxx xxx xxx
8. Strict observance of the provisions of this Circular is
enjoined; and any person, firm or corporation, foreign or
domestic, who being bound to the observance thereof, or of
such other rules, regulations or directives as may hereafter be
issued in implementation of this Circular, shall fail or refuse to
comply with, or abide by, or shall violate the same, shall
be subject to the penal sanctions provided in the Central Bank
Act.
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xxx xxx xxx DEPOSIT VOLUNTARY

Paragraph 4 (a) above was modified by Section 6 of Central

Bank Circular No. 281, Regulations on Foreign Exchange,
promulgated on November 26, 1969 by limiting its coverage to
Philippine residents only. Section 6 provides:
SEC. 6. All receipts of foreign exchange by
any resident person, firm, company or corporation shall be sold
to authorized agents of the Central Bank by the recipients
within one business day following the receipt of such foreign
exchange. Any resident person, firm, company or
corporation residing or located within the Philippines, who
acquires foreign exchange shall not, unless authorized by the
Central Bank, dispose of such foreign exchange in whole or in
part, nor receive less than its full value, nor delay taking
ownership thereof except as such delay is customary;
Provided, That, within one business day upon taking ownership
or receiving payment of foreign exchange the aforementioned
persons and entities shall sell such foreign exchange to the
authorized agents of the Central Bank.
[G.R. No. 4347. March 9, 1908. ]
JOSE ROGERS, Plaintiff-Appellant, v. SMITH, BELL &
Co., Defendants-Appellees.
SYLLABUS
1. IRREGULAR DEPOSIT; RELATION OF DEBTOR AND
CREDITOR. — The following document does not create an
irregular deposit, but simply creates the relation of debtor and
creditor between the parties:
"No. 1418. $12,000.
"The sum of pesos twelve thousand has been deposited with
us, received from Mr. .Jose Rogers, which sum we will pay on
the last day of the six months after the presentation of this
document, to the order of Mr. Jose Rogers.

As earlier stated, the document and the subsequent acts of the ‘’Manila, February 17, 1876.
parties show that they intended the bank to safekeep the
foreign exchange, and return it later to Zshornack, who alleged SMITH, BELL & Co.
in his complaint that he is a Philippine resident. The parties did
not intended to sell the US dollars to the Central Bank within "The said sum of twelve thousand pesos shall bear interest at
one business day from receipt. Otherwise, the contract the rate of eight per centum (8%) per annum from this date,
of depositum would never have been entered into at all. February 17, 1876.
Since the mere safekeeping of the greenbacks, without selling
SMITH, BELL & Co.
them to the Central Bank within one business day from receipt,
is a transaction which is not authorized by CB Circular No. 20,
2. LOAN; PAYMENT; CURRENCY. — A debt of 12,000 pesos,
it must be considered as one which falls under the general
created in 1876, can now be paid by 12,000 of the Philippine
class of prohibited transactions. Hence, pursuant to Article 5 of
pesos authorized by the act of Congress of March 2, 1903,
the Civil Code, it is void, having been executed against the
although at the time the loan was made, which created the
provisions of a mandatory/prohibitory law. More importantly, it
debt, the creditor delivered to the debtor 12,000 pesos in gold
affords neither of the parties a cause of action against the
coin.
other. "When the nullity proceeds from the illegality of the
cause or object of the contract, and the act constitutes a
3. CONSTITUTIONALITY OF LAWS; ACT OF CONGRESS,
criminal offense, both parties being in pari delicto, they shall
MARCH 2, 1903. — The act of Congress of March 2, 1903, by
have no cause of action against each other. . ." [Art. 1411, New
which it is provided that debts created prior to its passage may
Civil Code.] The only remedy is one on behalf of the State to
be thereafter paid in the money authorized by the Act, is not
prosecute the parties for violating the law.
unconstitutional.
We thus rule that Zshornack cannot recover under the second
DECISION
cause of action.
WILLARD, J. :
3. Lastly, we find the P8,000.00 awarded by the courts a
quo as damages in the concept of litigation expenses and The plaintiff brought this action in the Court of First Instance of
attorney's fees to be reasonable. The award is sustained. the city of Manila upon the following document:
WHEREFORE, the decision appealed from is hereby
"No. 1418. $12,000.
MODIFIED. Petitioner is ordered to restore to the dollar
savings account of private respondent the amount of
"The sum of pesos twelve thousand has been deposited with
US$1,000.00 as of October 27, 1975 to earn interest at the rate
us, received from Mr. Jose Rogers, which sum w e will pay on
fixed by the bank for dollar savings deposits. Petitioner is
the last day of the six months after the presentation of this
further ordered to pay private respondent the amount of
document, to the order of Mr. Jose Rogers.
P8,000.00 as damages. The other causes of action of private
respondent are ordered dismissed.
"Manila, February 17, 1876.
SO ORDERED.
‘’SMITH, BELL & CO.

"The said sum of twelve thousand pesos shall bear interest at
the rate of eight per centum (8%) per annum from this date,
February 17, 1876.
"SMITH, BELL & Co."
When this document was delivered by the defendants to the
plaintiff the former delivered to the latter the following letter:
"MANILA, 17 February, 1876
"JOSE ROGERS, Esq., Present.
"DEAR SIR: We have this day signed a receipt (quedan No.
1418) in your favor for twelve thousand dollars, deposited in
our hands, at interest of 8% per annum, commencing from to-
day.
"This interest will be paid to your order every three months,
either in Manila or in London, as you may wish.
"If at any time you should desire to receive said deposit of
twelve thousands dollars in London It will be paid to you, or
your order, by Messrs. Smith, Wood & Co., of that place, after
two months’ notice, and on presentation of said receipt or
quedan No. 1418.
"We are, dear sir, yours, truly,
"SMITH, BELL & Co."
The only question in the case is, whether upon these
documents the plaintiff is entitled to recover 12,000 pesos or
24,000 pesos. The court below held that he was entitled to
recover only 12,000 pesos, and the defendants having
deposited that amount in court, judgment was ordered in their
favor, from which judgment the plaintiff has appealed.
The facts in the case are undisputed. When this document was
delivered 12,000 pesos in silver were worth more than P2,000
pesos in gold. The plaintiff delivered to the defendants in
consideration of the execution of the document 12,000 pesos
in gold. Soon thereafter the plaintiff removed to Barcelona and
has since resided there. The defendants remitted the interest
to him every three months at the rate of 8 per cent per annum
until the 30th day of January, 1888, when they notified him that
thereafter the interest would be 6 per cent. The plaintiff
accepted this reduction and interest at that rate was remitted to
him by the defendants until the 10th of February, 1904. This
interest was remitted in silver; that is to say, every three
months the defendants took 180 pesos in silver and with it
bought exchange on Barcelona or other European point
converted into pesetas. The plaintiff received these payments
in silver without any protest whatever until the 10th day of
February, 1904. He then, in his letter of that date, called the
attention of the defendants to the fact that by the new American
law in force in the Philippines the gold standard had been
introduced and that by reason thereof he was entitled to
receive his interest in gold, in view of the fact that when he
delivered the money to the defendants in 1876 he delivered it
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in gold coin. In another letter of the 15th of December, 1904, he
expressly refers to the act of Congress of March 2, 1903, and
to the subsequent proclamations of the Governor-General
relating to coinage. These are practically all the facts in the
case, and the claim of the plaintiff is that, having paid to the
defendants 12,000 pesos in gold coin, he is now entitled to
receive from them the value of 12,000 pesos in gold coin; that
is to say, 24,000 pesos in silver.
It is necessary to determine in the first place the nature of the
contract evidenced by the document of the 17th of February,
1876.
The important, and to our minds decisive, question in the case
is, whether or not this document is evidence of an ordinary loan
which created between the plaintiff and the defendants the
simple relation of debtor and creditor. The appellant in his brief
repeatedly calls it a deposit, but we do not understand that he
claims that it is or ever was a deposit in the technical sense of
the term; that is, that the ownership of the particular coin which
was delivered by him to Smith, Bell & Co. did not pass to
Smith, Bell & Co. but remained in him and that Smith, Bell &
Co. was bound to return to him the identical coin which they
had received. It is apparent that no such claim could be
maintained in view of that part of the instrument which provides
for the payment of interest.
It is claimed, however, by the appellant, that while not a deposit
in the strict sense of the word, the document evidences what;s
known as an "irregular deposit." The parties agree that the
case must be decided in this respect in view of the legislation
in force prior to the adoption of the Civil Code, and the
appellant says that the definition of an irregular deposit is found
in Law II, Title III of the Fifth Partida. Manresa, in his
Commentaries on the Civil Code (vol. 11, p. 664), states that
there are three points of difference between a loan and an
irregular deposit. The first difference which, he points out
consists in the fact that in an irregular deposit the only benefit
is that which accrues to the depositor, while in a loan the
essential cause for the transaction is the necessity of the
borrower. The contract in question does not fulfill this
requirement of an irregular deposit. It is very apparent that it
was not for the sole benefit of Rogers. it, like any other loan of
money, was for the benefit of both parties. The benefit which
Smith, Bell & Co. received was the use of the money; the
benefit which Rogers received was the interest on his money.
In the letter in which Smith, Bell & Co. on the 30th of June,
1888, notified the plaintiff of the reduction of the interest, they
said: "We call your attention to this matter in order that you
may if you think best employ your money other place."
Nor does the contract in question fulfill the third requisite
indicated by Manresa, which is, that in an irregular deposit, the
depositor can demand the return of the article at any time,
while a lender is bound by the provisions of the contract and
can not seek restitution until the time for payment, as provided
in the contract, has arisen. It is apparent from the terms of this
document that the plaintiff could not demand his money at any
time. He was bound to give notice of his desire for its return
and then to wait for six months before he could insist upon

payment.
The second difference which exists, according to Manresa,
between an irregular deposit and a loan lies in the fact that in
an irregular deposit the depositor has a preference over other
creditors in the distribution of the debtor’s property. That this
preference may exist and the transaction be still a loan,
appears from the decision of the supreme court of Spain of the
8th of April, 1881. The court there said:
"Whereas, although the irregular deposit is considered as
mutual, with respect to the repayment between the depositor
and the depository, notwithstanding this, the latter retains the
original status of personal creditor and is simply privileged, in
concurrence with other creditors against the former, and he
must be paid after the mortgage creditors and before the
creditors whose right appears only by written instruments, in
accordance with Law XII, Title XIV, Fifth Partida.
It is apparent, therefore, that this document does not state
those requisites which are essential to an irregular deposit.
But even if it did, it seems that the appellant’s contention could
not be sustained. He claims that in accordance with said Law
II, Title III, Fifth Partida, the defendants are bound to return to
him the same kind of money which was received. That law is in
part as follows:
"And the ownership of the thing given in deposit is not
transferred to the one who receives the same; but, should the
thing be one of those which can be counted, weighed, or
measured, if, when receiving it, the same were given by count,
weight, or measure, then the ownership would be transferred to
him. Yet he would be obliged to return the same thing, or the
same quantity, or another similar to the one received, to him
who gave it to him in deposit."
An examination, however, of Law II, Title I, of the Fifth Partida,
which relates to loans, will show that the obligation of the
borrower in such case is stated in almost exactly the same
words. That law is in part as follows:
"A man may loan to another any of the things mentioned in the
last law which are susceptible of being counted, weighed, or
measured. And this is understood with regard to things
belonging to him who lends them, or which are loaned by
another by authority of his principal; provided, however, that
once the thing is in the possession of him who secures the
loan, he may dispose of it as though it were his own. But he
must return to the owner of the thing an equal amount of the
same kind and quality, although the creditor should not specify
either of the conditions."
The supreme court of Spain in the judgment of the 27th of
October, 1868, speaking of the obligation of the borrower in
such case, says:
"Whereas the principle established in laws I and II of Title I of
the Fifth Partida, according to which the borrower acquires
ownership of the thing and is bound to return an equal amount
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of the same kind and quality, have special application to cases
relating to loans of money or its equivalent; whereas the thing
loaned not being in such cases what properly constitutes the
material or the object of deposit, as happens with other
perishable things, but rather the value that the coins or the
paper money represents, the obligation of the depository in this
kind of contracts is to return the sum or amount therein
expressed, whatever may have been the increase or
depreciation suffered by the specific kind of coin or paper,
unless the contrary be stipulated."
It seems clear from these citations that the document in
question is evidence of an ordinary loan and created between
the plaintiff and defendants the relation of debtor and creditor.
The two judgments of the supreme court of Spain cited by the
appellant in his brief have no bearing upon the question. In that
of the 9th of July, 1889, it appeared that the Bank of Havana
returned to the plaintiff the same kind of money which it had
received from him. The other judgment, of the 7th of February,
1891, simply held that a servant who had left her money with
her master and had taken a written obligation from him to pay
the same was not, in the distribution of his property, entitled to
preference over other creditors on the ground that her debt
was for personal labor.
It having been determined that the contract between the parties
created the common relation of debtor and creditor, the case is
easily resolved. - Section 3 of the act of Congress of March 2,
1903, entitled "An act to establish a standard of value and to
provide for a coinage system in the Philippine Islands," is as
follows:
"That the silver Philippine peso authorized by this act shall be
legal tender in the Philippine Islands for all debts, public and
private, unless otherwise specifically provided by contract:
Provided, That debts contracted prior to the thirty-first day of
December, nineteen hundred and three, may be paid in the
legal-tender currency of said Islands existing at the time of the
making of said contracts, unless otherwise expressly provided
by contract."
That this case falls within the terms of this section is very clear.
The debt in question is a private debt, calling for the payment
of 12,000 pesos. This section authorizes the payment of that
debt in the Philippine pesos authorized by the act. That the act
applies as well to debts created prior to its passage as to those
created after, appears from the proviso. The effect of that
proviso is to give the debtor and not the creditor the option as
to the kind of money with which the debt shall be paid.
The only possible way to avoid the application of this section to
the case at bar is by saying that Congress had no power to
pass the act and that as to debts created prior to its passage it
is therefore null and void. That the act can not be declared void
on this ground is well settled by the decisions of the Supreme
Court of the United States. (Legal Tender Cases, 12 Wall., 457;
Dooley v. Smith, 13 Wall., 604; Railroad Company v. Johnson,
15 W a11., 195; Maryland v. Railroad Company, 22 Wall., 105;
and Juilliard v. Greenman, 110 U. S., 421.) In the first four of
those cases it was held that debts created when the only legal-

tender money was gold and silver could be paid in paper
money issued by the Government and which had no intrinsic
value.
The appellant in his brief discusses at length the meaning of
the world "dollars." We do not see how such a discussion IS
material. The contract provides for the payment of "pesos," not
"dollars." It is very evident that the contract was not changed
nor intended to be changed by the use of the word "dollars" in
the letter of February 17, 1876. That in English houses
especially the word "dollars" was, until very recently, used to
indicate pesos of local currency, whether Mexican, Spanish, or
Hongkong, is well known.
In conclusion it may be said that the plaintiff, in 1876, delivered
to the defendants the cheapest kind of money then in use. If he
had desired to be repaid in the same money which he
delivered, he should have so provided expressly in the
contract. He had a perfect right to do so, and if he had done so
he could now, by reason of the provisions of the said act of
Congress, demand payment in gold.
That the plaintiff’s protest of 1904 was based entirely upon his
construction of this act of Congress admits of no doubt; that he
believed that by the terms of the contract, without the act of
Congress, Smith, Bell & Co. had the right to pay him in silver is
beyond question. This belief is should not only by his letters of
protest which expressly refer to the act of Congress as the
basis of his claim but also by his conduct during more than
twenty-five years in receiving interest in silver without a sign of
protest. That he would have received the principal also in silver
had the defendants tendered it to him at any time prior to 1903
is also free from doubt. In making his protest in 1904 he
evidently believed that the act of Congress required the
payment of the 12,000 pesos in gold and that he thereby had
acquired additional rights. E[is construction of the act is, as we
have seen, wrong.
The judgment of the court below is affirmed, with the costs of
this instance against the Appellant. So ordered.
G.R. No. 4015 August 24, 1908
ANGEL JAVELLANA, plaintiff-appellee,
vs.
JOSE LIM, ET AL., defendants-appellants.
TORRES, J.:
The attorney for the plaintiff, Angel Javellana, file a complaint
on the 30th of October, 1906, with the Court of First Instance of
Iloilo, praying that the defendants, Jose Lim and Ceferino
Domingo Lim, he sentenced to jointly and severally pay the
sum of P2,686.58, with interest thereon at the rate of 15 per
cent per annum from the 20th of January, 1898, until full
payment should be made, deducting from the amount of
interest due the sum of P1,102.16, and to pay the costs of the
proceedings.
Authority from the court having been previously obtained, the
complaint was amended on the 10th of January, 1907; it was
then alleged, on the 26th of May, 1897, the defendants
7
executed and subscribed a document in favor of the plaintiff
reading as follows:
We have received from Angel Javellana, as a deposit without
interest, the sum of two thousand six hundred and eighty-six
cents of pesos fuertes, which we will return to the said
gentleman, jointly and severally, on the 20th of January, 1898.
— Jaro, 26th of May, 1897. — Signed Jose Lim. — Signed:
Ceferino Domingo Lim.
That, when the obligation became due, the defendants begged
the plaintiff for an extension of time for the payment thereof,
building themselves to pay interest at the rate of 15 per cent on
the amount of their indebtedness, to which the plaintiff
acceded; that on the 15th of May, 1902, the debtors paid on
account of interest due the sum of P1,000 pesos, with the
exception of either capital or interest, had thereby been
subjected to loss and damages.
A demurrer to the original complaint was overruled, and on the
4th of January, 1907, the defendants answered the original
complaint before its amendment, setting forth that they
acknowledged the facts stated in Nos. 1 and 2 of the
complaint; that they admitted the statements of the plaintiff
relative to the payment of 1,102.16 pesos made on the 15th of
November, 1902, not, however, as payment of interest on the
amount stated in the foregoing document, but on account of
the principal, and denied that there had been any agreement
as to an extension of the time for payment and the payment of
interest at the rate of 15 per cent per annum as alleged in
paragraph 3 of the complaint, and also denied all the other
statements contained therein.
As a counterclaim, the defendants alleged that they had paid to
the plaintiff sums which, together with the P1,102.16
acknowledged in the complaint, aggregated the total sum of
P5,602.16, and that, deducting therefrom the total sum of
P2,686.58 stated in the document transcribed in the complaint,
the plaintiff still owed the defendants P2,915.58; therefore, they
asked that judgment be entered absolving them, and
sentencing the plaintiff to pay them the sum of P2,915.58 with
the costs.
Evidence was adduced by both parties and, upon their exhibits,
together with an account book having been made of record, the
court below rendered judgment on the 15th of January, 1907,
in favor of the plaintiff for the recovery of the sum of P5,714.44
and costs.
The defendants excepted to the above decision and moved for
a new trial. This motion was overruled and was also excepted
to by them; the bill of exceptions presented by the appellants
having been approved, the same was in due course submitted
to this court.
The document of indebtedness inserted in the complaint states
that the plaintiff left on deposit with the defendants a given sum
of money which they were jointly and severally obliged to
return on a certain date fixed in the document; but that,
nevertheless, when the document appearing as Exhibits 2,
written in the Visayan dialect and followed by a translation into
Spanish was executed, it was acknowledged, at the date

thereof, the 15th of November, 1902, that the amount
deposited had not yet been returned to the creditor, whereby
he was subjected to losses and damages amounting to 830
pesos since the 20th of January, 1898, when the return was
again stipulated with the further agreement that the amount
deposited should bear interest at the rate of 15 per cent per
annum, from the aforesaid date of January 20, and that the
1,000 pesos paid to the depositor on the 15th of May, 1900,
according to the receipt issued by him to the debtors, would be
included, and that the said rate of interest would obtain until the
debtors on the 20th of May, 1897, it is called a deposit
consisted, and they could have accomplished the return
agreed upon by the delivery of a sum equal to the one received
by them. For this reason it must be understood that the debtors
were lawfully authorized to make use of the amount deposited,
which they have done, as subsequent shown when asking for
an extension of the time for the return thereof, inasmuch as,
acknowledging that they have subjected the letter, their
creditor, to losses and damages for not complying with what
had been stipulated, and being conscious that they had used,
for their own profit and gain, the money that they received
apparently as a deposit, they engaged to pay interest to the
creditor from the date named until the time when the refund
should be made. Such conduct on the part of the debtors is
unquestionable evidence that the transaction entered into
between the interested parties was not a deposit, but a real
contract of loan.
Article 1767 of the Civil Code provides that —
The depository can not make use of the thing deposited
without the express permission of the depositor.
Otherwise he shall be liable for losses and damages.
Article 1768 also provides that —
When the depository has permission to make use of the thing
deposited, the contract loses the character of a deposit and
becomes a loan or bailment.
The permission shall not be presumed, and its existence must
be proven.
When on one of the latter days of January, 1898, Jose Lim
went to the office of the creditor asking for an extension of one
year, in view of the fact the money was scare, and because
neither himself nor the other defendant were able to return the
amount deposited, for which reason he agreed to pay interest
at the rate of 15 per cent per annum, it was because, as a
matter of fact, he did not have in his possession the amount
deposited, he having made use of the same in his business
and for his own profit; and the creditor, by granting them the
extension, evidently confirmed the express permission
previously given to use and dispose of the amount stated as
having bee deposited, which, in accordance with the loan, to all
intents and purposes gratuitously, until the 20th of January,
1898, and from that dated with interest at 15 per cent per
annum until its full payment, deducting from the total amount of
interest the sum of 1,000 pesos, in accordance with the
provisions of article 1173 of the Civil Code.
8
Notwithstanding that it does not appear that Jose Lim signed
the document (Exhibit 2) executed in the presence of three
witnesses on the 15th of November, 1902, by Ceferino
Domingo Lim on behalf of himself and the former,
nevertheless, the said document has not been contested as
false, either by a criminal or by a civil proceeding, nor has any
doubt been cast upon the authenticity of the signatures of the
witnesses who attested the execution of the same; and from
the evidence in the case one is sufficiently convinced that the
said Jose Lim was perfectly aware of and authorized his joint
codebtor to liquidate the interest, to pay the sum of 1,000
pesos, on account thereof, and to execute the aforesaid
document No. 2. A true ratification of the original document of
deposit was thus made, and not the least proof is shown in the
record that Jose Lim had ever paid the whole or any part of the
capital stated in the original document, Exhibit 1.
If the amount, together with interest claimed in the complaint,
less 1,000 pesos appears as fully established, such is not the
case with the defendant's counterclaim for P5,602.16, because
the existence and certainty of said indebtedness imputed to the
plaintiff has not been proven, and the defendants, who call
themselves creditors for the said amount have not proven in a
satisfactory manner that the plaintiff had received partial
payments on account of the same; the latter alleges with good
reason, that they should produce the receipts which he may
have issued, and which he did issue whenever they paid him
any money on account. The plaintiffs allegation that the two
amounts of 400 and 1,200 pesos, referred to in documents
marked "C" and "D" offered in evidence by the defendants, had
been received from Ceferino Domingo Lim on account of other
debts of his, has not been contradicted, and the fact that in the
original complaint the sum of 1,102.16 pesos, was expressed
in lieu of 1,000 pesos, the only payment made on account of
interest on the amount deposited according to documents No.
2 and letter "B" above referred to, was due to a mistake.
Moreover, for the reason above set forth it may, as a matter of
course, be inferred that there was no renewal of the contract
deposited converted into a loan, because, as has already been
stated, the defendants received said amount by virtue of real
loan contract under the name of a deposit, since the so-called
bailees were forthwith authorized to dispose of the amount
deposited. This they have done, as has been clearly shown.
The original joint obligation contracted by the defendant debtor
still exists, and it has not been shown or proven in the
proceedings that the creditor had released Joe Lim from
complying with his obligation in order that he should not be
sued for or sentenced to pay the amount of capital and interest
together with his codebtor, Ceferino Domingo Lim, because the
record offers satisfactory evidence against the pretension of
Jose Lim, and it further appears that document No. 2 was
executed by the other debtor, Ceferino Domingo Lim, for
himself and on behalf of Jose Lim; and it has also been proven
that Jose Lim, being fully aware that his debt had not yet been
settled, took steps to secure an extension of the time for
payment, and consented to pay interest in return for the
concession requested from the creditor.
In view of the foregoing, and adopting the findings in the
judgment appealed from, it is our opinion that the same should

be and is hereby affirmed with the costs of this instance
against the appellant, provided that the interest agreed upon
shall be paid until the complete liquidation of the debt. So
ordered.
G.R. Nos. L-26948 and L-26949 October 8, 1927
SILVESTRA BARON, plaintiff-appellant, vs.
PABLO DAVID, defendant-appellant.
And
GUILLERMO BARON, plaintiff-appellant, vs.
PABLO DAVID, defendant-appellant.
STREET, J.:
These two actions were instituted in the Court of First Instance
of the Province of Pampanga by the respective plaintiffs,
Silvestra Baron and Guillermo Baron, for the purpose of
recovering from the defendant, Pablo David, the value of palay
alleged to have been sold by the plaintiffs to the defendant in
the year 1920. Owing to the fact that the defendant is the same
in both cases and that the two cases depend in part upon the
same facts, the cases were heard together in the trial court and
determined in a single opinion. The same course will
accordingly be followed here.
In the first case, i. e., that which Silvestra Baron is plaintiff, the
court gave judgment for her to recover of the defendant the
sum of P5,238.51, with costs. From this judgment both the
plaintiff and the defendant appealed.
In the second case, i. e., that in which Guillermo Baron, is
plaintiff, the court gave judgment for him to recover of the
defendant the sum of P5,734.60, with costs, from which
judgment both the plaintiff and the defendant also appealed. In
the same case the defendant interposed a counterclaim in
which he asked credit for the sum of P2,800 which he had
advanced to the plaintiff Guillermo Baron on various occasions.
This credit was admitted by the plaintiff and allowed by the trial
court. But the defendant also interposed a cross-action against
Guillermo Baron in which the defendant claimed compensation
for damages alleged to have Ben suffered by him by reason of
the alleged malicious and false statements made by the
plaintiff against the defendant in suing out an attachment
against the defendant's property soon after the institution of the
action. In the same cross-action the defendant also sought
compensation for damages incident to the shutting down of the
defendant's rice mill for the period of one hundred seventy
days during which the above-mentioned attachment was in
force. The trial judge disallowed these claims for damages, and
from this feature of the decision the defendant appealed. We
are therefore confronted with five distinct appeals in this
record.
Prior to January 17, 1921, the defendant Pablo David has been
engaged in running a rice mill in the municipality of Magalang,
in the Province of Pampanga, a mill which was well patronized
by the rice growers of the vicinity and almost constantly
running. On the date stated a fire occurred that destroyed the
mill and its contents, and it was some time before the mill could
be rebuilt and put in operation again. Silvestra Baron, the
9
plaintiff in the first of the actions before us, is an aunt of the
defendant; while Guillermo Baron, the plaintiff in the other
action; is his uncle. In the months of March, April, and May,
1920, Silvestra Baron placed a quantity of palay in the
defendant's mill; and this, in connection with some that she
took over from Guillermo Baron, amounted to 1,012 cavans
and 24 kilos. During approximately the same period Guillermo
Baron placed other 1,865 cavans and 43 kilos of palay in the
mill. No compensation has ever been received by Silvestra
Baron upon account of the palay delivered by Guillermo Baron,
he has received from the defendant advancements amounting
to P2,800; but apart from this he has not been compensated.
Both the plaintiffs claim that the palay which was delivered by
them to the defendant was sold to the defendant; while the
defendant, on the other hand, claims that the palay was
deposited subject to future withdrawal by the depositors or
subject to some future sale which was never effected. He
therefore supposes himself to be relieved from all responsibility
by virtue of the fire of January 17, 1921, already mentioned.
The plaintiff further say that their palay was delivered to the
defendant at his special request, coupled with a promise on his
part to pay for the same at the highest price per cavan at which
palay would sell during the year 1920; and they say that in
August of that year the defendant promised to pay them
severally the price of P8.40 per cavan, which was about the top
of the market for the season, provided they would wait for
payment until December. The trial judge found that no such
promise had been given; and the incredulity of the court upon
this point seems to us to be justified. A careful examination of
the proof, however, leads us to the conclusion that the plaintiffs
did, some time in the early part of August, 1920, make demand
upon the defendant for a settlement, which he evaded or
postponed leaving the exact amount due to the plaintiffs
undetermined.
It should be stated that the palay in question was place by the
plaintiffs in the defendant's mill with the understanding that the
defendant was at liberty to convert it into rice and dispose of it
at his pleasure. The mill was actively running during the entire
season, and as palay was daily coming in from many
customers and as rice was being constantly shipped by the
defendant to Manila, or other rice markets, it was impossible to
keep the plaintiffs' palay segregated. In fact the defendant
admits that the plaintiffs' palay was mixed with that of others. In
view of the nature of the defendant's activities and the way in
which the palay was handled in the defendant's mill, it is quite
certain that all of the plaintiffs' palay, which was put in before
June 1, 1920, been milled and disposed of long prior to the fire
of January 17, 1921. Furthermore, the proof shows that when
the fire occurred there could not have been more than about
360 cavans of palay in the mill, none of which by any
reasonable probability could have been any part of the palay
delivered by the plaintiffs. Considering the fact that the
defendant had thus milled and doubtless sold the plaintiffs'
palay prior to the date of the fire, it result that he is bound to
account for its value, and his liability was not extinguished by
the occurence of the fire. In the briefs before us it seems to
have been assumed by the opposing attorneys that in order for
the plaintiffs to recover, it is necessary that they should be able
to establish that the plaintiffs' palay was delivered in the

character of a sale, and that if, on the contrary, the defendant
should prove that the delivery was made in the character of
deposit, the defendant should be absolved. But the case does
not depend precisely upon this explicit alternative; for even
supposing that the palay may have been delivered in the
character of deposit, subject to future sale or withdrawal at
plaintiffs' election, nevertheless if it was understood that the
defendant might mill the palay and he has in fact appropriated
it to his own use, he is of course bound to account for its value.
Under article 1768 of the Civil Code, when the depository has
permission to make use of the thing deposited, the contract
loses the character of mere deposit and becomes a loan or
a commodatum; and of course by appropriating the thing, the
bailee becomes responsible for its value. In this connection we
wholly reject the defendant's pretense that the palay delivered
by the plaintiffs or any part of it was actually consumed in the
fire of January, 1921. Nor is the liability of the defendant in any
wise affected by the circumstance that, by a custom prevailing
among rice millers in this country, persons placing palay with
them without special agreement as to price are at liberty to
withdraw it later, proper allowance being made for storage and
shrinkage, a thing that is sometimes done, though rarely.
In view of what has been said it becomes necessary to
discover the price which the defendant should be required to
pay for the plaintiffs' palay. Upon this point the trial judge fixed
upon P6.15 per cavan; and although we are not exactly in
agreement with him as to the propriety of the method by which
he arrived at this figure, we are nevertheless of the opinion
that, all things considered, the result is approximately correct. It
appears that the price of palay during the months of April, May,
and June, 1920, had been excessively high in the Philippine
Islands and even prior to that period the Government of the
Philippine Islands had been attempting to hold the price in
check by executive regulation. The highest point was touched
in this season was apparently about P8.50 per cavan, but the
market began to sag in May or June and presently entered
upon a precipitate decline. As we have already stated, the
plaintiffs made demand upon the defendant for settlement in
the early part of August; and, so far as we are able to judge
from the proof, the price of P6.15 per cavan, fixed by the trial
court, is about the price at which the defendant should be
required to settle as of that date. It was the date of the demand
of the plaintiffs for settlement that determined the price to be
paid by the defendant, and this is true whether the palay was
delivered in the character of sale with price undetermined or in
the character of deposit subject to use by the defendant. It
results that the plaintiffs are respectively entitle to recover the
value of the palay which they had placed with the defendant
during the period referred to, with interest from the date of the
filing of their several complaints.
As already stated, the trial court found that at the time of the
fire there were about 360 cavans of palay in the mill and that
this palay was destroyed. His Honor assumed that this was
part of the palay delivered by the plaintiffs, and he held that the
defendant should be credited with said amount. His Honor
therefore deducted from the claims of the plaintiffs their
respective proportionate shares of this amount of palay. We
are unable to see the propriety of this feature of the decision.
There were many customers of the defendant's rice mill who
10
had placed their palay with the defendant under the same
conditions as the plaintiffs, and nothing can be more certain
than that the palay which was burned did not belong to the
plaintiffs. That palay without a doubt had long been sold and
marketed. The assignments of error of each of the plaintiffs-
appellants in which this feature of the decision is attacked are
therefore well taken; and the appealed judgments must be
modified by eliminating the deductions which the trial court
allowed from the plaintiffs' claims.
The trial judge also allowed a deduction from the claim of the
plaintiff Guillermo Baron of 167 cavans of palay, as indicated in
Exhibit 12, 13, 14, and 16. This was also erroneous. These
exhibits relate to transactions that occurred nearly two years
after the transactions with which we are here concerned, and
they were offered in evidence merely to show the character of
subsequent transactions between the parties, it appearing that
at the time said exhibits came into existence the defendant had
reconstructed his mill and that business relations with
Guillermo Baron had been resumed. The transactions shown
by these exhibits (which relate to palay withdrawn by the
plaintiff from the defendant's mill) were not made the subject of
controversy in either the complaint or the cross-complaint of
the defendant in the second case. They therefore should not
have been taken into account as a credit in favor of the
defendant. Said credit must therefore be likewise of course be
without prejudice to any proper adjustment of the rights of the
parties with respect to these subsequent transactions that they
have heretofore or may hereafter effect.
The preceding discussion disposes of all vital contentions
relative to the liability of the defendant upon the causes of
action stated in the complaints. We proceed therefore now to
consider the question of the liability of the plaintiff Guillermo
Baron upon the cross-complaint of Pablo David in case R. G.
No. 26949. In this cross-action the defendant seek, as the
stated in the third paragraph of this opinion, to recover
damages for the wrongful suing out of an attachment by the
plaintiff and the levy of the same upon the defendant's rice mill.
It appears that about two and one-half months after said action
was begun, the plaintiff, Guillermo Baron, asked for an
attachment to be issued against the property of the defendant;
and to procure the issuance of said writ the plaintiff made
affidavit to the effect that the defendant was disposing, or
attempting the plaintiff. Upon this affidavit an attachment was
issued as prayed, and on March 27, 1924, it was levied upon
the defendant's rice mill, and other property, real and
personal. 1awph!l.net
Upon attaching the property the sheriff closed the mill and
placed it in the care of a deputy. Operations were not resumed
until September 13, 1924, when the attachment was dissolved
by an order of the court and the defendant was permitted to
resume control. At the time the attachment was levied there
were, in the bodega, more than 20,000 cavans of palay
belonging to persons who held receipts therefor; and in order
to get this grain away from the sheriff, twenty-four of the
depositors found it necessary to submit third-party claims to the
sheriff. When these claims were put in the sheriff notified the
plaintiff that a bond in the amount of P50,000 must be given,
otherwise the grain would be released. The plaintiff, being

unable or unwilling to give this bond, the sheriff surrendered
the palay to the claimants; but the attachment on the rice mill
was maintained until September 13, as above stated, covering
a period of one hundred seventy days during which the mill
was idle. The ground upon which the attachment was based,
as set forth in the plaintiff's affidavit was that the defendant was
disposing or attempting to dispose of his property for the
purpose of defrauding the plaintiff. That this allegation was
false is clearly apparent, and not a word of proof has been
submitted in support of the assertion. On the contrary, the
defendant testified that at the time this attachment was secured
he was solvent and could have paid his indebtedness to the
plaintiff if judgment had been rendered against him in ordinary
course. His financial conditions was of course well known to
the plaintiff, who is his uncle. The defendant also states that he
had not conveyed away any of his property, nor had intended
to do so, for the purpose of defrauding the plaintiff. We have
before us therefore a case of a baseless attachment, recklessly
sued out upon a false affidavit and levied upon the defendant's
property to his great and needless damage. That the act of the
plaintiff in suing out the writ was wholly unjustifiable is perhaps
also indicated in the circumstance that the attachment was
finally dissolved upon the motion of the plaintiff himself.
The defendant testified that his mill was accustomed to clean
from 400 to 450 cavans of palay per day, producing 225
cavans of rice of 57 kilos each. The price charged for cleaning
each cavan rice was 30 centavos. The defendant also stated
that the expense of running the mill per day was from P18 to
P25, and that the net profit per day on the mill was more than
P40. As the mill was not accustomed to run on Sundays and
holiday, we estimate that the defendant lost the profit that
would have been earned on not less than one hundred forty
work days. Figuring his profits at P40 per day, which would
appear to be a conservative estimate, the actual net loss
resulting from his failure to operate the mill during the time
stated could not have been less than P5,600. The
reasonableness of these figures is also indicated in the fact
that the twenty-four customers who intervened with third-party
claims took out of the camarin 20,000 cavans of palay,
practically all of which, in the ordinary course of events, would
have been milled in this plant by the defendant. And of course
other grain would have found its way to this mill if it had
remained open during the one hundred forty days when it was
closed.
But this is not all. When the attachment was dissolved and the
mill again opened, the defendant found that his customers had
become scattered and could not be easily gotten back. So
slow, indeed, was his patronage in returning that during the
remainder of the year 1924 the defendant was able to mill
scarcely more than the grain belonging to himself and his
brothers; and even after the next season opened many of his
old customers did not return. Several of these individuals,
testifying as witnesses in this case, stated that, owing to the
unpleasant experience which they had in getting back their
grain from the sheriff to the mill of the defendant, though they
had previously had much confidence in him.
As against the defendant's proof showing the facts above
stated the plaintiff submitted no evidence whatever. We are
11
therefore constrained to hold that the defendant was damaged
by the attachment to the extent of P5,600, in profits lost by the
closure of the mill, and to the extent of P1,400 for injury to the
good-will of his business, making a total of P7,000. For this
amount the defendant must recover judgment on his cross-
complaint.
The trial court, in dismissing the defendant's cross-complaint
for damages resulting from the wrongful suing out of the
attachment, suggested that the closure of the rice mill was a
mere act of the sheriff for which the plaintiff was not
responsible and that the defendant might have been permitted
by the sheriff to continue running the mill if he had applied to
the sheriff for permission to operate it. This singular suggestion
will not bear a moment's criticism. It was of course the duty of
the sheriff, in levying the attachment, to take the attached
property into his possession, and the closure of the mill was a
natural, and even necessary, consequence of the attachment.
For the damage thus inflicted upon the defendant the plaintiff is
undoubtedly responsible.
One feature of the cross-complaint consist in the claim of the
defendant (cross-complaint) for the sum of P20,000 as
damages caused to the defendant by the false and alleged
malicious statements contained in the affidavit upon which the
attachment was procured. The additional sum of P5,000 is also
claimed as exemplary damages. It is clear that with respect to
these damages the cross-action cannot be maintained, for the
reason that the affidavit in question was used in course of a
legal proceeding for the purpose of obtaining a legal remedy,
and it is therefore privileged. But though the affidavit is not
actionable as a libelous publication, this fact in no obstacle to
the maintenance of an action to recover the damage resulting
from the levy of the attachment.
Before closing this opinion a word should be said upon the
point raised in the first assignment of error of Pablo David as
defendant in case R. G. No. 26949. In this connection it
appears that the deposition of Guillermo Baron was presented
in court as evidence and was admitted as an exhibit, without
being actually read to the court. It is supposed in the
assignment of error now under consideration that the
deposition is not available as evidence to the plaintiff because
it was not actually read out in court. This connection is not well
founded. It is true that in section 364 of the Code of Civil
Procedure it is said that a deposition, once taken, may be read
by either party and will then be deemed the evidence of the
party reading it. The use of the word "read" in this section finds
its explanation of course in the American practice of trying
cases for the most part before juries. When a case is thus tried
the actual reading of the deposition is necessary in order that
the jurymen may become acquainted with its contents. But in
courts of equity, and in all courts where judges have the
evidence before them for perusal at their pleasure, it is not
necessary that the deposition should be actually read when
presented as evidence.
From what has been said it result that judgment of the court
below must be modified with respect to the amounts
recoverable by the respective plaintiffs in the two actions R. G.
Nos. 26948 and 26949 and must be reversed in respect to the
disposition of the cross-complaint interposed by the defendant

in case R. G. No. 26949, with the following result: In case R. G.
No. 26948 the plaintiff Silvestra Baron will recover of the Pablo
David the sum of P6,227.24, with interest from November 21,
1923, the date of the filing of her complaint, and with costs. In
case R. G. No. 26949 the plaintiff Guillermo Baron will recover
of the defendant Pablo David the sum of P8,669.75, with
interest from January 9, 1924. In the same case the defendant
Pablo David, as plaintiff in the cross-complaint, will recover of
Guillermo Baron the sum of P7,000, without costs. So ordered.
G.R. No. L-32778 November 14, 1930
Involuntary insolvency of Mariano Velasco and Co., et al.
COMPAÑIA AGRICOLA DE ULTRAMAR, claimant-appellee,
vs.
VICENTE NEPOMUCENO, assignee-appellant.
OSTRAND, J.:
It appears from the record that on March 17, 1927, the
registered partnerships, Mariano Velasco & Co., Mariano
Velasco, Sons, & Co., and Mariano Velasco & Co., Inc., were,
on petition of the creditors, declared insolvent by the Court of
First Instance of Manila.
On the 16th day of April, 1927, the Compania Agricola de
Ultramar filed a claim against one of the insolvents Mariano
Velasco & Co., claiming the sum of P10,000, with the agreed
interest thereon at the rate of 6 per cent per annum from April
5, 1918, until its full payment was a deposit with said Mariano
Velasco & Co. and asked the court to declare it a preferred
claim.
The assignee of the insolvency answered the claim by
interposing a general denial. The claim was thereupon referred
by the court to a Commissioner to receive the evidence, and on
September 23, 1929, the court rendered a decision declaring
that the alleged deposit was a preferred claim for the sum
mentioned, with interest at 6 per cent per annum from April 5,
1918, until paid. From this decision the assignee appealed.
The evidence presented by the claimant Compania Agricola de
Ultramar consisted of a receipt in writing, and the testimony of
Jose Velasco who was manager of Mariano Velasco & Co. at
the time the note was executed. The receipt reads as follow
(translation):
MANILA, P. I., April 5, 1918.
Received from the "Compania Agricola de Ultramar" the sum of
ten thousand Philippine pesos as a deposit at the interest of six
per cent annually, for the term of three months from date.
In witness thereof, I sign the present.
MARIANO VELASCO & CO.
By (Sgd.) JOSE VELASCO
Manager.
P10,000.00.
In his testimony, Jose Velasco stated that his signature on the
receipt was authentic and that he received the said sum of
12
P10,000 from the appellee and deposited it with the bank in the
current account of Mariano Velasco & Co.
In our opinion the court below erred in finding that the claim of
the appellee should be considered a deposit and a preferred
claim. In the case of Gavieres vs. De Tavera (1 Phil., 17), very
similar to the present case, this court held that the transaction
therein involved was a loan and not a deposit. The facts of the
case were that in 1859 Ignacia de Gorricho delivered P3,000 to
Felix Pardo de Tavera. The agreement between them read as
follows (translation):
Received of Señorita Ignacia de Gorricho the sum of 3,000
pesos, gold (3,000 pesos), as a deposit payable on two
months' notice in advance, with interest at 6 percent per
annum with a hypothecation of the goods now owned by me or
which may be owned hereafter, as security of the payment.
In witness whereof I sign in Binondo, January 31, 1859.
FELIX PARDO DE TAVERA
After the death of both parties, Gavieres, as plaintiff and
successor in interest of the deceased Ignacia de Gorricho,
brought the action against Trinidad H. Pardo de Tavera, the
successor in interest of the deceased Felix Pardo de Tavera,
for the collection of the sum of P1,423.75, the remaining
portion of the 3,000 pesos. The plaintiff Gavieres alleged that
the money was delivered to Felix Pardo de Tavera as a
deposit, but the defendant insisted that the agreement above
quoted was not a contract of deposit but one of loan. This court
said:
Although in the document in question a deposit is spoken of,
nevertheless from an examination of the entire document it
clearly appears that the contract was a loan and that such was
the intention of the parties. It is unnecessary to recur to the
cannons of interpretation to arrive at this conclusion. The
obligation of the depository to pay interest at the rate of 6 per
cent to the depositor suffices to cause the obligation to be
considered as a loan and makes it likewise evident that it was
the intention of the parties that the depository should have the
right to make use of the amount deposited, since it was
stipulated that the amount could be collected after notice of two
months in advance. Such being the case, the contract lost the
character of a deposit and acquired that of a loan. (Art. 1768,
Civil Code.)
In the case of Javellana vs. Lim (11 Phil., 141) this court,
speaking through Justice Torres said:
Authority from the court having been previously obtained, the
complaint was amended on the 10th of January, 1907; it was
then alleged, that on the 26th of May, 1897, the defendants
executed and subscribed a document in favor of the plaintiff
reading as follows:
We have received from Angel Javellana, as a deposit without
interest, the sum of two thousand six hundred and eighty-six
pesos and fifty-eight cents of pesos fuertes, which we will
return to the said gentleman, jointly and severally on the 20th
of January, 1898. — Jaro, 26th of May 1879. — Signed: JOSE
LIM. — Signed: CEFERINO DOMINGO LIM.

That, when the obligation became due, the defendants begged
the plaintiff for an extension of time for the payment thereof
binding themselves to pay interest at the rate of 15 per cent on
the amount of their indebtedness, to which the plaintiff
acceded; that on the 15th of May, 1902, the debtors paid on
account of interest due the sum of 1,000 pesos, with the
exception of which they had not paid any other sum on account
of either capital or interest, notwithstanding the requests made
by the plaintiff, who had thereby been subjected to loss and
damages.
xxx xxx xxx
The document of indebtedness inserted in the complaint states
that the plaintiff left on deposit with the defendants a given sum
of money which they were jointly and severally obliged to
return on a certain date fixed in the document; but that,
nevertheless, when the document appearing as Exhibit 2,
written in the Visayan dialect and followed by a translation into
Spanish was executed, it was acknowledged, at the date
thereof, the 15th of November, 1902 that the amount deposited
had not yet been returned to the creditor, whereby he was
subjected to losses and damages amounting to 830 pesos
since the 20th of January, 1898, when the return was again
stipulated with the further agreement that the amount
deposited should bear interest at the rate of 15 per cent per
annum from the aforesaid date of January 20, and that the
1,000 pesos paid to the depositor on the 15th of May, 1900,
according to the receipt issued by him to the debtors, would be
included, and that the said rate of interest would obtain until the
debtors paid the creditor the said amount in full. In this second
document the contract between the parties, which is a real loan
of money with interest, appears perfectly defined,
notwithstanding the fact that in the original document executed
by the debtors on the 26th of May, 1897, it is called a deposit;
so that when they bound themselves jointly and severally to
refund the sum of 2,686.58 pesos to the depositor, Javellana,
they did not engage to return the same coins received and of
which the amount deposited consisted, and they could have
accomplished the return agreed upon by the delivery of a sum
equal to the one received by them. For this reason it must be
understood that the debtors were lawfully authorized to make
use of the amount deposited, which they have done, as
subsequently shown when asking for an extension of the time
for the return thereof, inasmuch as, acknowledging that they
have subjected the lender, their creditor, to losses and
damages for not complying with what had been stipulated, and
being conscious that they had used, for their own profit and
gain, the money that they received apparently as a deposit,
they engaged to pay interest to the creditor from the date
named until the time when the refund should be made. Such
conduct on the part of the debtors is unquestionable evidence
that the transaction entered in to between the interested parties
was not a deposit, but a real contract of loan.
Article 1767 of the Civil Code provides that —
"The depository cannot make use of the thing deposited
without the express permission of the depositor."
"Otherwise he shall be liable for losses and damages."
13
Article 1768 also provides that —
"When the depository has permission to make use of the thing
deposited, the contract loses the character of a deposit and
becomes a loan or bailment."
"The permission not be presumed, and its existence must be
proven."
xxx xxx xxx
Moreover, for the reasons above set forth it may, as a matter of
course, be inferred that there was no renewal of the contract of
deposit converted into a loan, because, as has already been
stated, the defendants received said amount by virtue of a real
loan contract under the name of a deposit, since the so-called
bailees were forthwith authorized to dispose of the amount
deposited. This they have done, as has been clearly
shown.lawphil.net
The two cases quoted are sufficient to show that the ten
thousand pesos delivered by the appellee to Mariano Velasco
& Co. cannot de regarded as a technical deposit. But the
appellee argues that it is at least an "irregular deposit." This
argument is, we think, sufficiently answered in the case of
Rogers vs. Smith, Bell & Co. (10 Phil., 319). There this court
said:
. . . Manresa, in his Commentaries on the Civil Code (vol. 11, p.
664), states that there are three points of difference between a
loan and an irregular deposit. The first difference which he
points out consists in the fact that in an irregular deposit the
only benefit is that which accrues to the depositor, while in a
loan the essential cause for the transaction is the necessity of
the borrower. The contract in question does not fulfill this
requirement of an irregular deposit. It is very apparent that it
was not for the sole benefit of Rogers. It, like any other loan of
money, was for the benefit of both parties. The benefit which
Smith, Bell & Co. received was the use of the money; the
benefit which Rogers received was the interest on his money.
In the letter in which Smith, Bell & Co. on the 30th of June,
1888, notified the plaintiff of the reduction of the interest, they
said: "We call your attention to this matter in order that you
may if you think best employ your money in some other place."
Nor does the contract in question fulfill the third requisite
indicated by Manresa, which is, that in an irregular deposit, the
depositor can demand the return of the article at any time,
while a lender is bound by the provisions of the contract and
cannot seek restitution until the time for payment, as provided
in the contract, has arisen. It is apparent from the terms of this
documents that the plaintiff could not demand his money at any
time. He was bound to give notice of his desire for its return
and then to wait for six months before he could insist upon
payment.
In the present case the transaction in question was clearly not
for the sole benefit of the Compania Agricola de Ultramar; it
was evidently for the benefit of both parties. Neither could the
alleged depositor demand payment until the expiration of the
term of three months.

For the reasons stated, the appealed judgment is reversed,
and we hold that the transaction in question must be regarded
as a loan, without preference. Without costs. So ordered.
G.R. No. L-60033 April 4, 1984
TEOFISTO GUINGONA, JR., ANTONIO I. MARTIN, and
TERESITA SANTOS, petitioners,
vs.
THE CITY FISCAL OF MANILA, HON. JOSE B.
FLAMINIANO, ASST. CITY FISCAL FELIZARDO N. LOTA
and CLEMENT DAVID, respondents.
MAKASIAR, Actg. C.J.:
This is a petition for prohibition and injunction with a prayer for
the immediate issuance of restraining order and/or writ of
preliminary injunction filed by petitioners on March 26, 1982.
On March 31, 1982, by virtue of a court resolution issued by
this Court on the same date, a temporary restraining order was
duly issued ordering the respondents, their officers, agents,
representatives and/or person or persons acting upon their
(respondents') orders or in their place or stead to refrain from
proceeding with the preliminary investigation in Case No.
8131938 of the Office of the City Fiscal of Manila (pp. 47-48,
rec.). On January 24, 1983, private respondent Clement David
filed a motion to lift restraining order which was denied in the
resolution of this Court dated May 18, 1983.
As can be gleaned from the above, the instant petition seeks to
prohibit public respondents from proceeding with the
preliminary investigation of I.S. No. 81-31938, in which
petitioners were charged by private respondent Clement David,
with estafa and violation of Central Bank Circular No. 364 and
related regulations regarding foreign exchange transactions
principally, on the ground of lack of jurisdiction in that the
allegations of the charged, as well as the testimony of private
respondent's principal witness and the evidence through said
witness, showed that petitioners' obligation is civil in nature.
For purposes of brevity, We hereby adopt the antecedent facts
narrated by the Solicitor General in its Comment dated June
28,1982, as follows:têñ.£îhqwâ£
On December 23,1981, private respondent David filed I.S. No.
81-31938 in the Office of the City Fiscal of Manila, which case
was assigned to respondent Lota for preliminary investigation
(Petition, p. 8).
In I.S. No. 81-31938, David charged petitioners (together with
one Robert Marshall and the following directors of the Nation
Savings and Loan Association, Inc., namely Homero Gonzales,
Juan Merino, Flavio Macasaet, Victor Gomez, Jr., Perfecto
Manalac, Jaime V. Paz, Paulino B. Dionisio, and one John
Doe) with estafa and violation of Central Bank Circular No. 364
and related Central Bank regulations on foreign exchange
transactions, allegedly committed as follows (Petition, Annex
"A"):têñ.£îhqwâ£
"From March 20, 1979 to March, 1981, David invested with the
Nation Savings and Loan Association, (hereinafter called
NSLA) the sum of P1,145,546.20 on nine deposits, P13,531.94
14
on savings account deposits (jointly with his sister, Denise
Kuhne), US$10,000.00 on time deposit, US$15,000.00 under a
receipt and guarantee of payment and US$50,000.00 under a
receipt dated June 8, 1980 (au jointly with Denise Kuhne), that
David was induced into making the aforestated investments by
Robert Marshall an Australian national who was allegedly a
close associate of petitioner Guingona Jr., then NSLA
President, petitioner Martin, then NSLA Executive Vice-
President of NSLA and petitioner Santos, then NSLA General
Manager; that on March 21, 1981 N LA was placed under
receivership by the Central Bank, so that David filed claims
therewith for his investments and those of his sister; that on
July 22, 1981 David received a report from the Central Bank
that only P305,821.92 of those investments were entered in the
records of NSLA; that, therefore, the respondents in I.S. No.
81-31938 misappropriated the balance of the investments, at
the same time violating Central Bank Circular No. 364 and
related Central Bank regulations on foreign exchange
transactions; that after demands, petitioner Guingona Jr. paid
only P200,000.00, thereby reducing the amounts
misappropriated to P959,078.14 and US$75,000.00."
Petitioners, Martin and Santos, filed a joint counter-affidavit
(Petition, Annex' B') in which they stated the following.têñ.
£îhqwâ£
"That Martin became President of NSLA in March 1978 (after
the resignation of Guingona, Jr.) and served as such until
October 30, 1980, while Santos was General Manager up to
November 1980; that because NSLA was urgently in need of
funds and at David's insistence, his investments were treated
as special- accounts with interest above the legal rate, an
recorded in separate confidential documents only a portion of
which were to be reported because he did not want the
Australian government to tax his total earnings (nor) to know
his total investments; that all transactions with David were
recorded except the sum of US$15,000.00 which was a
personal loan of Santos; that David's check for US$50,000.00
was cleared through Guingona, Jr.'s dollar account because
NSLA did not have one, that a draft of US$30,000.00 was
placed in the name of one Paz Roces because of a pending
transaction with her; that the Philippine Deposit Insurance
Corporation had already reimbursed David within the legal
limits; that majority of the stockholders of NSLA had filed
Special Proceedings No. 82-1695 in the Court of First Instance
to contest its (NSLA's) closure; that after NSLA was placed
under receivership, Martin executed a promissory note in
David's favor and caused the transfer to him of a nine and on
behalf (9 1/2) carat diamond ring with a net value of
P510,000.00; and, that the liabilities of NSLA to David were
civil in nature."
Petitioner, Guingona, Jr., in his counter-affidavit (Petition,
Annex' C') stated the following:têñ.£îhqwâ£
"That he had no hand whatsoever in the transactions between
David and NSLA since he (Guingona Jr.) had resigned as
NSLA president in March 1978, or prior to those transactions;
that he assumed a portion o; the liabilities of NSLA to David
because of the latter's insistence that he placed his
investments with NSLA because of his faith in Guingona, Jr.;
that in a Promissory Note dated June 17, 1981 (Petition, Annex

"D") he (Guingona, Jr.) bound himself to pay David the sums of
P668.307.01 and US$37,500.00 in stated installments; that he
(Guingona, Jr.) secured payment of those amounts with
second mortgages over two (2) parcels of land under a deed of
Second Real Estate Mortgage (Petition, Annex "E") in which it
was provided that the mortgage over one (1) parcel shall be
cancelled upon payment of one-half of the obligation to David;
that he (Guingona, Jr.) paid P200,000.00 and tendered another
P300,000.00 which David refused to accept, hence, he
(Guingona, Jr.) filed Civil Case No. Q-33865 in the Court of
First Instance of Rizal at Quezon City, to effect the release of
the mortgage over one (1) of the two parcels of land conveyed
to David under second mortgages."
At the inception of the preliminary investigation before
respondent Lota, petitioners moved to dismiss the charges
against them for lack of jurisdiction because David's claims
allegedly comprised a purely civil obligation which was itself
novated. Fiscal Lota denied the motion to dismiss (Petition, p.
8).
But, after the presentation of David's principal witness,
petitioners filed the instant petition because: (a) the production
of the Promisory Notes, Banker's Acceptance, Certificates of
Time Deposits and Savings Account allegedly showed that the
transactions between David and NSLA were simple loans, i.e.,
civil obligations on the part of NSLA which were novated when
Guingona, Jr. and Martin assumed them; and (b) David's
principal witness allegedly testified that the duplicate originals
of the aforesaid instruments of indebtedness were all on file
with NSLA, contrary to David's claim that some of his
investments were not record (Petition, pp. 8-9).
Petitioners alleged that they did not exhaust available
administrative remedies because to do so would be futile
(Petition, p. 9) [pp. 153-157, rec.].
As correctly pointed out by the Solicitor General, the sole issue
for resolution is whether public respondents acted without
jurisdiction when they investigated the charges (estafa and
violation of CB Circular No. 364 and related regulations
regarding foreign exchange transactions) subject matter of I.S.
No. 81-31938.
There is merit in the contention of the petitioners that their
liability is civil in nature and therefore, public respondents have
no jurisdiction over the charge of estafa.
A casual perusal of the December 23, 1981 affidavit. complaint
filed in the Office of the City Fiscal of Manila by private
respondent David against petitioners Teopisto Guingona, Jr.,
Antonio I. Martin and Teresita G. Santos, together with one
Robert Marshall and the other directors of the Nation Savings
and Loan Association, will show that from March 20, 1979 to
March, 1981, private respondent David, together with his sister,
Denise Kuhne, invested with the Nation Savings and Loan
Association the sum of P1,145,546.20 on time deposits
covered by Bankers Acceptances and Certificates of Time
Deposits and the sum of P13,531.94 on savings account
deposits covered by passbook nos. 6-632 and 29-742, or a
total of P1,159,078.14 (pp. 15-16, roc.). It appears further that
private respondent David, together with his sister, made
15
investments in the aforesaid bank in the amount of
US$75,000.00 (p. 17, rec.).
Moreover, the records reveal that when the aforesaid bank was
placed under receivership on March 21, 1981, petitioners
Guingona and Martin, upon the request of private respondent
David, assumed the obligation of the bank to private
respondent David by executing on June 17, 1981 a joint
promissory note in favor of private respondent acknowledging
an indebtedness of Pl,336,614.02 and US$75,000.00 (p. 80,
rec.). This promissory note was based on the statement of
account as of June 30, 1981 prepared by the private
respondent (p. 81, rec.). The amount of indebtedness assumed
appears to be bigger than the original claim because of the
added interest and the inclusion of other deposits of private
respondent's sister in the amount of P116,613.20.
Thereafter, or on July 17, 1981, petitioners Guingona and
Martin agreed to divide the said indebtedness, and petitioner
Guingona executed another promissory note antedated to June
17, 1981 whereby he personally acknowledged an
indebtedness of P668,307.01 (1/2 of P1,336,614.02) and
US$37,500.00 (1/2 of US$75,000.00) in favor of private
respondent (p. 25, rec.). The aforesaid promissory notes were
executed as a result of deposits made by Clement David and
Denise Kuhne with the Nation Savings and Loan Association.
Furthermore, the various pleadings and documents filed by
private respondent David, before this Court indisputably show
that he has indeed invested his money on time and savings
deposits with the Nation Savings and Loan Association.
It must be pointed out that when private respondent David
invested his money on nine. and savings deposits with the
aforesaid bank, the contract that was perfected was a contract
of simple loan or mutuum and not a contract of deposit. Thus,
Article 1980 of the New Civil Code provides that:têñ.£îhqwâ£
Article 1980. Fixed, savings, and current deposits of-money in
banks and similar institutions shall be governed by the
provisions concerning simple loan.
In the case of Central Bank of the Philippines vs. Morfe (63
SCRA 114,119 [1975], We said:têñ.£îhqwâ£
It should be noted that fixed, savings, and current deposits of
money in banks and similar institutions are hat true deposits.
are considered simple loans and, as such, are not preferred
credits (Art. 1980 Civil Code; In re Liquidation of Mercantile
Batik of China Tan Tiong Tick vs. American Apothecaries Co.,
66 Phil 414; Pacific Coast Biscuit Co. vs. Chinese Grocers
Association 65 Phil. 375; Fletcher American National Bank vs.
Ang Chong UM 66 PWL 385; Pacific Commercial Co. vs.
American Apothecaries Co., 65 PhiL 429; Gopoco Grocery vs.
Pacific Coast Biscuit CO.,65 Phil. 443)."
This Court also declared in the recent case of Serrano vs.
Central Bank of the Philippines (96 SCRA 102 [1980]) that:têñ.
£îhqwâ£
Bank deposits are in the nature of irregular deposits. They are
really 'loans because they earn interest. All kinds of bank
deposits, whether fixed, savings, or current are to be treated as

loans and are to be covered by the law on loans (Art. 1980
Civil Code Gullas vs. Phil. National Bank, 62 Phil.
519). Current and saving deposits, are loans to a bank
because it can use the same. The petitioner here in making
time deposits that earn interests will respondent Overseas
Bank of Manila was in reality a creditor of the respondent Bank
and not a depositor. The respondent Bank was in turn a debtor
of petitioner. Failure of the respondent Bank to honor the time
deposit is failure to pay its obligation as a debtor and not a
breach of trust arising from a depositary's failure to return the
subject matter of the deposit(Emphasis supplied).
Hence, the relationship between the private respondent and
the Nation Savings and Loan Association is that of creditor
and debtor; consequently, the ownership of the amount
deposited was transmitted to the Bank upon the perfection of
the contract and it can make use of the amount deposited for
its banking operations, such as to pay interests on deposits
and to pay withdrawals. While the Bank has the obligation to
return the amount deposited, it has, however, no obligation to
return or deliver the same money that was deposited. And, the
failure of the Bank to return the amount deposited will not
constitute estafa through misappropriation punishable under
Article 315, par. l(b) of the Revised Penal Code, but it will only
give rise to civil liability over which the public respondents have
no- jurisdiction.
WE have already laid down the rule that:têñ.£îhqwâ£
In order that a person can be convicted under the above-
quoted provision, it must be proven that he has the obligation
to deliver or return the some money, goods or personal
property that he received Petitioners had no such obligation to
return the same money, i.e., the bills or coins, which they
received from private respondents. This is so because as
clearly as stated in criminal complaints, the related civil
complaints and the supporting sworn statements, the sums of
money that petitioners received were loans.
The nature of simple loan is defined in Articles 1933 and 1953
of the Civil Code.têñ.£îhqwâ£
"Art. 1933. — By the contract of loan, one of the parties
delivers to another, either something not consumable so that
the latter may use the same for a certain time- and return it, in
which case the contract is called a commodatum; or money
or other consumable thing, upon the condition that the same
amount of the same kind and quality shall he paid in which
case the contract is simply called a loan or mutuum.
"Commodatum is essentially gratuitous.
"Simple loan may be gratuitous or with a stipulation to pay
interest.
"In commodatum the bailor retains the ownership of the thing
loaned while in simple loan, ownership passes to the borrower.
"Art. 1953. — A person who receives a loan of money or any
other fungible thing acquires the ownership thereof, and is
bound to pay to the creditor an equal amount of the same kind
and quality."
16
It can be readily noted from the above-quoted provisions that
in simple loan (mutuum), as contrasted to commodatum the
borrower acquires ownership of the money, goods or personal
property borrowed Being the owner, the borrower can dispose
of the thing borrowed (Article 248, Civil Code) and his act will
not be considered misappropriation thereof' (Yam vs. Malik, 94
SCRA 30, 34 [1979]; Emphasis supplied).
But even granting that the failure of the bank to pay the time
and savings deposits of private respondent David would
constitute a violation of paragraph 1(b) of Article 315 of the
Revised Penal Code, nevertheless any incipient criminal
liability was deemed avoided, because when the aforesaid
bank was placed under receivership by the Central Bank,
petitioners Guingona and Martin assumed the obligation of the
bank to private respondent David, thereby resulting in the
novation of the original contractual obligation arising from
deposit into a contract of loan and converting the original trust
relation between the bank and private respondent David into
an ordinary debtor-creditor relation between the petitioners and
private respondent. Consequently, the failure of the bank or
petitioners Guingona and Martin to pay the deposits of private
respondent would not constitute a breach of trust but would
merely be a failure to pay the obligation as a debtor.
Moreover, while it is true that novation does not extinguish
criminal liability, it may however, prevent the rise of criminal
liability as long as it occurs prior to the filing of the criminal
information in court. Thus, in Gonzales vs. Serrano ( 25 SCRA
64, 69 [1968]) We held that:têñ.£îhqwâ£
As pointed out in People vs. Nery, novation prior to the filing of
the criminal information — as in the case at bar — may convert
the relation between the parties into an ordinary creditor-debtor
relation, and place the complainant in estoppel to insist on the
original transaction or "cast doubt on the true nature" thereof.
Again, in the latest case of Ong vs. Court of Appeals (L-58476,
124 SCRA 578, 580-581 [1983] ), this Court reiterated the
ruling in People vs. Nery ( 10 SCRA 244 [1964] ), declaring
that:têñ.£îhqwâ£
The novation theory may perhaps apply prior to the filling of the
criminal information in court by the state prosecutors because
up to that time the original trust relation may be converted by
the parties into an ordinary creditor-debtor situation, thereby
placing the complainant in estoppel to insist on the original
trust. But after the justice authorities have taken cognizance of
the crime and instituted action in court, the offended party may
no longer divest the prosecution of its power to exact the
criminal liability, as distinguished from the civil. The crime being
an offense against the state, only the latter can renounce it
(People vs. Gervacio, 54 Off. Gaz. 2898; People vs. Velasco,
42 Phil. 76; U.S. vs. Montanes, 8 Phil. 620).
It may be observed in this regard that novation is not one of the
means recognized by the Penal Code whereby criminal liability
can be extinguished; hence, the role of novation may only be to
either prevent the rise of criminal habihty or to cast doubt on
the true nature of the original basic transaction, whether or not
it was such that its breach would not give rise to penal
responsibility, as when money loaned is made to appear as a

deposit, or other similar disguise is resorted to (cf. Abeto vs.
People, 90 Phil. 581; U.S. vs. Villareal, 27 Phil. 481).
In the case at bar, there is no dispute that petitioners Guingona
and Martin executed a promissory note on June 17, 1981
assuming the obligation of the bank to private respondent
David; while the criminal complaint for estafa was filed on
December 23, 1981 with the Office of the City Fiscal. Hence, it
is clear that novation occurred long before the filing of the
criminal complaint with the Office of the City Fiscal.
Consequently, as aforestated, any incipient criminal liability
would be avoided but there will still be a civil liability on the part
of petitioners Guingona and Martin to pay the assumed
obligation.
Petitioners herein were likewise charged with violation of
Section 3 of Central Bank Circular No. 364 and other related
regulations regarding foreign exchange transactions by
accepting foreign currency deposit in the amount of
US$75,000.00 without authority from the Central Bank. They
contend however, that the US dollars intended by respondent
David for deposit were all converted into Philippine currency
before acceptance and deposit into Nation Savings and Loan
Association.
Petitioners' contention is worthy of behelf for the following
reasons:
1. It appears from the records that when respondent David was
about to make a deposit of bank draft issued in his name in the
amount of US$50,000.00 with the Nation Savings and Loan
Association, the same had to be cleared first and converted
into Philippine currency. Accordingly, the bank draft was
endorsed by respondent David to petitioner Guingona, who in
turn deposited it to his dollar account with the Security Bank
and Trust Company. Petitioner Guingona merely
accommodated the request of the Nation Savings and loan
Association in order to clear the bank draft through his dollar
account because the bank did not have a dollar account.
Immediately after the bank draft was cleared, petitioner
Guingona authorized Nation Savings and Loan Association to
withdraw the same in order to be utilized by the bank for its
operations.
2. It is safe to assume that the U.S. dollars were converted first
into Philippine pesos before they were accepted and deposited
in Nation Savings and Loan Association, because the bank is
presumed to have followed the ordinary course of the business
which is to accept deposits in Philippine currency only, and that
the transaction was regular and fair, in the absence of a clear
and convincing evidence to the contrary (see
paragraphs p and q, Sec. 5, Rule 131, Rules of Court).
3. Respondent David has not denied the aforesaid contention
of herein petitioners despite the fact that it was raised. in
petitioners' reply filed on May 7, 1982 to private respondent's
comment and in the July 27, 1982 reply to public respondents'
comment and reiterated in petitioners' memorandum filed on
October 30, 1982, thereby adding more support to the
conclusion that the US$75,000.00 were really converted into
Philippine currency before they were accepted and deposited
17
into Nation Savings and Loan Association. Considering that
this might adversely affect his case, respondent David should
have promptly denied petitioners' allegation.
In conclusion, considering that the liability of the petitioners is
purely civil in nature and that there is no clear showing that
they engaged in foreign exchange transactions, We hold that
the public respondents acted without jurisdiction when they
investigated the charges against the petitioners. Consequently,
public respondents should be restrained from further
proceeding with the criminal case for to allow the case to
continue, even if the petitioners could have appealed to the
Ministry of Justice, would work great injustice to petitioners and
would render meaningless the proper administration of justice.
While as a rule, the prosecution in a criminal offense cannot be
the subject of prohibition and injunction, this court has
recognized the resort to the extraordinary writs of prohibition
and injunction in extreme cases, thus:têñ.£îhqwâ£
On the issue of whether a writ of injunction can restrain the
proceedings in Criminal Case No. 3140, the general rule is that
"ordinarily, criminal prosecution may not be blocked by court
prohibition or injunction." Exceptions, however, are allowed in
the following instances:têñ.£îhqwâ£
"1. for the orderly administration of justice;
"2. to prevent the use of the strong arm of the law in an
oppressive and vindictive manner;
"3. to avoid multiplicity of actions;
"4. to afford adequate protection to constitutional rights;
"5. in proper cases, because the statute relied upon is
unconstitutional or was held invalid" ( Primicias vs. Municipality
of Urdaneta, Pangasinan, 93 SCRA 462, 469-470 [1979]; citing
Ramos vs. Torres, 25 SCRA 557 [1968]; and Hernandez vs.
Albano, 19 SCRA 95, 96 [1967]).
Likewise, in Lopez vs. The City Judge, et al. ( 18 SCRA 616,
621-622 [1966]), We held that:têñ.£îhqwâ£
The writs of certiorari and prohibition, as extraordinary legal
remedies, are in the ultimate analysis, intended to annul void
proceedings; to prevent the unlawful and oppressive exercise
of legal authority and to provide for a fair and orderly
administration of justice. Thus, in Yu Kong Eng vs. Trinidad, 47
Phil. 385, We took cognizance of a petition for certiorari and
prohibition although the accused in the case could have
appealed in due time from the order complained of, our action
in the premises being based on the public welfare policy the
advancement of public policy. In Dimayuga vs. Fajardo, 43
Phil. 304, We also admitted a petition to restrain the
prosecution of certain chiropractors although, if convicted, they
could have appealed. We gave due course to their petition for
the orderly administration of justice and to avoid possible
oppression by the strong arm of the law. And in Arevalo vs.
Nepomuceno, 63 Phil. 627, the petition for certiorari
challenging the trial court's action admitting an amended
information was sustained despite the availability of appeal at
the proper time.

WHEREFORE, THE PETITION IS HEREBY GRANTED; THE
TEMPORARY RESTRAINING ORDER PREVIOUSLY ISSUED
IS MADE PERMANENT. COSTS AGAINST THE PRIVATE
RESPONDENT. SO ORDERED.
G.R. No. 90027 March 3, 1993
CA AGRO-INDUSTRIAL DEVELOPMENT CORP., petitioner,
vs.
THE HONORABLE COURT OF APPEALS and SECURITY
BANK AND TRUST COMPANY, respondents.
DAVIDE, JR., J.:
Is the contractual relation between a commercial bank and
another party in a contract of rent of a safety deposit box with
respect to its contents placed by the latter one of bailor and
bailee or one of lessor and lessee?
This is the crux of the present controversy.
On 3 July 1979, petitioner (through its President, Sergio
Aguirre) and the spouses Ramon and Paula Pugao entered
into an agreement whereby the former purchased from the
latter two (2) parcels of land for a consideration of
P350,625.00. Of this amount, P75,725.00 was paid as
downpayment while the balance was covered by three (3)
postdated checks. Among the terms and conditions of the
agreement embodied in a Memorandum of True and Actual
Agreement of Sale of Land were that the titles to the lots shall
be transferred to the petitioner upon full payment of the
purchase price and that the owner's copies of the certificates of
titles thereto, Transfer Certificates of Title (TCT) Nos. 284655
and 292434, shall be deposited in a safety deposit box of any
bank. The same could be withdrawn only upon the joint
signatures of a representative of the petitioner and the Pugaos
upon full payment of the purchase price. Petitioner, through
Sergio Aguirre, and the Pugaos then rented Safety Deposit Box
No. 1448 of private respondent Security Bank and Trust
Company, a domestic banking corporation hereinafter referred
to as the respondent Bank. For this purpose, both signed a
contract of lease (Exhibit "2") which contains, inter alia, the
following conditions:
13. The bank is not a depositary of the contents of the safe and
it has neither the possession nor control of the same.
14. The bank has no interest whatsoever in said contents,
except herein expressly provided, and it assumes absolutely
no liability in connection therewith.1
After the execution of the contract, two (2) renter's keys were
given to the renters — one to Aguirre (for the petitioner) and
the other to the Pugaos. A guard key remained in the
possession of the respondent Bank. The safety deposit box
has two (2) keyholes, one for the guard key and the other for
the renter's key, and can be opened only with the use of both
keys. Petitioner claims that the certificates of title were placed
inside the said box.
Thereafter, a certain Mrs. Margarita Ramos offered to buy from
the petitioner the two (2) lots at a price of P225.00 per square
meter which, as petitioner alleged in its complaint, translates to
18
a profit of P100.00 per square meter or a total of P280,500.00
for the entire property. Mrs. Ramos demanded the execution of
a deed of sale which necessarily entailed the production of the
certificates of title. In view thereof, Aguirre, accompanied by the
Pugaos, then proceeded to the respondent Bank on 4 October
1979 to open the safety deposit box and get the certificates of
title. However, when opened in the presence of the Bank's
representative, the box yielded no such certificates. Because of
the delay in the reconstitution of the title, Mrs. Ramos withdrew
her earlier offer to purchase the lots; as a consequence
thereof, the petitioner allegedly failed to realize the expected
profit of P280,500.00. Hence, the latter filed on 1 September
1980 a complaint2 for damages against the respondent Bank
with the Court of First Instance (now Regional Trial Court) of
Pasig, Metro Manila which docketed the same as Civil Case
No. 38382.
In its Answer with Counterclaim,3 respondent Bank alleged that
the petitioner has no cause of action because of paragraphs 13
and 14 of the contract of lease (Exhibit "2"); corollarily, loss of
any of the items or articles contained in the box could not give
rise to an action against it. It then interposed a counterclaim for
exemplary damages as well as attorney's fees in the amount of
P20,000.00. Petitioner subsequently filed an answer to the
counterclaim.4
In due course, the trial court, now designated as Branch 161 of
the Regional Trial Court (RTC) of Pasig, Metro Manila,
rendered a decision5 adverse to the petitioner on 8 December
1986, the dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby
rendered dismissing plaintiff's complaint.
On defendant's counterclaim, judgment is hereby rendered
ordering plaintiff to pay defendant the amount of FIVE
THOUSAND (P5,000.00) PESOS as attorney's fees.
With costs against plaintiff.6
The unfavorable verdict is based on the trial court's conclusion
that under paragraphs 13 and 14 of the contract of lease, the
Bank has no liability for the loss of the certificates of title. The
court declared that the said provisions are binding on the
parties.
Its motion for reconsideration7 having been denied, petitioner
appealed from the adverse decision to the respondent Court of
Appeals which docketed the appeal as CA-G.R. CV No. 15150.
Petitioner urged the respondent Court to reverse the
challenged decision because the trial court erred in (a)
absolving the respondent Bank from liability from the loss, (b)
not declaring as null and void, for being contrary to law, public
order and public policy, the provisions in the contract for lease
of the safety deposit box absolving the Bank from any liability
for loss, (c) not concluding that in this jurisdiction, as well as
under American jurisprudence, the liability of the Bank is
settled and (d) awarding attorney's fees to the Bank and
denying the petitioner's prayer for nominal and exemplary
damages and attorney's fees.8
In its Decision promulgated on 4 July 1989,9 respondent Court
affirmed the appealed decision principally on the theory that

the contract (Exhibit "2") executed by the petitioner and
respondent Bank is in the nature of a contract of lease by virtue
of which the petitioner and its co-renter were given control over
the safety deposit box and its contents while the Bank retained
no right to open the said box because it had neither the
possession nor control over it and its contents. As such, the
contract is governed by Article 1643 of the Civil Code 10 which
provides:
Art. 1643. In the lease of things, one of the parties binds
himself to give to another the enjoyment or use of a thing for a
price certain, and for a period which may be definite or
indefinite. However, no lease for more than ninety-nine years
shall be valid.
It invoked Tolentino vs. Gonzales 11 — which held that the
owner of the property loses his control over the property leased
during the period of the contract — and Article 1975 of the Civil
Code which provides:
Art. 1975. The depositary holding certificates, bonds, securities
or instruments which earn interest shall be bound to collect the
latter when it becomes due, and to take such steps as may be
necessary in order that the securities may preserve their value
and the rights corresponding to them according to law.
The above provision shall not apply to contracts for the rent of
safety deposit boxes.
and then concluded that "[c]learly, the defendant-appellee is
not under any duty to maintain the contents of the box. The
stipulation absolving the defendant-appellee from liability is in
accordance with the nature of the contract of lease and cannot
be regarded as contrary to law, public order and public
policy." 12 The appellate court was quick to add, however, that
under the contract of lease of the safety deposit box,
respondent Bank is not completely free from liability as it may
still be made answerable in case unauthorized persons enter
into the vault area or when the rented box is forced open.
Thus, as expressly provided for in stipulation number 8 of the
contract in question:
8. The Bank shall use due diligence that no unauthorized
person shall be admitted to any rented safe and beyond this,
the Bank will not be responsible for the contents of any safe
rented from it. 13
Its motion for reconsideration 14 having been denied in the
respondent Court's Resolution of 28 August 1989, 15petitioner
took this recourse under Rule 45 of the Rules of Court and
urges Us to review and set aside the respondent Court's ruling.
Petitioner avers that both the respondent Court and the trial
court (a) did not properly and legally apply the correct law in
this case, (b) acted with grave abuse of discretion or in excess
of jurisdiction amounting to lack thereof and (c) set a precedent
that is contrary to, or is a departure from precedents adhered
to and affirmed by decisions of this Court and precepts in
American jurisprudence adopted in the Philippines. It reiterates
the arguments it had raised in its motion to reconsider the trial
court's decision, the brief submitted to the respondent Court
and the motion to reconsider the latter's decision. In a nutshell,
petitioner maintains that regardless of nomenclature, the
19
contract for the rent of the safety deposit box (Exhibit "2") is
actually a contract of deposit governed by Title XII, Book IV of
the Civil Code of the
Philippines. 16 Accordingly, it is claimed that the respondent
Bank is liable for the loss of the certificates of title pursuant to
Article 1972 of the said Code which provides:
Art. 1972. The depositary is obliged to keep the thing safely
and to return it, when required, to the depositor, or to his heirs
and successors, or to the person who may have been
designated in the contract. His responsibility, with regard to the
safekeeping and the loss of the thing, shall be governed by the
provisions of Title I of this Book.
If the deposit is gratuitous, this fact shall be taken into account
in determining the degree of care that the depositary must
observe.
Petitioner then quotes a passage from American
Jurisprudence 17 which is supposed to expound on the
prevailing rule in the United States, to wit:
The prevailing rule appears to be that where a safe-deposit
company leases a safe-deposit box or safe and the lessee
takes possession of the box or safe and places therein his
securities or other valuables, the relation of bailee and bail or is
created between the parties to the transaction as to such
securities or other valuables; the fact that the
safe-deposit company does not know, and that it is not
expected that it shall know, the character or description of the
property which is deposited in such safe-deposit box or safe
does not change that relation. That access to the contents of
the safe-deposit box can be had only by the use of a key
retained by the lessee ( whether it is the sole key or one to be
used in connection with one retained by the lessor) does not
operate to alter the foregoing rule. The argument that there is
not, in such a case, a delivery of exclusive possession and
control to the deposit company, and that therefore the situation
is entirely different from that of ordinary bailment, has been
generally rejected by the courts, usually on the ground that as
possession must be either in the depositor or in the company, it
should reasonably be considered as in the latter rather than in
the former, since the company is, by the nature of the contract,
given absolute control of access to the property, and the
depositor cannot gain access thereto without the consent and
active participation of the company. . . . (citations omitted).
and a segment from Words and Phrases 18 which states that a
contract for the rental of a bank safety deposit box in
consideration of a fixed amount at stated periods is a bailment
for hire.
Petitioner further argues that conditions 13 and 14 of the
questioned contract are contrary to law and public policy and
should be declared null and void. In support thereof, it cites
Article 1306 of the Civil Code which provides that parties to a
contract may establish such stipulations, clauses, terms and
conditions as they may deem convenient, provided they are not
contrary to law, morals, good customs, public order or public
policy.

After the respondent Bank filed its comment, this Court gave
due course to the petition and required the parties to
simultaneously submit their respective Memoranda.
The petition is partly meritorious.
We agree with the petitioner's contention that the contract for
the rent of the safety deposit box is not an ordinary contract of
lease as defined in Article 1643 of the Civil Code. However, We
do not fully subscribe to its view that the same is a contract of
deposit that is to be strictly governed by the provisions in the
Civil Code on deposit; 19 the contract in the case at bar is a
special kind of deposit. It cannot be characterized as an
ordinary contract of lease under Article 1643 because the full
and absolute possession and control of the safety deposit box
was not given to the joint renters — the petitioner and the
Pugaos. The guard key of the box remained with the
respondent Bank; without this key, neither of the renters could
open the box. On the other hand, the respondent Bank could
not likewise open the box without the renter's key. In this case,
the said key had a duplicate which was made so that both
renters could have access to the box.
Hence, the authorities cited by the respondent Court 20 on this
point do not apply. Neither could Article 1975, also relied upon
by the respondent Court, be invoked as an argument against
the deposit theory. Obviously, the first paragraph of such
provision cannot apply to a depositary of certificates, bonds,
securities or instruments which earn interest if such documents
are kept in a rented safety deposit box. It is clear that the
depositary cannot open the box without the renter being
present.
We observe, however, that the deposit theory itself does not
altogether find unanimous support even in American
jurisprudence. We agree with the petitioner that under the
latter, the prevailing rule is that the relation between a bank
renting out safe-deposit boxes and its customer with respect to
the contents of the box is that of a bail or and bailee, the
bailment being for hire and mutual benefit. 21 This is just the
prevailing view because:
There is, however, some support for the view that the
relationship in question might be more properly characterized
as that of landlord and tenant, or lessor and lessee. It has also
been suggested that it should be characterized as that of
licensor and licensee. The relation between a bank, safe-
deposit company, or storage company, and the renter of a
safe-deposit box therein, is often described as contractual,
express or implied, oral or written, in whole or in part. But there
is apparently no jurisdiction in which any rule other than that
applicable to bailments governs questions of the liability and
rights of the parties in respect of loss of the contents of safe-
deposit boxes. 22 (citations omitted)
In the context of our laws which authorize banking institutions
to rent out safety deposit boxes, it is clear that in this
jurisdiction, the prevailing rule in the United States has been
adopted. Section 72 of the General Banking Act 23pertinently
provides:
20
Sec. 72. In addition to the operations specifically authorized
elsewhere in this Act, banking institutions other than building
and loan associations may perform the following services:
(a) Receive in custody funds, documents, and valuable objects,
and rent safety deposit boxes for the safeguarding of such
effects.
xxx xxx xxx
The banks shall perform the services permitted under
subsections (a), (b) and (c) of this section as depositories or as
agents. . . . 24 (emphasis supplied)
Note that the primary function is still found within the
parameters of a contract of deposit, i.e., the receiving in
custody of funds, documents and other valuable objects for
safekeeping. The renting out of the safety deposit boxes is not
independent from, but related to or in conjunction with, this
principal function. A contract of deposit may be entered into
orally or in writing 25 and, pursuant to Article 1306 of the Civil
Code, the parties thereto may establish such stipulations,
clauses, terms and conditions as they may deem convenient,
provided they are not contrary to law, morals, good customs,
public order or public policy. The depositary's responsibility for
the safekeeping of the objects deposited in the case at bar is
governed by Title I, Book IV of the Civil Code. Accordingly, the
depositary would be liable if, in performing its obligation, it is
found guilty of fraud, negligence, delay or contravention of the
tenor of the agreement. 26 In the absence of any stipulation
prescribing the degree of diligence required, that of a good
father of a family is to be observed. 27 Hence, any stipulation
exempting the depositary from any liability arising from the loss
of the thing deposited on account of fraud, negligence or delay
would be void for being contrary to law and public policy. In the
instant case, petitioner maintains that conditions 13 and 14 of
the questioned contract of lease of the safety deposit box,
which read:
13. The bank is not a depositary of the contents of the safe and
it has neither the possession nor control of the same.
14. The bank has no interest whatsoever in said contents,
except herein expressly provided, and it assumes absolutely
no liability in connection therewith. 28
are void as they are contrary to law and public policy. We find
Ourselves in agreement with this proposition for indeed, said
provisions are inconsistent with the respondent Bank's
responsibility as a depositary under Section 72(a) of the
General Banking Act. Both exempt the latter from any liability
except as contemplated in condition 8 thereof which limits its
duty to exercise reasonable diligence only with respect to who
shall be admitted to any rented safe, to wit:
8. The Bank shall use due diligence that no unauthorized
person shall be admitted to any rented safe and beyond this,
the Bank will not be responsible for the contents of any safe
rented from it. 29
Furthermore, condition 13 stands on a wrong premise and is
contrary to the actual practice of the Bank. It is not correct to
assert that the Bank has neither the possession nor control of

the contents of the box since in fact, the safety deposit box
itself is located in its premises and is under its absolute control;
moreover, the respondent Bank keeps the guard key to the
said box. As stated earlier, renters cannot open their respective
boxes unless the Bank cooperates by presenting and using this
guard key. Clearly then, to the extent above stated, the
foregoing conditions in the contract in question are void and
ineffective. It has been said:
With respect to property deposited in a safe-deposit box by a
customer of a safe-deposit company, the parties, since the
relation is a contractual one, may by special contract define
their respective duties or provide for increasing or limiting the
liability of the deposit company, provided such contract is not in
violation of law or public policy. It must clearly appear that there
actually was such a special contract, however, in order to vary
the ordinary obligations implied by law from the relationship of
the parties; liability of the deposit company will not be enlarged
or restricted by words of doubtful meaning. The company, in
renting
safe-deposit boxes, cannot exempt itself from liability for loss of
the contents by its own fraud or negligence or that of its agents
or servants, and if a provision of the contract may be construed
as an attempt to do so, it will be held ineffective for the
purpose. Although it has been held that the lessor of a safe-
deposit box cannot limit its liability for loss of the contents
thereof through its own negligence, the view has been taken
that such a lessor may limits its liability to some extent by
agreement or stipulation. 30 (citations omitted)
Thus, we reach the same conclusion which the Court of
Appeals arrived at, that is, that the petition should be
dismissed, but on grounds quite different from those relied
upon by the Court of Appeals. In the instant case, the
respondent Bank's exoneration cannot, contrary to the holding
of the Court of Appeals, be based on or proceed from a
characterization of the impugned contract as a contract of
lease, but rather on the fact that no competent proof was
presented to show that respondent Bank was aware of the
agreement between the petitioner and the Pugaos to the effect
that the certificates of title were withdrawable from the safety
deposit box only upon both parties' joint signatures, and that no
evidence was submitted to reveal that the loss of the
certificates of title was due to the fraud or negligence of the
respondent Bank. This in turn flows from this Court's
determination that the contract involved was one of deposit.
Since both the petitioner and the Pugaos agreed that each
should have one (1) renter's key, it was obvious that either of
them could ask the Bank for access to the safety deposit box
and, with the use of such key and the Bank's own guard key,
could open the said box, without the other renter being present.
Since, however, the petitioner cannot be blamed for the filing of
the complaint and no bad faith on its part had been
established, the trial court erred in condemning the petitioner to
pay the respondent Bank attorney's fees. To this extent, the
Decision (dispositive portion) of public respondent Court of
Appeals must be modified.
WHEREFORE, the Petition for Review is partially GRANTED
by deleting the award for attorney's fees from the 4 July 1989
Decision of the respondent Court of Appeals in CA-G.R. CV
21
No. 15150. As modified, and subject to the pronouncement We
made above on the nature of the relationship between the
parties in a contract of lease of safety deposit boxes, the
dispositive portion of the said Decision is hereby AFFIRMED
and the instant Petition for Review is otherwise DENIED for
lack of merit.
No pronouncement as to costs. SO ORDERED.
G.R. No. 102970 May 13, 1993
LUZAN SIA, petitioner, vs.
COURT OF APPEALS and SECURITY BANK and TRUST
COMPANY, respondents.
DAVIDE, JR., J.:
The Decision of public respondent Court of Appeals in CA-G.R.
CV No. 26737, promulgated on 21 August 1991,1reversing and
setting aside the Decision, dated 19 February 1990, 2 of
Branch 47 of the Regional Trial Court (RTC) of Manila in Civil
Case No. 87-42601, entitled "LUZAN SIA vs. SECURITY
BANK and TRUST CO.," is challenged in this petition for
review on certiorari under Rule 45 of the Rules Court.
Civil Case No. 87-42601 is an action for damages arising out of
the destruction or loss of the stamp collection of the plaintiff
(petitioner herein) contained in Safety Deposit Box No. 54
which had been rented from the defendant pursuant to a
contract denominated as a Lease Agreement. 3 Judgment
therein was rendered in favor of the dispositive portion of which
reads:
WHEREFORE, premises considered, judgment is hereby
rendered in favor of the plaintiff and against the defendant,
Security Bank & Trust Company, ordering the defendant bank
to pay the plaintiff the sum of —
a) Twenty Thousand Pesos (P20,000.00), Philippine Currency,
as actual damages;
b) One Hundred Thousand Pesos (P100,000.00), Philippine
Currency, as moral damages; and
c) Five Thousand Pesos (P5,000.00), Philippine Currency, as
attorney's fees and legal expenses.
The counterclaim set up by the defendant are hereby
dismissed for lack of merit.
No costs.
SO ORDERED.4
The antecedent facts of the present controversy are
summarized by the public respondent in its challenged decision
as follows:
The plaintiff rented on March 22, 1985 the Safety Deposit Box
No. 54 of the defendant bank at its Binondo Branch located at
the Fookien Times Building, Soler St., Binondo, Manila wherein
he placed his collection of stamps. The said safety deposit box
leased by the plaintiff was at the bottom or at the lowest level
of the safety deposit boxes of the defendant bank at its
aforesaid Binondo Branch.

During the floods that took place in 1985 and 1986, floodwater
entered into the defendant bank's premises, seeped into the
safety deposit box leased by the plaintiff and caused,
according to the plaintiff, damage to his stamps collection. The
defendant bank rejected the plaintiff's claim for compensation
for his damaged stamps collection, so, the plaintiff instituted an
action for damages against the defendant bank.
The defendant bank denied liability for the damaged stamps
collection of the plaintiff on the basis of the "Rules and
Regulations Governing the Lease of Safe Deposit Boxes"
(Exhs. "A-1", "1-A"), particularly paragraphs 9 and 13, which
reads (sic):
"9. The liability of the Bank by reason of the lease, is limited to
the exercise of the diligence to prevent the opening of the safe
by any person other than the Renter, his authorized agent or
legal representative;
xxx xxx xxx
"13. The Bank is not a depository of the contents of the safe
and it has neither the possession nor the control of the same.
The Bank has no interest whatsoever in said contents, except
as herein provided, and it assumes absolutely no liability in
connection therewith."
The defendant bank also contended that its contract with the
plaintiff over safety deposit box No. 54 was one of lease and
not of deposit and, therefore, governed by the lease agreement
(Exhs. "A", "L") which should be the applicable law; that the
destruction of the plaintiff's stamps collection was due to a
calamity beyond obligation on its part to notify the plaintiff
about the floodwaters that inundated its premises at Binondo
branch which allegedly seeped into the safety deposit box
leased to the plaintiff.
The trial court then directed that an ocular inspection on (sic)
the contents of the safety deposit box be conducted, which was
done on December 8, 1988 by its clerk of court in the presence
of the parties and their counsels. A report thereon was then
submitted on December 12, 1988 (Records, p. 98-A) and
confirmed in open court by both parties thru counsel during the
hearing on the same date (Ibid., p. 102) stating:
"That the Safety Box Deposit No. 54 was opened by both
plaintiff Luzan Sia and the Acting Branch Manager Jimmy B.
Ynion in the presence of the undersigned, plaintiff's and
defendant's counsel. Said Safety Box when opened contains
two albums of different sizes and thickness, length and width
and a tin box with printed word 'Tai Ping Shiang Roast Pork in
pieces with Chinese designs and character."
Condition of the above-stated Items —
"Both albums are wet, moldy and badly damaged.
1. The first album measures 10 1/8 inches in length, 8 inches in
width and 3/4 in thick. The leaves of the album are attached to
every page and cannot be lifted without destroying it, hence the
stamps contained therein are no longer visible.
2. The second album measure 12 1/2 inches in length, 9 3/4 in
width 1 inch thick. Some of its pages can still be lifted. The
22
stamps therein can still be distinguished but beyond
restoration. Others have lost its original form.
3. The tin box is rusty inside. It contains an album with several
pieces of papers stuck up to the cover of the box. The
condition of the album is the second abovementioned album."5
The SECURITY BANK AND TRUST COMPANY, hereinafter
referred to as SBTC, appealed the trial court's decision to the
public respondent Court of Appeals. The appeal was docketed
as CA-G.R. CV No. 26737.
In urging the public respondent to reverse the decision of the
trial court, SBTC contended that the latter erred in (a) holding
that the lease agreement is a contract of adhesion; (b) finding
that the defendant had failed to exercise the required diligence
expected of a bank in maintaining the safety deposit box; (c)
awarding to the plaintiff actual damages in the amount of
P20,000.00, moral damages in the amount of P100,000.00 and
attorney's fees and legal expenses in the amount of P5,000.00;
and (d) dismissing the counterclaim.
On 21 August 1991, the respondent promulgated its decision
the dispositive portion of which reads:
WHEREFORE, the decision appealed from is hereby
REVERSED and instead the appellee's complaint is hereby
DISMISSED. The appellant bank's counterclaim is likewise
DISMISSED. No costs.6
In reversing the trial court's decision and absolving SBTC from
liability, the public respondent found and ruled that:
a) the fine print in the "Lease Agreement " (Exhibits "A" and "1"
) constitutes the terms and conditions of the contract of lease
which the appellee (now petitioner) had voluntarily and
knowingly executed with SBTC;
b) the contract entered into by the parties regarding Safe
Deposit Box No. 54 was not a contract of deposit wherein the
bank became a depositary of the subject stamp collection;
hence, as contended by SBTC, the provisions of Book IV, Title
XII of the Civil Code on deposits do not apply;
c) The following provisions of the questioned lease agreement
of the safety deposit box limiting SBTC's liability:
9. The liability of the bank by reason of the lease, is limited to
the exercise of the diligence to prevent the opening of the Safe
by any person other than the Renter, his authorized agent or
legal representative.
xxx xxx xxx
13. The bank is not a depository of the contents of the Safe
and it has neither the possession nor the control of the same.
The Bank has no interest whatsoever in said contents, except
as herein provided, and it assumes absolutely no liability in
connection therewith.
are valid since said stipulations are not contrary to law, morals,
good customs, public order or public policy; and

d) there is no concrete evidence to show that SBTC failed to
exercise the required diligence in maintaining the safety
deposit box; what was proven was that the floods of 1985 and
1986, which were beyond the control of SBTC, caused the
damage to the stamp collection; said floods were fortuitous
events which SBTC should not be held liable for since it was
not shown to have participated in the aggravation of the
damage to the stamp collection; on the contrary, it offered its
services to secure the assistance of an expert in order to save
most of the stamps, but the appellee refused; appellee must
then bear the lose under the principle of "res perit domino."
Unsuccessful in his bid to have the above decision
reconsidered by the public respondent, 7 petitioner filed the
instant petition wherein he contends that:
I
IT WAS A GRAVE ERROR OR AN ABUSE OF DISCRETION
ON THE PART OF THE RESPONDENT COURT WHEN IT
RULED THAT RESPONDENT SBTC DID NOT FAIL TO
EXERCISE THE REQUIRED DILIGENCE IN MAINTAINING
THE SAFETY DEPOSIT BOX OF THE PETITIONER
CONSIDERING THAT SUBSTANTIAL EVIDENCE EXIST (sic)
PROVING THE CONTRARY.
II
THE RESPONDENT COURT SERIOUSLY ERRED IN
EXCULPATING PRIVATE RESPONDENT FROM ANY
LIABILITY WHATSOEVER BY REASON OF THE
PROVISIONS OF PARAGRAPHS 9 AND 13 OF THE
AGREEMENT (EXHS. "A" AND "A-1").
III
THE RESPONDENT COURT SERIOUSLY ERRED IN NOT
UPHOLDING THE AWARDS OF THE TRIAL COURT FOR
ACTUAL AND MORAL DAMAGES, INCLUDING ATTORNEY'S
FEES AND LEGAL EXPENSES, IN FAVOR OF THE
PETITIONER.8
We subsequently gave due course the petition and required
both parties to submit their respective memoranda, which they
complied with.9
Petitioner insists that the trial court correctly ruled that SBTC
had failed "to exercise the required diligence expected of a
bank maintaining such safety deposit box . . . in the light of the
environmental circumstance of said safety deposit box after the
floods of 1985 and 1986." He argues that such a conclusion is
supported by the evidence on record, to wit: SBTC was fully
cognizant of the exact location of the safety deposit box in
question; it knew that the premises were inundated by
floodwaters in 1985 and 1986 and considering that the bank is
guarded twenty-four (24) hours a day , it is safe to conclude
that it was also aware of the inundation of the premises where
the safety deposit box was located; despite such knowledge,
however, it never bothered to inform the petitioner of the
flooding or take any appropriate measures to insure the safety
and good maintenance of the safety deposit box in question.
23
SBTC does not squarely dispute these facts; rather, it relies on
the rule that findings of facts of the Court of Appeals, when
supported by substantial exidence, are not reviewable on
appeal by certiorari. 10
The foregoing rule is, of course, subject to certain exceptions
such as when there exists a disparity between the factual
findings and conclusions of the Court of Appeals and the trial
court. 11 Such a disparity obtains in the present case.
As We see it, SBTC's theory, which was upheld by the public
respondent, is that the "Lease Agreement " covering Safe
Deposit Box No. 54 (Exhibit "A and "1") is just that — a contract
of lease — and not a contract of deposit, and that paragraphs 9
and 13 thereof, which expressly limit the bank's liability as
follows:
9. The liability of the bank by reason of the lease, is limited to
the exercise of the diligence to prevent the opening of the Safe
by any person other than the Renter, his autliorized agent or
legal representative;
xxx xxx xxx
13. The bank is not a depository of the contents of the Safe
and it has neither the possession nor the control of the same.
The Bank has no interest whatsoever said contents, except as
herein provided, and it assumes absolutely no liability in
connection therewith. 12
are valid and binding upon the parties. In the challenged
decision, the public respondent further avers that even without
such a limitation of liability, SBTC should still be absolved from
any responsibility for the damage sustained by the petitioner as
it appears that such damage was occasioned by a fortuitous
event and that the respondent bank was free from any
participation in the aggravation of the injury.
We cannot accept this theory and ratiocination. Consequently,
this Court finds the petition to be impressed with merit.
In the recent case CA Agro-Industrial Development Corp. vs.
Court of Appeals, 13 this Court explicitly rejected the contention
that a contract for the use of a safety deposit box is a contract
of lease governed by Title VII, Book IV of the Civil Code. Nor
did We fully subscribe to the view that it is a contract of deposit
to be strictly governed by the Civil Code provision on
deposit; 14 it is, as We declared, a special kind of deposit. The
prevailing rule in American jurisprudence — that the relation
between a bank renting out safe deposit boxes and its
customer with respect to the contents of the box is that of a
bailor and bailee, the bailment for hire and mutual benefit 15 —
has been adopted in this jurisdiction, thus:
In the context of our laws which authorize banking institutions
to rent out safety deposit boxes, it is clear that in this
jurisdiction, the prevailing rule in the United States has been
adopted. Section 72 of the General Banking Act [R.A. 337, as
amended] pertinently provides:
"Sec. 72. In addition to the operations specifically authorized
elsewhere in this Act, banking institutions other than building
and loan associations may perform the following services:

(a) Receive in custody funds, documents, and valuable objects,
and rent safety deposit boxes for the safequarding of such
effects.
xxx xxx xxx
The banks shall perform the services permitted under
subsections (a), (b) and (c) of this section as depositories or as
agents. . . ."(emphasis supplied)
Note that the primary function is still found within the
parameters of a contract of deposit, i.e., the receiving in
custody of funds, documents and other valuable objects for
safekeeping. The renting out of the safety deposit boxes is not
independent from, but related to or in conjunction with, this
principal function. A contract of deposit may be entered into
orally or in writing (Art. 1969, Civil Code] and, pursuant to
Article 1306 of the Civil Code, the parties thereto may establish
such stipulations, clauses, terms and conditions as they may
deem convenient, provided they are not contrary to law,
morals, good customs, public order or public policy. The
depositary's responsibility for the safekeeping of the objects
deposited in the case at bar is governed by Title I, Book IV of
the Civil Code. Accordingly, the depositary would be liable if, in
performing its obligation, it is found guilty of fraud, negligence,
delay or contravention of the tenor of the agreement [Art.
1170, id.]. In the absence of any stipulation prescribing the
degree of diligence required, that of a good father of a family is
to be observed [Art. 1173, id.]. Hence, any stipulation
exempting the depositary from any liability arising from the loss
of the thing deposited on account of fraud, negligence or delay
would be void for being contrary to law and public policy. In the
instant case, petitioner maintains that conditions 13 and l4 of
the questioned contract of lease of the safety deposit box,
which read:
"13. The bank is a depositary of the contents of the safe and it
has neither the possession nor control of the same.
"14. The bank has no interest whatsoever in said contents,
except as herein expressly provided, and it assumes absolutely
no liability in connection therewith."
are void as they are contrary to law and public policy. We find
Ourselves in agreement with this proposition for indeed, said
provisions are inconsistent with the respondent Bank's
responsibility as a depositary under Section 72 (a) of the
General Banking Act. Both exempt the latter from any liability
except as contemplated in condition 8 thereof which limits its
duty to exercise reasonable diligence only with respect to who
shall be admitted to any rented safe, to wit:
"8. The Bank shall use due diligence that no unauthorized
person shall be admitted to any rented safe and beyond this,
the Bank will not be responsible for the contents of any safe
rented from it."
Furthermore condition 13 stands on a wrong premise and is
contrary to the actual practice of the Bank. It is not correct to
assert that the Bank has neither the possession nor control of
the contents of the box since in fact, the safety deposit box
itself is located in its premises and is under its absolute control;
moreover, the respondent Bank keeps the guard key to the
24
said box. As stated earlier, renters cannot open their respective
boxes unless the Bank cooperates by presenting and using this
guard key. Clearly then, to the extent above stated, the
foregoing conditions in the contract in question are void and
ineffective. It has been said:
"With respect to property deposited in a safe-deposit box by a
customer of a safe-deposit company, the parties, since the
relation is a contractual one, may by special contract define
their respective duties or provide for increasing or limiting the
liability of the deposit company, provided such contract is not in
violation of law or public policy. It must clearly appear that there
actually was such a special contract, however, in order to vary
the ordinary obligations implied by law from the relationship of
the parties; liability of the deposit company will not be enlarged
or restricted by words of doubtful meaning. The company, in
renting safe-deposit boxes, cannot exempt itself from liability
for loss of the contents by its own fraud or negligence or that,
of its agents or servants, and if a provision of the contract may
be construed as an attempt to do so, it will be held ineffective
for the purpose. Although it has been held that the lessor of a
safe-deposit box cannot limit its liability for loss of the contents
thereof through its own negligence, the view has been taken
that such a lessor may limit its liability to some extent by
agreement or stipulation ."[10 AM JUR 2d., 466]. (citations
omitted) 16
It must be noted that conditions No. 13 and No. 14 in the
Contract of Lease of Safety Deposit Box in CA Agro-Industrial
Development Corp. are strikingly similar to condition No. 13 in
the instant case. On the other hand, both condition No. 8 in CA
Agro-Industrial Development Corp. and condition No. 9 in the
present case limit the scope of the exercise of due diligence by
the banks involved to merely seeing to it that only the renter,
his authorized agent or his legal representative should open or
have access to the safety deposit box. In short, in all other
situations, it would seem that SBTC is not bound to exercise
diligence of any kind at all. Assayed in the light of Our
aforementioned pronouncements in CA Agro-lndustrial
Development Corp., it is not at all difficult to conclude that both
conditions No. 9 and No. 13 of the "Lease Agreement" covering
the safety deposit box in question (Exhibits "A" and "1") must
be stricken down for being contrary to law and public policy as
they are meant to exempt SBTC from any liability for damage,
loss or destruction of the contents of the safety deposit box
which may arise from its own or its agents' fraud, negligence or
delay. Accordingly, SBTC cannot take refuge under the said
conditions.
Public respondent further postulates that SBTC cannot be held
responsible for the destruction or loss of the stamp collection
because the flooding was a fortuitous event and there was no
showing of SBTC's participation in the aggravation of the loss
or injury. It states:
Article 1174 of the Civil Code provides:
"Except in cases expressly specified by the law, or when it is
otherwise declared by stipulation, or when the nature of the
obligation requires the assumption of risk, no person shall be
responsible for those events which could not be foreseen, or
which, though foreseen, were inevitable.'

In its dissertation of the phrase "caso fortuito" the Enciclopedia
Jurisdicada Española 17 says: "In a legal sense and,
consequently, also in relation to contracts, a "caso
fortuito" prevents (sic) 18 the following essential characteristics:
(1) the cause of the unforeseen ands unexpected occurrence,
or of the failure of the debtor to comply with his obligation, must
be independent of the human will; (2) it must be impossible to
foresee the event which constitutes the "caso fortuito," or if it
can be foreseen, it must be impossible to avoid; (3) the
occurrence must be such as to render it impossible for one
debtor to fulfill his obligation in a normal manner; and (4) the
obligor must be free from any participation in the aggravation of
the injury resulting to the creditor." (cited in Servando vs. Phil.,
Steam Navigation Co., supra). 19
Here, the unforeseen or unexpected inundating floods were
independent of the will of the appellant bank and the latter was
not shown to have participated in aggravating damage (sic) to
the stamps collection of the appellee. In fact, the appellant
bank offered its services to secure the assistance of an expert
to save most of the then good stamps but the appelle refused
and let (sic) these recoverable stamps inside the safety deposit
box until they were ruined. 20
Both the law and authority cited are clear enough and require
no further elucidation. Unfortunately, however, the public
respondent failed to consider that in the instant case, as
correctly held by the trial court, SBTC was guilty of negligence.
The facts constituting negligence are enumerated in the
petition and have been summarized in thisponencia. SBTC's
negligence aggravated the injury or damage to the stamp
collection. SBTC was aware of the floods of 1985 and 1986; it
also knew that the floodwaters inundated the room where Safe
Deposit Box No. 54 was located. In view thereof, it should have
lost no time in notifying the petitioner in order that the box
could have been opened to retrieve the stamps, thus saving
the same from further deterioration and loss. In this respect, it
failed to exercise the reasonable care and prudence expected
of a good father of a family, thereby becoming a party to the
aggravation of the injury or loss. Accordingly, the
aforementioned fourth characteristic of a fortuitous event is
absent Article 1170 of the Civil Code, which reads:
Those who in the performance of their obligation are guilty of
fraud, negligence, or delay, and those who in any manner
contravene the tenor thereof, are liable for damages,
thus comes to the succor of the petitioner. The destruction or
loss of the stamp collection which was, in the language of the
trial court, the "product of 27 years of patience and
diligence" 21 caused the petitioner pecuniary loss; hence, he
must be compensated therefor.
We cannot, however, place Our imprimatur on the trial court's
award of moral damages. Since the relationship between the
petitioner and SBTC is based on a contract, either of them may
be held liable for moral damages for breach thereof only if said
party had acted fraudulently or in bad faith. 22 There is here no
proof of fraud or bad faith on the part of SBTC.
WHEREFORE, the instant petition is hereby GRANTED. The
challenged Decision and Resolution of the public respondent
25
Court of Appeals of 21 August 1991 and 21 November 1991,
respectively, in CA-G.R. CV No. 26737, are hereby SET ASIDE
and the Decision of 19 February 1990 of Branch 47 of the
Regional Trial Court of Manila in Civil Case No. 87-42601 is
hereby REINSTATED in full, except as to the award of moral
damages which is hereby set aside.
Costs against the private respondent. SO ORDERED.
G.R. No. 104612 May 10, 1994
BANK OF THE PHILIPPINE ISLANDS (successor-in-
interest of COMMERCIAL AND TRUST CO.), petitioner,
vs.
HON. COURT OF APPEALS, EASTERN PLYWOOD CORP.
and BENIGNO D. LIM, respondents.
DAVIDE, JR., J.:
The petitioner urges us to review and set aside the amended
Decision1 of 6 March 1992 of respondent Court of Appeals in
CA- G.R. CV No. 25739 which modified the Decision of 15
November 1990 of Branch 19 of the Regional Trial Court (RTC)
of Manila in Civil Case No. 87-42967, entitled Bank of the
Philippine Islands (successor-in-interest of Commercial Bank
and Trust Company) versus Eastern Plywood Corporation and
Benigno D. Lim. The Court of Appeals had affirmed the
dismissal of the complaint but had granted the defendants'
counterclaim for P331,261.44 which represents the outstanding
balance of their account with the plaintiff.
As culled from the records and the pleadings of the parties, the
following facts were duly established:
Private respondents Eastern Plywood Corporation (Eastern)
and
Benigno D. Lim (Lim), an officer and stockholder of Eastern,
held at least one joint bank account ("and/or" account) with the
Commercial Bank and Trust Co. (CBTC), the predecessor-in-
interest of petitioner Bank of the Philippine Islands (BPI).
Sometime in March 1975, a joint checking account ("and"
account) with Lim in the amount of P120,000.00 was opened
by Mariano Velasco with funds withdrawn from the account of
Eastern and/or Lim. Various amounts were later deposited or
withdrawn from the joint account of Velasco and Lim. The
money therein was placed in the money market.
Velasco died on 7 April 1977. At the time of his death, the
outstanding balance of the account stood at P662,522.87. On 5
May 1977, by virtue of an Indemnity Undertaking executed by
Lim for himself and as President and General Manager of
Eastern, 2 one-half of this amount was provisionally released
and transferred to one of the bank accounts of Eastern with
CBTC. 3
Thereafter, on 18 August 1978, Eastern obtained a loan of
P73,000.00 from CBTC as "Additional Working Capital,"
evidenced by the "Disclosure Statement on Loan/Credit
Transaction" (Disclosure Statement) signed by CBTC through
its branch manager, Ceferino Jimenez, and Eastern, through
Lim, as its President and General Manager. 4The loan was
payable on demand with interest at 14% per annum.

For this loan, Eastern issued on the same day a negotiable
promissory note for P73,000.00 payable on demand to the
order of CBTC with interest at 14% per annum. 5 The note was
signed by Lim both in his own capacity and as President and
General Manager of Eastern. No reference to any security for
the loan appears on the note. In the Disclosure Statement, the
box with the printed word "UNSECURED" was marked with "X"
— meaning unsecured, while the line with the words "this loan
is wholly/partly secured by" is followed by the typewritten
words "Hold-Out on a 1:1 on C/A No. 2310-001-42," which
refers to the joint account of Velasco and Lim with a balance of
P331,261.44.
In addition, Eastern and Lim, and CBTC signed another
document entitled "Holdout Agreement," also dated 18 August
1978, 6 wherein it was stated that "as security for the Loan [Lim
and Eastern] have offered [CBTC] and the latter accepts a
holdout on said [Current Account No. 2310-011-42 in the joint
names of Lim and Velasco] to the full extent of their alleged
interests therein as these may appear as a result of final and
definitive judicial action or a settlement between and among
the contesting parties thereto." 7 Paragraph 02 of the
Agreement provides as follows:
Eastply [Eastern] and Mr. Lim hereby confer upon Comtrust
[CBTC], when and if their alleged interests in the Account
Balance shall have been established with finality, ample and
sufficient power as shall be necessary to retain said Account
Balance and enable Comtrust to apply the Account Balance for
the purpose of liquidating the Loan in respect of principal
and/or accrued interest.
And paragraph 05 thereof reads:
The acceptance of this holdout shall not impair the right of
Comtrust to declare the loan payable on demand at any time,
nor shall the existence hereof and the non-resolution of the
dispute between the contending parties in respect of
entitlement to the Account Balance, preclude Comtrust from
instituting an action for recovery against Eastply and/or Mr. Lim
in the event the Loan is declared due and payable and Eastply
and/or Mr. Lim shall default in payment of all obligations and
liabilities thereunder.
In the meantime, a case for the settlement of Velasco's estate
was filed with Branch 152 of the RTC of Pasig, entitled "In re
Intestate Estate of Mariano Velasco," and docketed as Sp.
Proc. No. 8959. In the said case, the whole balance of
P331,261.44 in the aforesaid joint account of Velasco and Lim
was being claimed as part of Velasco's estate. On 9
September 1986, the intestate court granted the urgent motion
of the heirs of Velasco to withdraw the deposit under the joint
account of Lim and Velasco and authorized the heirs to divide
among themselves the amount withdrawn. 8
Sometime in 1980, CBTC was merged with BPI. 9 On 2
December 1987, BPI filed with the RTC of Manila a complaint
against Lim and Eastern demanding payment of the
promissory note for P73,000.00. The complaint was docketed
as Civil Case No. 87- 42967 and was raffled to Branch 19 of
the said court, then presided over by Judge Wenceslao M.
Polo. Defendants Lim and Eastern, in turn, filed a counterclaim
26
against BPI for the return of the balance in the disputed
account subject of the Holdout Agreement and the interests
thereon after deducting the amount due on the promissory
note.
After due proceedings, the trial court rendered its decision on
15 November 1990 dismissing the complaint because BPI
failed to make out its case. Furthermore, it ruled that "the
promissory note in question is subject to the 'hold-out'
agreement," 10 and that based on this agreement, "it was the
duty of plaintiff Bank [BPI] to debit the account of the
defendants under the promissory note to set off the loan even
though the same has no fixed maturity." 11 As to the
defendants' counterclaim, the trial court, recognizing the fact
that the entire amount in question had been withdrawn by
Velasco's heirs pursuant to the order of the intestate court in
Sp. Proc. No. 8959, denied it because the "said claim cannot
be awarded without disturbing the resolution" of the intestate
court. 12
Both parties appealed from the said decision to the Court of
Appeals. Their appeal was docketed as CA-G.R. CV No.
25739.
On 23 January 1991, the Court of Appeals rendered a decision
affirming the decision of the trial court. It, however, failed to rule
on the defendants' (private respondents') partial appeal from
the trial court's denial of their counterclaim. Upon their motion
for reconsideration, the Court of Appeals promulgated on 6
March 1992 an Amended Decision 13 wherein it ruled that the
settlement of Velasco's estate had nothing to do with the claim
of the defendants for the return of the balance of their account
with CBTC/BPI as they were not privy to that case, and that the
defendants, as depositors of CBTC/BPI, are the latter's
creditors; hence, CBTC/BPI should have protected the
defendants' interest in Sp. Proc. No. 8959 when the said
account was claimed by Velasco's estate. It then ordered BPI
"to pay defendants the amount of P331,261.44 representing
the outstanding balance in the bank account of defendants." 14
On 22 April 1992, BPI filed the instant petition alleging therein
that the Holdout Agreement in question was subject to a
suspensive condition stated therein, viz., that the "P331,261.44
shall become a security for respondent Lim's promissory note
only if respondents' Lim and Eastern Plywood Corporation's
interests to that amount are established as a result of a final
and definitive judicial action or a settlement between and
among the contesting parties thereto." 15 Hence, BPI asserts,
the Court of Appeals erred in affirming the trial court's decision
dismissing the complaint on the ground that it was the duty of
CBTC to debit the account of the defendants to set off the
amount of P73,000.00 covered by the promissory note.
Private respondents Eastern and Lim dispute the "suspensive
condition" argument of the petitioner. They interpret the
findings of both the trial and appellate courts that the money
deposited in the joint account of Velasco and Lim came from
Eastern and Lim's own account as a finding that the money
deposited in the joint account of Lim and Velasco "rightfully
belong[ed] to Eastern Plywood Corporation and/or Benigno
Lim." And because the latter are the rightful owners of the
money in question, the suspensive condition does not find any

application in this case and the bank had the duty to set off this
deposit with the loan. They add that the ruling of the lower
court that they own the disputed amount is the final and
definitive judicial action required by the Holdout Agreement;
hence, the petitioner can only hold the amount of P73,000.00
representing the security required for the note and must return
the rest. 16
The petitioner filed a Reply to the aforesaid Comment. The
private respondents filed a Rejoinder thereto.
We gave due course to the petition and required the parties to
submit simultaneously their memoranda.
The key issues in this case are whether BPI can demand
payment of the loan of P73,000.00 despite the existence of the
Holdout Agreement and whether BPI is still liable to the private
respondents on the account subject of the Holdout Agreement
after its withdrawal by the heirs of Velasco.
The collection suit of BPI is based on the promissory note for
P73,000.00. On its face, the note is an unconditional promise
to pay the said amount, and as stated by the respondent Court
of Appeals, "[t]here is no question that the promissory note is a
negotiable instrument." 17 It further correctly ruled that BPI was
not a holder in due course because the note was not indorsed
to BPI by the payee, CBTC. Only a negotiation by indorsement
could have operated as a valid transfer to make BPI a holder in
due course. It acquired the note from CBTC by the contract of
merger or sale between the two banks. BPI, therefore, took the
note subject to the Holdout Agreement.
We disagree, however, with the Court of Appeals in its
interpretation of the Holdout Agreement. It is clear from
paragraph 02 thereof that CBTC, or BPI as its successor-in-
interest, had every right to demand that Eastern and Lim settle
their liability under the promissory note. It cannot be compelled
to retain and apply the deposit in Lim and Velasco's joint
account to the payment of the note. What the agreement
conferred on CBTC was a power, not a duty. Generally, a bank
is under no duty or obligation to make the application. 18 To
apply the deposit to the payment of a loan is a privilege, a right
of set-off which the bank has the option to exercise. 19
Also, paragraph 05 of the Holdout Agreement itself states that
notwithstanding the agreement, CBTC was not in any way
precluded from demanding payment from Eastern and from
instituting an action to recover payment of the loan. What it
provides is an alternative, not an exclusive, method of
enforcing its claim on the note. When it demanded payment of
the debt directly from Eastern and Lim, BPI had opted not to
exercise its right to apply part of the deposit subject of the
Holdout Agreement to the payment of the promissory note for
P73,000.00. Its suit for the enforcement of the note was then in
order and it was error for the trial court to dismiss it on the
theory that it was set off by an equivalent portion in C/A No.
2310-001-42 which BPI should have debited. The Court of
Appeals also erred in affirming such dismissal.
The "suspensive condition" theory of the petitioner is,
therefore, untenable.
27
The Court of Appeals correctly decided on the counterclaim.
The counterclaim of Eastern and Lim for the return of the
P331,261.44 20 was equivalent to a demand that they be
allowed to withdraw their deposit with the bank. Article 1980 of
the Civil Code expressly provides that "[f]ixed, savings, and
current deposits of money in banks and similar institutions shall
be governed by the provisions concerning simple loan."
In Serrano vs. Central Bank of the Philippines, 21 we held that
bank deposits are in the nature of irregular deposits; they are
really loans because they earn interest. The relationship then
between a depositor and a bank is one of creditor and debtor.
The deposit under the questioned account was an ordinary
bank deposit; hence, it was payable on demand of the
depositor. 22
The account was proved and established to belong to Eastern
even if it was deposited in the names of Lim and Velasco. As
the real creditor of the bank, Eastern has the right to withdraw
it or to demand payment thereof. BPI cannot be relieved of its
duty to pay Eastern simply because it already allowed the heirs
of Velasco to withdraw the whole balance of the account. The
petitioner should not have allowed such withdrawal because it
had admitted in the Holdout Agreement the questioned
ownership of the money deposited in the account. As early as
12 May 1979, CBTC was notified by the Corporate Secretary of
Eastern that the deposit in the joint account of Velasco and Lim
was being claimed by them and that one-half was being
claimed by the heirs of Velasco.23
Moreover, the order of the court in Sp. Proc. No. 8959 merely
authorized the heirs of Velasco to withdraw the account. BPI
was not specifically ordered to release the account to the said
heirs; hence, it was under no judicial compulsion to do so. The
authorization given to the heirs of Velasco cannot be construed
as a final determination or adjudication that the account
belonged to Velasco. We have ruled that when the ownership
of a particular property is disputed, the determination by a
probate court of whether that property is included in the estate
of a deceased is merely provisional in character and cannot be
the subject of execution. 24
Because the ownership of the deposit remained undetermined,
BPI, as the debtor with respect thereto, had no right to pay to
persons other than those in whose favor the obligation was
constituted or whose right or authority to receive payment is
indisputable. The payment of the money deposited with BPI
that will extinguish its obligation to the creditor-depositor is
payment to the person of the creditor or to one authorized by
him or by the law to receive it. 25 Payment made by the debtor
to the wrong party does not extinguish the obligation as to the
creditor who is without fault or negligence, even if the debtor
acted in utmost good faith and by mistake as to the person of
the creditor, or through error induced by fraud of a third
person. 26 The payment then by BPI to the heirs of Velasco,
even if done in good faith, did not extinguish its obligation to
the true depositor, Eastern.
In the light of the above findings, the dismissal of the
petitioner's complaint is reversed and set aside. The award on
the counterclaim is sustained subject to a modification of the
interest.

WHEREFORE, the instant petition is partly GRANTED. The
challenged amended decision in CA-G.R. CV No. 25735 is
hereby MODIFIED. As modified:
(1) Private respondents are ordered to pay the petitioner the
promissory note for P73,000.00 with interest at:
(a) 14% per annum on the principal, computed from
18 August 1978 until payment;
(b) 12% per annum on the interest which had accrued up to the
date of the filing of the complaint, computed from that date until
payment pursuant to Article 2212 of the Civil Code.
(2) The award of P331,264.44 in favor of the private
respondents shall bear interest at the rate of 12%per
annum computed from the filing of the counterclaim.
No pronouncement as to costs. SO ORDERED.
G.R. No. 118492 August 15, 2001
GREGORIO H. REYES and CONSUELO PUYAT-
REYES, petitioners,
vs.
THE HON. COURT OF APPEALS and FAR EAST BANK
AND TRUST COMPANY, respondents.
DE LEON, JR., J.:
Before us is a petition for review of the Decision1 dated July 22,
1994 and Resolution2 dated December 29, 1994 of the Court of
Appeals3 affirming with modification the Decision4 dated
November 12, 1992 of the Regional Trial Court of Makati,
Metro Manila, Branch 64, which dismissed the complaint for
damages of petitioners spouses Gregorio H. Reyes and
Consuelo Puyat-Reyes against respondent Far East Bank and
Trust Company.
The undisputed facts of the case are as follows:
In view of the 20th Asian Racing Conference then scheduled to
be held in September, 1988 in Sydney, Australia, the Philippine
Racing Club, Inc. (PRCI, for brevity) sent four (4) delegates to
the said conference. Petitioner Gregorio H. Reyes, as vice-
president for finance, racing manager, treasurer, and director of
PRCI, sent Godofredo Reyes, the club's chief cashier, to the
respondent bank to apply for a foreign exchange demand draft
in Australian dollars.
Godofredo went to respondent bank's Buendia Branch in
Makati City to apply for a demand draft in the amount One
Thousand Six Hundred Ten Australian Dollars (AU$1,610.00)
payable to the order of the 20th Asian Racing Conference
Secretariat of Sydney, Australia. He was attended to by
respondent bank's assistant cashier, Mr. Yasis, who at first
denied the application for the reason that respondent bank did
not have an Australian dollar account in any bank in Sydney.
Godofredo asked if there could be a way for respondent bank
to accommodate PRCI's urgent need to remit Australian dollars
to Sydney. Yasis of respondent bank then informed Godofredo
of a roundabout way of effecting the requested remittance to
Sydney thus: the respondent bank would draw a demand draft
against Westpac Bank in Sydney, Australia (Westpac-Sydney
28
for brevity) and have the latter reimburse itself from the U.S.
dollar account of the respondent in Westpac Bank in New York,
U.S.A. (Westpac-New York for brevity). This arrangement has
been customarily resorted to since the 1960's and the
procedure has proven to be problem-free. PRCI and the
petitioner Gregorio H. Reyes, acting through Godofredo,
agreed to this arrangement or approach in order to effect the
urgent transfer of Australian dollars payable to the Secretariat
of the 20th Asian Racing Conference.
On July 28, 1988, the respondent bank approved the said
application of PRCI and issued Foreign Exchange Demand
Draft (FXDD) No. 209968 in the sum applied for, that is, One
Thousand Six Hundred Ten Australian Dollars (AU$ 1,610.00),
payable to the order of the 20th Asian Racing Conference
Secretariat of Sydney, Australia, and addressed to Westpac-
Sydney as the drawee bank.1âwphi1.nêt
On August 10, 1988, upon due presentment of the foreign
exchange demand draft, denominated as FXDD No. 209968,
the same was dishonored, with the notice of dishonor stating
the following: "xxx No account held with Westpac." Meanwhile,
on August 16, 1988, Wespac-New York sent a cable to
respondent bank informing the latter that its dollar account in
the sum of One Thousand Six Hundred Ten Australian Dollars
(AU$ 1,610.00) was debited. On August 19, 1988, in response
to PRCI's complaint about the dishonor of the said foreign
exchange demand draft, respondent bank informed Westpac-
Sydney of the issuance of the said demand draft FXDD No.
209968, drawn against the Wespac-Sydney and informing the
latter to be reimbursed from the respondent bank's dollar
account in Westpac-New York. The respondent bank on the
same day likewise informed Wespac-New York requesting the
latter to honor the reimbursement claim of Wespac-Sydney. On
September 14, 1988, upon its second presentment for
payment, FXDD No. 209968 was again dishonored by
Westpac-Sydney for the same reason, that is, that the
respondent bank has no deposit dollar account with the drawee
Wespac-Sydney.
On September 17, 1988 and September 18, 1988, respectively,
petitioners spouses Gregorio H. Reyes and Consuelo Puyat-
Reyes left for Australia to attend the said racing conference.
When petitioner Gregorio H. Reyes arrived in Sydney in the
morning of September 18, 1988, he went directly to the lobby
of Hotel Regent Sydney to register as a conference delegate.
At the registration desk, in the presence of other delegates
from various member of the conference secretariat that he
could not register because the foreign exchange demand draft
for his registration fee had been dishonored for the second
time. A discussion ensued in the presence and within the
hearing of many delegates who were also registering. Feeling
terribly embarrassed and humiliated, petitioner Gregorio H.
Reyes asked the lady member of the conference secretariat
that he be shown the subject foreign exchange demand draft
that had been dishonored as well as the covering letter after
which he promised that he would pay the registration fees in
cash. In the meantime he demanded that he be given his name
plate and conference kit. The lady member of the conference
secretariat relented and gave him his name plate and
conference kit. It was only two (2) days later, or on September

20, 1988, that he was given the dishonored demand draft and
a covering letter. It was then that he actually paid in cash the
registration fees as he had earlier promised.
Meanwhile, on September 19, 1988, petitioner Consuelo
Puyat-Reyes arrived in Sydney. She too was embarassed and
humiliated at the registration desk of the conference secretariat
when she was told in the presence and within the hearing of
other delegates that she could not be registered due to the
dishonor of the subject foreign exchange demand draft. She
felt herself trembling and unable to look at the people around
her. Fortunately, she saw her husband, coming toward her. He
saved the situation for her by telling the secretariat member
that he had already arranged for the payment of the
registration fee in cash once he was shown the dishonored
demand draft. Only then was petitioner Puyat-Reyes given her
name plate and conference kit.
At the time the incident took place, petitioner Consuelo Puyat-
Reyes was a member of the House of Representatives
representing the lone Congressional District of Makati, Metro
Manila. She has been an officer of the Manila Banking
Corporation and was cited by Archbishop Jaime Cardinal Sin
as the top lady banker of the year in connection with her
conferment of the Pro-Ecclesia et Pontifice Award. She has
also been awarded a plaque of appreciation from the Philippine
Tuberculosis Society for her extraordinary service as the
Society's campaign chairman for the ninth (9th) consecutive
year.
On November 23, 1988, the petitioners filed in the Regional
Trial Court of Makati, Metro Manila, a complaint for damages,
docketed as Civil Case No. 88-2468, against the respondent
bank due to the dishonor of the said foreign exchange demand
draft issued by the respondent bank. The petitioners claim that
as a result of the dishonor of the said demand draft, they were
exposed to unnecessary shock, social humiliation, and deep
mental anguish in a foreign country, and in the presence of an
international audience.
On November 12, 1992, the trial court rendered judgment in
favor of the defendant (respondent bank) and against the
plaintiffs (herein petitioners), the dispositive portion of which
states:
WHEREFORE, judgment is hereby rendered in favor of the
defendant, dismissing plaintiff's complaint, and ordering
plaintiffs to pay to defendant, on its counterclaim, the amount
of P50,000.00, as reasonable attorney's fees. Costs against
the plaintiff.
5
SO ORDERED.
The petitioners appealed the decision of the trial court to the
Court of Appeals. On July 22, 1994, the appellate court
affirmed the decision of the trial court but in effect deleted the
award of attorney's fees to the defendant (herein respondent
bank) and the pronouncement as to the costs. The decretal
portion of the decision of the appellate court states:
WHEREFORE, the judgment appealed from, insofar as it
dismissed plaintiff's complaint, is hereby AFFIRMED, but is
29
hereby REVERSED and SET ASIDE in all other respect. No
special pronouncement as to costs.
SO ORDERED.6
According to the appellate court, there is no basis to hold the
respondent bank liable for damages for the reason that it
exerted every effort for the subject foreign exchange demand
draft to be honored. The appellate court found and declared
that:
xxx xxx xxx
Thus, the Bank had every reason to believe that the
transaction finally went through smoothly, considering that its
New York account had been debited and that there was no
miscommunication between it and Westpac-New York. SWIFT
is a world wide association used by almost all banks and is
known to be the most reliable mode of communication in the
international banking business. Besides, the above procedure,
with the Bank as drawer and Westpac-Sydney as drawee, and
with Westpac-New York as the reimbursement Bank had been
in place since 1960s and there was no reason for the Bank to
suspect that this particular demand draft would not be honored
by Westpac-Sydney.
From the evidence, it appears that the root cause of the
miscommunications of the Bank's SWIFT message is the
erroneous decoding on the part of Westpac-Sydney of the
Bank's SWIFT message as an MT799 format. However, a
closer look at the Bank's Exhs. "6" and "7" would show that
despite what appears to be an asterick written over the figure
before "99", the figure can still be distinctly seen as a number
"1" and not number "7", to the effect that Westpac-Sydney was
responsible for the dishonor and not the Bank.
Moreover, it is not said asterisk that caused the misleading on
the part of the Westpac-Sydney of the numbers "1" to "7", since
Exhs. "6" and "7" are just documentary copies of the cable
message sent to Wespac-Sydney. Hence, if there was mistake
committed by Westpac-Sydney in decoding the cable message
which caused the Bank's message to be sent to the wrong
department, the mistake was Westpac's, not the Bank's. The
Bank had done what an ordinary prudent person is required to
do in the particular situation, although appellants expect the
Bank to have done more. The Bank having done everything
necessary or usual in the ordinary course of banking
transaction, it cannot be held liable for any embarrassment and
corresponding damage that appellants may have incurred.7
xxx xxx xxx
Hence, this petition, anchored on the following assignment of
errors:
I
THE HONORABLE COURT OF APPEALS ERRED IN
FINDING PRIVATE RESPONDENT NOT NEGLIGENT BY
ERRONEOUSLY APPLYING THE STANDARD OF DILIGENCE
OF AN "ORDINARY PRUDENT PERSON" WHEN IN TRUTH A
HIGHER DEGREE OF DILIGENCE IS IMPOSED BY LAW
UPON THE BANKS.

II
THE HONORABLE COURT OF APPEALS ERRED IN
ABSOLVING PRIVATE RESPONDENT FROM LIABILITY BY
OVERLOOKING THE FACT THAT THE DISHONOR OF THE
DEMAND DRAFT WAS A BREACH OF PRIVATE
RESPONDENT'S WARRANTY AS THE DRAWER THEREOF.
III
THE HONORABLE COURT OF APPEALS ERRED IN NOT
HOLDING THAT AS SHOWN OVERWHELMINGLY BY THE
EVIDENCE, THE DISHONOR OF THE DEMAND DRAFT AS
DUE TO PRIVATE RESPONDENT'S NEGLIGENCE AND NOT
THE DRAWEE BANK.8
The petitioners contend that due to the fiduciary nature of the
relationship between the respondent bank and its clients, the
respondent should have exercised a higher degree of diligence
than that expected of an ordinary prudent person in the
handling of its affairs as in the case at bar. The appellate court,
according to petitioners, erred in applying the standard of
diligence of an ordinary prudent person only. Petitioners also
claim that the respondent bank violate Section 61 of the
Negotiable Instruments Law9 which provides the warranty of a
drawer that "xxx on due presentment, the instrument will be
accepted or paid, or both, according to its tenor xxx." Thus, the
petitioners argue that respondent bank should be held liable for
damages for violation of this warranty. The petitioners pray this
Court to re-examine the facts to cite certain instances of
negligence.
It is our view and we hold that there is no reversible error in the
decision of the appellate court.
Section 1 of Rule 45 of the Revised Rules of Court provides
that "(T)he petition (for review) shall raise only questions of
law which must be distinctly set forth." Thus, we have ruled that
factual findings of the Court of Appeals are conclusive on the
parties and not reviewable by this Court – and they carry even
more weight when the Court of Appeals affirms the factual
findings of the trial court.10
The courts a quo found that respondent bank did not
misrepresent that it was maintaining a deposit account with
Westpac-Sydney. Respondent bank's assistant cashier
explained to Godofredo Reyes, representing PRCI and
petitioner Gregorio H. Reyes, how the transfer of Australian
dollars would be effected through Westpac-New York where
the respondent bank has a dollar account to Westpac-Sydney
where the subject foreign exchange demand draft (FXDD No.
209968) could be encashed by the payee, the 20th Asian
Racing Conference Secretariat. PRCI and its Vice-President
for finance, petitioner Gregorio H. Reyes, through their said
representative, agreed to that arrangement or procedure. In
other words, the petitioners are estopped from denying the said
arrangement or procedure. Similar arrangements have been a
long standing practice in banking to facilitate international
commercial transactions. In fact, the SWIFT cable message
sent by respondent bank to the drawee bank, Westpac-
Sydney, stated that it may claim reimbursement from its New
York branch, Westpac-New York, where respondent bank has a
30
deposit dollar account. The facts as found by the courts a
quo show that respondent bank did not cause an erroneous
transmittal of its SWIFT cable message to Westpac-Sydney. It
was the erroneous decoding of the cable message on the part
of Westpac-Sydney that caused the dishonor of the subject
foreign exchange demand draft. An employee of Westpac-
Sydney in Sydney, Australia mistakenly read the printed figures
in the SWIFT cable message of respondent bank as "MT799"
instead of as "MT199". As a result, Westpac-Sydney construed
the said cable message as a format for a letter of credit, and
not for a demand draft. The appellate court correct found that
"the figure before '99' can still be distinctly seen as a number '1'
and not number '7'." Indeed, the line of a "7" is in a slanting
position while the line of a "1" is in a horizontal position. Thus,
the number "1" in "MT199" cannot be construed as "7".11
The evidence also shows that the respondent bank exercised
that degree of diligence expected of an ordinary prudent
person under the circumstances obtaining. Prior to the first
dishonor of the subject foreign exchange demand draft, the
respondent bank advised Westpac-New York to honor the
reimbursement claim of Westpac-Sydney and to debit the
dollar account12 of respondent bank with the former. As soon as
the demand draft was dishonored, the respondent bank,
thinking that the problem was with the reimbursement and
without any idea that it was due to miscommunication, re-
confirmed the authority of Westpac-New York to debit its dollar
account for the purpose of reimbursing Westpac-
Sydney.13 Respondent bank also sent two (2) more cable
messages to Westpac-New York inquiring why the demand
draft was not honored.14
With these established facts, we now determine the degree of
diligence that banks are required to exert in their commercial
dealings. In Philippine Bank of Commerce v. Court of
Appeals15 upholding a long standing doctrine, we ruled that the
degree of diligence required of banks, is more than that of
a good father of a family where the fiduciary nature of their
relationship with their depositors is concerned. In other words
banks are duty bound to treat the deposit accounts of their
depositors with the highest degree of care. But the said ruling
applies only to cases where banks act under their fiduciary
capacity, that is, as depositary of the deposits of their
depositors. But the same higher degree of diligence is not
expected to be exerted by banks in commercial transactions
that do not involve their fiduciary relationship with their
depositors.
Considering the foregoing, the respondent bank was not
required to exert more than the diligence of a good father of a
family in regard to the sale and issuance of the subject foreign
exchange demand draft. The case at bar does not involve the
handling of petitioners' deposit, if any, with the respondent
bank. Instead, the relationship involved was that of a buyer and
seller, that is, between the respondent bank as the seller of the
subject foreign exchange demand draft, and PRCI as the buyer
of the same, with the 20th Asian Racing conference Secretariat
in Sydney, Australia as the payee thereof. As earlier
mentioned, the said foreign exchange demand draft was
intended for the payment of the registration fees of the

petitioners as delegates of the PRCI to the 20th Asian Racing
Conference in Sydney.
The evidence shows that the respondent bank did everything
within its power to prevent the dishonor of the subject foreign
exchange demand draft. The erroneous reading of its cable
message to Westpac-Sydney by an employee of the latter
could not have been foreseen by the respondent bank. Being
unaware that its employee erroneously read the said cable
message, Westpac-Sydney merely stated that the respondent
bank has no deposit account with it to cover for the amount of
One Thousand Six Hundred Ten Australian Dollar (AU
$1610.00) indicated in the foreign exchange demand draft.
Thus, the respondent bank had the impression that Westpac-
New York had not yet made available the amount for
reimbursement to Westpac-Sydney despite the fact that
respondent bank has a sufficient deposit dollar account with
Westpac-New York. That was the reason why the respondent
bank had to re-confirm and repeatedly notify Westpac-New
York to debit its (respondent bank's) deposit dollar account with
it and to transfer or credit the corresponding amount to
Westpac-Sydney to cover the amount of the said demand draft.
In view of all the foregoing, and considering that the dishonor
of the subject foreign exchange demand draft is not attributable
to any fault of the respondent bank, whereas the petitioners
appeared to be under estoppel as earlier mentioned, it is no
longer necessary to discuss the alleged application of Section
61 of the Negotiable Instruments Law to the case at bar. In any
event, it was established that the respondent bank acted in
good faith and that it did not cause the embarrassment of the
petitioners in Sydney, Australia. Hence, the Court of Appeals
did not commit any reversable error in its challenged decision.
WHEREFORE, the petition is hereby DENIED, and the
assailed decision of the Court of Appeals is AFFIRMED. Costs
against the petitioners. SO ORDERED.
[G.R. No. 142591. April 30, 2003]
JOSEPH CHAN, WILSON CHAN and LILY
CHAN, petitioners, vs. BONIFACIO S.
MACEDA, JR., respondent.
DECISION
SANDOVAL-GUTIERREZ, J.:
A judgment of default does not automatically imply admission
by the defendant of the facts and causes of action of the
plaintiff. The Rules of Court require the latter to adduce
evidence in support of his allegations as an indispensable
condition before final judgment could be given in his favor.
[1]
The trial judge has to evaluate the allegations with the
highest degree of objectivity and certainty. He may sustain an
allegation for which the plaintiff has adduced sufficient
evidence, otherwise, he has to reject it. In the case at bar,
judicial review is imperative to avert the award of damages that
is unreasonable and without evidentiary support.
Assailed in this petition for review under Rule 45 of the 1997
Rules of Civil Procedure, as amended, is the Decision[2] dated
June 17, 1999 of the Court of Appeals in CA-G.R. CV No.
31
57323, entitled Bonifacio S. Maceda, Jr. versus Joseph Chan,
et. al., affirming in toto the Decision[3] dated December 26,
1996 of the Regional Trial Court, Branch 160, Pasig City, in
Civil Case No. 53044.
The essential antecedents are as follows:
On July 28, 1976, Bonifacio S. Maceda, Jr., herein respondent,
obtained a P7.3 million loan from the Development Bank of the
Philippines for the construction of his New Gran Hotel Project
in Tacloban City.
Thereafter, on September 29, 1976, respondent entered into a
building construction contract with Moreman Builders Co., Inc.,
(Moreman). They agreed that the construction would be
finished not later than December 22, 1977.
Respondent purchased various construction materials and
equipment in Manila. Moreman, in turn, deposited them in the
warehouse of Wilson and Lily Chan, herein petitioners. The
deposit was free of charge.
Unfortunately, Moreman failed to finish the construction of the
hotel at the stipulated time. Hence, on February 1, 1978,
respondent filed with the then Court of First Instance (CFI, now
Regional Trial Court), Branch 39, Manila, an action for
rescission and damages against Moreman, docketed as Civil
Case No. 113498.
On November 28, 1978, the CFI rendered its
Decision[4] rescinding the contract between Moreman and
respondent and awarding to the latter P 445,000.00 as actual,
moral and liquidated damages; P20,000.00 representing the
increase in the construction materials; and P35,000.00 as
attorneys fees. Moreman interposed an appeal to the Court of
Appeals but the same was dismissed on March 7, 1989 for
being dilatory. He elevated the case to this Court via a petition
for review on certiorari. In a Decision[5] dated February 21,
1990, we denied the petition. On April 23, 1990,[6] an Entry of
Judgment was issued.
Meanwhile, during the pendency of the case, respondent
ordered petitioners to return to him the construction materials
and equipment which Moreman deposited in their
warehouse. Petitioners, however, told them that Moreman
withdrew those construction materials in 1977.
Hence, on December 11, 1985, respondent filed with the
Regional Trial Court, Branch 160, Pasig City, an action for
damages with an application for a writ of preliminary
attachment against petitioners,[7] docketed as Civil Case No.
53044.
In the meantime, on October 30, 1986, respondent was
appointed Judge of the Regional Trial Court, Branch 12, San
Jose Antique.[8]
On August 25, 1989, or after almost four (4) years, the trial
court dismissed respondents complaint for his failure to
prosecute and for lack of interest.[9] On September 6, 1994, or
five years thereafter, respondent filed a motion for
reconsideration, but the same was denied in the Order dated

September 9, 1994 because of the failure of respondent and
his counsel to appear on the scheduled hearing.[10]
On October 14, 1994, respondent filed a second motion for
reconsideration. This time, the motion was granted and
the case was ordered reinstated on January 10, 1995, or
ten (10) years from the time the action was originally filed.
[11]
Thereafter, summons, together with the copies of the
complaint and its annexes, were served on petitioners.
On March 2, 1995, counsel for petitioners filed a motion to
dismiss on several grounds.[12] Respondent, on the other hand,
moved to declare petitioners in default on the ground that their
motion to dismiss was filed out of time and that it did not
contain any notice of hearing.[13]
On April 27, 1995, the trial court issued an order declaring
petitioners in default.[14]
Petitioners filed with the Court of Appeals a petition for
certiorari[15] to annul the trial courts order of default, but the
same was dismissed in its Order[16] dated August 31, 1995. The
case reached this Court, and in a Resolution dated October 25,
1995,[17] we affirmed the assailed order of the Court of
Appeals. On November 29, 1995,[18] the corresponding Entry of
Judgment was issued.
Thus, upon the return of the records to the RTC, Branch 160,
Pasig City, respondent was allowed to present his evidence
ex-parte.
Upon motion of respondent, which was granted by the trial
court in its Order dated April 29, 1996,[19] the depositions of his
witnesses, namely, Leonardo Conge, Alfredo Maceda and
Engr. Damiano Nadera were taken in the Metropolitan Trial
Court in Cities, Branch 2, Tacloban City.[20] Deponent Leonardo
Conge, a labor contractor, testified that on December 14 up to
December 24, 1977, he was contracted by petitioner Lily Chan
to get bags of cement from the New Gran Hotel construction
site and to store the same into the latters warehouse in
Tacloban City. Aside from those bags of cement, deponent also
hauled about 400 bundles of steel bars from the same
construction site, upon order of petitioners. Corresponding
delivery receipts were presented and marked as Exhibits A, A-
1,A-2,A-3 and A-4.[21]
Deponent Alfredo Maceda testified that he was respondents
Disbursement and Payroll Officer who supervised the
construction and kept inventory of the properties of the New
Gran Hotel. While conducting the inventory on November 23,
1977, he found that the approximate total value of the materials
stored in petitioners warehouse was P214,310.00. This amount
was accordingly reflected in the certification signed by Mario
Ramos, store clerk and representative of Moreman who was
present during the inventory.[22]
Deponent Damiano Nadera testified on the current cost of the
architectural and structural requirements needed to complete
the construction of the New Gran Hotel.[23]
On December 26, 1996, the trial court rendered a decision in
favor of respondent, thus:
32
WHEREFORE, foregoing considered, judgment is hereby
rendered ordering defendants to jointly and severally pay
plaintiff:
1) P1,930,000.00 as actual damages;
2) P2,549,000.00 as actual damages;
3) Moral damages of P150,000.00; exemplary damages
of P50,000.00 and attorneys fees of P50,000.00 and to pay the
costs.
SO ORDERED.
The trial court ratiocinated as follows:
The inventory of other materials, aside from the steel bars and
cement is found highly reliable based on first, the affidavit of
Arthur Edralin dated September 15, 1979, personnel officer of
Moreman Builders that he was assigned with others to guard
the warehouse; (Exhs. M & O); secondly, the inventory (Exh.
C) dated November 23, 1977 shows (sic) deposit of assorted
materials; thirdly, that there were items in the warehouse as of
February 3, 1978 as shown in the balance sheet of Moremans
stock clerk Jose Cedilla.
Plaintiff is entitled to payment of damages for the overhauling
of materials from the construction site by Lily Chan without the
knowledge and consent of its owner. Article 20 of the Civil
Code provides:
Art. 20. Every person who contrary to law, willfully or
negligently caused damage to another, shall indemnify the
latter for the same.
As to the materials stored inside the bodega of defendant
Wilson Chan, the inventory (Exh. C) show (sic), that the same
were owned by the New Gran Hotel. Said materials were
stored by Moreman Builders Co., Inc. since it was attested to
by the warehouseman as without any lien or encumbrances,
the defendants are duty bound to release it. Article 21 of the
Civil Code provides:
Art. 21. Any person who willfully caused loss or injury to
another in a manner that is contrary to morals, good customs
or public policy shall compensate the latter for the damage.
Plaintiff is entitled to payment of actual damages based on the
inventory as of November 23, 1977 amounting
to P1,930,080.00 (Exhs. Q & Q-1). The inventory was signed
by the agent Moreman Builders Corporation and defendants.
Plaintiff is likewise entitled to payment of 12,500 bags of
cement and 400 bundles of steel bars totaling P2,549,000.00
(Exhs. S & S-1; Exhs. B & B-3).
Defendants should pay plaintiff moral damages
of P150,000.00; exemplary damages of P50,000.00 and
attorneys fees of P50,000.00 and to pay the costs.
The claim of defendant for payment of damages with respect to
the materials appearing in the balance sheets as of February 3,
1978 in the amount of P3,286,690.00, not having been

established with enough preponderance of evidence cannot be
given weight.[24]
Petitioners then elevated the case to the Court of Appeals,
docketed as CA-G.R. CV No. 57323. On June 17, 1999, the
Appellate Court rendered the assailed
Decision[25]affirming in toto the trial courts judgment,
ratiocinating as follows:
Moreover, although the prayer in the complaint did not specify
the amount of damages sought, the same was satisfactorily
proved during the trial. For damages to be awarded, it is
essential that the claimant satisfactorily prove during the trial
the existence of the factual basis thereof and its causal
connection with the adverse partys act (PAL, Inc. vs. NLRC,
259 SCRA 459. In sustaining appellees claim for damages, the
court a quo held as follows:
The Court finds the contention of plaintiff that materials and
equipment of plaintiff were stored in the warehouse of
defendants and admitted by defendants in the certification
issued to Sheriff Borja. x x x
Evidence further revealed that assorted materials owned by the
New Gran Hotel (Exh. C) were deposited in the bodega of
defendant Wilson Chan with a total market value
of P1,930,000.00, current price.
The inventory of other materials, aside from the steel bars and
cement, is highly reliable based on first, the affidavit of Arthur
Edralin dated September 15, 1979, personnel officer of
Moreman Builders; that he was assigned, with others to guard
the warehouse (Exhs. M & O); secondly, the inventory (Exh. C)
November 23, 1977 shows deposit of assorted materials;
thirdly, that there were items in the warehouse as of February
3, 1978, as shown in the balance sheet of Moremans stock
clerk, Jose Cedilla (pp. 60-61, Rollo).
The Court affirms the above findings.
Well settled is the rule that absent any proper reason to depart
from the rule, factual conclusions reached by the trial court are
not to be disturbed (People vs. Dupali, 230 SCRA 62). Hence,
in the absence of any showing that serious and substantial
errors were committed by the lower court in the appraisal of the
evidence, the trial judges assessment of the credibility of the
witnesses is accorded great weight and respect (People vs.
Jain, 254 SCRA 686). And, there being absolutely nothing on
record to show that the court a quo overlooked, disregarded, or
misinterpreted facts of weight and significance, its factual
findings and conclusions must be given great weight and
should not be disturbed on appeal.
WHEREFORE, being in accord with law and evidence, the
appealed decision is hereby AFFIRMED in toto.
Hence, this petition for review on certiorari anchored on the
following grounds:
I evidence submitted by the contending parties during the trial of
The Court of Appeals acted with grave abuse of discretion
and under a misapprehension of the law and the facts
33
when it affirmed in toto the award of actual damages made
by the trial court in favor of respondent in this case.
II
The awards of moral and exemplary damages of the trial
court to respondent in this case and affirmed in toto by the
Court of Appeals are unwarranted by the evidence
presented by respondent at the ex parte hearing of this
case and should, therefore, be eliminated or at least
reduced.
III
The award of attorneys fees by the trial court to
respondent in this case and affirmed by the Court of
Appeals should be deleted because of the failure of the
trial court to state the legal and factual basis of such
award.
Petitioners contend inter alia that the actual damages claimed
by respondent in the present case were already awarded to
him in Civil Case No. 113498[26] and hence, cannot be
recovered by him again. Even assuming that respondent is
entitled to damages, he can not recover P4,479,000.00 which
is eleven (11) times more than the total actual damages
of P365,000.00 awarded to him in Civil Case No. 113498.[27]
In his comment on the petition, respondent maintains that
petitioners, as depositaries under the law, have both the
fiduciary and extraordinary obligations not only to safely keep
the construction material deposited, but also to return them
with all their products, accessories and accessions, pursuant to
Articles 1972,[28] 1979,[29] 1983,[30] and 1988[31]of the Civil
Code. Considering that petitioners duty to return the
construction materials in question has already become
impossible, it is only proper that the prices of those
construction materials in 1996 should be the basis of the award
of actual damages. This is the only way to fulfill the duty to
return contemplated in the applicable laws.[32]Respondent
further claims that petitioners must bear the increase in market
prices from 1977 to 1996 because liability for fraud includes all
damages which may be reasonably attributed to the non-
performance of the obligation. Lastly, respondent insists that
there can be no double recovery because in Civil Case No.
113498,[33] the parties were respondent himself and Moreman
and the cause of action was the rescission of their building
contract. In the present case, however, the parties are
respondent and petitioners and the cause of action between
them is for recovery of damages arising from petitioners failure
to return the construction materials and equipment.
Obviously, petitioners assigned errors call for a review of the
lower courts findings of fact.
Succinct is the rule that this Court is not a trier of facts and
does not normally undertake the re-examination of the
the case considering that findings of fact of the Court of
Appeals are generally binding and conclusive on this Court.
[34]
The jurisdiction of this Court in a petition for review on

certiorari is limited to reviewing only errors of law,[35] not of fact,
unless it is shown, inter alia, that: (1) the conclusion is a finding
grounded on speculations, surmises or conjectures; (2) the
inference is manifestly mistaken, absurd and
impossible; (3) there is grave abuse of discretion; (4) the
judgment is based on misapprehension of facts; (5)the findings
of fact are conflicting; and (6) the Court of Appeals, in making
its findings went beyond the issues of the case and the same is
contrary to the admission of both parties.[36]
Petitioners submit that this case is an exception to the general
rule since both the trial court and the Court of Appeals based
their judgments on misapprehension of facts.
We agree.
At the outset, the case should have been dismissed outright by
the trial court because of patent procedural infirmities. It bears
stressing that the case was originally filed on December 11,
1985. Four (4) years thereafter, or on August 25, 1989, the
case was dismissed for respondents failure to prosecute. Five
(5) years after, or on September 6, 1994, respondent filed his
motion for reconsideration. From here, the trial court already
erred in its ruling because it should have dismissed the motion
for reconsideration outright as it was filed far beyond the
fifteen-day reglementary period.[37] Worse, when respondent
filed his second motion for reconsideration on October 14,
1994, a prohibited pleading,[38] the trial court still granted the
same and reinstated the case on January 10, 1995. This is a
glaring gross procedural error committed by both the trial court
and the Court of Appeals.
Even without such serious procedural flaw, the case should
also be dismissed for utter lack of merit.
It must be stressed that respondents claim for damages is
based on petitioners failure to return or to release to him the
construction materials and equipment deposited by Moreman
to their warehouse. Hence, the essential issues to be resolved
are: (1) Has respondent presented proof that the construction
materials and equipment were actually in petitioners
warehouse when he asked that the same be turned over to
him? (2) If so, does respondent have the right to demand the
release of the said materials and equipment or claim for
damages?
Under Article 1311 of the Civil Code, contracts are binding
upon the parties (and their assigns and heirs) who execute
them. When there is no privity of contract, there is likewise no
obligation or liability to speak about and thus no cause of
action arises. Specifically, in an action against the depositary,
the burden is on the plaintiff to prove the bailment or deposit
and the performance of conditions precedent to the right of
action.[39] A depositary is obliged to return the thing to the
depositor, or to his heirs or successors, or to the person who
may have been designated in the contract. [40]
In the present case, the record is bereft of any contract of
deposit, oral or written, between petitioners and respondent. If
at all, it was only between petitioners and Moreman. And
granting arguendo that there was indeed a contract of deposit
between petitioners and Moreman, it is still incumbent upon
34
respondent to prove its existence and that it was executed in
his favor. However, respondent miserably failed to do so. The
only pieces of evidence respondent presented to prove the
contract of deposit were the delivery receipts.[41] Significantly,
they are unsigned and not duly received or authenticated
by either Moreman, petitioners or respondent or any of
their authorized representatives. Hence, those delivery
receipts have no probative value at all. While our laws grant a
person the remedial right to prosecute or institute a civil action
against another for the enforcement or protection of a right, or
the prevention or redress of a wrong,[42] every cause of
action ex-contractu must be founded upon a contract, oral or
written, express or implied.
Moreover, respondent also failed to prove that there were
construction materials and equipment in petitioners warehouse
at the time he made a demand for their return.
Considering that respondent failed to prove (1) the existence of
any contract of deposit between him and petitioners, nor
between the latter and Moreman in his favor, and (2) that there
were construction materials in petitioners warehouse at the
time of respondents demand to return the same, we hold that
petitioners have no corresponding obligation or liability to
respondent with respect to those construction materials.
Anent the issue of damages, petitioners are still not liable
because, as expressly provided for in Article 2199 of the Civil
Code,[43] actual or compensatory damages cannot be
presumed, but must be proved with reasonable degree of
certainty. A court cannot rely on speculations, conjectures, or
guesswork as to the fact and amount of damages, but must
depend upon competent proof that they have been suffered by
the injured party and on the best obtainable evidence of the
actual amount thereof. It must point out specific facts which
could afford a basis for measuring whatever compensatory or
actual damages are borne.[44]
Considering our findings that there was no contract of deposit
between petitioners and respondent or Moreman and that
actually there were no more construction materials or
equipment in petitioners warehouse when respondent made a
demand for their return, we hold that he has no right
whatsoever to claim for damages.
As we stressed in the beginning, a judgment of default does
not automatically imply admission by the defendant of plaintiffs
causes of action. Here, the trial court merely adopted
respondents allegations in his complaint and evidence without
evaluating them with the highest degree of objectivity and
certainty.
WHEREFORE, the petition is GRANTED. The challenged
Decision of the Court of Appeals dated June 17, 1999 is
REVERSED and SET ASIDE. Costs against respondent.
SO ORDERED.
[G.R. No. 129995. October 19, 2001]
THE PROVINCE OF BATAAN, petitioner-appellant, vs. HON.
PEDRO VILLAFUERTE, JR., as Presiding Judge of the
Regional Trial Court of Bataan (Branch 4), and THE

PRESIDENTIAL COMMISSION ON GOOD
GOVERNMENT, respondents-appellees.
DECISION
BUENA, J.:
Sought to be reversed in the instant Petition for Review
on Certiorari is the Decision[1] of the Court of Appeals, dated 19
December 1996, in C.A. G.R. SP. No. 33344, upholding the
twin orders dated 28 July 1993 and 11 November 1993 of the
Regional Trial Court (RTC) of Bataan, Branch 4, in Civil Case
No. 210-ML, for annulment of sale.
In its order dated 28 July 1993,[2] the lower court directed that
herein petitioner Province of Bataan remit to said court
whatever lease rentals petitioner may receive from lessees 7-R
Port Services and Marina Port Services, and that such lease
rentals be placed under a special time deposit with the Land
Bank of the Philippines, Balanga Branch, for the account of the
RTC-Balanga, Branch 4, in escrow, for the person or persons,
natural or juridical, who may be adjudged lawfully entitled
thereto. The order dated 11 November 1993,[3] denied herein
petitioners motion for reconsideration of the 28 July, 1993
order.
Involved in the present controversy is an expanse of real
property (hereinafter referred to as the BASECO property)
situated at Mariveles, Bataan and formerly registered and titled
in the name of either the Bataan Shipyard and Engineering
Corporation (BASECO), the Philippine Dockyard Corporation
or the Baseco Drydock and Construction Co., Inc..
Pursuant to Presidential Decree No. 464, otherwise known as
the Real Property Tax Code of 1974, the Provincial Treasurer
of Bataan advertised for auction sale the BASECO property
due to real estate tax delinquency amounting to
P7,914,281.72, inclusive of penalties.[4] At the auction sale held
on 12 February 1988, no bidder vied for said property as a
result of which, the Provincial Treasurer of Bataan adjudged
the property to, and acquired the same for, and in the name of
herein petitioner Province of Bataan. Upon the expiration of the
one-year redemption period, and without the owner exercising
its right to redeem the subject property, the Provincial
Government of Bataan consolidated its title thereon; the
corresponding certificates of title were then issued in the name
of herein petitioner Province of Bataan.
Eventually, petitioner, thru then Provincial Governor Enrique T.
Garcia, entered into a ten-year contract of lease with 7-R Port
Services, Inc., whereby portions of the BASECO property
including facilities and improvements thereon, were leased to
the latter for a minimum escalating annual rental of Eighteen
Million Pesos (P18 million). On 10 May 1993, petitioner forged
another contract of lease with Marina Port Services, over a ten-
hectare portion of the BASECO property.
On 11 May 1993, The Presidential Commission on Good
Government (PCGG), for itself and on behalf of the Republic of
the Philippines and the BASECO, the Philippine Dockyard
Corporation and the Baseco Drydock and Construction Co.
Inc., filed with the RTC-Bataan a complaint for annulment of
sale,[5] principally assailing the validity of the tax delinquency
35
sale of the BASECO property in favor of petitioner Province of
Bataan. Among others, the complaint alleged that the auction
sale held on 12 February 1988, is void for having been
conducted:[6]
a) In defiance of an injunctive order issued by the PCGG in the
exercise of its powers under Executive Order No. 1, Series of
1986;
b) in contravention of the Real Property Tax Code of 1974;
c) while the issue of ownership of the Baseco property and of
whether the same partakes of the nature of ill-gotten wealth is
pending litigation in Civil Case No. 0010 before the
Sandiganbayan; and
d) despite the inscription of the sequestration order at the back
of each title of the BASECO property.
In its prayer, the complaint asked for the following reliefs:
1) The tax delinquency sale held on February 12, 1988 be
declared null and void; and the defendant Province of Bataan
be ordered to reconvey all the properties thus sold to its rightful
owners, the Republic of the Philippines and/or the other
plaintiffs herein;
2) The defendants be ordered to render an accounting to, and
pay plaintiffs all earnings, fruits and income which they have
received or could have received from the time they claimed
ownership and took possession and control of all the auctioned
properties; and to account and pay for all the losses,
deterioration and destruction thereof;
3) The defendants be ordered, jointly and severally to pay
plaintiffs for all damages suffered by it/them by reason of the
unlawful actuations of the defendants, in the sum herein
claimed and proven at the trial of this case, including attorneys
fees and costs of suit;
4) The defendant 7-R Port Services, Inc. be ordered to
immediately cease and desist from paying any lease rentals to
the Province of Bataan, and instead to pay the same directly to
the plaintiffs;
5) The Register of Deeds of Bataan be ordered to cancel the
Torrens titles it had issued in favor of the Province of Bataan,
and issue a new Torrens titles (sic) in favor of plaintiffs in lieu of
the cancelled ones.
Herein respondent PCGG, upon learning of the lease contracts
entered into by and between petitioner and Marina Port
Services, filed with the RTC an urgent motion for the issuance
of a writ of preliminary injunction to enjoin herein petitioner
from entering into a lease contract with Marina Port Services,
Inc. (Marina), or any other entity, and/or from
implementing/enforcing such lease contract, if one has already
been executed, and to maintain the status quo until further
orders from the Court.
On 06 July 1993, the lower court denied the motion
ratiocinating that the lease contract with Marina was already
a fait accompli when the motion was filed, and that Marina was

not a party to the suit for not having been impleaded as party-
defendant.
On 30 June 1993, the PCGG filed with the lower court an
Urgent Motion to Deposit Lease Rentals, alleging inter alia that
the rentals amounting to Hundreds of Millions of Pesos are in
danger of being unlawfully spent, squandered and dissipated to
the great and irreparable damage of plaintiffs who are the
rightful owners of the property leased.
On 28 July 1993, the lower court granted the PCGGs urgent
motion and issued its assailed order the dispositive portion of
which reads:
ACCORDINGLY, the defendant Province of Bataan is hereby
ordered to remit to this Court the lease rentals it may receive
from the defendant 7-R Port Services, Inc. and the Marina Port
Services, Inc. to commence from its receipt of this Order and
for the Clerk of Court of this Branch to deposit said amount
under special time deposit with the Land Bank of the
Philippines, Balanga Branch, in Balanga, Bataan in the name
and/or account of this Court to be held in ESCROW for the
person or persons, natural or juridical, who may be finally
adjudged lawfully entitled thereto, and subject to further orders
from this Court.[7]
Petitioner moved to reconsider the aforementioned order,
which motion the lower court denied via its assailed order
dated 11 November 1993.[8] Aggrieved by the lower courts twin
orders, petitioner filed before the Court of Appeals a petition
for certiorari with prayer for issuance of a temporary restraining
order and writ of preliminary injunction.[9]
On 01 December 1995, the Bataan Shipyard and Engineering
Corporation, the Philippine Dockyard Corporation and the
Baseco Drydock and Construction Co., Inc., filed a motion for
leave to intervene before the Court of Appeals. In a Resolution
dated 26 March 1996, the appellate court granted the motion.
On 16 April 1996, the intervenors-respondents filed their
Answer-in-Intervention praying for the dismissal of the petition
before the Court of Appeals and the dissolution of the
preliminary injunction issued in favor of petitioners.[10]
In its Decision dated 19 December 1996, the Court of Appeals
dismissed the petition to which a motion for reconsideration
was filed by petitioner. In a Resolution dated 21 July 1997,
respondent court likewise denied the motion for
reconsideration, hence, the instant appeal where petitioner
Province of Bataan imputes to the Court of Appeals a lone
assignment of error, to wit:
The Court of Appeals manifestly erred in refusing to declare
and/or hold that the respondent judge acted without jurisdiction
or with grave abuse of discretion in ordering the deposit in
escrow of the rental payments pertaining to the petitioner
province.
In simpler terms, the sole issue for resolution revolves around
the propriety of the escrow order issued by the lower court in
the civil suit for annulment of sale.
The instant petition is devoid of merit.
36
In the main, petitioner insists that the issuance of the escrow
order by the trial court was patently irregular, if not downright
anomalous, reasoning that nowhere in the Revised Rules of
Court is the trial court, or any court for that matter, authorized
to issue such escrow order, whether as a provisional or
permanent remedy. According to petitioner, the escrow orders
in question are null and void ab initio for having been issued
absent any legal basis and are merely calculated to prejudice
the petitioner province without any practical or worthwhile,
much less legal objective.
We do not agree. An escrow[11] fills a definite niche in the body
of the law; it has a distinct legal character.[12] The usual
definition is that an escrow is a written instrument which by its
terms imports a legal obligation and which is deposited by the
grantor, promisor, or obligor, or his agent with a stranger or
third party, to be kept by the depositary until the performance of
a condition or the happening of a certain event, and then to be
delivered over to the grantee, promisee, or obligee.[13]
While originally, the doctrine of escrow applied only to deeds
by way of grant,[14] or as otherwise stated, instruments for the
conveyance of land,[15] under modern theories of law, the term
escrow is not limited in its application to deeds, but is applied
to the deposit of any written instrument with a third person.
[16]
Particular instruments which have been held to be the
subject of an escrow include bonds or covenants, deeds,
mortgages, oil and gas leases, contracts for the sale of land or
for the purchase of personal property, corporate stocks and
stock subscriptions, promissory notes or other commercial
paper, insurance applications and policies, contracts for the
settlement of will-contest cases, indentures of apprenticeship,
receipts assigning concessions and discontinuances and
releases of causes of action.[17] Moreover, it is no longer open
to question that money may be delivered in escrow.[18]
In our jurisdiction, an escrow order issued by a court of law
may find ample basis and support in the courts intrinsic power
to issue orders and other ancillary writs and processes
incidental or reasonably necessary to the exercise of its main
jurisdiction. Evidently, judicial power connotes certain incidental
and inherent attributes reasonably necessary for an effective
administration of justice.[19]
In a manner of speaking, courts have not only the power to
maintain their life, but they have also the power to make that
existence effective for the purpose for which the judiciary was
created. They can, by appropriate means, do all things
necessary to preserve and maintain every quality needful to
make the judiciary an effective institution of
Government. Courts have therefore inherent power to preserve
their integrity, maintain their dignity and to insure effectiveness
in the administration of justice.[20]
To lend flesh and blood to this legal aphorism, Rule 135 of the
Rules of Court explicitly provides:
Section 5. Inherent powers of courts- Every court shall have
power:
X X X (g) To amend and control its process and orders so as to
make them conformable to law and justice.

Section 6. Means to carry jurisdiction into effect - When by law
jurisdiction is conferred on a court or judicial officer, all auxiliary
writs, processes and other means necessary to carry it into
effect may be employed by such court or officer, and if the
procedure to be followed in the exercise of such jurisdiction is
not specifically pointed out by law or by these rules, any
suitable process or mode of proceeding may be adopted which
appears conformable to the spirit of said law or
rules. (Emphasis ours)
It is beyond dispute that the lower court exercised jurisdiction
over the main action docketed as Civil Case No. 210-ML,
which involved the annulment of sale and reconveyance of the
subject properties. Under this circumstance, we are of the firm
view that the trial court, in issuing the assailed escrow orders,
acted well within its province and sphere of power inasmuch as
the subject orders were adopted in accordance with the Rules
and jurisprudence and were merely incidental to the courts
exercise of jurisdiction over the main case, thus:
X X X Jurisdiction attaching, the courts powers as a necessary
incident to their general jurisdiction, to make such orders in
relation to the cases pending before them are as necessary to
the progress of the cases and the dispatch of business
follow. Deming v. Foster, 42 N.H. 165, 178 cited in Burleigh v.
Wong Sung De Leon 139 A. 184,83 N.H. 115.
XXXXXXXXX
X X X A court is vested, not only with the powers expressly
granted by the statute, but also with all such powers as are
incidentally necessary to the effective exercise of the powers
expressly conferred (In re McLures Estate, 68 Mont. 556, 220
P. 527) and to render its orders, made under such express
powers effective. Brown v. Clark, 102 Tex. 323, 116 S.W. 360,
24 L.R.A. (N.S.) 670 cited in State v. District Court, 272 P. 525.
XXXXXXXXX
In the absence of prohibitive legislation, courts have inherent
power to provide themselves with appropriate procedures
required for the performance of their tasks. Ex parte Peterson,
253 U.S. 300, 312, 313, 40 S. Ct. 543, 64 L. Ed. 919; Funk v.
U.S., 290 U.S. 371,381-384, 54 A. Ct. 212, 78 L.Ed. 369, 93
A.L.R. 1136 cited in Ex parte U.S. C.C.A. Wis., 101 F 2d 870.
XXXXXXXXX
A court has inherent power to make such interlocutory orders
as may be necessary to protect its jurisdiction, and to make
certain that its eventual decree may not be ineffective.
(Boynton v. Moffat Tunnel Improvement Dist. C.C.A. Colo, 57 F,
2d 772.
XXXXXXXXX
In the ordinary case the courts can proceed to the enforcement
of the plaintiffs rights only after a trial had in the manner
prescribed by the laws of the land, which involves due notice,
the right of the trial by jury, etc. Preliminary to such an
adjucation, the power of the court is generally to preserve the
subject matter of the litigation to maintain the status, or issue
some extraordinary writs provided by law, such as
37
attachments, etc. None of these powers, however, are
exercised on the theory that the court should, in advance of the
final adjudication determine the rights of the parties in any
summary way and put either of them in the enjoyment
thereof; but such actions taken merely, as means for securing
an effective adjudication and enforcement of rights of the
parties after such adjudication. Colby c. Osgood Tex. Civ. App.,
230 S.W. 459;)[21] (emphasis ours)
On this score, the incisive disquisition of the Court of Appeals
is worthy of mention, to wit:
X X X Given the jurisdiction of the trial court to pass upon the
raised question of ownership and possession of the disputed
property, there then can hardly be any doubt as to the
competence of the same court, as an adjunct of its main
jurisdiction, to require the deposit in escrow of the rentals
thereof pending final resolution of such question. To
paraphrase the teaching in Manila Herald Publishing Co.,
Inc. vs. Ramos (G.R. No. L-4268, January 18, 1951, cited in
Francisco, Revised Rules of Court, Vol. 1, 2nd ed., p. 133),
jurisdiction over an action carries with it jurisdiction over an
interlocutory matter incidental to the cause and deemed
essential to preserve the subject matter of the suit or to protect
the parties interest. X X X
X X X the impugned orders appear to us as a fair response to
the exigencies and equities of the situation. Parenthetically, it is
not disputed that even before the institution of the main case
below, the Province of Bataan has been utilizing the rental
payments on the Baseco Property to meet its financial
requirements. To us, this circumstance adds a more compelling
dimension for the issuance of the assailed orders. X X X
Applying the foregoing principles and considering the
peculiarities of the instant case, the lower court, in the course
of adjudicating and resolving the issues presented in the main
suit, is clearly empowered to control the proceedings therein
through the adoption, formulation and issuance of orders and
other ancillary writs, including the authority to place the
properties in custodia legis, for the purpose of effectuating its
judgment or decree and protecting further the interests of the
rightful claimants of the subject property.
To trace its source, the courts authority proceeds from its
jurisdiction and power to decide, adjudicate and resolve the
issues raised in the principal suit. Stated differently, the deposit
of the rentals in escrow with the bank, in the name of the lower
court, is only an incident in the main proceeding.[22] To be sure,
placing property in litigation under judicial possession, whether
in the hands of a receiver, and administrator, or as in this case,
in a government bank,[23] is an ancient and accepted
procedure.[24] Consequently, we find no cogency to disturb the
questioned orders of the lower court and in effect uphold the
propriety of the subject escrow orders. (emphasis ours)
IN VIEW WHEREOF, the instant petition is hereby DENIED for
lack of merit. ACCORDINGLY, the assailed decision of the
Court of Appeals is hereby AFFIRMED. SO ORDERED.
G.R. No. 179952 December 4, 2009

METROPOLITAN BANK AND TRUST COMPANY (formerly
ASIANBANK CORPORATION), Petitioner, vs.
BA FINANCE CORPORATION and MALAYAN INSURANCE
CO., INC., Respondents.
DECISION
CARPIO MORALES, J.:
Lamberto Bitanga (Bitanga) obtained from respondent BA
Finance Corporation (BA Finance) a ₱329,2801 loan to secure
which, he mortgaged his car to respondent BA Finance.2 The
mortgage contained the following stipulation:
The MORTGAGOR covenants and agrees that he/it will cause
the property(ies) hereinabove mortgaged to be insured against
loss or damage by accident, theft and fire for a period of one
year from date hereof with an insurance company or
companies acceptable to the MORTGAGEE in an amount not
less than the outstanding balance of mortgage obligations and
that he/it will make all loss, if any, under such policy or
policies, payable to the MORTGAGEE or its assigns as its
interest may appear x x x.3 (emphasis and underscoring
supplied)
Bitanga thus had the mortgaged car insured by respondent
Malayan Insurance Co., Inc. (Malayan Insurance)4which issued
a policy stipulating that, inter alia,
Loss, if any shall be payable to BA FINANCE CORP. as its
interest may appear. It is hereby expressly understood that this
policy or any renewal thereof, shall not be cancelled without
prior notification and conformity by BA FINANCE
CORPORATION.5 (emphasis and underscoring supplied)
The car was stolen. On Bitanga’s claim, Malayan Insurance
issued a check payable to the order of "B.A. Finance
Corporation and Lamberto Bitanga" for ₱224,500, drawn
against China Banking Corporation (China Bank). The check
was crossed with the notation "For Deposit Payees’ Account
Only."6
Without the indorsement or authority of his co-payee BA
Finance, Bitanga deposited the check to his account with the
Asianbank Corporation (Asianbank), now merged with herein
petitioner Metropolitan Bank and Trust Company (Metrobank).
Bitanga subsequently withdrew the entire proceeds of the
check.
In the meantime, Bitanga’s loan became past due, but despite
demands, he failed to settle it.
BA Finance eventually learned of the loss of the car and of
Malayan Insurance’s issuance of a crossed check payable to it
and Bitanga, and of Bitanga’s depositing it in his account at
Asianbank and withdrawing the entire proceeds thereof.
BA Finance thereupon demanded the payment of the value of
the check from Asianbank7 but to no avail, prompting it to file a
complaint before the Regional Trial Court (RTC) of Makati for
sum of money and damages against Asianbank and
Bitanga,8 alleging that, inter alia, it is entitled to the entire
proceeds of the check.
38
In its Answer with Counterclaim,9 Asianbank alleged that BA
Finance "instituted [the] complaint in bad faith to coerce [it] into
paying the whole amount of the CHECK knowing fully well that
its rightful claim, if any, is against Malayan [Insurance]."10
Asianbank thereafter filed a cross-claim against
Bitanga,11 alleging that he fraudulently induced its personnel to
release to him the full amount of the check; and that on being
later informed that the entire amount of the check did not
belong to Bitanga, it took steps to get in touch with him but he
had changed residence without leaving any forwarding
address.12
And Asianbank filed a third-party complaint against
Malayan Insurance,13 alleging that Malayan Insurance was
grossly negligent in issuing the check payable to both Bitanga
and BA Finance and delivering it to Bitanga without the consent
of BA Finance.14
Bitanga was declared in default in Asianbank’s cross-claim.15
Branch 137 of the Makati RTC, finding that Malayan Insurance
was not privy to the contract between BA Finance and Bitanga,
and noting the claim of Malayan Insurance that it is its policy to
issue checks to both the insured and the financing company,
held that Malayan Insurance cannot be faulted for negligence
for issuing the check payable to both BA Finance and Bitanga.
The trial court, holding that Asianbank was negligent in
allowing Bitanga to deposit the check to his account and to
withdraw the proceeds thereof, without his co-payee BA
Finance having either indorsed it or authorized him to indorse it
in its behalf,16 found Asianbank and Bitanga jointly and
severally liable to BA Finance following Section 41 of
the Negotiable Instruments Law and Associated Bank v. Court
of Appeals.17
Thus the trial court disposed:
WHEREFORE, premises considered, judgment is hereby
rendered ordering defendants Asian Bank Corporation and
Lamberto Bitanga:
1) To pay plaintiff jointly and severally the sum of P224,500.00
with interest thereon at the rate of 12% from September 25,
1992 until fully paid;
2) To pay plaintiff the sum of P50,000.00 as exemplary
damages; P20,000.00 as actual damages; P30,000.00 as
attorney’s fee; and
3) To pay the costs of suit.
Asianbank’s and Bitanga’s [sic] counterclaims are dismissed.
The third party complaint of defendant/third party plaintiff
against third-party defendant Malayan Insurance, Co., Inc. is
hereby dismissed. Asianbank is ordered to pay Malayan
attorney’s fee of P50,000.00 and a per appearance fee of
P500.00.
On the cross-claim of defendant Asianbank, co-defendant
Lamberto Bitanga is ordered to pay the former the

amounts the latter is ordered to pay the plaintiff in Nos. 1,
2 and 3 above-mentioned.
SO ORDERED.18 (emphasis and underscoring supplied)
Before the Court of Appeals, Asianbank, in its Appellant’s Brief,
submitted the following issues for consideration:
3.01.1.1 Whether BA Finance has a cause of action against
Asianbank.
3.01.1.2 Assuming that BA Finance has a valid cause of
action, may it claim from Asianbank more than one-half of the
value of the check considering that it is a mere co-payee or
joint payee of the check?
3.01.1.3 Whether BA Finance is liable to Asianbank for actual
and exemplary damages for wrongfully bringing the case to
court.
3.01.1.4 Whether Malayan is liable to Asianbank for
reimbursement of any sum of money which this Honorable
Court may award to BA Finance in this case.19 (underscoring
supplied)
And it proffered the following arguments:
A. BA Finance has no cause of action against Asianbank as it
has no legal right and title to the check considering that
the check was not delivered to BA Finance. Hence, BA Finance
is not a holder thereof under the Negotiable Instruments Law.
B. Asianbank, as collecting bank, is not liable to BA Finance as
there was no privity of contract between them.
C. Asianbank, as collecting bank, is not liable to BA Finance,
considering that, as the intermediary between the payee and
the drawee Chinabank, it merely acted on the instructions of
drawee Chinabank to pay the amount of the check to Bitanga,
hence, the consequent damage to BA Finance was due to the
negligence of Chinabank.
D. Malayan’s act of issuing and delivering the check solely to
Bitanga in violation of the "loss payee" clause in the Policy, is
the proximate cause of the alleged damage to BA Finance.
E. Assuming Asianbank is liable, BA Finance can claim only his
proportionate interest on the check as it is a joint payee
thereof.
F. Bitanga alone is liable for the amount to BA Finance on the
ground of unjust enrichment or solutio indebiti.
G. BA Finance is liable to pay Asianbank actual and exemplary
damages.20 (underscoring supplied)
The appellate court, "summarizing" the errors attributed to the
trial court by Asianbank to be "whether…BA Finance has a
cause of action against [it] even if the subject check had not
been delivered to…BA Finance by the issuer itself," held in the
affirmative and accordingly affirmed the trial court’s decision
but deleted the award of ₱20,000 as actual damages.21
39
Hence, the present Petition for Review on Certiorari22 filed by
Metrobank (hereafter petitioner) to which Asianbank was, as
earlier stated, merged, faulting the appellate court
I. x x x in applying the case of Associated Bank v. Court of
Appeals, in the absence of factual similarity and of the legal
relationships necessary for the application of the desirable
shortcut rule. x x x
II. x x x in not finding that x x x the general rule that the payee
has no cause of action against the collecting bank absent
delivery to him must be applied.
III. x x x in finding that all the elements of a cause of action by
BA Finance Corporation against Asianbank Corporation are
present.
IV. x x x in finding that Article 1208 of the Civil Code is not
applicable.
V. x x x in awarding of exemplary damages even in the
absence of moral, temperate, liquidated or compensatory
damages and a finding of fact that Asianbank acted in a
wanton, fraudulent, reckless, oppressive or malevolent manner.
xxxx
VII. x x x in dismissing Asianbank’s counterclaim and Third
Party complaint [against Malayan Insurance].23(italics in the
original; underscoring supplied)
Petitioner proffers the following arguments against the
application of Associated Bank v. CA to the case:
x x x [T]he rule established in the Associated Bank case has
provided a speedier remedy for the payee to recover from
erring collecting banks despite the absence of delivery of the
negotiable instrument. However, the application of the rule
demands careful consideration of the factual settings and
issues raised in the case x x x.
One of the relevant circumstances raised in Associated Bank is
the existence of forgery or unauthorized indorsement. x x x
xxxx
In the case at bar, Bitanga is authorized to indorse the check
as the drawer names him as one of the payees. Moreover, his
signature is not a forgery nor has he or anyone forged the
signature of the representative of BA Finance Corporation. No
unauthorized indorsement appears on the check.
xxxx
Absent the indispensable fact of forgery or unauthorized
indorsement, the desirable shortcut rule cannot be
applied,24 (underscoring supplied)
The petition fails.
Section 41 of the Negotiable Instruments Law provides:
Where an instrument is payable to the order of two or more
payees or indorsees who are not partners, all must

indorse unless the one indorsing has authority to indorse for
the others. (emphasis and underscoring supplied)
Bitanga alone endorsed the crossed check, and petitioner
allowed the deposit and release of the proceeds thereof,
despite the absence of authority of Bitanga’s co-payee BA
Finance to endorse it on its behalf.25
Denying any irregularity in accepting the check, petitioner
maintains that it followed normal banking procedure. The
testimony of Imelda Cruz, Asianbank’s then accounting head,
shows otherwise, however, viz:
Q Now, could you be familiar with a particular policy of the
bank with respect to checks with joined (sic) payees?
A Yes, sir.
Q And what would be the particular policy of the bank
regarding this transaction?
A The bank policy and procedure regarding the joint
checks. Once it is deposited to a single account, we are
not accepting joint checks for single account, depositing
to a single account (sic).
Q What happened to the bank employee who allowed this
particular transaction to occur?
A Once the branch personnel, the bank personnel (sic)
accepted it, he is liable.
Q What do you mean by the branch personnel being held
liable?
A Because since (sic) the bank policy, we are not
supposed to accept joint checks to a [single] account, so
we mean that personnel would be held liable in the sense
that (sic) once it is withdrawn or encashed, it will not be
allowed.
Q In your experience, have you encountered any bank
employee who was subjected to disciplinary action by not
following bank policies?
A The one that happened in that case, since I really don’t know
who that personnel is, he is no longer connected with the bank.
Q What about in general, do you know of any disciplinary
action, Madam witness?
A Since there’s a negligence on the part of the bank
personnel, it will be a ground for his separation [from] the
bank.26 (emphasis, italics and underscoring supplied)
Admittedly, petitioner dismissed the employee who allowed the
deposit of the check in Bitanga’s account.
Petitioner’s argument that since there was neither forgery, nor
unauthorized indorsement because Bitanga was a co-payee in
the subject check, the dictum in Associated Bank v. CA does
not apply in the present case fails. The payment of an
instrument over a missing indorsement is the equivalent of
payment on a forged indorsement27 or an unauthorized
indorsement in itself in the case of joint payees.28
40
Clearly, petitioner, through its employee, was negligent when it
allowed the deposit of the crossed check, despite the lone
endorsement of Bitanga, ostensibly ignoring the fact that the
check did not, it bears repeating, carry the indorsement of BA
Finance.29
As has been repeatedly emphasized, the banking business is
imbued with public interest such that the highest degree of
diligence and highest standards of integrity and performance
are expected of banks in order to maintain the trust and
confidence of the public in general in the banking
sector.30 Undoubtedly, BA Finance has a cause of action
against petitioner.
Is petitioner liable to BA Finance for the full value of the check?
Petitioner, at all events, argue that its liability to BA Finance
should only be one-half of the amount covered by the check as
there is no indication in the check that Bitanga and BA Finance
are solidary creditors to thus make them presumptively joint
creditors under Articles 1207 and 1208 of the Civil Code which
respectively provide:
Art. 1207. The concurrence of two or more creditors or of two
or more debtors in one and the same obligation does not imply
that each one of the former has a right to demand, or that each
one of the latter is bound to render, entire compliance with the
prestations. There is a solidary liability only when the obligation
expressly so states, or when the law or the nature of the
obligation requires solidarity.
Art. 1208. If from the law, or the nature or wording of the
obligations to which the preceding article refers to the contrary
does not appear, the credit or debt shall be presumed to be
divided into as many equal shares as there are creditors or
debtors, the debts or credits being considered distinct from one
another, subject to the Rules of Court governing the multiplicity
of suits.
Petitioner’s argument is flawed.
The provisions of the Negotiable Instruments Law and
underlying jurisprudential teachings on the black-letter law
provide definitive justification for petitioner’s full liability on the
value of the check.
To be sure, a collecting bank, Asianbank in this case, where a
check is deposited and which indorses the check upon
presentment with the drawee bank, is an indorser.[31] This is
because in indorsing a check to the drawee bank, a collecting
bank stamps the back of the check with the phrase "all prior
endorsements and/or lack of endorsement guaranteed"32 and,
for all intents and purposes, treats the check as a negotiable
instrument, hence, assumes the warranty of an
indorser.33 Without Asianbank’s warranty, the drawee bank
(China Bank in this case) would not have paid the value of the
subject check.
Petitioner, as the collecting bank or last indorser, generally
suffers the loss because it has the duty to ascertain the
genuineness of all prior indorsements considering that the act
of presenting the check for payment to the drawee is an

assertion that the party making the presentment has done its
duty to ascertain the genuineness of prior indorsements.34
Accordingly, one who credits the proceeds of a check to the
account of the indorsing payee is liable in conversion to the
non-indorsing payee for the entire amount of the check.35
It bears noting that in petitioner’s cross-claim against Bitanga,
the trial court ordered Bitanga to return to petitioner the entire
value of the check ─ ₱224,500.00 ─ with interest as well as
damages and cost of suit. Petitioner never questioned this
aspect of the trial court’s disposition, yet it now prays for the
modification of its liability to BA Finance to only one-half of said
amount. To pander to petitioner’s supplication would certainly
amount to unjust enrichment at BA Finance’s expense.
Petitioner’s remedy—which is the reimbursement for the full
amount of the check from the perpetrator of the irregularity —
lies with Bitanga.
Articles 1207 and 1208 of the Civil Code cannot be applied to
the present case as these are completely irrelevant. The
drawer, Malayan Insurance in this case, issued the check to
answer for an underlying contractual obligation (payment of
insurance proceeds). The obligation is merely reflected in the
instrument and whether the payees would jointly share in the
proceeds or not is beside the point.
Moreover, granting petitioner’s appeal for partial liability would
run counter to the existing principles on the liabilities of parties
on negotiable instruments, particularly on Section 68 of
the Negotiable Instruments Law which instructs that joint
payees who indorse are deemed to indorse jointly and
severally.36 Recall that when the maker dishonors the
instrument, the holder thereof can turn to those secondarily
liable — the indorser — for recovery.37 And since the law
explicitly mandates a solidary liability on the part of the joint
payees who indorse the instrument, the holder thereof
(assuming the check was further negotiated) can turn to either
Bitanga or BA Finance for full recompense.
Respecting petitioner’s challenge to the award by the appellate
court of exemplary damages to BA Finance, the same fails.
Contrary to petitioner’s claim that no moral, temperate,
liquidated or compensatory damages were awarded by the trial
court,38 the RTC did in fact award compensatory or actual
damages of ₱224,500, the value of the check, plus interest
thereon.
Petitioner argues, however, that assuming arguendo that
compensatory damages had been awarded, the same
contravened Article 2232 of the Civil Code which provides that
in contracts or quasi-contracts, the court may award exemplary
damages only if the defendant acted in a wanton, fraudulent,
reckless, oppressive, or malevolent manner. Since, so
petitioner concludes, there was no finding that it acted in a
wanton, fraudulent, reckless, oppressive, or malevolent
manner,39 it is not liable for exemplary damages.
The argument fails. To reiterate, petitioner’s liability is based
not on contract or quasi-contract but on quasi-delictsince there
is no pre-existing contractual relation between the
parties.40 Article 2231 of the Civil Code, which provides that
41
in quasi-delict, exemplary damages may be granted if the
defendant acted with gross negligence, thus applies. For
"gross negligence" implies a want or absence of or failure to
exercise even slight care or diligence, or the entire absence of
care,41 evincing a thoughtless disregard of consequences
without exerting any effort to avoid them.42
x x x The law allows the grant of exemplary damages to set an
example for the public good. The business of a bank is affected
with public interest; thus it makes a sworn profession of
diligence and meticulousness in giving irreproachable service.
For this reason, the bank should guard against in injury
attributable to negligence or bad faith on its part. The award of
exemplary damages is proper as a warning to [the petitioner]
and all concerned not to recklessly disregard their obligation to
exercise the highest and strictest diligence in serving their
depositors.43(Italics and underscoring supplied)
As for the dismissal by the appellate court of petitioner’s third-
party complaint against Malayan Insurance, the same is well-
taken. Petitioner based its third-party complaint on Malayan
Insurance’s alleged gross negligence in issuing the check
payable to both BA Finance and Bitanga, despite the
stipulation in the mortgage and in the insurance policy that
liability for loss shall be payable to BA Finance.44 Malayan
Insurance countered, however, that it
x x x paid the amount of ₱224,500 to ‘BA Finance Corporation
and Lamberto Bitanga’ in compliance with the decision in the
case of "Lamberto Bitanga versus Malayan Insurance Co., Inc.,
Civil Case No. 88-2802, RTC-Makati Br. 132, and affirmed on
appeal by the Supreme Court [3rd Division], G.R. no. 101964,
April 8, 1992 x x x.45(underscoring supplied)
It is noted that Malayan Insurance, which stated that it was a
matter of company policy to issue checks in the name of the
insured and the financing company, presented a witness to
rebut its supposed negligence. 46 Perforce, it thus wrote
a crossed check with joint payees so as to serve warning that
the check was issued for a definite purpose.47Petitioner never
ever disputed these assertions.
The Court takes exception, however, to the appellate court’s
affirmance of the trial court’s grant of legal interest of 12% per
annum on the value of the check. For the obligation in this case
did not arise out of a loan or forbearance of money, goods or
credit. While Article 1980 of the Civil Code provides that:
Fixed savings, and current deposits of money in banks and
similar institutions shall be governed by the provisions
concerning simple loan,
said provision does not find application in this case since the
nature of the relationship between BA Finance and petitioner is
one of agency whereby petitioner, as collecting bank, is to
collect for BA Finance the corresponding proceeds from the
check.48 Not being a loan or forbearance of money, the interest
should be 6% per annum computed from the date of
extrajudicial demand on September 25, 1992 until finality of
judgment; and 12% per annum from finality of judgment until
payment, conformably with Eastern Shipping Lines, Inc. v.
Court of Appeals.[49]

WHEREFORE, the Decision of the Court of Appeals dated May
18, 2007 is AFFIRMED with MODIFICATION in that the rate of
interest on the judgment obligation of ₱224,500 should be 6%
per annum, computed from the time of extrajudicial demand on
September 25, 1992 until its full payment before finality of
judgment; thereafter, if the amount adjudged remains unpaid,
the interest rate shall be 12% per annum computed from the
time the judgment becomes final and executory until fully
satisfied. Costs against petitioner. SO ORDERED.
DEPOSIT NECESSARY
G.R. No. 126780 February 17, 2005
YHT REALTY CORPORATION, ERLINDA LAINEZ and
ANICIA PAYAM, petitioners,
vs.
THE COURT OF APPEALS and MAURICE
McLOUGHLIN, respondents.
DECISION
TINGA, J.:
The primary question of interest before this Court is the only
legal issue in the case: It is whether a hotel may evade liability
for the loss of items left with it for safekeeping by its guests, by
having these guests execute written waivers holding the
establishment or its employees free from blame for such loss in
light of Article 2003 of the Civil Code which voids such waivers.
Before this Court is a Rule 45 petition for review of
the Decision1 dated 19 October 1995 of the Court of Appeals
which affirmed the Decision2 dated 16 December 1991 of the
Regional Trial Court (RTC), Branch 13, of Manila, finding YHT
Realty Corporation, Brunhilda Mata-Tan (Tan), Erlinda Lainez
(Lainez) and Anicia Payam (Payam) jointly and solidarily liable
for damages in an action filed by Maurice McLoughlin
(McLoughlin) for the loss of his American and Australian dollars
deposited in the safety deposit box of Tropicana Copacabana
Apartment Hotel, owned and operated by YHT Realty
Corporation.
The factual backdrop of the case follow.
Private respondent McLoughlin, an Australian businessman-
philanthropist, used to stay at Sheraton Hotel during his trips to
the Philippines prior to 1984 when he met Tan. Tan befriended
McLoughlin by showing him around, introducing him to
important people, accompanying him in visiting impoverished
street children and assisting him in buying gifts for the children
and in distributing the same to charitable institutions for poor
children. Tan convinced McLoughlin to transfer from Sheraton
Hotel to Tropicana where Lainez, Payam and Danilo Lopez
were employed. Lopez served as manager of the hotel while
Lainez and Payam had custody of the keys for the safety
deposit boxes of Tropicana. Tan took care of McLoughlin's
booking at the Tropicana where he started staying during his
trips to the Philippines from December 1984 to September
1987.3
On 30 October 1987, McLoughlin arrived from Australia and
registered with Tropicana. He rented a safety deposit box as it
42
was his practice to rent a safety deposit box every time he
registered at Tropicana in previous trips. As a tourist,
McLoughlin was aware of the procedure observed by
Tropicana relative to its safety deposit boxes. The safety
deposit box could only be opened through the use of two keys,
one of which is given to the registered guest, and the other
remaining in the possession of the management of the hotel.
When a registered guest wished to open his safety deposit
box, he alone could personally request the management who
then would assign one of its employees to accompany the
guest and assist him in opening the safety deposit box with the
two keys.4
McLoughlin allegedly placed the following in his safety deposit
box: Fifteen Thousand US Dollars (US$15,000.00) which he
placed in two envelopes, one envelope containing Ten
Thousand US Dollars (US$10,000.00) and the other envelope
Five Thousand US Dollars (US$5,000.00); Ten Thousand
Australian Dollars (AUS$10,000.00) which he also placed in
another envelope; two (2) other envelopes containing letters
and credit cards; two (2) bankbooks; and a checkbook,
arranged side by side inside the safety deposit box.5
On 12 December 1987, before leaving for a brief trip to
Hongkong, McLoughlin opened his safety deposit box with his
key and with the key of the management and took therefrom
the envelope containing Five Thousand US Dollars
(US$5,000.00), the envelope containing Ten Thousand
Australian Dollars (AUS$10,000.00), his passports and his
credit cards.6 McLoughlin left the other items in the box as he
did not check out of his room at the Tropicana during his short
visit to Hongkong. When he arrived in Hongkong, he opened
the envelope which contained Five Thousand US Dollars
(US$5,000.00) and discovered upon counting that only Three
Thousand US Dollars (US$3,000.00) were enclosed
therein.7 Since he had no idea whether somebody else had
tampered with his safety deposit box, he thought that it was
just a result of bad accounting since he did not spend anything
from that envelope.8
After returning to Manila, he checked out of Tropicana on 18
December 1987 and left for Australia. When he arrived in
Australia, he discovered that the envelope with Ten Thousand
US Dollars (US$10,000.00) was short of Five Thousand US
Dollars (US$5,000). He also noticed that the jewelry which he
bought in Hongkong and stored in the safety deposit box upon
his return to Tropicana was likewise missing, except for a
diamond bracelet.9
When McLoughlin came back to the Philippines on 4 April
1988, he asked Lainez if some money and/or jewelry which he
had lost were found and returned to her or to the management.
However, Lainez told him that no one in the hotel found such
things and none were turned over to the management. He
again registered at Tropicana and rented a safety deposit box.
He placed therein one (1) envelope containing Fifteen
Thousand US Dollars (US$15,000.00), another envelope
containing Ten Thousand Australian Dollars (AUS$10,000.00)
and other envelopes containing his traveling
papers/documents. On 16 April 1988, McLoughlin requested
Lainez and Payam to open his safety deposit box. He noticed
that in the envelope containing Fifteen Thousand US Dollars

(US$15,000.00), Two Thousand US Dollars (US$2,000.00)
were missing and in the envelope previously containing Ten
Thousand Australian Dollars (AUS$10,000.00), Four Thousand
Five Hundred Australian Dollars (AUS$4,500.00) were
missing.10
When McLoughlin discovered the loss, he immediately
confronted Lainez and Payam who admitted that Tan opened
the safety deposit box with the key assigned to
him.11 McLoughlin went up to his room where Tan was staying
and confronted her. Tan admitted that she had stolen
McLoughlin's key and was able to open the safety deposit box
with the assistance of Lopez, Payam and Lainez.12 Lopez also
told McLoughlin that Tan stole the key assigned to McLoughlin
while the latter was asleep.13
McLoughlin requested the management for an investigation of
the incident. Lopez got in touch with Tan and arranged for a
meeting with the police and McLoughlin. When the police did
not arrive, Lopez and Tan went to the room of McLoughlin at
Tropicana and thereat, Lopez wrote on a piece of paper a
promissory note dated 21 April 1988. The promissory note
reads as follows:
I promise to pay Mr. Maurice McLoughlin the amount of
AUS$4,000.00 and US$2,000.00 or its equivalent in Philippine
currency on or before May 5, 1988.14
Lopez requested Tan to sign the promissory note which the
latter did and Lopez also signed as a witness. Despite the
execution of promissory note by Tan, McLoughlin insisted that
it must be the hotel who must assume responsibility for the loss
he suffered. However, Lopez refused to accept the
responsibility relying on the conditions for renting the safety
deposit box entitled "Undertaking For the Use Of Safety
Deposit Box,"15 specifically paragraphs (2) and (4) thereof, to
wit:
2. To release and hold free and blameless TROPICANA
APARTMENT HOTEL from any liability arising from any loss in
the contents and/or use of the said deposit box for any cause
whatsoever, including but not limited to the presentation or use
thereof by any other person should the key be lost;
...
4. To return the key and execute the RELEASE in favor of
TROPICANA APARTMENT HOTEL upon giving up the use of
the box.16
On 17 May 1988, McLoughlin went back to Australia and he
consulted his lawyers as to the validity of the abovementioned
stipulations. They opined that the stipulations are void for being
violative of universal hotel practices and customs. His lawyers
prepared a letter dated 30 May 1988 which was signed by
McLoughlin and sent to President Corazon Aquino.17 The Office
of the President referred the letter to the Department of Justice
(DOJ) which forwarded the same to the Western Police District
(WPD).18
After receiving a copy of the indorsement in Australia,
McLoughlin came to the Philippines and registered again as a
hotel guest of Tropicana. McLoughlin went to Malacaňang to
43
follow up on his letter but he was instructed to go to the DOJ.
The DOJ directed him to proceed to the WPD for
documentation. But McLoughlin went back to Australia as he
had an urgent business matter to attend to.
For several times, McLoughlin left for Australia to attend to his
business and came back to the Philippines to follow up on his
letter to the President but he failed to obtain any concrete
assistance.19
McLoughlin left again for Australia and upon his return to the
Philippines on 25 August 1989 to pursue his claims against
petitioners, the WPD conducted an investigation which resulted
in the preparation of an affidavit which was forwarded to the
Manila City Fiscal's Office. Said affidavit became the basis of
preliminary investigation. However, McLoughlin left again for
Australia without receiving the notice of the hearing on 24
November 1989. Thus, the case at the Fiscal's Office was
dismissed for failure to prosecute. Mcloughlin requested the
reinstatement of the criminal charge for theft. In the meantime,
McLoughlin and his lawyers wrote letters of demand to those
having responsibility to pay the damage. Then he left again for
Australia.
Upon his return on 22 October 1990, he registered at the
Echelon Towers at Malate, Manila. Meetings were held
between McLoughlin and his lawyer which resulted to the filing
of a complaint for damages on 3 December 1990 against YHT
Realty Corporation, Lopez, Lainez, Payam and Tan
(defendants) for the loss of McLoughlin's money which was
discovered on 16 April 1988. After filing the complaint,
McLoughlin left again for Australia to attend to an urgent
business matter. Tan and Lopez, however, were not served
with summons, and trial proceeded with only Lainez, Payam
and YHT Realty Corporation as defendants.
After defendants had filed their Pre-Trial Brief admitting that
they had previously allowed and assisted Tan to open the
safety deposit box, McLoughlin filed
an Amended/Supplemental Complaint20 dated 10 June 1991
which included another incident of loss of money and jewelry in
the safety deposit box rented by McLoughlin in the same hotel
which took place prior to 16 April 1988.21 The trial court
admitted the Amended/Supplemental Complaint.
During the trial of the case, McLoughlin had been in and out of
the country to attend to urgent business in Australia, and while
staying in the Philippines to attend the hearing, he incurred
expenses for hotel bills, airfare and other transportation
expenses, long distance calls to Australia, Meralco power
expenses, and expenses for food and maintenance, among
others.22
After trial, the RTC of Manila rendered judgment in favor of
McLoughlin, the dispositive portion of which reads:
WHEREFORE, above premises considered, judgment is
hereby rendered by this Court in favor of plaintiff and against
the defendants, to wit:
1. Ordering defendants, jointly and severally, to pay plaintiff the
sum of US$11,400.00 or its equivalent in Philippine Currency of
₱342,000.00, more or less, and the sum of AUS$4,500.00 or

its equivalent in Philippine Currency of ₱99,000.00, or a total of
₱441,000.00, more or less, with 12% interest from April 16
1988 until said amount has been paid to plaintiff (Item 1,
Exhibit CC);
2. Ordering defendants, jointly and severally to pay plaintiff the
sum of ₱3,674,238.00 as actual and consequential damages
arising from the loss of his Australian and American dollars and
jewelries complained against and in prosecuting his claim and
rights administratively and judicially (Items II, III, IV, V, VI, VII,
VIII, and IX, Exh. "CC");
3. Ordering defendants, jointly and severally, to pay plaintiff the
sum of ₱500,000.00 as moral damages (Item X, Exh. "CC");
4. Ordering defendants, jointly and severally, to pay plaintiff the
sum of ₱350,000.00 as exemplary damages (Item XI, Exh.
"CC");
5. And ordering defendants, jointly and severally, to pay
litigation expenses in the sum of ₱200,000.00 (Item XII, Exh.
"CC");
6. Ordering defendants, jointly and severally, to pay plaintiff the
sum of ₱200,000.00 as attorney's fees, and a fee of ₱3,000.00
for every appearance; and
7. Plus costs of suit.
SO ORDERED.23
The trial court found that McLoughlin's allegations as to the fact
of loss and as to the amount of money he lost were sufficiently
shown by his direct and straightforward manner of testifying in
court and found him to be credible and worthy of belief as it
was established that McLoughlin's money, kept in Tropicana's
safety deposit box, was taken by Tan without McLoughlin's
consent. The taking was effected through the use of the master
key which was in the possession of the management. Payam
and Lainez allowed Tan to use the master key without authority
from McLoughlin. The trial court added that if McLoughlin had
not lost his dollars, he would not have gone through the trouble
and personal inconvenience of seeking aid and assistance
from the Office of the President, DOJ, police authorities and
the City Fiscal's Office in his desire to recover his losses from
the hotel management and Tan.24
As regards the loss of Seven Thousand US Dollars
(US$7,000.00) and jewelry worth approximately One Thousand
Two Hundred US Dollars (US$1,200.00) which allegedly
occurred during his stay at Tropicana previous to 4 April 1988,
no claim was made by McLoughlin for such losses in his
complaint dated 21 November 1990 because he was not sure
how they were lost and who the responsible persons were. But
considering the admission of the defendants in their pre-trial
brief that on three previous occasions they allowed Tan to open
the box, the trial court opined that it was logical and reasonable
to presume that his personal assets consisting of Seven
Thousand US Dollars (US$7,000.00) and jewelry were taken
by Tan from the safety deposit box without McLoughlin's
consent through the cooperation of Payam and Lainez.25
44
The trial court also found that defendants acted with gross
negligence in the performance and exercise of their duties and
obligations as innkeepers and were therefore liable to answer
for the losses incurred by McLoughlin.26
Moreover, the trial court ruled that paragraphs (2) and (4) of the
"Undertaking For The Use Of Safety Deposit Box" are not valid
for being contrary to the express mandate of Article 2003 of the
New Civil Code and against public policy.27 Thus, there being
fraud or wanton conduct on the part of defendants, they should
be responsible for all damages which may be attributed to the
non-performance of their contractual obligations.28
The Court of Appeals affirmed the disquisitions made by the
lower court except as to the amount of damages awarded. The
decretal text of the appellate court's decision reads:
THE FOREGOING CONSIDERED, the appealed Decision is
hereby AFFIRMED but modified as follows:
The appellants are directed jointly and severally to pay the
plaintiff/appellee the following amounts:
1) ₱153,200.00 representing the peso equivalent of
US$2,000.00 and AUS$4,500.00;
2) ₱308,880.80, representing the peso value for the air fares
from Sidney [sic] to Manila and back for a total of eleven (11)
trips;
3) One-half of ₱336,207.05 or ₱168,103.52 representing
payment to Tropicana Apartment Hotel;
4) One-half of ₱152,683.57 or ₱76,341.785 representing
payment to Echelon Tower;
5) One-half of ₱179,863.20 or ₱89,931.60 for the taxi xxx
transportation from the residence to Sidney [sic] Airport and
from MIA to the hotel here in Manila, for the eleven (11) trips;
6) One-half of ₱7,801.94 or ₱3,900.97 representing Meralco
power expenses;
7) One-half of ₱356,400.00 or ₱178,000.00 representing
expenses for food and maintenance;
8) ₱50,000.00 for moral damages;
9) ₱10,000.00 as exemplary damages; and
10) ₱200,000 representing attorney's fees.
With costs.
SO ORDERED.29
Unperturbed, YHT Realty Corporation, Lainez and Payam went
to this Court in this appeal by certiorari.
Petitioners submit for resolution by this Court the following
issues: (a) whether the appellate court's conclusion on the
alleged prior existence and subsequent loss of the subject
money and jewelry is supported by the evidence on record; (b)
whether the finding of gross negligence on the part of
petitioners in the performance of their duties as innkeepers is
supported by the evidence on record; (c) whether the

"Undertaking For The Use of Safety Deposit Box" admittedly
executed by private respondent is null and void; and (d)
whether the damages awarded to private respondent, as well
as the amounts thereof, are proper under the circumstances.30
The petition is devoid of merit.
It is worthy of note that the thrust of Rule 45 is the resolution
only of questions of law and any peripheral factual question
addressed to this Court is beyond the bounds of this mode of
review.
Petitioners point out that the evidence on record is insufficient
to prove the fact of prior existence of the dollars and the
jewelry which had been lost while deposited in the safety
deposit boxes of Tropicana, the basis of the trial court and the
appellate court being the sole testimony of McLoughlin as to
the contents thereof. Likewise, petitioners dispute the finding of
gross negligence on their part as not supported by the
evidence on record.
We are not persuaded.l^vvphi1.net We adhere to the findings
of the trial court as affirmed by the appellate court that the fact
of loss was established by the credible testimony in open court
by McLoughlin. Such findings are factual and therefore beyond
the ambit of the present petition.1awphi1.nét
The trial court had the occasion to observe the demeanor of
McLoughlin while testifying which reflected the veracity of the
facts testified to by him. On this score, we give full credence to
the appreciation of testimonial evidence by the trial court
especially if what is at issue is the credibility of the witness.
The oft-repeated principle is that where the credibility of a
witness is an issue, the established rule is that great respect is
accorded to the evaluation of the credibility of witnesses by the
trial court.31 The trial court is in the best position to assess the
credibility of witnesses and their testimonies because of its
unique opportunity to observe the witnesses firsthand and note
their demeanor, conduct and attitude under grilling
examination.32
We are also not impressed by petitioners' argument that the
finding of gross negligence by the lower court as affirmed by
the appellate court is not supported by evidence. The evidence
reveals that two keys are required to open the safety deposit
boxes of Tropicana. One key is assigned to the guest while the
other remains in the possession of the management. If the
guest desires to open his safety deposit box, he must request
the management for the other key to open the same. In other
words, the guest alone cannot open the safety deposit box
without the assistance of the management or its employees.
With more reason that access to the safety deposit box should
be denied if the one requesting for the opening of the safety
deposit box is a stranger. Thus, in case of loss of any item
deposited in the safety deposit box, it is inevitable to conclude
that the management had at least a hand in the consummation
of the taking, unless the reason for the loss is force majeure.
Noteworthy is the fact that Payam and Lainez, who were
employees of Tropicana, had custody of the master key of the
management when the loss took place. In fact, they even
admitted that they assisted Tan on three separate occasions in
45
opening McLoughlin's safety deposit box.33 This only proves
that Tropicana had prior knowledge that a person aside from
the registered guest had access to the safety deposit box. Yet
the management failed to notify McLoughlin of the incident and
waited for him to discover the taking before it disclosed the
matter to him. Therefore, Tropicana should be held responsible
for the damage suffered by McLoughlin by reason of the
negligence of its employees.
The management should have guarded against the occurrence
of this incident considering that Payam admitted in open court
that she assisted Tan three times in opening the safety deposit
box of McLoughlin at around 6:30 A.M. to 7:30 A.M. while the
latter was still asleep.34 In light of the circumstances
surrounding this case, it is undeniable that without the
acquiescence of the employees of Tropicana to the opening of
the safety deposit box, the loss of McLoughlin's money could
and should have been avoided.
The management contends, however, that McLoughlin, by his
act, made its employees believe that Tan was his spouse for
she was always with him most of the time. The evidence on
record, however, is bereft of any showing that McLoughlin
introduced Tan to the management as his wife. Such an
inference from the act of McLoughlin will not exculpate the
petitioners from liability in the absence of any showing that he
made the management believe that Tan was his wife or was
duly authorized to have access to the safety deposit box. Mere
close companionship and intimacy are not enough to warrant
such conclusion considering that what is involved in the instant
case is the very safety of McLoughlin's deposit. If only
petitioners exercised due diligence in taking care of
McLoughlin's safety deposit box, they should have confronted
him as to his relationship with Tan considering that the latter
had been observed opening McLoughlin's safety deposit box a
number of times at the early hours of the morning. Tan's acts
should have prompted the management to investigate her
relationship with McLoughlin. Then, petitioners would have
exercised due diligence required of them. Failure to do so
warrants the conclusion that the management had been remiss
in complying with the obligations imposed upon hotel-keepers
under the law.
Under Article 1170 of the New Civil Code, those who, in the
performance of their obligations, are guilty of negligence, are
liable for damages. As to who shall bear the burden of paying
damages, Article 2180, paragraph (4) of the same Code
provides that the owners and managers of an establishment
or enterprise are likewise responsible for damages caused by
their employees in the service of the branches in which the
latter are employed or on the occasion of their functions. Also,
this Court has ruled that if an employee is found negligent, it is
presumed that the employer was negligent in selecting and/or
supervising him for it is hard for the victim to prove the
negligence of such employer.35 Thus, given the fact that the
loss of McLoughlin's money was consummated through the
negligence of Tropicana's employees in allowing Tan to open
the safety deposit box without the guest's consent, both the
assisting employees and YHT Realty Corporation itself, as
owner and operator of Tropicana, should be held solidarily
liable pursuant to Article 2193.36

The issue of whether the "Undertaking For The Use of Safety
Deposit Box" executed by McLoughlin is tainted with nullity
presents a legal question appropriate for resolution in this
petition. Notably, both the trial court and the appellate court
found the same to be null and void. We find no reason to
reverse their common conclusion. Article 2003 is controlling,
thus:
Art. 2003. The hotel-keeper cannot free himself from
responsibility by posting notices to the effect that he is not
liable for the articles brought by the guest. Any stipulation
between the hotel-keeper and the guest whereby the
responsibility of the former as set forth in Articles 1998 to
200137 is suppressed or diminished shall be void.
Article 2003 was incorporated in the New Civil Code as an
expression of public policy precisely to apply to situations such
as that presented in this case. The hotel business like the
common carrier's business is imbued with public interest.
Catering to the public, hotelkeepers are bound to provide not
only lodging for hotel guests and security to their persons and
belongings. The twin duty constitutes the essence of the
business. The law in turn does not allow such duty to the public
to be negated or diluted by any contrary stipulation in so-called
"undertakings" that ordinarily appear in prepared forms
imposed by hotel keepers on guests for their signature.
In an early case,38 the Court of Appeals through its then
Presiding Justice (later Associate Justice of the Court) Jose P.
Bengzon, ruled that to hold hotelkeepers or innkeeper liable for
the effects of their guests, it is not necessary that they be
actually delivered to the innkeepers or their employees. It is
enough that such effects are within the hotel or inn.39 With
greater reason should the liability of the hotelkeeper be
enforced when the missing items are taken without the guest's
knowledge and consent from a safety deposit box provided by
the hotel itself, as in this case.
Paragraphs (2) and (4) of the "undertaking" manifestly
contravene Article 2003 of the New Civil Code for they allow
Tropicana to be released from liability arising from any loss in
the contents and/or use of the safety deposit box for any cause
whatsoever.40 Evidently, the undertaking was intended to bar
any claim against Tropicana for any loss of the contents of the
safety deposit box whether or not negligence was incurred by
Tropicana or its employees. The New Civil Code is explicit that
the responsibility of the hotel-keeper shall extend to loss of, or
injury to, the personal property of the guests even if caused by
servants or employees of the keepers of hotels or inns as well
as by strangers, except as it may proceed from any force
majeure.41 It is the loss through force majeure that may spare
the hotel-keeper from liability. In the case at bar, there is no
showing that the act of the thief or robber was done with the
use of arms or through an irresistible force to qualify the same
as force majeure.42
Petitioners likewise anchor their defense on Article
200243 which exempts the hotel-keeper from liability if the loss
is due to the acts of his guest, his family, or visitors. Even a
cursory reading of the provision would lead us to reject
petitioners' contention. The justification they raise would render
nugatory the public interest sought to be protected by the
46
provision. What if the negligence of the employer or its
employees facilitated the consummation of a crime committed
by the registered guest's relatives or visitor? Should the law
exculpate the hotel from liability since the loss was due to the
act of the visitor of the registered guest of the hotel? Hence,
this provision presupposes that the hotel-keeper is not guilty of
concurrent negligence or has not contributed in any degree to
the occurrence of the loss. A depositary is not responsible for
the loss of goods by theft, unless his actionable negligence
contributes to the loss.44
In the case at bar, the responsibility of securing the safety
deposit box was shared not only by the guest himself but also
by the management since two keys are necessary to open the
safety deposit box. Without the assistance of hotel employees,
the loss would not have occurred. Thus, Tropicana was guilty
of concurrent negligence in allowing Tan, who was not the
registered guest, to open the safety deposit box of McLoughlin,
even assuming that the latter was also guilty of negligence in
allowing another person to use his key. To rule otherwise would
result in undermining the safety of the safety deposit boxes in
hotels for the management will be given imprimatur to allow
any person, under the pretense of being a family member or a
visitor of the guest, to have access to the safety deposit box
without fear of any liability that will attach thereafter in case
such person turns out to be a complete stranger. This will allow
the hotel to evade responsibility for any liability incurred by its
employees in conspiracy with the guest's relatives and visitors.
Petitioners contend that McLoughlin's case was mounted on
the theory of contract, but the trial court and the appellate court
upheld the grant of the claims of the latter on the basis of
tort.45 There is nothing anomalous in how the lower courts
decided the controversy for this Court has pronounced a
jurisprudential rule that tort liability can exist even if there are
already contractual relations. The act that breaks the contract
may also be tort.46
As to damages awarded to McLoughlin, we see no reason to
modify the amounts awarded by the appellate court for the
same were based on facts and law. It is within the province of
lower courts to settle factual issues such as the proper amount
of damages awarded and such finding is binding upon this
Court especially if sufficiently proven by evidence and not
unconscionable or excessive. Thus, the appellate court
correctly awarded McLoughlin Two Thousand US Dollars
(US$2,000.00) and Four Thousand Five Hundred Australian
dollars (AUS$4,500.00) or their peso equivalent at the time of
payment,47 being the amounts duly proven by evidence.48 The
alleged loss that took place prior to 16 April 1988 was not
considered since the amounts alleged to have been taken were
not sufficiently established by evidence. The appellate court
also correctly awarded the sum of ₱308,880.80, representing
the peso value for the air fares from Sydney to Manila and
back for a total of eleven (11) trips;49 one-half of ₱336,207.05 or
₱168,103.52 representing payment to Tropicana;50 one-half of
₱152,683.57 or ₱76,341.785 representing payment to Echelon
Tower;51 one-half of ₱179,863.20 or ₱89,931.60 for the taxi or
transportation expenses from McLoughlin's residence to
Sydney Airport and from MIA to the hotel here in Manila, for the
eleven (11) trips;52 one-half of ₱7,801.94 or ₱3,900.97

representing Meralco power expenses;53 one-half of
₱356,400.00 or ₱178,000.00 representing expenses for food
and maintenance.54
The amount of ₱50,000.00 for moral damages is reasonable.
Although trial courts are given discretion to determine the
amount of moral damages, the appellate court may modify or
change the amount awarded when it is palpably and
scandalously excessive.l^vvphi1.net Moral damages are not
intended to enrich a complainant at the expense of a
defendant.l^vvphi1.net They are awarded only to enable the
injured party to obtain means, diversion or amusements that
will serve to alleviate the moral suffering he has undergone, by
reason of defendants' culpable action.55
The awards of ₱10,000.00 as exemplary damages and
₱200,000.00 representing attorney's fees are likewise
sustained.
WHEREFORE, foregoing premises considered, the Decision of
the Court of Appeals dated 19 October 1995 is hereby
AFFIRMED. Petitioners are directed, jointly and severally, to
pay private respondent the following amounts:
(1) US$2,000.00 and AUS$4,500.00 or their peso equivalent at
the time of payment;
(2) ₱308,880.80, representing the peso value for the air fares
from Sydney to Manila and back for a total of eleven (11) trips;
(3) One-half of ₱336,207.05 or ₱168,103.52 representing
payment to Tropicana Copacabana Apartment Hotel;
(4) One-half of ₱152,683.57 or ₱76,341.785 representing
payment to Echelon Tower;
(5) One-half of ₱179,863.20 or ₱89,931.60 for the taxi or
transportation expense from McLoughlin's residence to Sydney
Airport and from MIA to the hotel here in Manila, for the eleven
(11) trips;
(6) One-half of ₱7,801.94 or ₱3,900.97 representing Meralco
power expenses;
(7) One-half of ₱356,400.00 or ₱178,200.00 representing
expenses for food and maintenance;
(8) ₱50,000.00 for moral damages;
(9) ₱10,000.00 as exemplary damages; and
(10) ₱200,000 representing attorney's fees.
With costs.
SO ORDERED.
G.R. No. 179419 January 12, 2011
DURBAN APARTMENTS CORPORATION, doing business
under the name and style of City Garden Hotel,Petitioner,
vs.
PIONEER INSURANCE AND SURETY
CORPORATION, Respondent.
DECISION
47
NACHURA, J.:
For review is the Decision1 of the Court of Appeals (CA) in CA-
G.R. CV No. 86869, which affirmed the decision2 of the
Regional Trial Court (RTC), Branch 66, Makati City, in Civil
Case No. 03-857, holding petitioner Durban Apartments
Corporation solely liable to respondent Pioneer Insurance and
Surety Corporation for the loss of Jeffrey See’s (See’s) vehicle.
The facts, as found by the CA, are simple.
On July 22, 2003, [respondent] Pioneer Insurance and Surety
Corporation x x x, by right of subrogation, filed [with the RTC of
Makati City] a Complaint for Recovery of Damages against
[petitioner] Durban Apartments Corporation, doing business
under the name and style of City Garden Hotel, and [defendant
before the RTC] Vicente Justimbaste x x x. [Respondent
averred] that: it is the insurer for loss and damage of Jeffrey S.
See’s [the insured’s] 2001 Suzuki Grand Vitara x x x with Plate
No. XBH-510 under Policy No. MC-CV-HO-01-0003846-00-D
in the amount of ₱1,175,000.00; on April 30, 2002, See arrived
and checked in at the City Garden Hotel in Makati corner
Kalayaan Avenues, Makati City before midnight, and its parking
attendant, defendant x x x Justimbaste got the key to said
Vitara from See to park it[. O]n May 1, 2002, at about 1:00
o’clock in the morning, See was awakened in his room by [a]
telephone call from the Hotel Chief Security Officer who
informed him that his Vitara was carnapped while it was parked
unattended at the parking area of Equitable PCI Bank along
Makati Avenue between the hours of 12:00 [a.m.] and 1:00
[a.m.]; See went to see the Hotel Chief Security Officer,
thereafter reported the incident to the Operations Division of
the Makati City Police Anti-Carnapping Unit, and a flash alarm
was issued; the Makati City Police Anti-Carnapping Unit
investigated Hotel Security Officer, Ernesto T. Horlador, Jr. x x
x and defendant x x x Justimbaste; See gave his Sinumpaang
Salaysay to the police investigator, and filed a Complaint Sheet
with the PNP Traffic Management Group in Camp Crame,
Quezon City; the Vitara has not yet been recovered since July
23, 2002 as evidenced by a Certification of Non- Recovery
issued by the PNP TMG; it paid the ₱1,163,250.00 money
claim of See and mortgagee ABN AMRO Savings Bank, Inc. as
indemnity for the loss of the Vitara; the Vitara was lost due to
the negligence of [petitioner] Durban Apartments and
[defendant] Justimbaste because it was discovered during the
investigation that this was the second time that a similar
incident of carnapping happened in the valet parking service of
[petitioner] Durban Apartments and no necessary precautions
were taken to prevent its repetition; [petitioner] Durban
Apartments was wanting in due diligence in the selection and
supervision of its employees particularly defendant x x x
Justimbaste; and defendant x x x Justimbaste and [petitioner]
Durban Apartments failed and refused to pay its valid, just, and
lawful claim despite written demands.
Upon service of Summons, [petitioner] Durban Apartments and
[defendant] Justimbaste filed their Answer with Compulsory
Counterclaim alleging that: See did not check in at its hotel, on
the contrary, he was a guest of a certain Ching Montero x x x;
defendant x x x Justimbaste did not get the ignition key of
See’s Vitara, on the contrary, it was See who requested a
parking attendant to park the Vitara at any available parking

space, and it was parked at the Equitable Bank parking area,
which was within See’s view, while he and Montero were
waiting in front of the hotel; they made a written denial of the
demand of [respondent] Pioneer Insurance for want of legal
basis; valet parking services are provided by the hotel for the
convenience of its customers looking for a parking space near
the hotel premises; it is a special privilege that it gave to
Montero and See; it does not include responsibility for any
losses or damages to motor vehicles and its accessories in the
parking area; and the same holds true even if it was See
himself who parked his Vitara within the premises of the hotel
as evidenced by the valet parking customer’s claim stub issued
to him; the carnapper was able to open the Vitara without using
the key given earlier to the parking attendant and subsequently
turned over to See after the Vitara was stolen; defendant x x x
Justimbaste saw the Vitara speeding away from the place
where it was parked; he tried to run after it, and blocked its
possible path but to no avail; and See was duly and
immediately informed of the carnapping of his Vitara; the
matter was reported to the nearest police precinct; and
defendant x x x Justimbaste, and Horlador submitted
themselves to police investigation.
During the pre-trial conference on November 28, 2003, counsel
for [respondent] Pioneer Insurance was present. Atty. Monina
Lee x x x, counsel of record of [petitioner] Durban Apartments
and Justimbaste was absent, instead, a certain Atty. Nestor
Mejia appeared for [petitioner] Durban Apartments and
Justimbaste, but did not file their pre-trial brief.
On November 5, 2004, the lower court granted the motion of
[respondent] Pioneer Insurance, despite the opposition of
[petitioner] Durban Apartments and Justimbaste, and allowed
[respondent] Pioneer Insurance to present its evidence ex
parte before the Branch Clerk of Court.
See testified that: on April 30, 2002, at about 11:30 in the
evening, he drove his Vitara and stopped in front of City
Garden Hotel in Makati Avenue, Makati City; a parking
attendant, whom he had later known to be defendant x x x
Justimbaste, approached and asked for his ignition key, told
him that the latter would park the Vitara for him in front of the
hotel, and issued him a valet parking customer’s claim stub; he
and Montero, thereafter, checked in at the said hotel; on May 1,
2002, at around 1:00 in the morning, the Hotel Security Officer
whom he later knew to be Horlador called his attention to the
fact that his Vitara was carnapped while it was parked at the
parking lot of Equitable PCI Bank which is in front of the hotel;
his Vitara was insured with [respondent] Pioneer Insurance; he
together with Horlador and defendant x x x Justimbaste went to
Precinct 19 of the Makati City Police to report the carnapping
incident, and a police officer came accompanied them to the
Anti-Carnapping Unit of the said station for investigation, taking
of their sworn statements, and flashing of a voice alarm; he
likewise reported the said incident in PNP TMG in Camp
Crame where another alarm was issued; he filed his claim with
[respondent] Pioneer Insurance, and a representative of the
latter, who is also an adjuster of Vesper Insurance Adjusters-
Appraisers [Vesper], investigated the incident; and
[respondent] Pioneer Insurance required him to sign a Release
48
of Claim and Subrogation Receipt, and finally paid him the sum
of ₱1,163,250.00 for his claim.
Ricardo F. Red testified that: he is a claims evaluator of
[petitioner] Pioneer Insurance tasked, among others, with the
receipt of claims and documents from the insured, investigation
of the said claim, inspection of damages, taking of pictures of
insured unit, and monitoring of the processing of the claim until
its payment; he monitored the processing of See’s claim when
the latter reported the incident to [respondent] Pioneer
Insurance; [respondent] Pioneer Insurance assigned the case
to Vesper who verified See’s report, conducted an
investigation, obtained the necessary documents for the
processing of the claim, and tendered a settlement check to
See; they evaluated the case upon receipt of the subrogation
documents and the adjuster’s report, and eventually
recommended for its settlement for the sum of ₱1,163,250.00
which was accepted by See; the matter was referred and
forwarded to their counsel, R.B. Sarajan & Associates, who
prepared and sent demand letters to [petitioner] Durban
Apartments and [defendant] Justimbaste, who did not pay
[respondent] Pioneer Insurance notwithstanding their receipt of
the demand letters; and the services of R.B. Sarajan &
Associates were engaged, for ₱100,000.00 as attorney’s fees
plus ₱3,000.00 per court appearance, to prosecute the claims
of [respondent] Pioneer Insurance against [petitioner] Durban
Apartments and Justimbaste before the lower court.
Ferdinand Cacnio testified that: he is an adjuster of Vesper;
[respondent] Pioneer Insurance assigned to Vesper the
investigation of See’s case, and he was the one actually
assigned to investigate it; he conducted his investigation of the
matter by interviewing See, going to the City Garden Hotel,
required subrogation documents from See, and verified the
authenticity of the same; he learned that it is the standard
procedure of the said hotel as regards its valet parking service
to assist their guests as soon as they get to the lobby entrance,
park the cars for their guests, and place the ignition keys in
their safety key box; considering that the hotel has only twelve
(12) available parking slots, it has an agreement with Equitable
PCI Bank permitting the hotel to use the parking space of the
bank at night; he also learned that a Hyundai Starex van was
carnapped at the said place barely a month before the
occurrence of this incident because Liberty Insurance assigned
the said incident to Vespers, and Horlador and defendant x x x
Justimbaste admitted the occurrence of the same in their
sworn statements before the Anti-Carnapping Unit of the
Makati City Police; upon verification with the PNP TMG [Unit] in
Camp Crame, he learned that See’s Vitara has not yet been
recovered; upon evaluation, Vesper recommended to
[respondent] Pioneer Insurance to settle See’s claim for
₱1,045,750.00; See contested the recommendation of Vesper
by reasoning out that the 10% depreciation should not be
applied in this case considering the fact that the Vitara was
used for barely eight (8) months prior to its loss; and
[respondent] Pioneer Insurance acceded to See’s contention,
tendered the sum of ₱1,163,250.00 as settlement, the former
accepted it, and signed a release of claim and subrogation
receipt.

The lower court denied the Motion to Admit Pre-Trial Brief and
Motion for Reconsideration field by [petitioner] Durban
Apartments and Justimbaste in its Orders dated May 4, 2005
and October 20, 2005, respectively, for being devoid of merit.3
Thereafter, on January 27, 2006, the RTC rendered a decision,
disposing, as follows:
WHEREFORE, judgment is hereby rendered ordering
[petitioner Durban Apartments Corporation] to pay [respondent
Pioneer Insurance and Surety Corporation] the sum of
₱1,163,250.00 with legal interest thereon from July 22, 2003
until the obligation is fully paid and attorney’s fees and litigation
expenses amounting to ₱120,000.00.
SO ORDERED.4
On appeal, the appellate court affirmed the decision of the trial
court, viz.:
WHEREFORE, premises considered, the Decision dated
January 27, 2006 of the RTC, Branch 66, Makati City in Civil
Case No. 03-857 is hereby AFFIRMED insofar as it holds
[petitioner] Durban Apartments Corporation solely liable to
[respondent] Pioneer Insurance and Surety Corporation for the
loss of Jeffrey See’s Suzuki Grand Vitara.
5 parties and their counsel to appear at the pre-trial. The non-
SO ORDERED.
Hence, this recourse by petitioner.
The issues for our resolution are:
1. Whether the lower courts erred in declaring petitioner as in
default for failure to appear at the pre-trial conference and to
file a pre-trial brief;
2. Corollary thereto, whether the trial court correctly allowed
respondent to present evidence ex-parte;
3. Whether petitioner is liable to respondent for attorney’s fees
in the amount of ₱120,000.00; and
4. Ultimately, whether petitioner is liable to respondent for the
loss of See’s vehicle.
The petition must fail.
We are in complete accord with the common ruling of the lower
courts that petitioner was in default for failure to appear at the
pre-trial conference and to file a pre-trial brief, and thus,
correctly allowed respondent to present evidence ex-parte.
Likewise, the lower courts did not err in holding petitioner liable
for the loss of See’s vehicle.
Well-entrenched in jurisprudence is the rule that factual
findings of the trial court, especially when affirmed by the
appellate court, are accorded the highest degree of respect
and are considered conclusive between the parties.6 A review
of such findings by this Court is not warranted except upon a
showing of highly meritorious circumstances, such as: (1) when
the findings of a trial court are grounded entirely on
speculation, surmises, or conjectures; (2) when a lower court’s
inference from its factual findings is manifestly mistaken,
absurd, or impossible; (3) when there is grave abuse of
49
discretion in the appreciation of facts; (4) when the findings of
the appellate court go beyond the issues of the case, or fail to
notice certain relevant facts which, if properly considered, will
justify a different conclusion; (5) when there is a
misappreciation of facts; (6) when the findings of fact are
conclusions without mention of the specific evidence on which
they are based, are premised on the absence of evidence, or
are contradicted by evidence on record.7 None of the foregoing
exceptions permitting a reversal of the assailed decision exists
in this instance.
Petitioner urges us, however, that "strong [and] compelling
reason[s]" such as the prevention of miscarriage of justice
warrant a suspension of the rules and excuse its and its
counsel’s non-appearance during the pre-trial conference and
their failure to file a pre-trial brief.
We are not persuaded.
Rule 18 of the Rules of Court leaves no room for equivocation;
appearance of parties and their counsel at the pre-trial
conference, along with the filing of a corresponding pre-trial
brief, is mandatory, nay, their duty. Thus, Section 4 and Section
6 thereof provide:
SEC. 4. Appearance of parties.–It shall be the duty of the
appearance of a party may be excused only if a valid cause is
shown therefor or if a representative shall appear in his behalf
fully authorized in writing to enter into an amicable settlement,
to submit to alternative modes of dispute resolution, and to
enter into stipulations or admissions of facts and documents.
SEC. 6. Pre-trial brief.–The parties shall file with the court and
serve on the adverse party, in such manner as shall ensure
their receipt thereof at least three (3) days before the date of
the pre-trial, their respective pre-trial briefs which shall contain,
among others:
xxxx
Failure to file the pre-trial brief shall have the same effect as
failure to appear at the pre-trial.
Contrary to the foregoing rules, petitioner and its counsel of
record were not present at the scheduled pre-trial conference.
Worse, they did not file a pre-trial brief. Their non-appearance
cannot be excused as Section 4, in relation to Section 6, allows
only two exceptions: (1) a valid excuse; and (2) appearance of
a representative on behalf of a party who is fully authorized in
writing to enter into an amicable settlement, to submit to
alternative modes of dispute resolution, and to enter into
stipulations or admissions of facts and documents.
Petitioner is adamant and harps on the fact that November 28,
2003 was merely the first scheduled date for the pre-trial
conference, and a certain Atty. Mejia appeared on its behalf.
However, its assertion is belied by its own admission that, on
said date, this Atty. Mejia "did not have in his possession the
Special Power of Attorney issued by petitioner’s Board of
Directors."

As pointed out by the CA, petitioner, through Atty. Lee,
received the notice of pre-trial on October 27, 2003, thirty-two
(32) days prior to the scheduled conference. In that span of
time, Atty. Lee, who was charged with the duty of notifying
petitioner of the scheduled pre-trial conference,8 petitioner, and
Atty. Mejia should have discussed which lawyer would appear
at the pre-trial conference with petitioner, armed with the
appropriate authority therefor. Sadly, petitioner failed to comply
with not just one rule; it also did not proffer a reason why it
likewise failed to file a pre-trial brief. In all, petitioner has not
shown any persuasive reason why it should be exempt from
abiding by the rules.
The appearance of Atty. Mejia at the pre-trial conference,
without a pre-trial brief and with only his bare allegation that he
is counsel for petitioner, was correctly rejected by the trial
court. Accordingly, the trial court, as affirmed by the appellate
court, did not err in allowing respondent to present evidence
ex-parte.
Former Chief Justice Andres R. Narvasa’s words continue to
resonate, thus:
Everyone knows that a pre-trial in civil actions is mandatory,
and has been so since January 1, 1964. Yet to this day its
place in the scheme of things is not fully appreciated, and it
receives but perfunctory treatment in many courts. Some
courts consider it a mere technicality, serving no useful
purpose save perhaps, occasionally to furnish ground for non-
suiting the plaintiff, or declaring a defendant in default, or,
wistfully, to bring about a compromise. The pre-trial device is
not thus put to full use. Hence, it has failed in the main to
accomplish the chief objective for it: the simplification,
abbreviation and expedition of the trial, if not indeed its
dispensation. This is a great pity, because the objective is
attainable, and with not much difficulty, if the device were more
intelligently and extensively handled.
xxxx
Consistently with the mandatory character of the pre-trial, the
Rules oblige not only the lawyers but the parties as well to
appear for this purpose before the Court, and when a party
"fails to appear at a pre-trial conference (he) may be non-
suited or considered as in default." The obligation "to appear"
denotes not simply the personal appearance, or the mere
physical presentation by a party of one’s self, but connotes as
importantly, preparedness to go into the different subject
assigned by law to a pre-trial. And in those instances where a
party may not himself be present at the pre-trial, and another
person substitutes for him, or his lawyer undertakes to appear
not only as an attorney but in substitution of the client’s person,
it is imperative for that representative of the lawyer to have
"special authority" to make such substantive agreements as
only the client otherwise has capacity to make. That "special
authority" should ordinarily be in writing or at the very least be
"duly established by evidence other than the self-serving
assertion of counsel (or the proclaimed representative)
himself." Without that special authority, the lawyer or
representative cannot be deemed capacitated to appear in
place of the party; hence, it will be considered that the latter
has failed to put in an appearance at all, and he [must]
50
therefore "be non-suited or considered as in default,"
notwithstanding his lawyer’s or delegate’s presence.9
We are not unmindful that defendant’s (petitioner’s) preclusion
from presenting evidence during trial does not automatically
result in a judgment in favor of plaintiff (respondent). The
plaintiff must still substantiate the allegations in its
complaint.10 Otherwise, it would be inutile to continue with the
plaintiff’s presentation of evidence each time the defendant is
declared in default.
In this case, respondent substantiated the allegations in its
complaint, i.e., a contract of necessary deposit existed
between the insured See and petitioner. On this score, we find
no error in the following disquisition of the appellate court:
[The] records also reveal that upon arrival at the City Garden
Hotel, See gave notice to the doorman and parking attendant
of the said hotel, x x x Justimbaste, about his Vitara when he
entrusted its ignition key to the latter. x x x Justimbaste issued
a valet parking customer claim stub to See, parked the Vitara
at the Equitable PCI Bank parking area, and placed the ignition
key inside a safety key box while See proceeded to the hotel
lobby to check in. The Equitable PCI Bank parking area
became an annex of City Garden Hotel when the management
of the said bank allowed the parking of the vehicles of hotel
guests thereat in the evening after banking hours.11
Article 1962, in relation to Article 1998, of the Civil Code
defines a contract of deposit and a necessary deposit made by
persons in hotels or inns:
Art. 1962. A deposit is constituted from the moment a person
receives a thing belonging to another, with the obligation of
safely keeping it and returning the same. If the safekeeping of
the thing delivered is not the principal purpose of the contract,
there is no deposit but some other contract.
Art. 1998. The deposit of effects made by travelers in hotels or
inns shall also be regarded as necessary.1avvphi1 The
keepers of hotels or inns shall be responsible for them as
depositaries, provided that notice was given to them, or to their
employees, of the effects brought by the guests and that, on
the part of the latter, they take the precautions which said
hotel-keepers or their substitutes advised relative to the care
and vigilance of their effects.
Plainly, from the facts found by the lower courts, the insured
See deposited his vehicle for safekeeping with petitioner,
through the latter’s employee, Justimbaste. In turn,
Justimbaste issued a claim stub to See. Thus, the contract of
deposit was perfected from See’s delivery, when he handed
over to Justimbaste the keys to his vehicle, which Justimbaste
received with the obligation of safely keeping and returning it.
Ultimately, petitioner is liable for the loss of See’s vehicle.
Lastly, petitioner assails the lower courts’ award of attorney’s
fees to respondent in the amount of ₱120,000.00. Petitioner
claims that the award is not substantiated by the evidence on
record.
We disagree.

While it is a sound policy not to set a premium on the right to
litigate,12 we find that respondent is entitled to reasonable
attorney’s fees. Attorney’s fees may be awarded when a party
is compelled to litigate or incur expenses to protect its
interest,13 or when the court deems it just and equitable.14 In
this case, petitioner refused to answer for the loss of See’s
vehicle, which was deposited with it for safekeeping. This
refusal constrained respondent, the insurer of See, and
subrogated to the latter’s right, to litigate and incur expenses.
However, we reduce the award of ₱120,000.00 to ₱60,000.00
in view of the simplicity of the issues involved in this case.
WHEREFORE, the petition is DENIED. The Decision of the
Court of Appeals in CA-G.R. CV No. 86869 is AFFIRMED with
the MODIFICATION that the award of attorney’s fees is
reduced to ₱60,000.00. Costs against petitioner. SO
ORDERED.
SEQUESTRATION
G.R. No. 143994 July 11, 2002
LOS BAÑOS RURAL BANK, INC., petitioner,
vs.
PACITA O. AFRICA, GLORIA AFRICA, ANTONIO AFRICA,
ARISTEO AFRICA, SOCORRO AFRICA, CONSUELO
AFRICA, AND LOURDES AFRICA, respondents.
PANGANIBAN, J.:
A writ of preliminary injunction is issued to preserve the status
quo ante, upon an applicant’s showing of two important
requisite conditions; namely, (1) the right to be protected exists
prima facie, and (2) the acts sought to be enjoined are violative
of that right. It must be proven that the violation sought to be
prevented would cause an irreparable injustice.
Statement of the Case
Before us is a Petition for Review under Rule 45 of the Rules of
Court, assailing the June 30, 2000 Decision1 of the Court of
Appeals2 (CA) in CA-GR SP No. 53355. The decretal portion of
the Decision reads as follows:
"WHEREFORE, the petition is GRANTED. The Order dated
April 19, 1999 insofar as it denied the petitioners’ application
for the issuance of a writ of preliminary injunction, is hereby
RECALLED and SET ASIDE.
"Let a writ of preliminary injunction issue in this case to restrain
the respondent bank from proceeding with the foreclosure and
consolidation of the title over the subject property upon posting
by petitioners of a bond in the amount of Php20,000.00."3
The Order of the Regional Trial Court (RTC) of Quezon City
(Branch 220), which was reversed by the CA, reads as follows:
"WHEREFORE, premises considered, the Order of the Court
dated July 22, 1997 is hereby recalled and set aside. The
application for issuance of writ of preliminary injunction is
hereby DENIED.
51
"Issues in this case having been joined, let this case be set for
pre-trial on May 28, 1999 at 8:30 o’ clock in the morning. Send
notice of pre-trial to the parties and counsels."4
The Facts
The factual antecedents of the case are summarized by the
Court of Appeals in this wise:
"Petitioner Pacita Africa (Pacita for brevity) is the widow of
Alberto Africa and the rest of her co-petitioners are their
children.
"Records disclose that sometime in June 1989, the Quezon
City Hall building where the Register of Deeds was then
holding office was razed by fire, destroying some of its
records/documents among which was the original Transfer
Certificate of Title (TCT) No. 203492 covering a parcel of land
situated in Diliman, Quezon City, and registered in the name of
petitioner Pacita. The aforesaid property was part of the
conjugal property of petitioner Pacita and her late husband
Alberto Africa.
"On request of Pacita, private respondent Macy Africa, the
common-law wife of petitioner Antonio Africa, worked for the
reconstitution of the aforesaid TCT No. 203492. The same was
done and a new Transfer Certificate of Title (TCT) No. RT-
76140 (203492) PR-36463 was issued in the name of Pacita
Africa. While the reconstituted title was in her possession,
Macy allegedly forged, or caused the forgery of, Pacita’s
signature on a Deed of Absolute Sale dated December 29,
1992, purporting to transfer ownership of the subject property
to Macy. On the strength of the forged Deed of Absolute Sale,
Macy was able to cause the issuance of TCT No. 81519 in her
name, without the knowledge of any of herein petitioners.
"Still as part of the scheme to defraud petitioners, Macy caused
the preparation of a fake TCT No. 81519 in the name of Pacita,
which the former showed to the latter to make Pacita believe
that the said title was issued in her (Pacita’s) name.
"Sometime in March 1994, petitioners discovered private
respondent’s fraudulent act. They (petitioners) likewise came to
know that the subject property was mortgaged by Macy to the
respondent bank. To protect their interests over the subject
property, petitioners lodged an action in court against Macy
and the respondent bank for Annulment of Title, Deed of
Absolute Sale and Deed of Mortgage. The case was originally
assigned to Branch 99 of the RTC of Quezon City and
docketed as Civil Case No. Q-94-20898.
"After the filing of the aforesaid case, the respondent bank in
utter bad faith, foreclosed the subject property on June 11,
1996 without due notice to the petitioners, prompting the
petitioners to amend [their] complaint, this time incorporating
therein a prayer for the issuance of a temporary restraining
order and/or writ of preliminary injunction, to stop the
respondent bank from, among others, consolidating title to the
subject property.
"On July 2, 1997, RTC Branch 99 issued an Order granting
petitioners’ application for a temporary restraining order.
Meanwhile, the respondent bank filed its Manifestation,

Opposition and Motion to Postpone dated July 11, 1997,
praying, inter alia, for the denial of petitioner’s application for a
writ of preliminary injunction, or in the alternative, for the
cancellation of the hearing thereon. On July 18, 1997, the
aforesaid court denied the respondent bank’s motion to
postpone and proceeded with the hearing of petitioners’
application. Thereafter, petitioners’ application was considered
submitted for resolution.
"On July 22, 1997, the Court issued an Order granting
petitioners’ application for a writ of preliminary injunction to
which respondent bank filed a Motion for Reconsideration
dated July 11, 1997 followed by a Motion for Inhibition on
January 1, 1998 praying that Hon. Felix M. de Guzman,
presiding judge of RTC, Branch 99, inhibit himself from further
trying the case. This latter motion was granted, and the case
was re-raffled and assigned to Branch 220.
"On April 19, 1999, RTC Branch 220, public respondent herein,
issued the questioned Order."5
Ruling of the Court of Appeals
The CA overturned the RTC Order dated April 19, 1999, and
granted the issuance of a preliminary injunction to restrain
petitioner from proceeding with the foreclosure and the
consolidation of title over the subject property. The CA ruled
that respondents had title to and possession of the property
and were deprived thereof by petitioner. Thus, respondents
had a clear and unmistakable right to protect their title and
possession.6
Hence, this Petition.7
Issues
In its Memorandum, petitioner raises the following issues for
the Court’s consideration:
I
"Whether the Court of Appeals acted with patent grave abuse
of discretion in applying the ruling in Verzosa vs. Court of
Appeals, (299 SCRA 100), to the instant case to justify its
reversal of the 19 April 1999 Order of Branch 220 of the
Regional Trial Court of Quezon City in Civil Case No. Q-94-
20898[;]
II
"Whether the Court of Appeals acted with patent grave abuse
of discretion when it rationalized its decision by citing factual
premises therein that are not borne out by the records nor
based on evidence and in fact contrary to reality[;]
III
"Whether the Court of Appeals acted with patent grave abuse
of discretion when it ignored, disregarded and/or deviated from
established jurisprudence governing the issuance of
preliminary injunction demanded by private respondents
against the petitioner bank[;]
IV
52
"Whether the Court [of] Appeals acted with patent grave abuse
of discretion when it disregarded the pertinent provisions of
Section 3, Rule 58, of the Revised Rules of Court providing for
the grounds for issuance of preliminary injunction."8
In sum, the issues boil down to whether the appellate court
erred in issuing a writ of preliminary injunction to stop
petitioner’s consolidation of its title to the subject property.
This Court’s Ruling
The Petition is not meritorious; it has not shown any reversible
error in the CA’s Decision.
Main Issue:
Propriety of Preliminary Injunction
Petitioner argues that respondents do not have a right to the
relief demanded, because they merely have possession of the
property, as the legal title is in the name of Macy
Africa.9 Furthermore, it claims that the consolidation of title in
its name does not constitute an "invasion of a right that is
material and substantial."10
On the other hand, respondents maintain that they would suffer
great irreparable damage if the writ of preliminary injunction is
not granted.11 They likewise contend that if petitioner is allowed
to consolidate its title to the subject property, they would lose
their ancestral home, a loss that would result in unnecessary
and protracted proceedings involving third parties.12
We agree with respondents.
The grounds for the issuance of a writ of preliminary injunction
are enumerated in Rule 58, Section 3 of the Revised Rules of
Court, which reads as follows:
"Sec. 3. Grounds for issuance of preliminary injunction. – A
preliminary injunction may be granted when it is established;
(a)That the applicant is entitled to the relief demanded, and the
whole or part of such relief consists in restraining the
commission or continuance of the act or acts complained of, or
in requiring the performance of an act or acts, either for a
limited period or perpetually;
(b)That the commission, continuance or non-performance of
the act or acts complained of during the litigation would
probably work injustice to the applicant; or
(c)That a party, court, agency or a person is doing, threatening,
or is attempting to do, or is procuring or suffering to be done,
some act or acts probably in violation of the rights of the
applicant respecting the subject of the action or proceeding,
and tending to render the judgment ineffectual."
Injunction is a preservative remedy aimed at no other purpose
than to protect the complainant’s substantive rights and
interests13 during the pendency of the principal action.14 A
preliminary injunction, as the term itself suggests, is merely
temporary.15 It is to be resorted to only when there is a pressing
necessity to avoid injurious consequences that cannot be
remedied under any standard of compensation.16

Moreover, injunction, like other equitable remedies, should be
issued only at the instance of a suitor who has sufficient
interest in or title to the right or the property sought to be
protected.17 It is proper only when the plaintiff appears to be
entitled to the relief demanded in the complaint.18 In particular,
the existence of the right and the violation thereof must appear
in the allegations of the complaint19 and must constitute at least
a prima facie showing of a right to the final relief.20 Thus, there
are two requisite conditions for the issuance of a preliminary
injunction, namely, (1) the right to be protected exists prima
facie, and (2) the acts sought to be enjoined are violative of
that right.21 It must be proven that the violation sought to be
prevented would cause an irreparable injustice.
Further, while a clear showing of the right is necessary, its
existence need not be conclusively established.22 In fact, the
evidence required to justify the issuance of a writ of preliminary
injunction in the hearing thereon need not be conclusive or
complete. The evidence need only be a "sampling" intended
merely to give the court an idea of the justification for the
preliminary injunction, pending the decision of the case on the
merits.23 Thus, to be entitled to the writ, respondents are only
required to show that they have the ostensible right to the final
relief prayed for in their Complaint.24
First Requisite:
Existence of the Right
In the case at bar, we find ample justification for the issuance
of a writ of preliminary injunction.25 Evidently, the question on
whether or not respondents possess the requisite right hinges
on the prima facie existence of their legal title to the subject
property.26 They have shown that they have that right, and that
it is directly threatened by the act sought to be enjoined.27
First, as alleged in the Complaint,28 Respondent Pacita Africa is
the registered owner of the subject property. Her ownership is
evidenced by the reconstituted Transfer Certificate of Title
(TCT) No. RT-76140 (203492) PR-36463,29issued by the
Registry of Deeds of Quezon City. Second, the validity of the
Deed of Sale30 dated December 29, 1992, is still in dispute
because Respondent Pacita Africa claims that her signature
was forged by the vendee, Macy Africa.31 Third, there is doubt
as to the validity of the mortgage in favor of petitioner, because
there exists on record two TCTs covering the mortgaged
property: (1) TCT No. 8151932 registered in the name of Pacita
Africa and (2) TCT No. 8151933 registered in the name of Macy
Africa.
If indeed the Deed of Sale is a forgery, no parcel of land was
ever transferred to the purported buyer34 who, not being the
owner, could not have validly mortgaged the
property.35 Consequently, neither has petitioner -- the buyer
and mortgagee of the same lot -- ever acquired any title
thereto.36 Significantly, no evidence was presented by
petitioner to controvert these allegations put forward by
respondents. Clearly then, on the basis of the evidence
presented, respondents possess the right to prevent petitioner
from consolidating the title in its name. The first requisite -- the
existence of a right to be protected -- is thus present.37
53
Second Requisite:
Violation of Applicant’s Right
As to the second requisite, what is sought to be enjoined by
respondents is the consolidation of the title to the subject
property in petitioner’s name. After having discovered that the
property had been mortgaged to petitioner, respondents filed
on June 12, 1994 an action for Annulment of Title, Deed of
Sale, and Mortgage to protect their rights over the
property.38 This notwithstanding, petitioner foreclosed it on
June 11, 1996.39 To enjoin petitioner from consolidating the title
in its name, respondents then filed an Amended
Complaint,40 praying for a writ of preliminary injunction.
Unless legally stopped, petitioner may consolidate title to the
property in its name and enjoy the unbridled freedom to
dispose of it to third persons, to the damage and prejudice of
respondents.41 What respondents stand to lose is material and
substantial.42 They would lose their ancestral home even
without the benefit of a trial.43 Clearly, the act sought to be
enjoined is violative of their proprietary right over the property.44
A writ of preliminary injunction is issued precisely to preserve
threatened or continuous irremediable injury to some of the
parties before their claims can be thoroughly studied and
adjudicated.45 Denial of the application for the writ may make
the Complaint of respondents moot and academic.
Furthermore, it would render ineffectual a final judgment in
their favor or, at the very least, compel them to litigate
needlessly with third persons who may have acquired an
interest in the property.46 Such a situation cannot be
countenanced.47
Lis Pendens
Petitioner further contends that respondents are not entitled to
the relief prayed for, because they caused a notice of lis
pendens to be annotated at the back of TCT No. 81519,
registered in the name of Macy P. Africa; thus, that notice
provided ample protection of their rights and interests.48
We are not persuaded. A notice of lis pendens serves as an
announcement to the whole world that a particular real property
is in litigation and as a warning that those who acquire an
interest in the property do so at their own risk -- they gamble on
the result of the litigation over it.49 However, the cancellation of
such notice may be ordered by the court that has jurisdiction
over it at any given time.50 Its continuance or removal -- like the
continuance or the removal of a preliminary attachment or
injunction -- is not contingent on the existence of a final
judgment on the action and ordinarily has no effect on the
merits thereof.51 Thus, the notice of lis pendens does not
suffice to protect herein respondents’ rights over the
property.52 It does not provide complete and ample protection.
Status Quo Ante
Petitioner further claims that the RTC erred in enjoining the
foreclosure sale of the subject property.53 It argues that the
foreclosure may no longer be enjoined, because it has long
been effected since 1996.54 We agree with petitioner.
 54

It is a well-entrenched rule that consummated acts can no
longer be restrained by injunction55 whose sole objective is to
preserve the status quo until the merits of the case are fully
heard.56 Status quo is defined as the last actual peaceful
uncontested situation that precedes a controversy, and its
preservation is the office of an injunctive writ.57
In the instant case, the status quo was the situation of the
parties at the time of the filing of the Amended Complaint58 with
a prayer for a writ of preliminary injunction. It was that point at
which petitioner had already foreclosed the subject property
and, hence, could no longer be enjoined from going on with the
foreclosure. However, the last actual uncontested status that
preceded the controversy was when the property in dispute
was still registered in the name of Macy Africa, petitioner not
having consolidated in its name the title thereto.59 Thus, the
issuance of the writ would no doubt preserve the status quo.60
We cannot rule on the allegation of petitioner that this case is a
"scam perpetrated by private respondents" to defraud it.61 The
truth or the falsity of that assertion cannot be ascertained by
this Court at this time. Verily, we refrain from expressing any
opinion on the merits of the case, pending a full consideration
of the evidence that would be presented by the parties.62
Yujuico, executed in favor of the bank a total of eleven (11)
promissory notes.
Despite the lapse of the respective due dates under the
promissory notes and notwithstanding the bank’s demand
letters, RTMC failed to pay its loans. Hence, on January 22,
1993, the bank filed a complaint for sum of money against
RTMC and Yujuico before the Regional Trial Court, Br. 16,
Manila.
In their answer (OR, pp. 44-47), RTMC and Yujuico contend
that they should be absolved from liability. They claimed that
although the grant of the credit line and the execution of the
suretyship agreement are admitted, the bank gave assurance
that the suretyship agreement was merely a formality under
which Yujuico will not be personally liable. They argue that the
importation of raw materials under the credit line was with a
grant of option to them to turn-over to the bank the imported
raw materials should these fail to meet their manufacturing
requirements. RTMC offered to make such turn-over since the
imported materials did not conform to the required
specifications. However, the bank refused to accept the same,
until the materials were destroyed by a fire which gutted down
RTMC’s premises.

WHEREFORE, the Petition is DENIED and the assailed For failure of the parties to amicably settle the case, trial on the
Decision of the Court of Appeals AFFIRMED. Costs against merits proceeded. After the trial, the Court a quorendered a
petitioner. SO ORDERED. decision in favor of the bank, the decretal part of which reads:

TRUST RECEIPTS ‘WHEREFORE, PREMISES CONSIDERED, judgment is

hereby rendered in favor of plaintiff and against defendants
G.R. No. 137232 June 29, 2005 who are ordered to pay jointly and severally in favor of plaintiff,
inclusive of stipulated 30% per annum interest and penalty of
ROSARIO TEXTILE MILLS CORPORATION and
3% per month until fully paid, under the following promissory
EDILBERTO YUJUICO, petitioners,
notes:
vs.
HOME BANKERS SAVINGS AND TRUST
9 6 9
COMPANY, respondent.
0 - -
₱73
DECISION - 2 1
7,0
1 0 8
88.
SANDOVAL-GUTIERREZ, J.: 1 - -
25
1 9 9
For our resolution is the petition for review 6 0 0
on certiorari assailing the Decision1 of the Court of Appeals
dated March 31, 1998 in CA-G.R. CV No. 48708 and its
(ma
Resolution dated January 12, 1999.
turit
The facts of the case as found by the Court of Appeals are: y)

"Sometime in 1989, Rosario Textile Mills Corporation (RTMC) 1

applied from Home Bankers Savings & Trust Co. for an 9 7
0
Omnibus Credit Line for ₱10 million. The bank approved 0 -
₱65 -
RTMC’s credit line but for only ₱8 million. The bank notified - 1
0,0 1
RTMC of the grant of the said loan thru a letter dated March 2, 1 3
00. 1
1989 which contains terms and conditions conformed by 3 -
00 -
RTMC thru Edilberto V. Yujuico. On March 3, 1989, Yujuico 2 9
9
signed a Surety Agreement in favor of the bank, in which he 0 0
0
bound himself jointly and severally with RTMC for the payment
of all RTMC’s indebtedness to the bank from 1989 to 1990. 9 7 ₱42 1
RTMC availed of the credit line by making numerous 0 - 2,5 0
drawdowns, each drawdown being covered by a separate - 1 00. -
promissory note and trust receipt. RTMC, represented by 1 7 1
 55

5 0 1
3 - -
- - -
3 9 00 9 9,4
9 1 8
4 0 - 33.
0 5 -
9 75
6 9
0
1 9 0
9 7
0
0 -
₱42 - 9 5 8
- 1
2,5 1 0 - -
1 7 ₱74
00. 5 - 2 2
3 - 7,7
00 - 0 8 6
3 9 80.
9 9 - -
5 0 00
0 2 9 9
2 0 0
1
9 7
0
0 -
₱79 -
- 1 The counterclaims of defendants are hereby DISMISSED.
5,0 1
1 8
00. 6 SO ORDERED." (OR, p. 323; Rollo, p. 73)."2
3 -
00 -
4 9
9 Dissatisfied, RTMC and Yujuico, herein petitioners, appealed to
7 0
0 the Court of Appeals, contending that under the trust receipt
contracts between the parties, they merely held the goods
1 described therein in trust for respondent Home Bankers
9 7 Savings and Trust Company (the bank) which owns the
0
0 - same. Since the ownership of the goods remains with the
₱71 -
- 2 bank, then it should bear the loss. With the destruction of the
5,9 1
1 0 goods by fire, petitioners should have been relieved of any
00. 8
3 - obligation to pay.
00 -
7 9
9
3 0 The Court of Appeals, however, affirmed the trial court’s
0
judgment, holding that the bank is merely the holder of the
security for its advance payments to petitioners; and that the
1
9 7 goods they purchased, through the credit line extended by the
0
0 - bank, belong to them and hold said goods at their own risk.
₱77 -
- 2
3,5 2 Petitioners then filed a motion for reconsideration but this was
1 7
00. 0 denied by the Appellate Court in its Resolution dated January
3 -
00 - 12, 1999.
9 9
9
7 0 Hence, this petition for review on certiorari ascribing to the
0
Court of Appeals the following errors:
1
9 7 "I
0
0 -
₱42 - THE HONORABLE COURT OF APPEALS ERRED IN NOT
- 2
5,7 2 HOLDING THAT THE ACTS OF THE PETITIONERS-
1 6
50. 4 DEFENDANTS WERE TANTAMOUNT TO A VALID AND
4 -
00 - EFFECTIVE TENDER OF THE GOODS TO THE
2 9
9 RESPONDENT-PLAINTIFF.
9 0
0
II
9 1
8 THE HONORABLE COURT OF APPEALS ERRED IN NOT
0 1
- ₱72 APPLYING THE DOCTRINE OF ‘RES PERIT DOMINO’ IN
- -
7 0,9 THE CASE AT BAR CONSIDERING THE VALID AND
1 5
- 84. EFFECTIVE TENDER OF THE DEFECTIVE RAW
5 -
9 00 MATERIALS BY THE PETITIONERS-DEFENDANTS TO THE
4 9
0 RESPONDENT-PLAINTIFF AND THE EXPRESS
0 0
STIPULATION IN THEIR CONTRACT THAT OWNERSHIP OF
THE GOODS REMAINS WITH THE RESPONDENT-
9 8 ₱20 1 PLAINTIFF.

III
THE HONORABLE COURT OF APPEALS VIOLATED
ARTICLE 1370 OF THE CIVIL CODE AND THE LONG-
STANDING JURISPRUDENCE THAT ‘INTENTION OF THE
PARTIES IS PRIMORDIAL’ IN ITS FAILURE TO UPHOLD THE
INTENTION OF THE PARTIES THAT THE SURETY
AGREEMENT WAS A MERE FORMALITY AND DID NOT
INTEND TO HOLD PETITIONER YUJUICO LIABLE UNDER
THE SAME SURETY AGREEMENT.
IV
ASSUMING ARGUENDO THAT THE SURETYSHIP
AGREEMENT WAS VALID AND EFFECTIVE, THE
HONORABLE COURT OF APPEALS VIOLATED THE BASIC
LEGAL PRECEPT THAT A SURETY IS NOT LIABLE UNLESS
THE DEBTOR IS HIMSELF LIABLE.
V
THE HONORABLE COURT OF APPEALS VIOLATED THE
PURPOSE OF TRUST RECEIPT LAW IN HOLDING THE
PETITIONERS LIABLE TO THE RESPONDENT."
The above assigned errors boil down to the following issues:
(1) whether the Court of Appeals erred in holding that
petitioners are not relieved of their obligation to pay their loan
after they tried to tender the goods to the bank which refused
to accept the same, and which goods were subsequently lost in
a fire; (2) whether the Court of Appeals erred when it ruled that
petitioners are solidarily liable for the payment of their
obligations to the bank; and (3) whether the Court of Appeals
violated the Trust Receipts Law.
On the first issue, petitioners theorize that when petitioner
RTMC imported the raw materials needed for its manufacture,
using the credit line, it was merely acting on behalf of the bank,
the true owner of the goods by virtue of the trust receipts.
Hence, under the doctrine of res perit domino, the bank took
the risk of the loss of said raw materials. RTMC’s role in the
transaction was that of end user of the raw materials and when
it did not accept those materials as they did not meet the
manufacturing requirements, RTMC made a valid and effective
tender of the goods to the bank. Since the bank refused to
accept the raw materials, RTMC stored them in its warehouse.
When the warehouse and its contents were gutted by fire,
petitioners’ obligation to the bank was accordingly
extinguished.
Petitioners’ stance, however, conveniently ignores the true
nature of its transaction with the bank. We recall that RTMC
filed with the bank an application for a credit line in the amount
of ₱10 million, but only ₱8 million was approved. RTMC then
made withdrawals from this credit line and issued several
promissory notes in favor of the bank. In banking and
commerce, a credit line is "that amount of money or
merchandise which a banker, merchant, or supplier agrees to
supply to a person on credit and generally agreed to in
advance."3 It is the fixed limit of credit granted by a bank,
retailer, or credit card issuer to a customer, to the full extent of
which the latter may avail himself of his dealings with the
former but which he must not exceed and is usually intended to
56
cover a series of transactions in which case, when the
customer’s line of credit is nearly exhausted, he is expected to
reduce his indebtedness by payments before making any
further drawings.4
It is thus clear that the principal transaction between petitioner
RTMC and the bank is a contract of loan. RTMC used the
proceeds of this loan to purchase raw materials from a supplier
abroad. In order to secure the payment of the loan, RTMC
delivered the raw materials to the bank as collateral. Trust
receipts were executed by the parties to evidence this security
arrangement. Simply stated, the trust receipts were mere
securities.
In Samo vs. People,5 we described a trust receipt as "a security
transaction intended to aid in financing importers and retail
dealers who do not have sufficient funds or resources to
finance the importation or purchase of merchandise, and who
may not be able to acquire credit except through utilization, as
collateral, of the merchandise imported or purchased."6
In Vintola vs. Insular Bank of Asia and America,7 we elucidated
further that "a trust receipt, therefore, is a security agreement,
pursuant to which a bank acquires a ‘security interest’ in the
goods. It secures an indebtedness and there can be no such
thing as security interest that secures no
obligation."8 Section 3 (h) of the Trust Receipts Law (P.D. No.
115) defines a "security interest" as follows:
"(h) Security Interest means a property interest in goods,
documents, or instruments to secure performance of some
obligation of the entrustee or of some third persons to the
entruster and includes title, whether or not expressed to be
absolute, whenever such title is in substance taken or retained
for security only."
Petitioners’ insistence that the ownership of the raw materials
remained with the bank is untenable. In Sia vs. People,9 Abad
vs. Court of Appeals,10 and PNB vs. Pineda,11 we held that:
"If under the trust receipt, the bank is made to appear as the
owner, it was but an artificial expedient, more of legal fiction
than fact, for if it were really so, it could dispose of the goods in
any manner it wants, which it cannot do, just to give
consistency with purpose of the trust receipt of giving a
stronger security for the loan obtained by the importer. To
consider the bank as the true owner from the inception of
the transaction would be to disregard the loan feature
thereof..."12
Thus, petitioners cannot be relieved of their obligation to pay
their loan in favor of the bank.
Anent the second issue, petitioner Yujuico contends that the
suretyship agreement he signed does not bind him, the same
being a mere formality.
We reject petitioner Yujuico’s contentions for two reasons.
First, there is no record to support his allegation that the surety
agreement is a "mere formality;" and
Second, as correctly held by the Court of Appeals, the
Suretyship Agreement signed by petitioner Yujuico binds him.

The terms clearly show that he agreed to pay the bank jointly
and severally with RTMC. The parole evidence rule under
Section 9, Rule 130 of the Revised Rules of Court is in point,
thus:
"SEC. 9. Evidence of written agreements. – When the terms of
an agreement have been reduced in writing, it is considered as
containing all the terms agreed upon and there can be,
between the parties and their successors in interest, no
evidence of such terms other than the contents of the written
agreement.
However, a party may present evidence to modify, explain, or
add to the terms of the written agreement if he puts in issue in
his pleading:
(a) An intrinsic ambiguity, mistake, or imperfection in the written
agreement;
(b) The failure of the written agreement to express the true
intent and agreement of the parties thereto;
(c) The validity of the written agreement; or
(d) The existence of other terms agreed to by the parties or
their successors in interest after the execution of the written
agreement.
x x x."
Under this Rule, the terms of a contract are rendered
conclusive upon the parties and evidence aliunde is not
admissible to vary or contradict a complete and enforceable
agreement embodied in a document.13 We have carefully
examined the Suretyship Agreement signed by Yujuico and
found no ambiguity therein. Documents must be taken as
explaining all the terms of the agreement between the parties
when there appears to be no ambiguity in the language of said
documents nor any failure to express the true intent and
agreement of the parties.14
As to the third and final issue – At the risk of being repetitious,
we stress that the contract between the parties is a loan. What
respondent bank sought to collect as creditor was the loan it
granted to petitioners. Petitioners’ recourse is to sue their
supplier, if indeed the materials were defective.
WHEREFORE, the petition is DENIED. The assailed Decision
and Resolution of the Court of Appeals in CA-G.R. CV No.
48708 are AFFIRMED IN TOTO. Costs against petitioners.
SO ORDERED.
G.R. No. 166884 June 13, 2012
LAND BANK OF THE PHILIPPINES, Petitioner,
vs.
LAMBERTO C. PEREZ, NESTOR C. KUN, MA. ESTELITA P.
ANGELES-PANLILIO, and NAPOLEON O.
GARCIA, Respondents.
DECISION
BRION, J.:
57
Before this Court is a petition for review on certiorari,1 under
Rule 45 of the Rules of Court, assailing the decision2dated
January 20, 2005 of the Court of Appeals in CA-G.R. SP No.
76588. In the assailed decision, the Court of Appeals
dismissed the criminal complaint for estafa against the
respondents, Lamberto C. Perez, Nestor C. Kun, Ma. Estelita
P. Angeles-Panlilio and Napoleon Garcia, who allegedly
violated Article 315, paragraph 1(b) of the Revised Penal Code,
in relation with Section 13 of Presidential Decree No. (P.D.) 115
– the "Trust Receipts Law."
Petitioner Land Bank of the Philippines (LBP) is a government
financial institution and the official depository of the
Philippines.3 Respondents are the officers and representatives
of Asian Construction and Development Corporation (ACDC), a
corporation incorporated under Philippine law and engaged in
the construction business.4
On June 7, 1999, LBP filed a complaint for estafa or violation of
Article 315, paragraph 1(b) of the Revised Penal Code, in
relation to P.D. 115, against the respondents before the City
Prosecutor’s Office in Makati City. In the affidavit-complaint5 of
June 7, 1999, the LBP’s Account Officer for the Account
Management Development, Edna L. Juan, stated that LBP
extended a credit accommodation to ACDC through the
execution of an Omnibus Credit Line Agreement
(Agreement)6 between LBP and ACDC on October 29, 1996. In
various instances, ACDC used the Letters of Credit/Trust
Receipts Facility of the Agreement to buy construction
materials. The respondents, as officers and representatives of
ACDC, executed trust receipts7 in connection with the
construction materials, with a total principal amount of
₱52,344,096.32. The trust receipts matured, but ACDC failed
to return to LBP the proceeds of the construction projects or
the construction materials subject of the trust receipts. LBP
sent ACDC a demand letter,8 dated May 4, 1999, for the
payment of its debts, including those under the Trust Receipts
Facility in the amount of ₱66,425,924.39. When ACDC failed to
comply with the demand letter, LBP filed the affidavit-
complaint.
The respondents filed a joint affidavit9 wherein they stated that
they signed the trust receipt documents on or about the same
time LBP and ACDC executed the loan documents; their
signatures were required by LBP for the release of the loans.
The trust receipts in this case do not contain (1) a description
of the goods placed in trust, (2) their invoice values, and (3)
their maturity dates, in violation of Section 5(a) of P.D. 115.
Moreover, they alleged that ACDC acted as a subcontractor for
government projects such as the Metro Rail Transit, the Clark
Centennial Exposition and the Quezon Power Plant in Mauban,
Quezon. Its clients for the construction projects, which were the
general contractors of these projects, have not yet paid them;
thus, ACDC had yet to receive the proceeds of the materials
that were the subject of the trust receipts and were allegedly
used for these constructions. As there were no proceeds
received from these clients, no misappropriation thereof could
have taken place.
On September 30, 1999, Makati Assistant City Prosecutor
Amador Y. Pineda issued a Resolution10 dismissing the
complaint. He pointed out that the evidence presented by LBP

failed to state the date when the goods described in the letters
of credit were actually released to the possession of the
respondents. Section 4 of P.D. 115 requires that the goods
covered by trust receipts be released to the possession of the
entrustee after the latter’s execution and delivery to the
entruster of a signed trust receipt. He adds that LBP’s evidence
also fails to show the date when the trust receipts were
executed since all the trust receipts are undated. Its dispositive
portion reads:
WHEREFORE, premises considered, and for insufficiency of
evidence, it is respectfully recommended that the instant
complaints be dismissed, as upon approval, the same are
hereby dismissed.11
LBP filed a motion for reconsideration which the Makati
Assistant City Prosecutor denied in his order of January 7,
2000.12
On appeal, the Secretary of Justice reversed the Resolution of
the Assistant City Prosecutor. In his resolution of August 1,
2002,13 the Secretary of Justice pointed out that there was no
question that the goods covered by the trust receipts were
received by ACDC. He likewise adopted LBP’s argument that
while the subjects of the trust receipts were not mentioned in
the trust receipts, they were listed in the letters of credit
referred to in the trust receipts. He also noted that the trust
receipts contained maturity dates and clearly set out their
stipulations. He further rejected the respondents’ defense that
ACDC failed to remit the payments to LBP due to the failure of
the clients of ACDC to pay them. The dispositive portion of the
resolution reads:
WHEREFORE, the assailed resolution is REVERSED and SET
ASIDE. The City Prosecutor of Makati City is hereby directed to
file an information for estafa under Art. 315 (1) (b) of the
Revised Penal Code in relation to Section 13, Presidential
Decree No. 115 against respondents Lamberto C. Perez,
Nestor C. Kun, [Ma. Estelita P. Angeles-Panlilio] and Napoleon
O. Garcia and to report the action taken within ten (10) days
from receipt hereof.14
The respondents filed a motion for reconsideration of the
resolution dated August 1, 2002, which the Secretary of Justice
denied.15 He rejected the respondents’ submission that
Colinares v. Court of Appeals16 does not apply to the case. He
explained that in Colinares, the building materials were
delivered to the accused before they applied to the bank for a
loan to pay for the merchandise; thus, the ownership of the
merchandise had already been transferred to the entrustees
before the trust receipts agreements were entered into. In the
present case, the parties have already entered into the
Agreement before the construction materials were delivered to
ACDC.
Subsequently, the respondents filed a petition for review before
the Court of Appeals.
After both parties submitted their respective Memoranda, the
Court of Appeals promulgated the assailed decision of January
20, 2005.17 Applying the doctrine in Colinares, it ruled that this
case did not involve a trust receipt transaction, but a mere
58
loan. It emphasized that construction materials, the subject of
the trust receipt transaction, were delivered to ACDC even
before the trust receipts were executed. It noted that LBP did
not offer proof that the goods were received by ACDC, and that
the trust receipts did not contain a description of the goods,
their invoice value, the amount of the draft to be paid, and their
maturity dates. It also adopted ACDC’s argument that since no
payment for the construction projects had been received by
ACDC, its officers could not have been guilty of
misappropriating any payment. The dispositive portion reads:
WHEREFORE, in view of the foregoing, the Petition is GIVEN
DUE COURSE. The assailed Resolutions of the respondent
Secretary of Justice dated August 1, 2002 and February 17,
2003, respectively in I.S. No. 99-F-9218-28 are hereby
REVERSED and SET ASIDE.18
LBP now files this petition for review on certiorari, dated March
15, 2005, raising the following error:
THE COURT OF APPEALS GRAVELY ERRED WHEN IT
REVERSED AND SET ASIDE THE RESOLUTIONS OF THE
HONORABLE SECRETARY OF JUSTICE BY APPLYING THE
RULING IN THE CASE OF COLINARES V. COURT OF
APPEALS, 339 SCRA 609, WHICH IS NOT APPLICABLE IN
THE CASE AT BAR.19
On April 8, 2010, while the case was pending before this Court,
the respondents filed a motion to dismiss.20 They informed the
Court that LBP had already assigned to Philippine
Opportunities for Growth and Income, Inc. all of its rights, title
and interests in the loans subject of this case in a Deed of
Absolute Sale dated June 23, 2005 (attached as Annex "C" of
the motion). The respondents also stated that Avent Holdings
Corporation, in behalf of ACDC, had already settled ACDC’s
obligation to LBP on October 8, 2009. Included as Annex "A" in
this motion was a certification21 issued by the Philippine
Opportunities for Growth and Income, Inc., stating that it was
LBP’s successor-in-interest insofar as the trust receipts in this
case are concerned and that Avent Holdings Corporation had
already settled the claims of LBP or obligations of ACDC
arising from these trust receipts.
We deny this petition.
The disputed transactions are not trust receipts.
Section 4 of P.D. 115 defines a trust receipt transaction in this
manner:
Section 4. What constitutes a trust receipt transaction. A trust
receipt transaction, within the meaning of this Decree, is any
transaction by and between a person referred to in this Decree
as the entruster, and another person referred to in this Decree
as entrustee, whereby the entruster, who owns or holds
absolute title or security interests over certain specified goods,
documents or instruments, releases the same to the
possession of the entrustee upon the latter's execution and
delivery to the entruster of a signed document called a "trust
receipt" wherein the entrustee binds himself to hold the
designated goods, documents or instruments in trust for the
entruster and to sell or otherwise dispose of the goods,
documents or instruments with the obligation to turn over to the

entruster the proceeds thereof to the extent of the amount
owing to the entruster or as appears in the trust receipt or the
goods, documents or instruments themselves if they are unsold
or not otherwise disposed of, in accordance with the terms and
conditions specified in the trust receipt, or for other purposes
substantially equivalent to any of the following:
1. In the case of goods or documents, (a) to sell the goods or
procure their sale; or (b) to manufacture or process the goods
with the purpose of ultimate sale: Provided, That, in the case of
goods delivered under trust receipt for the purpose of
manufacturing or processing before its ultimate sale, the
entruster shall retain its title over the goods whether in its
original or processed form until the entrustee has complied fully
with his obligation under the trust receipt; or (c) to load, unload,
ship or tranship or otherwise deal with them in a manner
preliminary or necessary to their sale[.]
There are two obligations in a trust receipt transaction. The first
is covered by the provision that refers to money under the
obligation to deliver it (entregarla) to the owner of the
merchandise sold. The second is covered by the provision
referring to merchandise received under the obligation to return
it (devolvera) to the owner. Thus, under the Trust Receipts
Law,22 intent to defraud is presumed when (1) the entrustee
fails to turn over the proceeds of the sale of goods covered by
the trust receipt to the entruster; or (2) when the entrustee fails
to return the goods under trust, if they are not disposed of in
accordance with the terms of the trust receipts.23
In all trust receipt transactions, both obligations on the part of
the trustee exist in the alternative – the return of the proceeds
of the sale or the return or recovery of the goods, whether raw
or processed.24 When both parties enter into an agreement
knowing that the return of the goods subject of the trust receipt
is not possible even without any fault on the part of the trustee,
it is not a trust receipt transaction penalized under Section 13
of P.D. 115; the only obligation actually agreed upon by the
parties would be the return of the proceeds of the sale
transaction. This transaction becomes a mere loan,25 where the
borrower is obligated to pay the bank the amount spent for the
purchase of the goods.
Article 1371 of the Civil Code provides that "[i]n order to judge
the intention of the contracting parties, their contemporaneous
and subsequent acts shall be principally considered." Under
this provision, we can examine the contemporaneous actions
of the parties rather than rely purely on the trust receipts that
they signed in order to understand the transaction through their
intent.
We note in this regard that at the onset of these transactions,
LBP knew that ACDC was in the construction business and
that the materials that it sought to buy under the letters of credit
were to be used for the following projects: the Metro Rail
Transit Project and the Clark Centennial Exposition
Project.26 LBP had in fact authorized the delivery of the
materials on the construction sites for these projects, as seen
in the letters of credit it attached to its complaint.27 Clearly, they
were aware of the fact that there was no way they could
recover the buildings or constructions for which the materials
subject of the alleged trust receipts had been used. Notably,
59
despite the allegations in the affidavit-complaint wherein LBP
sought the return of the construction materials,28 its demand
letter dated May 4, 1999 sought the payment of the balance
but failed to ask, as an alternative, for the return of the
construction materials or the buildings where these materials
had been used.29
The fact that LBP had knowingly authorized the delivery of
construction materials to a construction site of two government
projects, as well as unspecified construction sites, repudiates
the idea that LBP intended to be the owner of those
construction materials. As a government financial institution,
LBP should have been aware that the materials were to be
used for the construction of an immovable property, as well as
a property of the public domain. As an immovable property, the
ownership of whatever was constructed with those materials
would presumably belong to the owner of the land, under
Article 445 of the Civil Code which provides:
Article 445. Whatever is built, planted or sown on the land of
another and the improvements or repairs made thereon,
belong to the owner of the land, subject to the provisions of the
following articles.
Even if we consider the vague possibility that the materials,
consisting of cement, bolts and reinforcing steel bars, would be
used for the construction of a movable property, the ownership
of these properties would still pertain to the government and
not remain with the bank as they would be classified as
property of the public domain, which is defined by the Civil
Code as:
Article 420. The following things are property of public
dominion:
(1) Those intended for public use, such as roads, canals,
rivers, torrents, ports and bridges constructed by the State,
banks, shores, roadsteads, and others of similar character;
(2) Those which belong to the State, without being for public
use, and are intended for some public service or for the
development of the national wealth.
In contrast with the present situation, it is fundamental in a trust
receipt transaction that the person who advanced payment for
the merchandise becomes the absolute owner of said
merchandise and continues as owner until he or she is paid in
full, or if the goods had already been sold, the proceeds should
be turned over to him or to her.30
Thus, in concluding that the transaction was a loan and not a
trust receipt, we noted in Colinares that the industry or line of
work that the borrowers were engaged in was construction. We
pointed out that the borrowers were not importers acquiring
goods for resale.31 Indeed, goods sold in retail are often within
the custody or control of the trustee until they are purchased. In
the case of materials used in the manufacture of finished
products, these finished products – if not the raw materials or
their components – similarly remain in the possession of the
trustee until they are sold. But the goods and the materials that
are used for a construction project are often placed under the
control and custody of the clients employing the contractor,
who can only be compelled to return the materials if they fail to

pay the contractor and often only after the requisite legal
proceedings. The contractor’s difficulty and uncertainty in
claiming these materials (or the buildings and structures which
they become part of), as soon as the bank demands them,
disqualify them from being covered by trust receipt
agreements.
Based on these premises, we cannot consider the agreements
between the parties in this case to be trust receipt transactions
because (1) from the start, the parties were aware that ACDC
could not possibly be obligated to reconvey to LBP the
materials or the end product for which they were used; and (2)
from the moment the materials were used for the government
projects, they became public, not LBP’s, property.
Since these transactions are not trust receipts, an action for
estafa should not be brought against the respondents, who are
liable only for a loan. In passing, it is useful to note that this is
the threat held against borrowers that Retired Justice Claudio
Teehankee emphatically opposed in his dissent in People v.
Cuevo,32 restated in Ong v. CA, et al.:33
The very definition of trust receipt x x x sustains the lower
court’s rationale in dismissing the information that the contract
covered by a trust receipt is merely a secured loan. The goods
imported by the small importer and retail dealer through the
bank’s financing remain of their own property and risk and the
old capitalist orientation of putting them in jail for estafa for
non-payment of the secured loan (granted after they had been
fully investigated by the bank as good credit risks) through the
fiction of the trust receipt device should no longer be permitted
in this day and age.
As the law stands today, violations of Trust Receipts Law are
criminally punishable, but no criminal complaint for violation of
Article 315, paragraph 1(b) of the Revised Penal Code, in
relation with P.D. 115, should prosper against a borrower who
was not part of a genuine trust receipt transaction.
Misappropriation or abuse of confidence is absent in this case.
Even if we assume that the transactions were trust receipts,
the complaint against the respondents still should have been
dismissed. The Trust Receipts Law punishes the dishonesty
and abuse of confidence in the handling of money or goods to
the prejudice of another, regardless of whether the latter is the
owner or not. The law does not singularly seek to enforce
payment of the loan, as "there can be no violation of [the] right
against imprisonment for non-payment of a debt."34
In order that the respondents "may be validly prosecuted for
estafa under Article 315, paragraph 1(b) of the Revised Penal
Code,35 in relation with Section 13 of the Trust Receipts Law,
the following elements must be established: (a) they received
the subject goods in trust or under the obligation to sell the
same and to remit the proceeds thereof to [the trustor], or to
return the goods if not sold; (b) they misappropriated or
converted the goods and/or the proceeds of the sale; (c) they
performed such acts with abuse of confidence to the damage
and prejudice of Metrobank; and (d) demand was made on
them by [the trustor] for the remittance of the proceeds or the
return of the unsold goods."36
60
In this case, no dishonesty or abuse of confidence existed in
the handling of the construction materials.
In this case, the misappropriation could be committed should
the entrustee fail to turn over the proceeds of the sale of the
goods covered by the trust receipt transaction or fail to return
the goods themselves. The respondents could not have failed
to return the proceeds since their allegations that the clients of
ACDC had not paid for the projects it had undertaken with
them at the time the case was filed had never been questioned
or denied by LBP. What can only be attributed to the
respondents would be the failure to return the goods subject of
the trust receipts.
We do not likewise see any allegation in the complaint that
ACDC had used the construction materials in a manner that
LBP had not authorized. As earlier pointed out, LBP had
authorized the delivery of these materials to these project sites
for which they were used. When it had done so, LBP should
have been aware that it could not possibly recover the
processed materials as they would become part of government
projects, two of which (the Metro Rail Transit Project and the
Quezon Power Plant Project) had even become part of the
operations of public utilities vital to public service. It clearly had
no intention of getting these materials back; if it had, as a
primary government lending institution, it would be guilty of
extreme negligence and incompetence in not foreseeing the
legal complications and public inconvenience that would arise
should it decide to claim the materials. ACDC’s failure to return
these materials or their end product at the time these "trust
receipts" expired could not be attributed to its volition. No bad
faith, malice, negligence or breach of contract has been
attributed to ACDC, its officers or representatives. Therefore,
absent any abuse of confidence or misappropriation on the part
of the respondents, the criminal proceedings against them for
estafa should not prosper.
In Metropolitan Bank,37 we affirmed the city prosecutor’s
dismissal of a complaint for violation of the Trust Receipts Law.
In dismissing the complaint, we took note of the Court of
Appeals’ finding that the bank was interested only in collecting
its money and not in the return of the goods. Apart from the
bare allegation that demand was made for the return of the
goods (raw materials that were manufactured into textiles), the
bank had not accompanied its complaint with a demand letter.
In addition, there was no evidence offered that the respondents
therein had misappropriated or misused the goods in question.
The petition should be dismissed because the OSG did not file
it and the civil liabilities have already been settled.
The proceedings before us, regarding the criminal aspect of
this case, should be dismissed as it does not appear from the
records that the complaint was filed with the participation or
consent of the Office of the Solicitor General (OSG). Section
35, Chapter 12, Title III, Book IV of the Administrative Code of
1987 provides that:
Section 35. Powers and Functions. — The Office of the
Solicitor General shall represent the Government of the
Philippines, its agencies and instrumentalities and its officials
and agents in any litigation, proceedings, investigation or

matter requiring the services of lawyers. x x x It shall have the
following specific powers and functions:
(1) Represent the Government in the Supreme Court and the
Court of Appeals in all criminal proceedings; represent the
Government and its officers in the Supreme Court, the Court of
Appeals and all other courts or tribunals in all civil actions and
special proceedings in which the Government or any officer
thereof in his official capacity is a party. (Emphasis provided.)
In Heirs of Federico C. Delgado v. Gonzalez,38 we ruled that the
preliminary investigation is part of a criminal proceeding. As all
criminal proceedings before the Supreme Court and the Court
of Appeals may be brought and defended by only the Solicitor
General in behalf of the Republic of the Philippines, a criminal
action brought to us by a private party alone suffers from a fatal
defect. The present petition was brought in behalf of LBP by
the Government Corporate Counsel to protect its private
interests. Since the representative of the "People of the
Philippines" had not taken any part of the case, it should be
dismissed.1âwphi1
On the other hand, if we look at the mandate given to the
Office of the Government Corporate Counsel, we find that it is
limited to the civil liabilities arising from the crime, and is
subject to the control and supervision of the public prosecutor.
Section 2, Rule 8 of the Rules Governing the Exercise by the
Office of the Government Corporate Counsel of its Authority,
Duties and Powers as Principal Law Office of All Government
Owned or Controlled Corporations, filed before the Office of the
National Administration Register on September 5, 2011, reads:
Section 2. Extent of legal assistance – The OGCC shall
represent the complaining GOCC in all stages of the criminal
proceedings. The legal assistance extended is not limited to
the preparation of appropriate sworn statements but shall
include all aspects of an effective private prosecution including
recovery of civil liability arising from the crime, subject to the
control and supervision of the public prosecutor.
Based on jurisprudence, there are two exceptions when a
private party complainant or offended party in a criminal case
may file a petition with this Court, without the intervention of the
OSG: (1) when there is denial of due process of law to the
prosecution, and the State or its agents refuse to act on the
case to the prejudice of the State and the private offended
party;39 and (2) when the private offended party questions the
civil aspect of a decision of the lower court.40
In this petition, LBP fails to allege any inaction or refusal to act
on the part of the OSG, tantamount to a denial of due process.
No explanation appears as to why the OSG was not a party to
the case. Neither can LBP now question the civil aspect of this
decision as it had already assigned ACDC’s debts to a third
person, Philippine Opportunities for Growth and Income, Inc.,
and the civil liabilities appear to have already been settled by
Avent Holdings Corporation, in behalf of ACDC. These facts
have not been disputed by LBP. Therefore, we can reasonably
conclude that LBP no longer has any claims against ACDC, as
regards the subject matter of this case, that would entitle it to
file a civil or criminal action.
61
WHEREFORE, we DENY the petition and AFFIRM the January
20, 2005 decision of the Court of Appeals in CA-G.R. SP No.
76588. No costs. SO ORDERED.
G.R. No. 195117 August 14, 2013
HUR TIN YANG, PETITIONER
vs.
PEOPLE OF THE PHILIPPINES, RESPONDENT.
RESOLUTION
VELASCO JR., J.:
This is a motion for reconsideration of our February 1, 2012
Minute Resolution1 sustaining the July 28, 2010 Decision2 and
December 20, 2010 Resolution3 of the Court of Appeals (CA) in
CA-G.R. CR No. 30426, finding petitioner Hur Tin Yang guilty
beyond reasonable doubt of the crime of Estafa under A11icle
315, paragraph 1 (b) of the Revised Penal Code (RPC) in
relation to Presidential Decree No. 115 (PD 115) or the Trust
Receipts Law.
In twenty-four (24) consolidated Informations, all dated March
15, 2002, petitioner Hur Tin Yang was charged at the instance
of the same complainant with the crime of Estafa under Article
315, par. 1(b) of the RPC,4 in relation to PD 115,5 docketed as
Criminal Case Nos. 04-223911 to 34 and raffled to the
Regional Trial Court of Manila, Branch 20. The 24
Informations––differing only as regards the alleged date of
commission of the crime, date of the trust receipts, the number
of the letter of credit, the subject goods and the amount––
uniformly recite:
That on or about May 28, 1998, in the City of Manila,
Philippines, the said accused being then the authorized officer
of SUPERMAX PHILIPPINES, INC., with office address at No.
11/F, Global Tower, Gen Mascardo corner M. Reyes St.,
Bangkal, Makati City, did then and there willfully, unlawfully and
feloniously defraud the METROPOLITAN BANK AND TRUST
COMPANY (METROBANK), a corporation duly organized and
existing under and by virtue of the laws of the Republic of the
Philippines, represented by its Officer in Charge, WINNIE M.
VILLANUEVA, in the following manner, to wit: the said accused
received in trust from the said Metropolitan Bank and Trust
Company reinforcing bars valued at ₱1,062,918.84 specified in
the undated Trust Receipt Agreement covered by Letter of
Credit No. MG-LOC 216/98 for the purpose of holding said
merchandise/goods in trust, with obligation on the part of the
accused to turn over the proceeds of the sale thereof or if
unsold, to return the goods to the said bank within the specified
period agreed upon, but herein accused once in possession of
the said merchandise/goods, far from complying with his
aforesaid obligation, failed and refused and still fails and
refuses to do so despite repeated demands made upon him to
that effect and with intent to defraud and with grave abuse of
confidence and trust, misappropriated, misapplied and
converted the said merchandise/goods or the value thereof to
his own personal use and benefit, to the damage and prejudice
of said METROPOLITAN BANK AND TRUST COMPANY in the
aforesaid amount of ₱1,062,918.84, Philippine Currency.
Contrary to law.6

Upon arraignment, petitioner pleaded "not guilty." Thereafter,
trial on the merits then ensued.
The facts of these consolidated cases are undisputed:
Supermax Philippines, Inc. (Supermax) is a domestic
corporation engaged in the construction business. On various
occasions in the month of April, May, July, August, September,
October and November 1998, Metropolitan Bank and Trust
Company (Metrobank), Magdalena Branch, Manila, extended
several commercial letters of credit (LCs) to Supermax. These
commercial LCs were used by Supermax to pay for the
delivery of several construction materials which will be used in
their construction business. Thereafter, Metrobank required
petitioner, as representative and Vice-President for Internal
Affairs of Supermax, to sign twenty-four (24) trust receipts as
security for the construction materials and to hold those
materials or the proceeds of the sales in trust for Metrobank to
the extent of the amount stated in the trust receipts.
When the 24 trust receipts fell due and despite the receipt of a
demand letter dated August 15, 2000, Supermax failed to pay
or deliver the goods or proceeds to Metrobank. Instead,
Supermax, through petitioner, requested the restructuring of
the loan. When the intended restructuring of the loan did not
materialize, Metrobank sent another demand letter dated
October 11, 2001. As the demands fell on deaf ears,
Metrobank, through its representative, Winnie M. Villanueva,
filed the instant criminal complaints against petitioner.
For his defense, while admitting signing the trust receipts,
petitioner argued that said trust receipts were demanded by
Metrobank as additional security for the loans extended to
Supermax for the purchase of construction equipment and
materials. In support of this argument, petitioner presented as
witness, Priscila Alfonso, who testified that the construction
materials covered by the trust receipts were delivered way
before petitioner signed the corresponding trust
receipts.7 Further, petitioner argued that Metrobank knew all
along that the construction materials subject of the trust
receipts were not intended for resale but for personal use of
Supermax relating to its construction business.8
The trial court a quo, by Judgment dated October 6, 2006,
found petitioner guilty as charged and sentenced him as
follows:
His guilt having been proven and established beyond
reasonable doubt, the Court hereby renders judgment
CONVICTING accused HUR TIN YANG of the crime of estafa
under Article 315 paragraph 1 (a) of the Revised Penal Code
and hereby imposes upon him the indeterminate penalty of 4
years, 2 months and 1 day of prision correccional to 20 years
of reclusion temporal and to pay Metropolitan Bank and Trust
Company, Inc. the amount of Php13,156,256.51 as civil liability
and to pay cost.
SO ORDERED.9
Petitioner appealed to the CA. On July 28, 2010, the appellate
court rendered a Decision, upholding the findings of the RTC
that the prosecution has satisfactorily established the guilt of
petitioner beyond reasonable doubt, including the following
62
critical facts, to wit: (1) petitioner signing the trust receipts
agreement; (2) Supermax failing to pay the loan; and (3)
Supermax failing to turn over the proceeds of the sale or the
goods to Metrobank upon demand. Curiously, but significantly,
the CA also found that even before the execution of the trust
receipts, Metrobank knew or should have known that the
subject construction materials were never intended for resale
or for the manufacture of items to be sold.10
The CA ruled that since the offense punished under PD 115 is
in the nature of malum prohibitum, a mere failure to deliver the
proceeds of the sale or goods, if not sold, is sufficient to justify
a conviction under PD 115. The fallo of the CA Decision reads:
WHEREFORE, in view of the foregoing premises, the appeal
filed in this case is hereby DENIED and, consequently,
DISMISSED. The assailed Decision dated October 6, 2006 of
the Rregional Trial Court, Branch 20, in the City of Manila in
Criminal Cases Nos. 04223911 to 223934 is hereby
AFFIRMED.
SO ORDERED.
Petitioner filed a Motion for Reconsideration, but it was denied
in a Resolution dated December 20, 2010. Not satisfied,
petitioner filed a petition for review under Rule 45 of the Rules
of Court. The Office of the Solicitor General (OSG) filed its
Comment dated November 28, 2011, stressing that the pieces
of evidence adduced from the testimony and documents
submitted before the trial court are sufficient to establish the
guilt of petitioner.11
On February 1, 2012, this Court dismissed the Petition via a
Minute Resolution on the ground that the CA committed no
reversible error in the assailed July 28, 2010 Decision. Hence,
petitioner filed the present Motion for Reconsideration
contending that the transactions between the parties do not
constitute trust receipt agreements but rather of simple loans.
On October 3, 2012, the OSG filed its Comment on the Motion
for Reconsideration, praying for the denial of said motion and
arguing that petitioner merely reiterated his arguments in the
petition and his Motion for Reconsideration is nothing more
than a mere rehash of the matters already thoroughly passed
upon by the RTC, the CA and this Court.12
The sole issue for the consideration of the Court is whether or
not petitioner is liable for Estafa under Art. 315, par. 1(b) of the
RPC in relation to PD 115, even if it was sufficiently proved that
the entruster (Metrobank) knew beforehand that the goods
(construction materials) subject of the trust receipts were never
intended to be sold but only for use in the entrustee’s
construction business.
The motion for reconsideration has merit.
In determining the nature of a contract, courts are not bound by
the title or name given by the parties. The decisive factor in
evaluating such agreement is the intention of the parties, as
shown not necessarily by the terminology used in the contract
but by their conduct, words, actions and deeds prior to, during
and immediately after executing the agreement. As such,

therefore, documentary and parol evidence may be submitted
and admitted to prove such intention.13
In the instant case, the factual findings of the trial and appellate
courts reveal that the dealing between petitioner and
Metrobank was not a trust receipt transaction but one of simple
loan. Petitioner’s admission––that he signed the trust receipts
on behalf of Supermax, which failed to pay the loan or turn
over the proceeds of the sale or the goods to Metrobank upon
demand––does not conclusively prove that the transaction
was, indeed, a trust receipts transaction. In contrast to the
nomenclature of the transaction, the parties really intended a
contract of loan. This Court––in Ng v. People14 and Land Bank
of the Philippines v. Perez,15 cases which are in all four corners
the same as the instant case––ruled that the fact that the
entruster bank knew even before the execution of the trust
receipt agreements that the construction materials covered
were never intended by the entrustee for resale or for the
manufacture of items to be sold is sufficient to prove that the
transaction was a simple loan and not a trust receipts
transaction.
The petitioner was charged with Estafa committed in what is
called, under PD 115, a "trust receipt transaction," which is
defined as:
Section 4. What constitutes a trust receipts transaction.—A
trust receipt transaction, within the meaning of this Decree, is
any transaction by and between a person referred to in this
Decree as the entruster, and another person referred to in this
Decree as entrustee, whereby the entruster, who owns or holds
absolute title or security interests over certain specified goods,
documents or instruments, releases the same to the
possession of the entrustee upon the latter’s execution and
delivery to the entruster of a signed document called a "trust
receipt" wherein the entrustee binds himself to hold the
designated goods, documents or instruments in trust for the
entruster and to sell or otherwise dispose of the goods,
documents or instruments with the obligation to turn over to the
entruster the proceeds thereof to the extent of the amount
owing to the entruster or as appears in the trust receipt or the
goods, documents or instruments themselves if they are unsold
or not otherwise disposed of, in accordance with the terms and
conditions specified in the trust receipt, or for other purposes
substantially equivalent to any of the following:
1. In the case of goods or documents: (a) to sell the goods or
procure their sale; or (b) to manufacture or process the goods
with the purpose of ultimate sale: Provided, That, in the case of
goods delivered under trust receipt for the purpose of
manufacturing or processing before its ultimate sale, the
entruster shall retain its title over the goods whether in its
original or processed form until the entrustee has complied full
with his obligation under the trust receipt; or (c) to load, unload,
ship or transship or otherwise deal with them in a manner
preliminary or necessary to their sale; or
2. In the case of instruments: (a) to sell or procure their sale or
exchange; or (b) to deliver them to a principal; or (c) to effect
the consummation of some transactions involving delivery to a
depository or register; or (d) to effect their presentation,
collection or renewal.
63
Simply stated, a trust receipt transaction is one where the
entrustee has the obligation to deliver to the entruster the price
of the sale, or if the merchandise is not sold, to return the
merchandise to the entruster. There are, therefore, two
obligations in a trust receipt transaction: the first refers to
money received under the obligation involving the duty to turn it
over (entregarla) to the owner of the merchandise sold, while
the second refers to the merchandise received under the
obligation to "return" it (devolvera) to the owner.16 A violation of
any of these undertakings constitutes Estafa defined under Art.
315, par. 1(b) of the RPC, as provided in Sec. 13 of PD 115,
viz:
Section 13. Penalty Clause.—The failure of an entrustee to
turn over the proceeds of the sale of the goods, documents or
instruments covered by a trust receipt to the extent of the
amount owing to the entruster or as appears in the trust receipt
or to return said goods, documents or instruments if they were
not sold or disposed of in accordance with the terms of the
trust receipt shall constitute the crime of estafa, punishable
under the provisions of Article Three hundred fifteen,
paragraph one (b) of Act Numbered Three thousand eight
hundred and fifteen, as amended, otherwise known as the
Revised Penal Code. x x x (Emphasis supplied.)
Nonetheless, when both parties enter into an agreement
knowing fully well that the return of the goods subject of the
trust receipt is not possible even without any fault on the part of
the trustee, it is not a trust receipt transaction penalized under
Sec. 13 of PD 115 in relation to Art. 315, par. 1(b) of the RPC,
as the only obligation actually agreed upon by the parties
would be the return of the proceeds of the sale transaction.
This transaction becomes a mere loan, where the borrower is
obligated to pay the bank the amount spent for the purchase of
the goods.17
In Ng v. People, Anthony Ng, then engaged in the business of
building and fabricating telecommunication towers, applied for
a credit line of PhP 3,000,000 with Asiatrust Development
Bank, Inc. Prior to the approval of the loan, Anthony Ng
informed Asiatrust that the proceeds would be used for
purchasing construction materials necessary for the completion
of several steel towers he was commissioned to build by
several telecommunication companies. Asiatrust approved the
loan but required Anthony Ng to sign a trust receipt agreement.
When Anthony Ng failed to pay the loan, Asiatrust filed a
criminal case for Estafa in relation to PD 115 or the Trust
Receipts Law. This Court acquitted Anthony Ng and ruled that
the Trust Receipts Law was created to "to aid in financing
importers and retail dealers who do not have sufficient funds or
resources to finance the importation or purchase of
merchandise, and who may not be able to acquire credit
except through utilization, as collateral, of the merchandise
imported or purchased." Since Asiatrust knew that Anthony Ng
was neither an importer nor retail dealer, it should have known
that the said agreement could not possibly apply to petitioner,
viz:
The true nature of a trust receipt transaction can be found in
the "whereas" clause of PD 115 which states that a trust
receipt is to be utilized "as a convenient business device to
assist importers and merchants solve their financing

problems." Obviously, the State, in enacting the law, sought to
find a way to assist importers and merchants in their financing
in order to encourage commerce in the Philippines.
[A] trust receipt is considered a security transaction intended to
aid in financing importers and retail dealers who do not have
sufficient funds or resources to finance the importation or
purchase of merchandise, and who may not be able to acquire
credit except through utilization, as collateral, of the
merchandise imported or purchased. Similarly, American
Jurisprudence demonstrates that trust receipt transactions
always refer to a method of "financing importations or financing
sales." The principle is of course not limited in its application to
financing importations, since the principle is equally applicable
to domestic transactions. Regardless of whether the
transaction is foreign or domestic, it is important to note that
the transactions discussed in relation to trust receipts mainly
involved sales.
Following the precept of the law, such transactions affect
situations wherein the entruster, who owns or holds absolute
title or security interests over specified goods, documents or
instruments, releases the subject goods to the possession of
the entrustee. The release of such goods to the entrustee is
conditioned upon his execution and delivery to the entruster of
a trust receipt wherein the former binds himself to hold the
specific goods, documents or instruments in trust for the
entruster and to sell or otherwise dispose of the goods,
documents or instruments with the obligation to turn over to the
entruster the proceeds to the extent of the amount owing to the
entruster or the goods, documents or instruments themselves if
they are unsold. x x x [T]he entruster is entitled "only to the
proceeds derived from the sale of goods released under a trust
receipt to the entrustee."
Considering that the goods in this case were never intended for
sale but for use in the fabrication of steel communication
towers, the trial court erred in ruling that the agreement is a
trust receipt transaction.
xxxx
To emphasize, the Trust Receipts Law was created to "to aid in
financing importers and retail dealers who do not have
sufficient funds or resources to finance the importation or
purchase of merchandise, and who may not be able to acquire
credit except through utilization, as collateral, of the
merchandise imported or purchased." Since Asiatrust knew
that petitioner was neither an importer nor retail dealer, it
should have known that the said agreement could not possibly
apply to petitioner.18
Further, in Land Bank of the Philippines v. Perez, the
respondents were officers of Asian Construction and
Development Corporation (ACDC), a corporation engaged in
the construction business. On several occasions, respondents
executed in favor of Land Bank of the Philippines (LBP) trust
receipts to secure the purchase of construction materials that
they will need in their construction projects. When the trust
receipts matured, ACDC failed to return to LBP the proceeds of
the construction projects or the construction materials subject
of the trust receipts. After several demands went unheeded,
64
LBP filed a complaint for Estafa or violation of Art. 315, par.
1(b) of the RPC, in relation to PD 115, against the respondent
officers of ACDC. This Court, like in Ng, acquitted all the
respondents on the postulate that the parties really intended a
simple contract of loan and not a trust receipts transaction, viz:
When both parties enter into an agreement knowing that the
return of the goods subject of the trust receipt is not possible
even without any fault on the part of the trustee, it is not a trust
receipt transaction penalized under Section 13 of P.D. 115; the
only obligation actually agreed upon by the parties would be
the return of the proceeds of the sale transaction. This
transaction becomes a mere loan, where the borrower is
obligated to pay the bank the amount spent for the purchase of
the goods.
xxxx
Thus, in concluding that the transaction was a loan and not a
trust receipt, we noted in Colinares that the industry or line of
work that the borrowers were engaged in was construction. We
pointed out that the borrowers were not importers acquiring
goods for resale. Indeed, goods sold in retail are often within
the custody or control of the trustee until they are purchased. In
the case of materials used in the manufacture of finished
products, these finished products – if not the raw materials or
their components – similarly remain in the possession of the
trustee until they are sold. But the goods and the materials that
are used for a construction project are often placed under the
control and custody of the clients employing the contractor,
who can only be compelled to return the materials if they fail to
pay the contractor and often only after the requisite legal
proceedings. The contractor’s difficulty and uncertainty in
claiming these materials (or the buildings and structures which
they become part of), as soon as the bank demands them,
disqualify them from being covered by trust receipt
agreements.19
Since the factual milieu of Ng and Land Bank of the Philippines
are in all four corners similar to the instant case, it behooves
this Court, following the principle of stare decisis,20 to rule that
the transactions in the instant case are not trust receipts
transactions but contracts of simple loan. The fact that the
entruster bank, Metrobank in this case, knew even before the
execution of the alleged trust receipt agreements that the
covered construction materials were never intended by the
entrustee (petitioner) for resale or for the manufacture of items
to be sold would take the transaction between petitioner and
Metrobank outside the ambit of the Trust Receipts Law.
For reasons discussed above, the subject transactions in the
instant case are not trust receipts transactions.1âwphi1 Thus,
the consolidated complaints for Estafa in relation to PD 115
have really no leg to stand on.
The Court’s ruling in Colinares v. Court of Appeals21 is very apt,
thus:
The practice of banks of making borrowers sign trust receipts
to facilitate collection of loans and place them under the threats
of criminal prosecution should they be unable to pay it may be
unjust and inequitable. if not reprehensible. Such agreements

are contracts of adhesion which borrowers have no option but
to sign lest their loan be disapproved. The resort to this
scheme leaves poor and hapless borrowers at the mercy of
banks and is prone to misinterpretation x x x.
Unfortunately, what happened in Colinares is exactly the
situation in the instant case. This reprehensible bank practice
described in Colinares should be stopped and discouraged.
For this Court to give life to the constitutional provision of non-
imprisonment for nonpayment of debts,22 it is imperative that
petitioner be acquitted of the crime of Estafa under Art. 315,
par. 1 (b) ofthe RPC, in relation to PD 115.
WHEREFORE, the Resolution dated February 1, 2012,
upholding theCA's Decision dated July 28, 2010 and
Resolution dated December 20, 2010 in CA-G.R. CR No.
30426, is hereby RECONSIDERED. Petitioner Hur Tin Yang is
ACQUITTED of the charge of violating Art. 315, par. 1 (b) of the
RPC, in relation to the pertinent provision of PD 115 in Criminal
Case Nos. 04-223911 to 34. SO ORDERED.
LETTERS OF CREDIT
G.R. No. 74886 December 8, 1992
PRUDENTIAL BANK, petitioner, vs.
INTERMEDIATE APPELLATE COURT, PHILIPPINE RAYON
MILLS, INC. and ANACLETO R. CHI, respondents.
DAVIDE, JR., J.:
Petitioner seeks to review and set aside the decision 1 of public
respondent; Intermediate Appellate Court (now Court of
Appeals), dated 10 March 1986, in AC-G.R. No. 66733 which
affirmed in toto the 15 June 1978 decision of Branch 9
(Quezon City) of the then Court of First Instance (now Regional
Trial Court) of Rizal in Civil Case No. Q-19312. The latter
involved an action instituted by the petitioner for the recovery of
a sum of money representing the amount paid by it to the
Nissho Company Ltd. of Japan for textile machinery imported
by the defendant, now private respondent, Philippine Rayon
Mills, Inc. (hereinafter Philippine Rayon), represented by co-
defendant Anacleto R. Chi.
The facts which gave rise to the instant controversy are
summarized by the public respondent as follows:
On August 8, 1962, defendant-appellant Philippine Rayon Mills,
Inc. entered into a contract with Nissho Co., Ltd. of Japan for
the importation of textile machineries under a five-year
deferred payment plan (Exhibit B, Plaintiff's Folder of Exhibits,
p 2). To effect payment for said machineries, the defendant-
appellant applied for a commercial letter of credit with the
Prudential Bank and Trust Company in favor of Nissho. By
virtue of said application, the Prudential Bank opened Letter of
Credit No. DPP-63762 for $128,548.78 (Exhibit A, Ibid., p. 1).
Against this letter of credit, drafts were drawn and issued by
Nissho (Exhibits X, X-1 to X-11, Ibid., pp. 65, 66 to 76), which
were all paid by the Prudential Bank through its correspondent
in Japan, the Bank of Tokyo, Ltd. As indicated on their faces,
two of these drafts (Exhibit X and X-1, Ibid., pp. 65-66) were
accepted by the defendant-appellant through its president,
65
Anacleto R. Chi, while the others were not (Exhibits X-2 to X-
11, Ibid., pp. 66 to 76).
Upon the arrival of the machineries, the Prudential Bank
indorsed the shipping documents to the defendant-appellant
which accepted delivery of the same. To enable the defendant-
appellant to take delivery of the machineries, it executed, by
prior arrangement with the Prudential Bank, a trust receipt
which was signed by Anacleto R. Chi in his capacity as
President (sic) of defendant-appellant company (Exhibit
C, Ibid., p. 13).
At the back of the trust receipt is a printed form to be
accomplished by two sureties who, by the very terms and
conditions thereof, were to be jointly and severally liable to the
Prudential Bank should the defendant-appellant fail to pay the
total amount or any portion of the drafts issued by Nissho and
paid for by Prudential Bank. The defendant-appellant was able
to take delivery of the textile machineries and installed the
same at its factory site at 69 Obudan Street, Quezon City.
Sometime in 1967, the defendant-appellant ceased business
operation (sic). On December 29, 1969, defendant-appellant's
factory was leased by Yupangco Cotton Mills for an annual
rental of P200,000.00 (Exhibit I, Ibid., p. 22). The lease was
renewed on January 3, 1973 (Exhibit J, Ibid., p. 26). On
January 5, 1974, all the textile machineries in the defendant-
appellant's factory were sold to AIC Development Corporation
for P300,000.00 (Exhibit K, Ibid., p. 29).
The obligation of the defendant-appellant arising from the letter
of credit and the trust receipt remained unpaid and
unliquidated. Repeated formal demands (Exhibits U, V, and W,
Ibid., pp. 62, 63, 64) for the payment of the said trust receipt
yielded no result Hence, the present action for the collection of
the principal amount of P956,384.95 was filed on October 3,
1974 against the defendant-appellant and Anacleto R. Chi. In
their respective answers, the defendants interposed identical
special defenses, viz., the complaint states no cause of action;
if there is, the same has prescribed; and the plaintiff is guilty of
laches. 2
On 15 June 1978, the trial court rendered its decision the
dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered sentencing the
defendant Philippine Rayon Mills, Inc. to pay plaintiff the sum
of P153,645.22, the amounts due under Exhibits "X" & "X-1",
with interest at 6% per annum beginning September 15, 1974
until fully paid.
Insofar as the amounts involved in drafts Exhs. "X" (sic) to "X-
11", inclusive, the same not having been accepted by
defendant Philippine Rayon Mills, Inc., plaintiff's cause of
action thereon has not accrued, hence, the instant case is
premature.
Insofar as defendant Anacleto R. Chi is concerned, the case is
dismissed. Plaintiff is ordered to pay defendant Anacleto R. Chi
the sum of P20,000.00 as attorney's fees.
With costs against defendant Philippine Rayon Mills, Inc.

SO ORDERED. 3
Petitioner appealed the decision to the then Intermediate
Appellate Court. In urging the said court to reverse or modify
the decision, petitioner alleged in its Brief that the trial court
erred in (a) disregarding its right to reimbursement from the
private respondents for the entire unpaid balance of the
imported machines, the total amount of which was paid to the
Nissho Company Ltd., thereby violating the principle of the
third party payor's right to reimbursement provided for in the
second paragraph of Article 1236 of the Civil Code and under
the rule against unjust enrichment; (b) refusing to hold Anacleto
R. Chi, as the responsible officer of defendant corporation,
liable under Section 13 of P.D No 115 for the entire unpaid
balance of the imported machines covered by the bank's trust
receipt (Exhibit "C"); (c) finding that the solidary guaranty
clause signed by Anacleto R. Chi is not a guaranty at all; (d)
controverting the judicial admissions of Anacleto R. Chi that he
is at least a simple guarantor of the said trust receipt obligation;
(e) contravening, based on the assumption that Chi is a simple
guarantor, Articles 2059, 2060 and 2062 of the Civil Code and
the related evidence and jurisprudence which provide that such
liability had already attached; (f) contravening the judicial
admissions of Philippine Rayon with respect to its liability to
pay the petitioner the amounts involved in the drafts (Exhibits
"X", "X-l" to "X-11''); and (g) interpreting "sight" drafts as
requiring acceptance by Philippine Rayon before the latter
could be held liable thereon. 4
In its decision, public respondent sustained the trial court in all
respects. As to the first and last assigned errors, it ruled that
the provision on unjust enrichment, Article 2142 of the Civil
Code, applies only if there is no express contract between the
parties and there is a clear showing that the payment is
justified. In the instant case, the relationship existing between
the petitioner and Philippine Rayon is governed by specific
contracts, namely the application for letters of credit, the
promissory note, the drafts and the trust receipt. With respect
to the last ten (10) drafts (Exhibits "X-2" to "X-11") which had
not been presented to and were not accepted by Philippine
Rayon, petitioner was not justified in unilaterally paying the
amounts stated therein. The public respondent did not agree
with the petitioner's claim that the drafts were sight drafts which
did not require presentment for acceptance to Philippine Rayon
because paragraph 8 of the trust receipt presupposes prior
acceptance of the drafts. Since the ten (10) drafts were not
presented and accepted, no valid demand for payment can be
made.
Public respondent also disagreed with the petitioner's
contention that private respondent Chi is solidarily liable with
Philippine Rayon pursuant to Section 13 of P.D. No. 115 and
based on his signature on the solidary guaranty clause at the
dorsal side of the trust receipt. As to the first contention, the
public respondent ruled that the civil liability provided for in said
Section 13 attaches only after conviction. As to the second, it
expressed misgivings as to whether Chi's signature on the trust
receipt made the latter automatically liable thereon because
the so-called solidary guaranty clause at the dorsal portion of
the trust receipt is to be signed not by one (1) person alone,
but by two (2) persons; the last sentence of the same is
66
incomplete and unsigned by witnesses; and it is not
acknowledged before a notary public. Besides, even granting
that it was executed and acknowledged before a notary public,
Chi cannot be held liable therefor because the records fail to
show that petitioner had either exhausted the properties of
Philippine Rayon or had resorted to all legal remedies as
required in Article 2058 of the Civil Code. As provided for under
Articles 2052 and 2054 of the Civil Code, the obligation of a
guarantor is merely accessory and subsidiary, respectively.
Chi's liability would therefore arise only when the principal
debtor fails to comply with his obligation. 5
Its motion to reconsider the decision having been denied by the
public respondent in its Resolution of 11 June 1986, 6 petitioner
filed the instant petition on 31 July 1986 submitting the
following legal issues:
I. WHETHER OR NOT THE RESPONDENT APPELLATE
COURT GRIEVOUSLY ERRED IN DENYING PETITIONER'S
CLAIM FOR FULL REIMBURSEMENT AGAINST THE
PRIVATE RESPONDENTS FOR THE PAYMENT PETITIONER
MADE TO NISSHO CO. LTD. FOR THE BENEFIT OF
PRIVATE RESPONDENT UNDER ART. 1283 OF THE NEW
CIVIL CODE OF THE PHILIPPINES AND UNDER THE
GENERAL PRINCIPLE AGAINST UNJUST ENRICHMENT;
II. WHETHER OR NOT RESPONDENT CHI IS SOLIDARILY
LIABLE UNDER THE TRUST RECEIPT (EXH. C);
III. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL
ADMISSIONS OF RESPONDENT CHI HE IS LIABLE
THEREON AND TO WHAT EXTENT;
IV. WHETHER OR NOT RESPONDENT CHI IS MERELY A
SIMPLE GUARANTOR; AND IF SO; HAS HIS LIABILITY AS
SUCH ALREADY ATTACHED;
V. WHETHER OR NOT AS THE SIGNATORY AND
RESPONSIBLE OFFICER OF RESPONDENT PHIL. RAYON
RESPONDENT CHI IS PERSONALLY LIABLE PURSUANT
TO THE PROVISION OF SECTION 13, P.D. 115;
VI. WHETHER OR NOT RESPONDENT PHIL. RAYON IS
LIABLE TO THE PETITIONER UNDER THE TRUST RECEIPT
(EXH. C);
VII. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL
ADMISSIONS RESPONDENT PHIL. RAYON IS LIABLE TO
THE PETITIONER UNDER THE DRAFTS (EXHS. X, X-1 TO
X-11) AND TO WHAT EXTENT;
VIII. WHETHER OR NOT SIGHT DRAFTS REQUIRE PRIOR
ACCEPTANCE FROM RESPONDENT PHIL. RAYON
BEFORE THE LATTER BECOMES LIABLE TO
PETITIONER. 7
In the Resolution of 12 March 1990, 8 this Court gave due
course to the petition after the filing of the Comment thereto by
private respondent Anacleto Chi and of the Reply to the latter
by the petitioner; both parties were also required to submit their
respective memoranda which they subsequently complied with.
As We see it, the issues may be reduced as follows:

1. Whether presentment for acceptance of the drafts was
indispensable to make Philippine Rayon liable thereon;
2. Whether Philippine Rayon is liable on the basis of the trust
receipt;
3. Whether private respondent Chi is jointly and severally liable
with Philippine Rayon for the obligation sought to be enforced
and if not, whether he may be considered a guarantor; in the
latter situation, whether the case should have been dismissed
on the ground of lack of cause of action as there was no prior
exhaustion of Philippine Rayon's properties.
Both the trial court and the public respondent ruled that
Philippine Rayon could be held liable for the two (2) drafts,
Exhibits "X" and "X-1", because only these appear to have
been accepted by the latter after due presentment. The liability
for the remaining ten (10) drafts (Exhibits "X-2" to "X-11"
inclusive) did not arise because the same were not presented
for acceptance. In short, both courts concluded that
acceptance of the drafts by Philippine Rayon was
indispensable to make the latter liable thereon. We are unable
to agree with this proposition. The transaction in the case at
bar stemmed from Philippine Rayon's application for a
commercial letter of credit with the petitioner in the amount of
$128,548.78 to cover the former's contract to purchase and
import loom and textile machinery from Nissho Company, Ltd.
of Japan under a five-year deferred payment plan. Petitioner
approved the application. As correctly ruled by the trial court in
its Order of 6 March 1975: 9
. . . By virtue of said Application and Agreement for Commercial
Letter of Credit, plaintiff bank 10 was under obligation to pay
through its correspondent bank in Japan the drafts that Nisso
(sic) Company, Ltd., periodically drew against said letter of
credit from 1963 to 1968, pursuant to plaintiff's contract with
the defendant Philippine Rayon Mills, Inc. In turn, defendant
Philippine Rayon Mills, Inc., was obligated to pay plaintiff bank
the amounts of the drafts drawn by Nisso (sic) Company, Ltd.
against said plaintiff bank together with any accruing
commercial charges, interest, etc. pursuant to the terms and
conditions stipulated in the Application and Agreement of
Commercial Letter of Credit Annex "A".
A letter of credit is defined as an engagement by a bank or
other person made at the request of a customer that the issuer
will honor drafts or other demands for payment upon
compliance with the conditions specified in the
credit. 11Through a letter of credit, the bank merely substitutes
its own promise to pay for one of its customers who in return
promises to pay the bank the amount of funds mentioned in the
letter of credit plus credit or commitment fees mutually agreed
upon. 12 In the instant case then, the drawee was necessarily
the herein petitioner. It was to the latter that the drafts were
presented for payment. In fact, there was no need for
acceptance as the issued drafts are sight drafts. Presentment
for acceptance is necessary only in the cases expressly
provided for in Section 143 of the Negotiable Instruments Law
(NIL). 13 The said section reads:
Sec. 143. When presentment for acceptance must be made. —
Presentment for acceptance must be made:
67
(a) Where the bill is payable after sight, or in any other case,
where presentment for acceptance is necessary in order to fix
the maturity of the instrument; or
(b) Where the bill expressly stipulates that it shall be presented
for acceptance; or
(c) Where the bill is drawn payable elsewhere than at the
residence or place of business of the drawee.
In no other case is presentment for acceptance necessary in
order to render any party to the bill liable.
Obviously then, sight drafts do not require presentment for
acceptance.
The acceptance of a bill is the signification by the drawee of his
assent to the order of the drawer; 14 this may be done in writing
by the drawee in the bill itself, or in a separate instrument. 15
The parties herein agree, and the trial court explicitly ruled, that
the subject, drafts are sight drafts. Said the latter:
. . . In the instant case the drafts being at sight, they are
supposed to be payable upon acceptance unless plaintiff bank
has given the Philippine Rayon Mills Inc. time within which to
pay the same. The first two drafts (Annexes C & D, Exh. X & X-
1) were duly accepted as indicated on their face (sic), and
upon such acceptance should have been paid forthwith. These
two drafts were not paid and although Philippine Rayon Mills
ought to have paid the same, the fact remains that until now
they are still unpaid. 16
Corollarily, they are, pursuant to Section 7 of the NIL, payable
on demand. Section 7 provides:
Sec. 7. When payable on demand. — An instrument is payable
on demand —
(a) When so it is expressed to be payable on demand, or at
sight, or on presentation; or
(b) In which no time for payment in expressed.
Where an instrument is issued, accepted, or indorsed when
overdue, it is, as regards the person so issuing, accepting, or
indorsing it, payable on demand. (emphasis supplied)
Paragraph 8 of the Trust Receipt which reads: "My/our liability
for payment at maturity of any accepted draft, bill of exchange
or indebtedness shall not be extinguished or modified" 17 does
not, contrary to the holding of the public respondent,
contemplate prior acceptance by Philippine Rayon, but by the
petitioner. Acceptance, however, was not even necessary in
the first place because the drafts which were eventually issued
were sight drafts And even if these were not sight drafts,
thereby necessitating acceptance, it would be the petitioner —
and not Philippine Rayon — which had to accept the same for
the latter was not the drawee. Presentment for acceptance is
defined an the production of a bill of exchange to a drawee for
acceptance. 18The trial court and the public respondent,
therefore, erred in ruling that presentment for acceptance was
an indispensable requisite for Philippine Rayon's liability on the
drafts to attach. Contrary to both courts' pronouncements,

Philippine Rayon immediately became liable thereon upon
petitioner's payment thereof. Such is the essence of the letter
of credit issued by the petitioner. A different conclusion would
violate the principle upon which commercial letters of credit are
founded because in such a case, both the beneficiary and the
issuer, Nissho Company Ltd. and the petitioner, respectively,
would be placed at the mercy of Philippine Rayon even if the
latter had already received the imported machinery and the
petitioner had fully paid for it. The typical setting and purpose
of a letter of credit are described in Hibernia Bank and Trust
Co.vs. J. Aron & Co., Inc., 19 thus:
Commercial letters of credit have come into general use in
international sales transactions where much time necessarily
elapses between the sale and the receipt by a purchaser of the
merchandise, during which interval great price changes may
occur. Buyers and sellers struggle for the advantage of
position. The seller is desirous of being paid as surely and as
soon as possible, realizing that the vendee at a distant point
has it in his power to reject on trivial grounds merchandise on
arrival, and cause considerable hardship to the shipper. Letters
of credit meet this condition by affording celerity and certainty
of payment. Their purpose is to insure to a seller payment of a
definite amount upon presentation of documents. The bank
deals only with documents. It has nothing to do with the quality
of the merchandise. Disputes as to the merchandise shipped
may arise and be litigated later between vendor and vendee,
but they may not impede acceptance of drafts and payment by
the issuing bank when the proper documents are presented.
The trial court and the public respondent likewise erred in
disregarding the trust receipt and in not holding that Philippine
Rayon was liable thereon. In People vs. Yu Chai Ho, 20 this
Court explains the nature of a trust receipt by quoting In re
Dunlap Carpet Co., 21 thus:
By this arrangement a banker advances money to an intending
importer, and thereby lends the aid of capital, of credit, or of
business facilities and agencies abroad, to the enterprise of
foreign commerce. Much of this trade could hardly be carried
on by any other means, and therefore it is of the first
importance that the fundamental factor in the transaction, the
banker's advance of money and credit, should receive the
amplest protection. Accordingly, in order to secure that the
banker shall be repaid at the critical point — that is, when the
imported goods finally reach the hands of the intended vendee
— the banker takes the full title to the goods at the very
beginning; he takes it as soon as the goods are bought and
settled for by his payments or acceptances in the foreign
country, and he continues to hold that title as his indispensable
security until the goods are sold in the United States and the
vendee is called upon to pay for them. This security is not an
ordinary pledge by the importer to the banker, for the importer
has never owned the goods, and moreover he is not able to
deliver the possession; but the security is the complete title
vested originally in the bankers, and this characteristic of the
transaction has again and again been recognized and
protected by the courts. Of course, the title is at bottom a
security title, as it has sometimes been called, and the banker
is always under the obligation to reconvey; but only after his
68
advances have been fully repaid and after the importer has
fulfilled the other terms of the contract.
As further stated in National Bank vs. Viuda e Hijos de Angel
Jose, 22 trust receipts:
. . . [I]n a certain manner, . . . partake of the nature of a
conditional sale as provided by the Chattel Mortgage Law, that
is, the importer becomes absolute owner of the imported
merchandise as soon an he has paid its price. The ownership
of the merchandise continues to be vested in the owner thereof
or in the person who has advanced payment, until he has been
paid in full, or if the merchandise has already been sold, the
proceeds of the sale should be turned over to him by the
importer or by his representative or successor in interest.
Under P.D. No. 115, otherwise known an the Trust Receipts
Law, which took effect on 29 January 1973, a trust receipt
transaction is defined as "any transaction by and between a
person referred to in this Decree as the entruster, and another
person referred to in this Decree as the entrustee, whereby the
entruster, who owns or holds absolute title or security interests'
over certain specified goods, documents or instruments,
releases the same to the possession of the entrustee upon the
latter's execution and delivery to the entruster of a signed
document called the "trust receipt" wherein the entrustee binds
himself to hold the designated goods, documents or
instruments in trust for the entruster and to sell or otherwise
dispose of the goods, documents or instruments with the
obligation to turn over to the entruster the proceeds thereof to
the extent of the amount owing to the entruster or as appears
in the trust receipt or the goods, instruments themselves if they
are unsold or not otherwise disposed of, in accordance with the
terms and conditions specified in the trusts receipt, or for other
purposes substantially equivalent to any one of the following: . .
."
It is alleged in the complaint that private respondents "not only
have presumably put said machinery to good use and have
profited by its operation and/or disposition but very recent
information that (sic) reached plaintiff bank that defendants
already sold the machinery covered by the trust receipt to
Yupangco Cotton Mills," and that "as trustees of the property
covered by the trust receipt, . . . and therefore acting in
fiduciary (sic) capacity, defendants have willfully violated their
duty to account for the whereabouts of the machinery covered
by the trust receipt or for the proceeds of any lease, sale or
other disposition of the same that they may have made,
notwithstanding demands therefor; defendants have
fraudulently misapplied or converted to their own use any
money realized from the lease, sale, and other disposition of
said machinery." 23 While there is no specific prayer for the
delivery to the petitioner by Philippine Rayon of the proceeds of
the sale of the machinery covered by the trust receipt, such
relief is covered by the general prayer for "such further and
other relief as may be just and equitable on the
premises." 24 And although it is true that the petitioner
commenced a criminal action for the violation of the Trust
Receipts Law, no legal obstacle prevented it from enforcing the
civil liability arising out of the trust, receipt in a separate civil
action. Under Section 13 of the Trust Receipts Law, the failure
of an entrustee to turn over the proceeds of the sale of goods,

documents or instruments covered by a trust receipt to the
extent of the amount owing to the entruster or as appear in the
trust receipt or to return said goods, documents or instruments
if they were not sold or disposed of in accordance with the
terms of the trust receipt shall constitute the crime of estafa,
punishable under the provisions of Article 315, paragraph 1(b)
of the Revised Penal Code. 25 Under Article 33 of the Civil
Code, a civil action for damages, entirely separate and distinct
from the criminal action, may be brought by the injured party in
cases of defamation, fraud and physical injuries. Estafa falls
under fraud.
We also conclude, for the reason hereinafter discussed, and
not for that adduced by the public respondent, that private
respondent Chi's signature in the dorsal portion of the trust
receipt did not bind him solidarily with Philippine Rayon. The
statement at the dorsal portion of the said trust receipt, which
petitioner describes as a "solidary guaranty clause", reads:
In consideration of the PRUDENTIAL BANK AND TRUST
COMPANY complying with the foregoing, we jointly and
severally agree and undertake to pay on demand to the
PRUDENTIAL BANK AND TRUST COMPANY all sums of
money which the said PRUDENTIAL BANK AND TRUST
COMPANY may call upon us to pay arising out of or pertaining
to, and/or in any event connected with the default of and/or
non-fulfillment in any respect of the undertaking of the
aforesaid:
PHILIPPINE RAYON MILLS, INC.
We further agree that the PRUDENTIAL BANK AND TRUST
COMPANY does not have to take any steps or exhaust its
remedy against aforesaid:
before making demand on me/us.
(Sgd.) Anacleto R. Chi
ANACLETO R. CHI 26
Petitioner insists that by virtue of the clear wording of the
statement, specifically the clause ". . . we jointly and severally
agree and undertake . . .," and the concluding sentence on
exhaustion, Chi's liability therein is solidary.
In holding otherwise, the public respondent ratiocinates as
follows:
With respect to the second argument, we have our misgivings
as to whether the mere signature of defendant-appellee Chi of
(sic) the guaranty agreement, Exhibit "C-1", will make it an
actionable document. It should be noted that Exhibit "C-1" was
prepared and printed by the plaintiff-appellant. A perusal of
Exhibit "C-1" shows that it was to be signed and executed by
two persons. It was signed only by defendant-appellee Chi.
Exhibit "C-1" was to be witnessed by two persons, but no one
signed in that capacity. The last sentence of the guaranty
clause is incomplete. Furthermore, the plaintiff-appellant also
failed to have the purported guarantee clause acknowledged
before a notary public. All these show that the alleged guaranty
provision was disregarded and, therefore, not consummated.
69
But granting arguendo that the guaranty provision in Exhibit "C-
1" was fully executed and acknowledged still defendant-
appellee Chi cannot be held liable thereunder because the
records show that the plaintiff-appellant had neither exhausted
the property of the defendant-appellant nor had it resorted to all
legal remedies against the said defendant-appellant as
provided in Article 2058 of the Civil Code. The obligation of a
guarantor is merely accessory under Article 2052 of the Civil
Code and subsidiary under Article 2054 of the Civil Code.
Therefore, the liability of the defendant-appellee arises only
when the principal debtor fails to comply with his obligation. 27
Our own reading of the questioned solidary guaranty clause
yields no other conclusion than that the obligation of Chi is only
that of a guarantor. This is further bolstered by the last
sentence which speaks of waiver of exhaustion, which,
nevertheless, is ineffective in this case because the space
therein for the party whose property may not be exhausted was
not filled up. Under Article 2058 of the Civil Code, the defense
of exhaustion (excussion) may be raised by a guarantor before
he may be held liable for the obligation. Petitioner likewise
admits that the questioned provision is a solidary guaranty
clause, thereby clearly distinguishing it from a contract of
surety. It, however, described the guaranty as solidary between
the guarantors; this would have been correct if two (2)
guarantors had signed it. The clause "we jointly and severally
agree and undertake" refers to the undertaking of the two (2)
parties who are to sign it or to the liability existing between
themselves. It does not refer to the undertaking between either
one or both of them on the one hand and the petitioner on the
other with respect to the liability described under the trust
receipt. Elsewise stated, their liability is not divisible as
between them, i.e., it can be enforced to its full extent against
any one of them.
Furthermore, any doubt as to the import, or true intent of the
solidary guaranty clause should be resolved against the
petitioner. The trust receipt, together with the questioned
solidary guaranty clause, is on a form drafted and prepared
solely by the petitioner; Chi's participation therein is limited to
the affixing of his signature thereon. It is, therefore, a contract
of adhesion; 28 as such, it must be strictly construed against the
party responsible for its preparation. 29
Neither can We agree with the reasoning of the public
respondent that this solidary guaranty clause was effectively
disregarded simply because it was not signed and witnessed
by two (2) persons and acknowledged before a notary public.
While indeed, the clause ought to have been signed by two (2)
guarantors, the fact that it was only Chi who signed the same
did not make his act an idle ceremony or render the clause
totally meaningless. By his signing, Chi became the sole
guarantor. The attestation by witnesses and the
acknowledgement before a notary public are not required by
law to make a party liable on the instrument. The rule is that
contracts shall be obligatory in whatever form they may have
been entered into, provided all the essential requisites for their
validity are present; however, when the law requires that a
contract be in some form in order that it may be valid or
enforceable, or that it be proved in a certain way, that
requirement is absolute and indispensable. 30 With respect to a

guaranty, 31 which is a promise to answer for the debt or default
of another, the law merely requires that it, or some note or
memorandum thereof, be in writing. Otherwise, it would be
unenforceable unless ratified. 32 While the acknowledgement of
a surety before a notary public is required to make the same
a public document, under Article 1358 of the Civil Code, a
contract of guaranty does not have to appear in a public
document.
And now to the other ground relied upon by the petitioner as
basis for the solidary liability of Chi, namely the criminal
proceedings against the latter for the violation of P.D. No. 115.
Petitioner claims that because of the said criminal proceedings,
Chi would be answerable for the civil liability arising therefrom
pursuant to Section 13 of P.D. No. 115. Public respondent
rejected this claim because such civil liability presupposes prior
conviction as can be gleaned from the phrase "without
prejudice to the civil liability arising from the criminal offense."
Both are wrong. The said section reads:
Sec. 13. Penalty Clause. — The failure of an entrustee to turn
over the proceeds of the sale of the goods, documents or
instruments covered by a trust receipt to the extent of the
amount owing to the entruster or as appears in the trust receipt
or to return said goods, documents or instruments if they were
not sold or disposed of in accordance with the terms of the
trust receipt shall constitute the crime of estafa, punishable
under the provisions of Article Three hundred and fifteen,
paragraph one (b) of Act Numbered Three thousand eight
hundred and fifteen, as amended, otherwise known as the
Revised Penal Code. If the violation or offense is committed by
a corporation, partnership, association or other juridical
entities, the penalty provided for in this Decree shall be
imposed upon the directors, officers, employees or other
officials or persons therein responsible for the offense, without
prejudice to the civil liabilities arising from the criminal offense.
A close examination of the quoted provision reveals that it is
the last sentence which provides for the correct solution. It is
clear that if the violation or offense is committed by a
corporation, partnership, association or other juridical entities,
the penalty shall be imposed upon the directors, officers,
employees or other officials or persons therein responsible for
the offense. The penalty referred to is imprisonment, the
duration of which would depend on the amount of the fraud as
provided for in Article 315 of the Revised Penal Code. The
reason for this is obvious: corporations, partnerships,
associations and other juridical entities cannot be put in jail.
However, it is these entities which are made liable for the civil
liability arising from the criminal offense. This is the import of
the clause "without prejudice to the civil liabilities arising from
the criminal offense." And, as We stated earlier, since that
violation of a trust receipt constitutes fraud under Article 33 of
the Civil Code, petitioner was acting well within its rights in
filing an independent civil action to enforce the civil liability
arising therefrom against Philippine Rayon.
The remaining issue to be resolved concerns the propriety of
the dismissal of the case against private respondent Chi. The
trial court based the dismissal, and the respondent Court its
affirmance thereof, on the theory that Chi is not liable on the
trust receipt in any capacity — either as surety or as guarantor
70
— because his signature at the dorsal portion thereof was
useless; and even if he could be bound by such signature as a
simple guarantor, he cannot, pursuant to Article 2058 of the
Civil Code, be compelled to pay until
after petitioner has exhausted and resorted to all legal
remedies against the principal debtor, Philippine Rayon. The
records fail to show that petitioner had done so 33 Reliance is
thus placed on Article 2058 of the Civil Code which provides:
Art. 2056. The guarantor cannot be compelled to pay the
creditor unless the latter has exhausted all the property of the
debtor, and has resorted to all the legal remedies against the
debtor.
Simply stated, there is as yet no cause of action against Chi.
We are not persuaded. Excussion is not a condition sine qua
non for the institution of an action against a guarantor.
In Southern Motors, Inc. vs. Barbosa, 34 this Court stated:
4. Although an ordinary personal guarantor — not a mortgagor
or pledgor — may demand the aforementioned exhaustion, the
creditor may, prior thereto, secure a judgment against said
guarantor, who shall be entitled, however, to a deferment of the
execution of said judgment against him until after the
properties of the principal debtor shall have been exhausted to
satisfy the obligation involved in the case.
There was then nothing procedurally objectionable in
impleading private respondent Chi as a co-defendant in Civil
Case No. Q-19312 before the trial court. As a matter of fact,
Section 6, Rule 3 of the Rules of Court on permissive joinder of
parties explicitly allows it. It reads:
Sec. 6. Permissive joinder of parties. — All persons in whom or
against whom any right to relief in respect to or arising out of
the same transaction or series of transactions is alleged to
exist, whether jointly, severally, or in the alternative, may,
except as otherwise provided in these rules, join as plaintiffs or
be joined as defendants in one complaint, where any question
of law or fact common to all such plaintiffs or to all such
defendants may arise in the action; but the court may make
such orders as may be just to prevent any plaintiff or defendant
from being embarrassed or put to expense in connection with
any proceedings in which he may have no interest.
This is the equity rule relating to multifariousness. It is based
on trial convenience and is designed to permit the joinder of
plaintiffs or defendants whenever there is a common question
of law or fact. It will save the parties unnecessary work, trouble
and expense. 35
However, Chi's liability is limited to the principal obligation in
the trust receipt plus all the accessories thereof including
judicial costs; with respect to the latter, he shall only be liable
for those costs incurred after being judicially required to
pay. 36 Interest and damages, being accessories of the
principal obligation, should also be paid; these, however, shall
run only from the date of the filing of the complaint. Attorney's
fees may even be allowed in appropriate cases.37
In the instant case, the attorney's fees to be paid by Chi cannot
be the same as that to be paid by Philippine Rayon since it is

only the trust receipt that is covered by the guaranty and not
the full extent of the latter's liability. All things considered, he
can be held liable for the sum of P10,000.00 as attorney's fees
in favor of the petitioner.
Thus, the trial court committed grave abuse of discretion in
dismissing the complaint as against private respondent Chi and
condemning petitioner to pay him P20,000.00 as attorney's
fees.
In the light of the foregoing, it would no longer necessary to
discuss the other issues raised by the petitioner
WHEREFORE, the instant Petition is hereby GRANTED.
The appealed Decision of 10 March 1986 of the public
respondent in AC-G.R. CV No. 66733 and, necessarily, that of
Branch 9 (Quezon City) of the then Court of First Instance of
Rizal in Civil Case No. Q-19312 are hereby REVERSED and
SET ASIDE and another is hereby entered:
1. Declaring private respondent Philippine Rayon Mills, Inc.
liable on the twelve drafts in question (Exhibits "X", "X-1" to "X-
11", inclusive) and on the trust receipt (Exhibit "C"), and
ordering it to pay petitioner: (a) the amounts due thereon in the
total sum of P956,384.95 as of 15 September 1974, with
interest thereon at six percent (6%) per annum from 16
September 1974 until it is fully paid, less whatever may have
been applied thereto by virtue of foreclosure of mortgages, if
any; (b) a sum equal to ten percent (10%) of the aforesaid
amount as attorney's fees; and (c) the costs.
2. Declaring private respondent Anacleto R. Chi secondarily
liable on the trust receipt and ordering him to pay the face
value thereof, with interest at the legal rate, commencing from
the date of the filing of the complaint in Civil Case No. Q-19312
until the same is fully paid as well as the costs and attorney's
fees in the sum of P10,000.00 if the writ of execution for the
enforcement of the above awards against Philippine Rayon
Mills, Inc. is returned unsatisfied.
Costs against private respondents. SO ORDERED.
G.R. No. 105395 December 10, 1993
BANK OF AMERICA, NT & SA, petitioners,
vs.
COURT OF APPEALS, INTER-RESIN INDUSTRIAL
CORPORATION, FRANCISCO TRAJANO, JOHN DOE AND
JANE DOE, respondents.
Agcaoili & Associates for petitioner.
Valenzuela Law Center, Victor Fernandez and Ramon
Guevarra for private respondents.
VITUG, J.:
A "fiasco," involving an irrevocable letter of credit, has found
the distressed parties coming to court as adversaries in
seeking a definition of their respective rights or liabilities
thereunder.
71
On 05 March 1981, petitioner Bank of America, NT & SA,
Manila, received by registered mail an Irrevocable Letter of
Credit No. 20272/81 purportedly issued by Bank of Ayudhya,
Samyaek Branch, for the account of General Chemicals, Ltd.,
of Thailand in the amount of US$2,782,000.00 to cover the
sale of plastic ropes and "agricultural files," with the petitioner
as advising bank and private respondent Inter-Resin Industrial
Corporation as beneficiary.
On 11 March 1981, Bank of America wrote Inter-Resin
informing the latter of the foregoing and transmitting, along with
the bank's communication,
the latter of credit. Upon receipt of the letter-advice with the
letter of credit, Inter-Resin sent Atty. Emiliano Tanay to Bank of
America to have the letter of credit confirmed. The bank did
not. Reynaldo Dueñas, bank employee in charge of letters of
credit, however, explained to Atty. Tanay that there was no
need for confirmation because the letter of credit would not
have been transmitted if it were not genuine.
Between 26 March to 10 April 1981, Inter-Resin sought to
make a partial availment under the letter of credit by submitting
to Bank of America invoices, covering the shipment of 24,000
bales of polyethylene rope to General Chemicals valued at
US$1,320,600.00, the corresponding packing list, export
declaration and bill of lading. Finally, after being satisfied that
Inter-Resin's documents conformed with the conditions
expressed in the letter of credit, Bank of America issued in
favor of Inter-Resin a Cashier's Check for P10,219,093.20, "the
Peso equivalent of the draft (for) US$1,320,600.00 drawn by
Inter-Resin, after deducting the costs for documentary stamps,
postage and mail issuance." 1 The check was picked up by
Inter-Resin's Executive Vice-President Barcelina Tio. On 10
April 1981, Bank of America wrote Bank of Ayudhya advising
the latter of the availment under the letter of credit and sought
the corresponding reimbursement therefor.
Meanwhile, Inter-Resin, through Ms. Tio, presented to Bank of
America the documents for the second availment under the
same letter of credit consisting of a packing list, bill of lading,
invoices, export declaration and bills in set, evidencing the
second shipment of goods. Immediately upon receipt of a telex
from the Bank of Ayudhya declaring the letter of credit
fraudulent, 2 Bank of America stopped the processing of Inter-
Resin's documents and sent a telex to its branch office in
Bangkok, Thailand, requesting assistance in determining the
authenticity of the letter of credit. 3 Bank of America kept Inter-
Resin informed of the developments. Sensing a fraud, Bank of
America sought the assistance of the National Bureau of
Investigation (NBI). With the help of the staff of the Philippine
Embassy at Bangkok, as well as the police and customs
personnel of Thailand, the NBI agents, who were sent to
Thailand, discovered that the vans exported by Inter-Resin did
not contain ropes but plastic strips, wrappers, rags and waste
materials. Here at home, the NBI also investigated Inter-
Resin's President Francisco Trajano and Executive Vice
President Barcelina Tio, who, thereafter, were criminally
charged for estafa through falsification of commercial
documents. The case, however, was eventually dismissed by
the Rizal Provincial Fiscal who found no prima facieevidence to
warrant prosecution.

Bank of America sued Inter-Resin for the recovery of
P10,219,093.20, the peso equivalent of the draft for
US$1,320,600.00 on the partial availment of the now disowned
letter of credit. On the other hand, Inter-Resin claimed that not
only was it entitled to retain P10,219,093.20 on its first
shipment but also to the balance US$1,461,400.00 covering
the second shipment.
On 28 June 1989, the trial court ruled for Inter-Resin, 4 holding
that:
(a) Bank of America made assurances that enticed Inter-Resin
to send the merchandise to Thailand; (b) the telex declaring the
letter of credit fraudulent was unverified and self-serving,
hence, hearsay, but even assuming that the letter of credit was
fake, "the fault should be borne by the BA which was careless
and negligent" 5 for failing to utilize its modern means of
communication to verify with Bank of Ayudhya in Thailand the
authenticity of the letter of credit before sending the same to
Inter-Resin; (c) the loading of plastic products into the vans
were under strict supervision, inspection and verification of
government officers who have in their favor the presumption of
regularity in the performance of official functions; and (d) Bank
of America failed to prove the participation of Inter-Resin or its
employees in the alleged fraud as, in fact, the complaint for
estafa through falsification of documents was dismissed by the
Provincial Fiscal of Rizal.6
On appeal, the Court of Appeals 7 sustained the trial court;
hence, this present recourse by petitioner Bank of America.
The following issues are raised by Bank of America: (a)
whether it has warranted the genuineness and authenticity of
the letter of credit and, corollarily, whether it has acted merely
as an advising bank or as a confirming bank; (b) whether Inter-
Resin has actually shipped the ropes specified by the letter of
credit; and (c) following the dishonor of the letter of credit by
Bank of Ayudhya, whether Bank of America may recover
against Inter-Resin under the draft executed in its partial
availment of the letter of credit.8
In rebuttal, Inter-Resin holds that: (a) Bank of America cannot,
on appeal, belatedly raise the issue of being only an advising
bank; (b) the findings of the trial court that the ropes have
actually been shipped is binding on the Court; and, (c) Bank of
America cannot recover from Inter-Resin because the drawer
of the letter of credit is the Bank of Ayudhya and not Inter-
Resin.
If only to understand how the parties, in the first place, got
themselves into the mess, it may be well to start by recalling
how, in its modern use, a letter of credit is employed in trade
transactions.
A letter of credit is a financial device developed by merchants
as a convenient and relatively safe mode of dealing with sales
of goods to satisfy the seemingly irreconcilable interests of a
seller, who refuses to part with his goods before he is paid, and
a buyer, who wants to have control of the goods before
paying. 9 To break the impasse, the buyer may be required to
contract a bank to issue a letter of credit in favor of the seller
so that, by virtue of the latter of credit, the issuing bank can
authorize the seller to draw drafts and engage to pay them
72
upon their presentment simultaneously with the tender of
documents required by the letter of credit. 10 The buyer and the
seller agree on what documents are to be presented for
payment, but ordinarily they are documents of title evidencing
or attesting to the shipment of the goods to the buyer.
Once the credit is established, the seller ships the goods to the
buyer and in the process secures the required shipping
documents or documents of title. To get paid, the seller
executes a draft and presents it together with the required
documents to the issuing bank. The issuing bank redeems the
draft and pays cash to the seller if it finds that the documents
submitted by the seller conform with what the letter of credit
requires. The bank then obtains possession of the documents
upon paying the seller. The transaction is completed when the
buyer reimburses the issuing bank and acquires the
documents entitling him to the goods. Under this arrangement,
the seller gets paid only if he delivers the documents of title
over the goods, while the buyer acquires said documents and
control over the goods only after reimbursing the bank.
What characterizes letters of credit, as distinguished from other
accessory contracts, is the engagement of the issuing bank to
pay the seller of the draft and the required shipping documents
are presented to it. In turn, this arrangement assures the seller
of prompt payment, independent of any breach of the main
sales contract. By this so-called "independence principle," the
bank determines compliance with the letter of credit only by
examining the shipping documents presented; it is precluded
from determining whether the main contract is actually
accomplished or not. 11
There would at least be three (3) parties: (a) the buyer, 12 who
procures the letter of credit and obliges himself to reimburse
the issuing bank upon receipts of the documents of title; (b)
the bank issuing the letter of credit, 13 which undertakes to pay
the seller upon receipt of the draft and proper document of
titles and to surrender the documents to the buyer upon
reimbursement; and, (c) the seller, 14 who in compliance with
the contract of sale ships the goods to the buyer and delivers
the documents of title and draft to the issuing bank to recover
payment.
The number of the parties, not infrequently and almost
invariably in international trade practice, may be increased.
Thus, the services of an advising (notifying) bank 15 may be
utilized to convey to the seller the existence of the credit; or, of
a confirming bank 16 which will lend credence to the letter of
credit issued by a lesser known issuing bank; or, of a paying
bank, 17 which undertakes to encash the drafts drawn by the
exporter. Further, instead of going to the place of the issuing
bank to claim payment, the buyer may approach another bank,
termed the negotiating bank, 18 to have the draft discounted.
Being a product of international commerce, the impact of this
commercial instrument transcends national boundaries, and it
is thus not uncommon to find a dearth of national law that can
adequately provide for its governance. This country is no
exception. Our own Code of Commerce basically introduces
only its concept under Articles 567-572, inclusive, thereof. It is
no wonder then why great reliance has been placed on
commercial usage and practice, which, in any case, can be

justified by the universal acceptance of the autonomy of
contract rules. The rules were later developed into what is now
known as the Uniform Customs and Practice for Documentary
Credits ("U.C.P.") issued by the International Chamber of
Commerce. It is by no means a complete text by itself, for, to
be sure, there are other principles, which, although part of lex
mercatoria, are not dealt with the U.C.P.
In FEATI Bank and Trust Company v. Court of Appeals, 19 we
have accepted, to the extent of their pertinency, the application
in our jurisdiction of this international commercial credit
regulatory set of rules. 20 In Bank of Phil. Islands v. De
Nery, 21 we have said that the observances of the U.C.P. is
justified by Article 2 of the Code of Commerce which expresses
that, in the absence of any particular provision in the Code of
Commerce, commercial transactions shall be governed by
usages and customs generally observed. We have further
observed that there being no specific provisions which govern
the legal complexities arising from transactions involving letters
of credit not only between or among banks themselves but also
between banks and the seller or the buyer, as the case may
be, the applicability of the U.C.P. is undeniable.
The first issue raised with the petitioner, i.e., that it has in this
instance merely been advising bank, is outrightly rejected by
Inter-Resin and is thus sought to be discarded for having been
raised only on appeal. We cannot agree. The crucial point of
dispute in this case is whether under the "letter of credit," Bank
of America has incurred any liability to the "beneficiary" thereof,
an issue that largely is dependent on the bank's participation in
that transaction; as a mere advising or notifying bank, it would
not be liable, but as a confirming bank, had this been the case,
it could be considered as having incurred that liability. 22
In Insular Life Assurance Co. Ltd. Employees Association —
Natu vs. Insular Life Assurance Co., Ltd., 23 the Court said:
Where the issues already raised also rest on other issues not
specifically presented, as long as the latter issues bear
relevance and close relation to the former and as long as they
arise from the matters on record, the court has the authority to
include them in its discussion of the controversy and to pass
upon them just as well. In brief, in those cases where questions
not particularly raised by the parties surface as necessary for
the complete adjudication of the rights and obligations of the
parties, the interests of justice dictate that the court should
consider and resolve them. The rule that only issues or
theories raised in the initial proceedings may be taken up by a
party thereto on appeal should only refer to independent, not
concomitant matters, to support or oppose the cause of action
or defense. The evil that is sought to be avoided, i.e., surprise
to the adverse party, is in reality not existent on matters that
are properly litigated in the lower court and appear on record.
It cannot seriously be disputed, looking at this case, that Bank
of America has, in fact, only been an advising, not confirming,
bank, and this much is clearly evident, among other things, by
the provisions of the letter of credit itself, the petitioner bank's
letter of advice, its request for payment of advising fee, and the
admission of Inter-Resin that it has paid the same. That Bank
of America has asked Inter-Resin to submit documents
required by the letter of credit and eventually has paid the
proceeds thereof, did not obviously make it a confirming bank.
73
The fact, too, that the draft required by the letter of credit is to
be drawn under the account of General Chemicals (buyer) only
means the same had to be presented to Bank of Ayudhya
(issuing bank) for payment. It may be significant to recall that
the letter of credit is an engagement of the issuing bank, not
the advising bank, to pay the draft.
No less important is that Bank of America's letter of 11 March
1981 has expressly stated that "[t]he enclosure is solely an
advise of credit opened by the abovementioned correspondent
and conveys no engagement by us." 24This written reservation
by Bank of America in limiting its obligation only to being an
advising bank is in consonance with the provisions of U.C.P.
As an advising or notifying bank, Bank of America did not incur
any obligation more than just notifying Inter-Resin of the letter
of credit issued in its favor, let alone to confirm the letter of
credit. 25 The bare statement of the bank employees,
aforementioned, in responding to the inquiry made by Atty.
Tanay, Inter-Resin's representative, on the authenticity of the
letter of credit certainly did not have the effect of novating the
letter of credit and Bank of America's letter of advise, 26 nor can
it justify the conclusion that the bank must now assume total
liability on the letter of credit. Indeed, Inter-Resin itself cannot
claim to have been all that free from fault. As the seller, the
issuance of the letter of credit should have obviously been a
great concern to it. 27 It would have, in fact, been strange if it
did not, prior to the letter of credit, enter into a contract, or
negotiated at the every least, with General Chemicals. 28 In the
ordinary course of business, the perfection of contract
precedes the issuance of a letter of credit.
Bringing the letter of credit to the attention of the seller is the
primordial obligation of an advising bank. The view that Bank of
America should have first checked the authenticity of the letter
of credit with bank of Ayudhya, by using advanced mode of
business communications, before dispatching the same to
Inter-Resin finds no real support in U.C.P. Article 18 of the
U.C.P. states that: "Banks assume no liability or responsibility
for the consequences arising out of the delay and/or loss in
transit of any messages, letters or documents, or for delay,
mutilation or other errors arising in the transmission of any
telecommunication . . ." As advising bank, Bank of America is
bound only to check the "apparent authenticity" of the letter of
credit, which it did. 29 Clarifying its meaning, Webster's Ninth
New Collegiate Dictionary 30 explains that the word
"APPARENT suggests appearance to unaided senses that is
not or may not be borne out by more rigorous examination or
greater knowledge."
May Bank of America then recover what it has paid under the
letter of credit when the corresponding draft for partial
availment thereunder and the required documents were later
negotiated with it by Inter-Resin? The answer is yes. This kind
of transaction is what is commonly referred to as a discounting
arrangement. This time, Bank of America has acted
independently as a negotiating bank, thus saving Inter-Resin
from the hardship of presenting the documents directly to Bank
of Ayudhya to recover payment. (Inter-Resin, of course, could
have chosen other banks with which to negotiate the draft and
the documents.) As a negotiating bank, Bank of America has a
right to recourse against the issuer bank and until
 74

reimbursement is obtained, Inter-Resin, as the drawer of the WHEREFORE, the assailed decision is SET ASIDE, and
draft, continues to assume a contingent liability thereon. 31 respondent Inter-Resin Industrial Corporation is ordered to
refund to petitioner Bank of America NT & SA the amount of
While bank of America has indeed failed to allege material P10,219,093.20 with legal interest from the filing of the
facts in its complaint that might have likewise warranted the complaint until fully paid. No costs. SO ORDERED.
application of the Negotiable Instruments Law and possible
then allowed it to even go after the indorsers of the draft, this
failure, 32/ nonetheless, does not preclude petitioner bank's
right (as negotiating bank) of recovery from Inter-Resin itself.
Inter-Resin admits having received P10,219,093.20 from bank
of America on the letter of credit and in having executed the
corresponding draft. The payment to Inter-Resin has given, as
aforesaid, Bank of America the right of reimbursement from the
issuing bank, Bank of Ayudhya which, in turn, would then seek
indemnification from the buyer (the General Chemicals of
Thailand). Since Bank of Ayudhya disowned the letter of credit,
however, Bank of America may now turn to Inter-Resin for
restitution.

Between the seller and the negotiating bank there is the usual
relationship existing between a drawer and purchaser of drafts.
Unless drafts drawn in pursuance of the credit are indicated to
be without recourse therefore, the negotiating bank has the
ordinary right of recourse against the seller in the event of
dishonor by the issuing bank . . . The fact that the
correspondent and the negotiating bank may be one and the
same does not affect its rights and obligations in either
capacity, although a special agreement is always a
possibility . . . 33

The additional ground raised by the petitioner, i.e., that Inter-

Resin sent waste instead of its products, is really of no
consequence. In the operation of a letter of credit, the involved
banks deal only with documents and not on goods described in
those documents. 34

The other issues raised in then instant petition, for instance,

whether or not Bank of Ayudhya did issue the letter of credit
and whether or not the main contract of sale that has given rise
to the letter of credit has been breached, are not relevant to
this controversy. They are matters, instead, that can only be of
concern to the herein parties in an appropriate recourse
against those, who, unfortunately, are not impleaded in these
proceedings.

In fine, we hold that —

First, given the factual findings of the courts below, we

conclude that petitioner Bank of America has acted merely as
a notifying bank and did not assume the responsibility of
a confirming bank; and

Second, petitioner bank, as a negotiating bank, is entitled to

recover on Inter-Resin's partial availment as beneficiary of the
letter of credit which has been disowned by the alleged issuer
bank.

No judgment of civil liability against the other defendants,

Francisco Trajano and other unidentified parties, can be made,
in this instance, there being no sufficient evidence to warrant
any such finding.