department of the said bank, as required by the
Republic of the Philippines General Banking Act.
Supreme Court
Manila
SECOND DIVISION
JOSE C. GO, G.R. No. 178429
Petitioner,
Present:
QUISUMBING, J., Chairperson,
- versus - *
CARPIO,
CARPIO MORALES,
BRION, and
ABAD, JJ.
BANGKO SENTRAL NG PILIPINAS,
Respondent. Promulgated:
October 23, 2009
x ------------------------------------------------------------------------------------------x
DECISION
BRION, J.:
Through the present petition for review on certiorari,[1] petitioner
Jose C. Go (Go) assails the October 26, 2006 decision[2] of the Court of
Appeals (CA) in CA-G.R. SP No. 79149, as well as its June 4,
2007 resolution.[3] The CA decision and resolution annulled and set aside
the May 20, 2003[4] and June 30, 2003[5] orders of the Regional Trial Court
(RTC), Branch 26, Manila which granted Gos motion to quash the
Information filed against him.
THE FACTS
On August 20, 1999, an Information[6] for violation of Section 83 of Republic
Act No. 337 (RA 337) or the General Banking Act, as amended by Presidential
Decree No. 1795, was filed against Go before the RTC. The charge reads:
That on or about and during the period
comprised between June 27, 1996 and September
15, 1997, inclusive, in the City of Manila,
Philippines, the said accused, being then the
Director and the President and Chief Executive
Officer of the Orient Commercial Banking
Corporation (Orient Bank), a commercial banking
institution created, organized and existing under
Philippines laws, with its main branch located at C.M.
Recto Avenue, this City, and taking advantage of his
position as such officer/director of the said bank, did
then and there wilfully, unlawfully and knowingly
borrow, either directly or indirectly, for himself or
as the representative of his other related
companies, the deposits or funds of the said
banking institution and/or become a guarantor,
indorser or obligor for loans from the said bank
to others, by then and there using said borrowed
deposits/funds of the said bank in facilitating and
granting and/or caused the facilitating and
granting of credit lines/loans and, among others,
to the New Zealand Accounts loans in the total
amount of TWO BILLION AND SEVEN HUNDRED
FIFTY-FOUR MILLION NINE HUNDRED
FIVE THOUSAND AND EIGHT HUNDRED FIFTY-
SEVEN AND 0/100 PESOS, Philippine
Currency, said accused knowing fully well that the
same has been done by him without the written
approval of the majority of the Board of Directors
of said Orient Bankand which approval the said
accused deliberately failed to obtain and enter the
same upon the records of said banking institution and
to transmit a copy of which to the supervising
CONTRARY TO LAW. [Emphasis
supplied.]
On May 28, 2001, Go pleaded not guilty to the offense charged.
After the arraignment, both the prosecution and accused Go took
part in the pre-trial conference where the marking of the voluminous evidence
for the parties was accomplished. After the completion of the marking, the
trial court ordered the parties to proceed to trial on the merits.
Before the trial could commence, however, Go filed on February 26, 2003[7] a
motion to quash the Information, which motion Go amended on March 1,
2003.[8]Go claimed that the Information was defective, as the facts
charged therein do not constitute an offense under Section 83 of RA
337 which states:
No director or officer of any banking institution shall
either directly or indirectly, for himself or as the
representative or agent of another, borrow any of the
deposits of funds of such banks, nor shall he become
a guarantor, indorser, or surety for loans from such
bank, to others, or in any manner be an obligor for
money borrowed from the bank or loaned by it,
except with the written approval of the majority of the
directors of the bank, excluding the director
concerned. Any such approval shall be entered upon
the records of the corporation and a copy of such
entry shall be transmitted forthwith to the appropriate
supervising department. The office of any director or
officer of a bank who violates the provisions of this
section shall immediately become vacant and the
director or officer shall be punished by imprisonment
of not less than one year nor more than ten years and
by a fine of not less than one thousand nor more than
ten thousand pesos.
The Monetary Board may regulate the amount of
credit accommodations that may be extended,
directly or indirectly, by banking institutions to their
directors, officers, or stockholders. However, the
outstanding credit accommodations which a bank
may extend to each of its stockholders owning two
percent (2%) or more of the subscribed capital stock,
its directors, or its officers, shall be limited to an
amount equivalent to the respective outstanding
deposits and book value of the paid-in capital
contribution in the bank. Provided, however, that
loans and advances to officers in the form of fringe
benefits granted in accordance with rules and
regulations as may be prescribed by Monetary Board
shall not be subject to the preceding limitation. (As
amended by PD 1795)
In addition to the conditions established in the
preceding paragraph, no director or a building and
loan association shall engage in any of the
operations mentioned in said paragraphs, except
upon the pledge of shares of the association having
a total withdrawal value greater than the amount
borrowed. (As amended by PD 1795)
In support of his motion to quash, Go averred that based on the
facts alleged in the Information, he was being prosecuted for borrowing the
deposits or funds of the Orient Bank and/or acting as a guarantor, indorser
or obligor for the banks loans to other persons. The use of the word and/or
meant that he was charged for being either a borrower or a guarantor, or for
being both a borrower and guarantor. Go claimed that the charge was not
only vague, but also did not constitute an offense. He posited that Section 83
of RA 337 penalized only directors and officers of banking institutions who
acted either as borrower or as guarantor, but not as both.
Go further pointed out that the Information failed to state that his
alleged act of borrowing and/or guarantying was not among the exceptions
provided for in the law. According to Go, the second paragraph of Section 83
allowed banks to extend credit accommodations to their directors, officers,
and stockholders, provided it is limited to an amount equivalent to the
respective outstanding deposits and book value of the paid-in capital
contribution in the bank. Extending credit accommodations to bank directors,
officers, and stockholders is not per seprohibited, unless the amount
exceeds the legal limit. Since the Information failed to state that the amount
he purportedly borrowed and/or guarantied was beyond the limit set by law,
Go insisted that the acts so charged did not constitute an offense.
Finding Gos contentions persuasive, the RTC granted Gos
motion to quash the Information on May 20, 2003. It denied on June 30,
2003 the motion for reconsideration filed by the prosecution.
The prosecution did not accept the RTC ruling and filed a petition
for certiorari to question it before the CA. The Information, the prosecution
claimed, was sufficient. The word and/or did not materially affect the validity
of the Information, as it merely stated a mode of committing the crime
penalized under Section 83 of RA 337. Moreover, the prosecution asserted
that the second paragraph of Section 83 (referring to the credit
accommodation limit) cannot be interpreted as an exception to what the first
paragraph provided. The second paragraph only sets borrowing limits that, if
violated, render the bank, not the director-borrower, liable. A violation of the
second paragraph of Section 83 under which Go is being prosecuted is
therefore separate and distinct from a violation of the first paragraph.Thus,
the prosecution prayed that the orders of the RTC quashing the Information
be set aside and the criminal case against Go be reinstated.
On October 26, 2006, the CA rendered the assailed decision
granting the prosecutions petition for certiorari. [9] The CA declared that the
RTC misread the law when it decided to quash the Information against Go. It
explained that the allegation that Go acted either as a borrower or a
guarantor or as both borrower and guarantor merely set forth the different
modes by which the offense was committed. It did not necessarily mean that
Go acted both as borrower and guarantor for the same loan at the same
time. It agreed with the prosecutions stand that the second paragraph of
Section 83 of RA 337 is not an exception to the first paragraph. Thus, the
failure of the Information to state that the amount of the loan Go borrowed or
guaranteed exceeded the legal limits was, to the CA, an irrelevant issue. For
these reasons, the CA annulled and set aside the RTCs orders and ordered
the reinstatement of the criminal charge against Go. After the CAs denial of
his motion for reconsideration,[10] Go filed the present appeal by certiorari.
THE PETITION
In his petition, Go alleges that the appellate court legally erred in
overturning the trial courts orders. He insists that the Information failed to
allege the acts or omissions complained of with sufficient particularity to
enable him to know the offense being charged; to allow him to properly
prepare his defense; and likewise to allow the court to render proper
judgment.
Repeating his arguments in his motion to quash, Go reads
Section 83 of RA 337 as penalizing a director or officer of a banking institution
for either borrowingthe deposits or funds of the bank, or guaranteeing or
indorsing loans to others, but not for assuming both capacities. He claimed
that the prosecutions shotgun approach in alleging that he acted as borrower
and/or guarantor rendered the Information highly defective for failure to
specify with certainty the specific act or omission complained of. To petitioner
Go, the prosecutions approach was a clear violation of his constitutional right
to be informed of the nature and cause of the accusation against him.
Additionally, Go reiterates his claim that credit accommodations
by banks to their directors and officers are legal and valid, provided that these
are limited to their outstanding deposits and book value of the paid-in capital
contribution in the bank. The failure to state that he borrowed deposits and/or
guaranteed loans beyond this limit rendered the Information defective. He
thus asks the Court to reverse the CA decision to reinstate the criminal
charge.
In its Comment,[11] the prosecution raises the same defenses
against Gos contentions. It insists on the sufficiency of the allegations in the
Information and prays for the denial of Gos petition.
THE COURTS RULING
The Court does not find the petition meritorious and accordingly denies
it.
The Accuseds Right to be Informed
Under the Constitution, a person who stands charged of a
criminal offense has the right to be informed of the nature and cause of the
accusation against him.[12]The Rules of Court, in implementing the right,
specifically require that the acts or omissions complained of as constituting
the offense, including the qualifying and aggravating circumstances, must be
stated in ordinary and concise language, not necessarily in the language
used in the statute, but in terms sufficient to enable a person of common
understanding to know what offense is being charged and the attendant
qualifying and aggravating circumstances present, so that the accused can
properly defend himself and the court can pronounce judgment.[13] To
broaden the scope of the right, the Rules authorize the quashal, upon motion
of the accused, of an Information that fails to allege the acts constituting the
offense.[14]Jurisprudence has laid down the fundamental test in appreciating
a motion to quash an Information grounded on the insufficiency of the facts
alleged therein. We stated in People v. Romualdez[15] that:
The determinative test in appreciating a motion to
quash xxx is the sufficiency of the averments in the
information, that is, whether the facts alleged, if
hypothetically admitted, would establish the essential
elements of the offense as defined by law without
considering matters aliunde. As Section 6, Rule 110
of the Rules of Criminal Procedure requires, the
information only needs to state the ultimate facts;
the evidentiary and other details can be provided
during the trial.
To restate the rule, an Information only needs to
state the ultimate facts constituting the offense,
not the finer details of why and how the illegal
acts alleged amounted to undue injury or
damage matters that are appropriate for the trial.
[Emphasis supplied]
The facts and circumstances necessary to be included in the Information are
determined by reference to the definition and elements of the specific
crimes. The Information must allege clearly and accurately the elements
of the crime charged.[16]
Elements of Violation of Section 83 of RA
337
Under Section 83, RA 337, the following elements must be present to
constitute a violation of its first paragraph:
1. the offender is a director or officer of any banking institution;
2. the offender, either directly or indirectly, for himself or as
representative or agent of another, performs any of the following
acts:
a. he borrows any of the deposits or funds of such bank;
or
b. he becomes a guarantor, indorser, or surety for loans
from such bank to others, or
c. he becomes in any manner an obligor for money
borrowed from bank or loaned by it;
3. the offender has performed any of such acts without the written
approval of the majority of the directors of the bank, excluding
the offender, as the director concerned.
A simple reading of the above elements easily rejects Gos
contention that the law penalizes a bank director or officer only either for
borrowing the banks deposits or funds or for guarantying loans by the bank,
but not for acting in both capacities.The essence of the crime is becoming
an obligor of the bank without securing the necessary written approval
of the majority of the banks directors.
The second element merely lists down the various modes of
committing the offense. The third mode, by declaring that [no director or
officer of any banking institution shall xxx] in any manner be an obligor for
money borrowed from the bank or loaned by it, in fact serves a catch-all
phrase that covers any situation when a director or officer of the bank
becomes its obligor. The prohibition is directed against a bank director
or officer who becomes in any manner an obligor for money borrowed
from or loaned by the bank without the written approval of the majority
of the banks board of directors. To make a distinction between the act of
borrowing and guarantying is therefore unnecessary because in either
situation, the director or officer concerned becomes an obligor of the bank
against whom the obligation is juridically demandable.
The language of the law is broad enough to encompass either
act of borrowing or guaranteeing, or both. While the first paragraph of Section
83 is penal in nature, and by principle should be strictly construed in favor of
the accused, the Court is unwilling to adopt a liberal construction that would
defeat the legislatures intent in enacting the statute. The objective of the law
should allow for a reasonable flexibility in its construction. Section 83 of RA
337, as well as other banking laws adopting the same prohibition, [17] was
enacted to ensure that loans by banks and similar financial institutions to
their own directors, officers, and stockholders are above board. [18] Banks
were not created for the benefit of their directors and officers; they cannot
use the assets of the bank for their own benefit, except as may be permitted
by law. Congress has thus deemed it essential to impose restrictions on
borrowings by bank directors and officers in order to protect the public,
especially the depositors.[19] Hence, when the law prohibits directors and strengthens our conclusion that this criminal case should be resolved through
officers of banking institutions from becoming in any manner an obligor of the full-blown trial on the merits.
bank (unless with the approval of the board), the terms of the prohibition shall
be the standards to be applied to directors transactions such as those WHEREFORE, we DENY the petitioners petition for review
involved in the present case. on certiorari and AFFIRM the decision of the Court of Appeals in CA-G.R.
SP No. 79149, promulgated on October 26, 2006, as well as its resolution
Credit accommodation limit is not an of June 4, 2007. The Regional Trial Court, Branch 26, Manila is directed
exception nor is it an element of the to PROCEED with the hearing of Criminal Case No. 99-178551. Costs
offense against the petitioner.

SO ORDERED.
Contrary to Gos claims, the second paragraph of Section 83, RA
337 does not provide for an exception to a violation of the first paragraph
thereof, nor does it constitute as an element of the offense charged. Section
83 of RA 337 actually imposes three restrictions: approval, reportorial, and
ceiling requirements.

The approval requirement (found in the first sentence of the

first paragraph of the law) refers to the written approval of the majority of the
banks board of directors required before bank directors and officers can in
any manner be an obligor for money borrowed from or loaned by the bank.
Failure to secure the approval renders the bank director or officer concerned
liable for prosecution and, upon conviction, subjects him to the penalty
provided in the third sentence of first paragraph of Section 83.

The reportorial requirement, on the other hand, mandates that

any such approval should be entered upon the records of the corporation,
and a copy of the entry be transmitted to the appropriate supervising
department. The reportorial requirement is addressed to the bank itself,
which, upon its failure to do so, subjects it to quo warranto proceedings under
Section 87 of RA 337.[20]

The ceiling requirement under the second paragraph of

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

Evidently, the failure to observe the three requirements under

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

Rules of Court allow amendment of

insufficient Information

Assuming that the facts charged in the Information do not constitute an

offense, we find it erroneous for the RTC to immediately order the dismissal
of the Information, without giving the prosecution a chance to amend
it. Section 4 of Rule 117 states:

SEC. 4. Amendment of complaint or information.If

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

If it is based on the ground that the facts

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

Although an Information may be defective because the facts charged do not

constitute an offense, the dismissal of the case will not necessarily
follow. The Rules specifically require that the prosecution should be given a
chance to correct the defect; the court can order the dismissal only upon the
prosecutions failure to do so. The RTCs failure to provide the prosecution
this opportunity twice[21]constitutes an arbitrary exercise of power that was
correctly addressed by the CA through the certiorari petition. This defect in
the RTCs action on the case, while not central to the issue before us,

Republic of the Philippines
Supreme Court
Manila
SECOND DIVISION
HILARIO P. SORIANO, G.R. No. 162336
Petitioner,
- versus - Present:
PEOPLE OF THE PHILIPPINES, CARPIO, J., Chairperson,
BANGKO SENTRAL NG CORONA,*
PILIPINAS (BSP), PHILIPPINE BRION,
DEPOSIT INSURANCE DEL CASTILLO, and
CORPORATION (PDIC), PUBLIC PEREZ, JJ.
PROSECUTOR ANTONIO C.
BUAN, and STATE
PROSECUTOR ALBERTO R. Promulgated:
FONACIER,
Respondents. [1] February 1, 2010
x------------------------------------------------------------------
-x
D EC I SI O N
DEL CASTILLO, J.:
A bank officer violates the DOSRI[2] law when he acquires bank funds for his personal
benefit, even if such acquisition was facilitated by a fraudulent loan application. Directors,
officers, stockholders, and their related interests cannot be allowed to interpose the
fraudulent nature of the loan as a defense to escape culpability for their circumvention
of Section 83 of Republic Act (RA) No. 337.[3]
Before us is a Petition for Review on Certiorari[4] under Rule 45 of the Rules
of Court, assailing the September 26, 2003 Decision[5] and the February 5,
2004Resolution[6] of the Court of Appeals (CA) in CA-G.R. SP No. 67657. The
challenged Decision disposed as follows:
WHEREFORE, premises considered, the
instant petition for certiorari is hereby DENIED.[7]
Factual Antecedents
Sometime in 2000, the Office of Special Investigation (OSI) of the Bangko Sentral ng
Pilipinas (BSP), through its officers,[8] transmitted a letter[9] dated March 27, 2000 to
Jovencito Zuo, Chief State Prosecutor of the Department of Justice (DOJ). The letter
attached as annexes five affidavits,[10] which would allegedly serve as bases for filing
criminal charges for Estafa thru Falsification of Commercial Documents, in relation to
Presidential Decree (PD) No. 1689,[11] and for Violation of Section 83 of RA 337, as
amended by PD 1795,[12] against, inter alia, petitioner herein Hilario P. Soriano. These
five affidavits, along with other documents, stated that spouses Enrico and Amalia
Carlos appeared to have an outstanding loan of P8 million with the Rural Bank of San
Miguel (Bulacan), Inc. (RBSM), but had never applied for nor received such loan; that it
was petitioner, who was then president of RBSM, who had ordered, facilitated, and
received the proceeds of the loan; and that the P8 million loan had never been
authorized by RBSM's Board of Directors and no report thereof had ever been
submitted to the Department of Rural Banks, Supervision and Examination Sector of
the BSP. The letter of the OSI, which was not subscribed under oath, ended with a
request that a preliminary investigation be conducted and the corresponding criminal
charges be filed against petitioner at his last known address.
Acting on the letter-request and its annexes, State Prosecutor Albert R. Fonacier
proceeded with the preliminary investigation. He issued a subpoena with the witnesses
affidavits and supporting documents attached, and required petitioner to file his counter-
affidavit. In due course, the investigating officer issued a Resolution finding probable
cause and correspondingly filed two separate informations against petitioner before the
Regional Trial Court (RTC) of Malolos, Bulacan.[13]
The first Information,[14] dated November 14, 2000 and docketed as Criminal Case No.
237-M-2001, was for estafa through falsification of commercial documents, under Article
315, paragraph 1(b), of the Revised Penal Code (RPC), in relation to Article 172 of the
RPC and PD 1689. It basically alleged that petitioner and his co-accused, in abuse of
the confidence reposed in them as RBSM officers, caused the falsification of a number
of loan documents, making it appear that one Enrico Carlos filled up the same, and
thereby succeeded in securing a loan and converting the loan proceeds for their
personal gain and benefit.[15] The information reads:
That in or about the month of April, 1997, and
thereafter, in San Miguel, Bulacan, and within the jurisdiction
of this Honorable Court, the said accused HILARIO P.
SORIANO and ROSALINDA ILAGAN, as principals by
direct participation, with unfaithfulness or abuse of
confidence and taking advantage of their position as
President of the Rural Bank of San Miguel (Bulacan), Inc.
and Branch Manager of the Rural Bank of San Miguel San
Miguel Branch [sic], a duly organized banking institution
under Philippine Laws, conspiring, confederating and
mutually helping one another, did then and there, willfully and
feloniously falsify loan documents consisting of undated loan
application/information sheet, credit proposal dated April 14,
1997, credit proposal dated April 22, 1997, credit
investigation report dated April 15, 1997, promissory note
dated April 23, 1997, disclosure statement on loan/credit
transaction dated April 23, 1997, and other related
documents, by making it appear that one Enrico Carlos filled
up the application/information sheet and filed the
aforementioned loan documents when in truth and in fact
Enrico Carlos did not participate in the execution of said loan
documents and that by virtue of said falsification and with
deceit and intent to cause damage, the accused succeeded
in securing a loan in the amount of eight million pesos
(PhP8,000,000.00) from the Rural Bank of San Miguel San
Ildefonso branch in the name of Enrico Carlos which amount
of PhP8 million representing the loan proceeds the accused
thereafter converted the same amount to their own personal
gain and benefit, to the damage and prejudice of the Rural
Bank of San Miguel San Ildefonso branch, its creditors, the
Bangko Sentral ng Pilipinas, and the Philippine Deposit
Insurance Corporation.
CONTRARY TO LAW.[16]
The other Information[17] dated November 10, 2000 and docketed as Criminal Case No.
238-M-2001, was for violation of Section 83 of RA 337, as amended by PD 1795. The
said provision refers to the prohibition against the so-called DOSRI loans. The
information alleged that, in his capacity as President of RBSM, petitioner indirectly
secured an P8 million loan with RBSM, for his personal use and benefit, without the
written consent and approval of the bank's Board of Directors, without entering the said
transaction in the bank's records, and without transmitting a copy of the transaction to
the supervising department of the bank. His ruse was facilitated by placing the loan in
the name of an unsuspecting RBSM depositor, one Enrico Carlos.[18] The information
reads:
That in or about the month of April, 1997, and
thereafter, and within the jurisdiction of this Honorable Court,
the said accused, in his capacity as President of the Rural
Bank of San Miguel (Bulacan), Inc., did then and there,
willfully and feloniously indirectly borrow or secure a loan with
the Rural Bank of San Miguel San Ildefonso branch, a
domestic rural banking institution created, organized and
existing under Philippine laws, amounting to eight million
pesos (PhP8,000,000.00), knowing fully well that the same
has been done by him without the written consent and
approval of the majority of the board of directors of the said
bank, and which consent and approval the said accused
deliberately failed to obtain and enter the same upon the
records of said banking institution and to transmit a copy
thereof to the supervising department of the said bank, as
required by the General Banking Act, by using the name of
one depositor Enrico Carlos of San Miguel, Bulacan, the
latter having no knowledge of the said loan, and one in
possession of the said amount of eight million pesos
(PhP8,000,000.00), accused converted the same to his own
personal use and benefit, in flagrant violation of the said law.
CONTRARY TO LAW.[19]
Both cases were raffled to Branch 79 of the RTC of Malolos, Bulacan.[20]
On June 8, 2001, petitioner moved to quash[21] these informations on two grounds: that
the court had no jurisdiction over the offense charged, and that the facts charged do not
constitute an offense.
On the first ground, petitioner argued that the letter transmitted by the BSP to the DOJ
constituted the complaint and hence was defective for failure to comply with the
mandatory requirements of Section 3(a), Rule 112 of the Rules of Court, such as the
statement of address of petitioner and oath and subscription.[22] Moreover, petitioner
argued that the officers of OSI, who were the signatories to the letter-complaint, were
not authorized by the BSP Governor, much less by the Monetary Board, to file the
complaint.According to petitioner, this alleged fatal oversight violated Section 18, pars.
(c) and (d) of the New Central Bank Act (RA 7653).
On the second ground, petitioner contended that the commission of estafa under
paragraph 1(b) of Article 315 of the RPC is inherently incompatible with the violation of
DOSRI law (as set out in Section 83[23] of RA 337, as amended by PD 1795),[24] hence
a person cannot be charged for both offenses. He argued that a violation of DOSRI law
requires the offender to obtain a loan from his bank, without complying with procedural,
reportorial, or ceiling requirements. On the other hand, estafa under par. 1(b), Article 315
of the RPC requires the offender to misappropriate or convert something that he holds
in trust, or on commission, or for administration, or under any other obligation
involving the duty to return the same.[25]
Essentially, the petitioner theorized that the characterization of possession
is different in the two offenses. If petitioner acquired the loan as DOSRI, he owned the
loaned money and therefore, cannot misappropriate or convert it as contemplated in the
offense of estafa. Conversely, if petitioner committed estafa, then he merely held the
money in trust for someone else and therefore, did not acquire a loan in violation of
DOSRI rules.
Ruling of the Regional Trial Court
In an Order[26] dated August 8, 2001, the trial court denied petitioner's Motion to Quash
for lack of merit. The lower court agreed with the prosecution that the assailed OSI letter
was not the complaint-affidavit itself; thus, it need not comply with the requirements
under the Rules of Court. The trial court held that the affidavits, which were attached to
the OSI letter, comprised the complaint-affidavit in the case. Since these affidavits were
duly subscribed and sworn to before a notary public, there was adequate compliance
with the Rules. The trial court further held that the two offenses were separate and
distinct violations, hence the prosecution of one did not pose a bar to the other.[27]
Petitioners Motion for Reconsideration was likewise denied in an Order
dated September 5, 2001.[28]
Aggrieved, petitioner filed a Petition for Certiorari[29] with the CA, reiterating his
arguments before the trial court.
Ruling of the Court of Appeals
The CA denied the petition on both issues presented by petitioner.
On the first issue, the CA determined that the BSP letter, which petitioner characterized
to be a fatally infirm complaint, was not actually a complaint, but a transmittal or cover
letter only. This transmittal letter merely contained a summary of the affidavits which
were attached to it. It did not contain any averment of personal knowledge of the events
and transactions that constitute the elements of the offenses charged. Being a mere
transmittal letter, it need not comply with the requirements of Section 3(a) of Rule 112 of
the Rules of Court.[30]
The CA further determined that the five affidavits attached to the transmittal letter should
be considered as the complaint-affidavits that charged petitioner with violation of Section
83 of RA 337 and for Estafa thru Falsification of Commercial Documents. These
complaint-affidavits complied with the mandatory requirements set out in the Rules of
Court they were subscribed and sworn to before a notary public and subsequently
certified by State Prosecutor Fonacier, who personally examined the affiants and was
convinced that the affiants fully understood their sworn statements.[31]
Anent the second ground, the CA found no merit in petitioner's argument that the
violation of the DOSRI law and the commission of estafa thru falsification of commercial
documents are inherently inconsistent with each other. It explained that the test in
considering a motion to quash on the ground that the facts charged do not constitute an
offense, is whether the facts alleged, when hypothetically admitted, constitute the
elements of the offense charged. The appellate court held that this test was sufficiently
met because the allegations in the assailed informations, when hypothetically admitted,
clearly constitute the elements of Estafa thru Falsification of Commercial Documents
and Violation of DOSRI law.[32]
[33]
Petitioners Motion for Reconsideration was likewise denied for lack of merit.
Hence, this petition.
Issues
Restated, petitioner raises the following issues[34] for our consideration:
I the affidavits clearly fell within the purview of any competent person who may institute
Whether the complaint complied with the mandatory
requirements provided under Section 3(a), Rule 112 of the
Rules of Court and Section 18, paragraphs (c) and (d) of RA
7653.
II
Whether a loan transaction within the ambit of the DOSRI law
(violation of Section 83 of RA 337, as amended) could also
be the subject of Estafa under Article 315 (1) (b) of the
Revised Penal Code.
III
Is a petition for certiorari under Rule 65 the proper remedy
against an Order denying a Motion to Quash?
IV
Whether petitioner is entitled to a writ of injunction.
Our Ruling
The petition lacks merit.
First Issue:
Whether the complaint complied with the mandatory
requirements provided under Section 3(a), Rule 112 of
the Rules of Court and Section 18, paragraphs (c) and
(d) of
Republic Act No. 7653
Petitioner moved to withdraw the first issue from the
instant petition
On March 5, 2007, the Court noted[35] petitioner's Manifestation and Motion for Partial
Withdrawal of the Petition[36] dated February 7, 2007. In the said motion, petitioner
informed the Court of the promulgation of a Decision entitled Soriano v. Hon.
Casanova,[37] which also involved petitioner and similar BSP letters to the
DOJ. According to petitioner, the said Decision allegedly ruled squarely on the nature of
the BSP letters and the validity of the sworn affidavits attached thereto. For this reason,
petitioner moved for the partial withdrawal of the instant petition insofar as it involved the
issue of whether or not a court can legally acquire jurisdiction over a complaint which
failed to comply with the mandatory requirements provided under Section 3(a), Rule 112
of the Rules of Court and Section 18, paragraphs (c) and (d) of RA 7653.[38]
Given that the case had already been submitted for resolution of the Court when
petitioner filed his latest motion, and that all respondents had presented their positions
and arguments on the first issue, the Court deems it proper to rule on the same.
In Soriano v. Hon. Casanova, the Court held that the
affidavits attached to the BSP transmittal letter complied
with the mandatory requirements under the Rules of Court.
To be sure, the BSP letters involved in Soriano v. Hon. Casanova[39] are not the same
as the BSP letter involved in the instant case. However, the BSP letters in Soriano v.
Hon. Casanova and the BSP letter subject of this case are similar in the sense that they
are all signed by the OSI officers of the BSP, they were not sworn to by the said officers,
they all contained summaries of their attached affidavits, and they all requested the
conduct of a preliminary investigation and the filing of corresponding criminal charges
against petitioner Soriano. Thus, the principle of stare decisis dictates that the ruling
in Soriano v. Hon. Casanova be applied in the instant case once a question of law has
been examined and decided, it should be deemed settled and closed to further
argument.[40]
We held in Soriano v. Hon. Casanova, after a close scrutiny of the letters
transmitted by the BSP to the DOJ, that these were not intended to be the complaint, as
envisioned under the Rules. They did not contain averments of personal knowledge of
the events and transactions constitutive of any offense. The letters merely transmitted
for preliminary investigation the affidavits of people who had personal knowledge of the
acts of petitioner. We ruled that these affidavits, not the letters transmitting them, initiated
the preliminary investigation. Since these affidavits were subscribed under oath by the
witnesses who executed them before a notary public, then there was substantial
compliance with Section 3(a), Rule 112 of the Rules of Court.
Anent the contention that there was no authority from the BSP Governor or the
Monetary Board to file a criminal case against Soriano, we held that the requirements of
Section 18, paragraphs (c) and (d) of RA 7653 did not apply because the BSP did not
institute the complaint but merely transmitted the affidavits of the complainants to the
DOJ.
We further held that since the offenses for which Soriano was charged were public
crimes, authority holds that it can be initiated by any competent person with personal
knowledge of the acts committed by the offender. Thus, the witnesses who executed
the complaint for a public crime.
The ruling in Soriano v. Hon. Casanova has been adopted and elaborated
upon in the recent case of Santos-Concio v. Department of Justice.[41] Instead of a
transmittal letter from the BSP, the Court in Santos-Concio was faced with an NBI-NCR
Report, likewise with affidavits of witnesses as attachments. Ruling on the validity of the
witnesses sworn affidavits as bases for a preliminary investigation, we held:
The Court is not unaware of the practice of
incorporating all allegations in one document denominated
as complaint-affidavit. It does not pronounce strict adherence
to only one approach, however, for there are cases where
the extent of ones personal knowledge may not cover the
entire gamut of details material to the alleged offense. The
private offended party or relative of the deceased may not
even have witnessed the fatality,in which case the peace
officer or law enforcer has to rely chiefly on affidavits of
witnesses. The Rules do not in fact preclude the attachment
of a referral or transmittal letter similar to that of the NBI-
NCR. Thus, in Soriano v. Casanova, the Court held:
A close scrutiny of
the letters transmitted by the BSP
and PDIC to the DOJ shows that
these were not intended to
be the complaint envisioned
under the Rules. It may be clearly
inferred from the tenor of the
letters that the officers merely
intended to transmit the affidavits
of the bank employees to the
DOJ. Nowhere in the transmittal
letters is there any averment on
the part of the BSP and PDIC
officers of personal knowledge of
the events and transactions
constitutive of the criminal
violations alleged to have been
made by the accused.In fact, the
letters clearly stated that what the
OSI of the BSP and the LIS of the
PDIC did was to respectfully
transmit to the DOJ for
preliminary investigation the
affidavits and personal
knowledge of the acts of the
petitioner. These affidavits were
subscribed under oath by the
witnesses who executed them
before a notary public. Since
the affidavits, not the letters tr
ansmitting them, were intended
to initiate the preliminary
investigation, we hold that Section
3(a), Rule 112 of the Rules of
Court was substantially complied
with.
Citing the ruling of this
Court in Ebarle v. Sucaldito, the
Court of Appeals correctly held
that a complaint for purposes of
preliminary investigation by the
fiscal need not be filed by the
offended party. The rule has
been that, unless the offense
subject thereof is one that
cannot be prosecuted de
oficio, the same may be filed, for
preliminary investigation
purposes, by any competent
person. The crime of estafa is a
public crime which can be initiated
by any competent person. The
witnesses who executed the
affidavits based on their personal
knowledge of the acts committed
by the petitioner fall within the
purview of any competent person
who may institute the complaint
for a public crime. x x x (Emphasis
and italics supplied)
A preliminary investigation can thus validly proceed
on the basis of an affidavit of any competent person, without
the referral document, like the NBI-NCR Report, having been
sworn to by the law enforcer as the nominal complainant. To
require otherwise is a needless exercise. The cited case
of Oporto, Jr. v. Judge Monserate does not appear to dent
this proposition. After all, what is required is to reduce the
evidence into affidavits, for while reports and even raw
information may justify the initiation of an investigation, the
preliminary investigation stage can be held only after
sufficient evidence has been gathered and evaluated which
may warrant the eventual prosecution of the case in court.[42]
Following the foregoing rulings in Soriano v. Hon. Casanova and Santos-Concio v.
Department of Justice, we hold that the BSP letter, taken together with the affidavits
attached thereto, comply with the requirements provided under Section 3(a), Rule 112
of the Rules of Court and Section 18, paragraphs (c) and (d) of RA 7653.
Second Issue:
Whether a loan transaction within the ambit of the
DOSRI law (violation of Section 83 of RA 337, as
amended) could be the subject of Estafa under Article
315 (1) (b) of the
Revised Penal Code
The second issue was raised by petitioner in the context of his Motion to
Quash Information on the ground that the facts charged do not constitute an offense.[43] It
is settled that in considering a motion to quash on such ground, the test is whether the
facts alleged, if hypothetically admitted, would establish the essential elements of the
offense charged as defined by law. The trial court may not consider a situation contrary
to that set forth in the criminal complaint or information. Facts that constitute the defense
of the petitioner[s] against the charge under the information must be proved by [him]
during trial. Such facts or circumstances do not constitute proper grounds for a motion
to quash the information on the ground that the material averments do not constitute the
offense.[44]
We have examined the two informations against petitioner and we find that they contain
allegations which, if hypothetically admitted, would establish the essential elements of
the crime of DOSRI violation and estafa thru falsification of commercial documents.
In Criminal Case No. 238-M-2001 for violation of DOSRI rules, the information alleged
that petitioner Soriano was the president of RBSM; that he was able to indirectly obtain
a loan from RBSM by putting the loan in the name of depositor Enrico Carlos; and that
he did this without complying with the requisite board approval, reportorial, and ceiling
requirements.
In Criminal Case No. 237-M-2001 for estafa thru falsification of commercial documents,
the information alleged that petitioner, by taking advantage of his position as president
of RBSM, falsified various loan documents to make it appear that an Enrico Carlos
secured a loan of P8 million from RBSM; that petitioner succeeded in obtaining the loan
proceeds; that he later converted the loan proceeds to his own personal gain and
benefit; and that his action caused damage and prejudice to RBSM, its creditors, the
BSP, and the PDIC.
Significantly, this is not the first occasion that we adjudge the sufficiency of similarly
worded informations. In Soriano v. People,[45] involving the same petitioner in this case
(but different transactions), we also reviewed the sufficiency of informations for DOSRI
violation and estafa thru falsification of commercial documents, which were almost
identical, mutatis mutandis, with the subject informations herein. We held in Soriano v.
People that there is no basis for the quashal of the informations as they contain material
allegations charging Soriano with violation of DOSRI rules and estafa thru falsification of
commercial documents.
Petitioner raises the theory that he could not possibly be held liable for
estafa in concurrence with the charge for DOSRI violation. According to him, the DOSRI
charge presupposes that he acquired a loan, which would make the loan proceeds
his own money and which he could neither possibly misappropriate nor convert to the
prejudice of another, as required by the statutory definition of estafa.[46] On the other
hand, if petitioner did not acquire any loan, there can be no DOSRI violation to speak
of. Thus, petitioner posits that the two offenses cannot co-exist. This theory does not
persuade us.
Petitioners theory is based on the false premises that the loan was
extended to him by the bank in his own name, and that he became the owner of the
loan proceeds. Both premises are wrong.
The bank money (amounting to P8 million) which came to the possession
of petitioner was money held in trust or administration by him for the bank, in his
fiduciary capacity as the President of said bank.[47] It is not accurate to say that petitioner
became the owner of the P8 million because it was the proceeds of a loan. That would
have been correct if the bank knowingly extended the loan to petitioner himself. But that
is not the case here. According to the information for estafa, the loan was supposed to
be for another person, a certain Enrico Carlos; petitioner, through falsification, made it
appear that said Enrico Carlos applied for the loan when in fact he (Enrico Carlos) did
not.Through such fraudulent device, petitioner obtained the loan proceeds and
converted the same. Under these circumstances, it cannot be said that petitioner
became the legal owner of the P8 million. Thus, petitioner remained the banks fiduciary
with respect to that money, which makes it capable of misappropriation or conversion in
his hands.
The next question is whether there can also be, at the same time, a charge
for DOSRI violation in such a situation wherein the accused bank officer did not secure
a loan in his own name, but was alleged to have used the name of another person in
order to indirectly secure a loan from the bank. We answer this in the affirmative. Section
83 of RA 337 reads:
Section 83. No director or officer of any banking
institution shall, either directly or indirectly, for himself or as
the representative or agent of others, borrow any of the
deposits of funds of such bank, nor shall he become a
guarantor, indorser, or surety for loans from such bank to
others, or in any manner be an obligor for moneys borrowed
from the bank or loaned by it, except with the written approval
of the majority of the directors of the bank, excluding the
director concerned. Any such approval shall be entered upon
the records of the corporation and a copy of such entry shall
be transmitted forthwith to the Superintendent of Banks. The
office of any director or officer of a bank who violates the
provisions of this section shall immediately become vacant
and the director or officer shall be punished by imprisonment
of not less than one year nor more than ten years and by a
fine of not less than one thousand nor more than ten
thousand pesos. x x x
The prohibition in Section 83 is broad enough to cover various modes of borrowing.[48]
It covers loans by a bank director or officer (like herein petitioner) which are made either:
(1) directly, (2) indirectly, (3) for himself, (4) or as the representative or agent of others. It
applies even if the director or officer is a mere guarantor, indorser or surety for someone
else's loan or is in any manner an obligor for money borrowed from the bank or loaned
by it. The covered transactions are prohibited unless the approval, reportorial and ceiling
requirements under Section 83 are complied with. The prohibition is intended to protect
the public, especially the depositors,[49] from the overborrowing of bank funds by bank
officers, directors, stockholders and related interests, as such overborrowing may lead
to bank failures.[50] It has been said that banking institutions are not created for the benefit
of the directors [or officers]. While directors have great powers as directors, they have
no special privileges as individuals. They cannot use the assets of the bank for their own
benefit except as permitted by law. Stringent restrictions are placed about them so that
when acting both for the bank and for one of themselves at the same time, they must
keep within certain prescribed lines regarded by the legislature as essential to safety in
the banking business.[51]
A direct borrowing is obviously one that is made in the name of the DOSRI
himself or where the DOSRI is a named party, while an indirect borrowing includes one
that is made by a third party, but the DOSRI has a stake in the transaction.[52] The latter
type indirect borrowing applies here. The information in Criminal Case 238-M-2001
alleges that petitioner in his capacity as President of Rural Bank of San Miguel San
Ildefonso branch x x x indirectly borrow[ed] or secure[d] a loan with [RBSM] x x
x knowing fully well that the same has been done by him without the written consent and
approval of the majority of the board of directors x x x, and which consent and approval
the said accused deliberately failed to obtain and enter the same upon the records of
said banking institution and to transmit a copy thereof to the supervising department of
the said bank x x x by using the name of one depositor Enrico Carlos x x x, the latter
having no knowledge of the said loan, and once in possession of the said amount of
eight million pesos (P8 million), [petitioner] converted the same to his own personal use
and benefit.[53]
special defenses he had invoked in his motion to quash and
if after trial on the merits, an adverse decision is rendered, to
appeal therefrom in the manner authorized by law. Thus,
petitioners should not have forthwith filed a special civil action
for certiorari with the CA and instead, they should have gone
to trial and reiterated the special defenses contained in their
motion to quash. There are no special or exceptional
circumstances in the present case that would justify
immediate resort to a filing of a petition for certiorari. Clearly,
the CA did not commit any reversible error, much less, grave
abuse of discretion in dismissing the petition.[56]
Fourth Issue:
Whether petitioner is entitled to a writ of injunction
The requisites to justify an injunctive relief are: (1) the right of the complainant is clear
and unmistakable; (2) the invasion of the right sought to be protected is material and
substantial; and (3) there is an urgent and paramount necessity for the writ to prevent
serious damage. A clear legal right means one clearly founded in or granted by law or
is enforceable as a matter of law. Absent any clear and unquestioned legal right, the
issuance of an injunctive writ would constitute grave abuse of discretion.[57] Caution and
prudence must, at all times, attend the issuance of an injunctive writ because it effectively
disposes of the main case without trial and/or due process.[58] In Olalia v. Hizon,[59] the
Court held as follows:
It has been consistently held that there is no
power the exercise of which is more delicate, which requires
greater caution, deliberation and sound discretion, or more
dangerous in a doubtful case, than the issuance of an
injunction. It is the strong arm of equity that should never be
extended unless to cases of great injury, where courts of law
cannot afford an adequate or commensurate remedy in
damages.
Every court should remember that an injunction
is a limitation upon the freedom of action of the [complainant]
and should not be granted lightly or precipitately. It should be
granted only when the court is fully satisfied that the law
permits it and the emergency demands it.
Given this Court's findings in the earlier issues of the instant case, we find no compelling
reason to grant the injunctive relief sought by petitioner.
WHEREFORE, the petition is DENIED. The assailed September 26, 2003 Decision as
well as the February 5, 2004 Resolution of the Court of Appeals in CA-G.R. SP No.
67657 are AFFIRMED. Costs against petitioner.
SO ORDERED.

The foregoing information describes the manner of securing the loan

as indirect; names petitioner as the benefactor of the indirect loan; and states that the
requirements of the law were not complied with. It contains all the required
elements[54] for a violation of Section 83, even if petitioner did not secure the loan in his
own name.

The broad interpretation of the prohibition in Section 83 is justified by the

fact that it even expressly covers loans to third parties where the third parties are aware
of the transaction (such as principals represented by the DOSRI), and where the
DOSRIs interest does not appear to be beneficial but even burdensome (such as in
cases when the DOSRI acts as a mere guarantor or surety). If the law finds it necessary
to protect the bank and the banking system in such situations, it will surely be illogical for
it to exclude a case like this where the DOSRI acted for his own benefit, using the name
of an unsuspecting person. A contrary interpretation will effectively allow a DOSRI to use
dummies to circumvent the requirements of the law.
In sum, the informations filed against petitioner do not negate each other.

Third Issue:

Is a Rule 65 petition for certiorari the proper remedy against

an Order denying a Motion to Quash?

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

People,[55]where we held:

In fine, the Court has consistently held that a

special civil action for certiorari is not the proper remedy to
assail the denial of a motion to quash an information. The
proper procedure in such a case is for the accused to enter
a plea, go to trial without prejudice on his part to present the
 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-26649 July 13, 1927
THE GOVERNMENT OF THE PHILIPPINE ISLANDS (on relation of the
Attorney-General), plaintiff,
vs.
EL HOGAR FILIPINO, defendant.
Attorney-General Jaranilla and Solicitor-General Reyes for plaintiff.
Fisher, DeWitt, Perkins and Brady; Camus, Delgado and Recto and
Antonio Sanz for defendant.
Wm. J. Rohde as amicus curiae.
STREET, J.:
This is a quo warranto proceeding instituted originally in this court by the
Government of the Philippine Islands on the relation of the Attorney-General
against the building and loan association known as El Hogar Filipino, for the
purpose of depriving it of its corporate franchise, excluding it from all
corporate rights and privileges, and effecting a final dissolution of said
corporation. The complaint enumerates seventeen distinct causes of action,
to all of which the defendant has answered upon the merits, first admitting
the averments of the first paragraph in the statement of the first cause of
action, wherein it is alleged that the defendant was organized in the year
1911 as a building and loan association under the laws of the Philippine
Islands, and that, since its organization, the corporation has been doing
business in the Philippine Islands, with its principal office in the City of Manila.
Other facts alleged in the various causes of action in the complaint are either
denied in the answer or controverted in legal effect by other facts.
After issue had been thus joined upon the merits, the attorneys entered into
an elaborate agreement as to the fact, thereby removing from the field of
dispute such matters of fact as are necessary to the solution of the
controversy. It follows that we are here confronted only with the legal
questions arising upon the agreed statement.
On March 1, 1906, the Philippine Commission enacted what is known as the
Corporation Law (Act No. 1459) effective upon April 1 of the same year.
Section 171 to 190, inclusive, of this Act are devoted to the subject of building
and loan associations, defining their objects making various provisions
governing their organization and administration, and providing for the
supervision to be exercised over them. These provisions appear to be
adopted from American statutes governing building and loan associations
and they of course reflect the ideals and principles found in American law
relative to such associations. The respondent, El Hogar Filipino, was
apparently the first corporation organized in the Philippine Islands under the
provisions cited, and the association has been favored with extraordinary
success. The articles of incorporation bear the date of December 28, 1910,
at which time capital stock in the association had been subscribed to the
amount of P150,000 of which the sum of P10,620 had been paid in. Under
the law as it then stood, the capital of the Association was not permitted to
exceed P3,000,000, but by Act No. 2092, passed December 23, 1911, the
statute was so amended as to permit the capitalization of building and loan
associations to the amount of ten millions. Soon thereafter the association
took advantage of this enactment by amending its articles so as to provide
that the capital should be in an amount not exceeding the then lawful limit.
From the time of its first organization the number of shareholders has
constantly increased, with the result that on December 31, 1925, the
association had 5,826 shareholders holding 125,750 shares, with a total
paid-up value of P8,703,602.25. During the period of its existence prior to the
date last above-mentioned the association paid to withdrawing stockholders
the amount of P7,618,257,.72; and in the same period it distributed in the
form of dividends among its stockholders the sum of P7,621,565.81.
First cause of action. — The first cause of action is based upon the alleged
illegal holding by the respondent of the title to real property for a period in
excess of five years after the property had been bought in by the respondent
at one of its own foreclosure sales. The provision of law relevant to the matter
is found in section 75 of Act of Congress of July 1, 1902 (repeated in
subsection 5 of section 13 of the Corporation Law.) In both of these
provisions it is in substance declared that while corporations may loan funds
upon real estate security and purchase real estate when necessary for the
collection of loans, they shall dispose of real estate so obtained within five
years after receiving the title.
In this connection it appears that in the year 1920 El Hogar Filipino was the
holder of a recorded mortgage upon a tract of land in the municipality of San
Clemente, Province of Tarlac, as security for a loan of P24,000 to the
shareholders of El Hogar Filipino who were the owners of said property. The
borrowers having defaulted in their payments, El Hogar Filipino foreclosed
the mortgage and purchased the land at the foreclosure sale for the net
amount of the indebtedness, namely, the sum of P23,744.18. The auction
sale of the mortgaged property took place November 18, 1920, and the deed
conveying the property to El Hogar Filipino was executed and delivered
December 22, 1920. On December 27, 1920, the deed conveying the
property to El Hogar Filipino was sent to the register of deeds of the Province
of Tarlac, with the request that the certificate of title then standing in the name
of the former owners be cancelled and that a new certificate of title be issued
in the name of El Hogar Filipino. Said deed was received in the office of the
register of deeds of Tarlac on December 28, 1920, together with the old
certificate of title, and thereupon the register made upon the said deed the
following annotation:
The foregoing document was received in this office at 4.10 p. m.,
December 28, 1920, according to entry 1898, page 50 of Book
One of the Day Book and registered on the back of certificate of
title No. 2211 and its duplicate, folio 193 of Book A-10 of the
register of original certificate. Tarlac, Tarlac, January 12, 1921.
(Sgd.) SILVINO LOPEZ DE JESUS, Register of Deeds.
For months no reply was received by El Hogar Filipino from the register of
deeds of Tarlac, and letters were written to him by El Hogar Filipino on the
subject in March and April, 1921, requesting action. No answer having been
received to these letters, a complaint was made by El Hogar Filipino to the
Chief of the General Land Registration Office; and on May 7, 1921, the
certificate of title to the San Clemente land was received by El Hogar Filipino
from the register of deeds of Tarlac.
On March 10, 1921, the board of directors of El Hogar Filipino adopted a
resolution authorizing Vicente Bengzon, an agent of the corporation, to
endeavor to find a buyer for the San Clemente land. On July 27, 1921, El
Hogar Filipino authorized one Jose Laguardia to endeavor to find a
purchaser for the San Clemente land for the sum of P23,000 undertaking to
pay the said Laguardia a commission of 5 per centum of the selling price for
his services, but no offers to purchase were obtained through this agent or
through the agent Bengzon. In July, 1923, plans of the San Clemente land
were sent to Mr. Luis Gomez, Mr. J. Gonzalez and Mr. Alfonso de Castelvi,
as prospective purchasers, but no offers were received from them. In
January, 1926, the agent not having succeeded in finding a buyer, the San
Clemente land was advertised for sale by El Hogar Filipino in El Debate, La
Vanguardia and Taliba, three newspapers of general circulation in the
Philippine Islands published in the City of Manila. On March 16, 1926, the
first offer for the purchase of the San Clemente land was received by El
Hogar Filipino. This offer was made to it in writing by one Alcantara, who
offered to buy it for the sum of P4,000, Philippine currency, payable P500 in
cash, and the remainder within thirty days. Alcantara's offer having been
reported by the manager of El Hogar Filipino to its board of directors, it was
decided, by a resolution adopted at a meeting of the board held on March
25, 1926, to accept the offer, and this acceptance was communicated to the
prospective buyer. Alcantara was given successive extensions of the time,
the last of which expired April 30, 1926, within which to make the payment
agreed upon; and upon his failure to do so El Hogar Filipino treated the
contract with him as rescinded, and efforts were made at once to find another
buyer. Finally the land was sold to Doña Felipa Alberto for P6,000 by a public
instrument executed before a notary public at Manila, P. I., on July 30, 1926.
Upon consideration of the facts above set forth it is evident that the strict
letter of the law was violated by the respondent; but it is equally obvious that
its conduct has not been characterized by obduracy or pertinacity in
contempt of the law. Moreover, several facts connected with the incident tend
to mitigate the offense. The Attorney-General points out that the respondent
acquired title on December 22, 1920, when the deed was executed and
delivered, by which the property was conveyed to it as purchaser at its
foreclosure sale, and this title remained in it until July 30, 1926, when the
property was finally sold to Felipa Alberto. The interval between these two
conveyances is thus more than five years; and it is contended that the five
year period did not begin to run against the respondent until May 7, 1921,
when the register of deeds of Tarlac delivered the new certificate of title to
the respondent pursuant to the deed by which the property was acquired. As
an equitable consideration affecting the case this contention, though not
decisive, is in our opinion more than respectable. It has been held by this
court that a purchaser of land registered under the Torrens system cannot
acquire the status of an innocent purchaser for value unless his vendor is
able to place in his hands an owner's duplicate showing the title of such land
to be in the vendor (Director of Lands vs. Addison, 49, Phil., 19;
Rodriguez vs. Llorente, G. R. No. 266151). It results that prior to May 7, 1921,
El Hogar Filipino was not really in a position to pass an indefeasible title to
any purchaser. In this connection it will be noted that section 75 of the Act of
Congress of July 1, 1902, and the similar provision in section 13 of the
Corporation Law, allow the corporation "five years after receiving the title,"
within which to dispose of the property. A fair interpretation of these
provisions would seem to indicate that the date of the receiving of the title in
this case was the date when the respondent received the owner's certificate,
or May 7, 1921, for it was only after that date that the respondent had an
unequivocal and unquestionable power to pass a complete title. The failure
of the respondent to receive the certificate sooner was not due in any wise
to its fault, but to unexplained delay on the part of the register of deeds. For
this delay the respondent cannot be held accountable.
Again, it is urged for the respondent that the period between March 25, 1926,
and April 30, 1926, should not be counted as part of the five-year period. This
was the period during which the respondent was under obligation to sell the
property to Alcantara, prior to the rescission of the contract by reason of
Alcantara's failure to make the stipulated first payment. Upon this point the
contention of the respondent is, in our opinion, well founded. The acceptance
by it of Alcantara's offer obligated the respondent to Alcantara; and if it had
not been for the default of Alcantara, the effective sale of the property would
have resulted. The respondent was not at all chargeable with the collapse of
these negotiations; and hence in any equitable application of the law this
period should be deducted from the five-year period within which the
respondent ought to have made the sale. Another circumstance explanatory
of the respondent's delay in selling the property is found in the fact that it
purchased the property for the full amount of the indebtedness due to it from
the former owner, which was nearly P24,000. It was subsequently found that
the property was not salable for anything like that amount and in the end it
had to be sold for P6,000, notwithstanding energetic efforts on the part of the
respondent to find a purchaser upon better terms.
The question then arises whether the failure of the respondent to get rid of
the San Clemente property within five years after it first acquired the deed
thereto, even supposing the five-year period to be properly counted from that
date, is such a violation of law as should work a forfeiture of its franchise and
require a judgment to be entered for its dissolution in this action of quo
warranto. Upon this point we do not hesitate to say that in our opinion the
corporation has not been shown to have offended against the law in a
manner that should entail a forfeiture of its charter. Certainly no court with
any discretion to use in the matter would visit upon the respondent and its
thousands of shareholders the extreme penalty of the law as a consequence
of the delinquency here shown to have been committed.
The law applicable to the case is in our opinion found in section 212 of the
Code of Civil Procedure, as applied by this court in Government of the
Philippine Islands vs. Philippine Sugar Estates Development Co. (38 Phil.,
15). This section (212), in prescribing the judgment to be rendered against a
corporation in an action of quo warranto, among other things says:
. . . When it is found and adjudged that a corporation has
offended in any matter or manner which does not by law work as
a surrender or forfeiture, or has misused a franchise or exercised
a power not conferred by law, but not of such a character as to
work a surrender or forfeiture of its franchise, judgment shall be
rendered that it be outset from the continuance of such offense
or the exercise of such power.
This provision clearly shows that the court has a discretion with respect to
the infliction of capital punishment upon corporation and that there are certain
misdemeanors and misuses of franchises which should not be recognized
as requiring their dissolution. In Government of the Philippine Islands vs.
Philippine Sugar Estates Development Co.(38 Phil., 15), it was found that the
offending corporation had been largely (though indirectly) engaged in the
buying and holding or real property for speculative purposes in contravention
of its charter and contrary to the express provisions of law. Moreover, in that
case the offending corporation was found to be still interested in the
properties so purchased for speculative at the time the action was brought.
Nevertheless, instead of making an absolute and unconditional order for the
dissolution of the corporation, the judgment of ouster was made conditional
upon the failure of the corporation to discontinue its unlawful conduct within
six months after final decision. In the case before us the respondent appears
to have rid itself of the San Clemente property many months prior to the
institution of this action. It is evident from this that the dissolution of the
respondent would not be an appropriate remedy in this case. We do not of
course undertake to say that a corporation might not be dissolved for
offenses of this nature perpetrated in the past, especially if its conduct had
exhibited a willful obduracy and contempt of law. We content ourselves with
holding that upon the facts here before us the penalty of dissolution would
be excessively severe and fraught with consequences altogether
disproportionate to the offense committed.
The evident purpose behind the law restricting the rights of corporations with
respect to the tenure of land was to prevent the revival of the entail
(mayorazgo) or other similar institution by which land could be fettered and
its alienation hampered over long periods of time. In the case before us the
respondent corporation has in good faith disposed of the piece of property
which appears to have been in its hands at the expiration of the period fixed
by law, and a fair explanation is given of its failure to dispose of it sooner.
Under these circumstances the destruction of the corporation would bring
irreparable loss upon the thousand of innocent shareholders of the
corporation without any corresponding benefit to the public. The discretion
permitted to this court in the application of the remedy of quo
warranto forbids so radical a use of the remedy.
But the case for the plaintiff supposes that the discretion of this court in
matters like that now before us has been expressly taken away by the third
section of Act No. 2792, and that the dissolution of the corporation is
obligatory upon the court a mere finding that the respondent has violated the
provision of the Corporation Law in any respect. This makes necessary to
examine the Act last above-mentioned with some care. Upon referring
thereto, we find that it consists of three sections under the following style:
No. 2792. — An Act to amend certain sections of the Corporation
Law, Act Numbered Fourteen hundred and fifty-nine, providing
for the publication of the assets and liabilities of corporations
registering in the Bureau of Commerce and Industry, determining
the liability of the officers of corporations with regard to the
issuance of stock or bonus, establishing penalties for certain
things, and for other purposes.
The first two section contain amendments to the Corporation Law with
respect to matters with which we are not here concurred. The third section
contains anew enactment to be inserted as section 190 (A) in the corporation
Law immediately following section 190. This new section reads as follows:
SEC. 190. (A). Penalties. — The violation of any of the provisions
of this Act and its amendments not otherwise penalized therein,
shall be punished by a fine of not more than one thousand pesos,
or by imprisonment for not more than five years, or both, in the
discretion of the court. If the violation being proved, be dissolved
by quo warranto proceedings instituted by the Attorney-General
or by any provincial fiscal, by order of said Attorney-General:
Provided, That nothing in this section provided shall be construed
to repeal the other causes for the dissolution of corporation
prescribed by existing law, and the remedy provided for in this
section shall be considered as additional to the remedies already
existing.
The contention for the plaintiff is to the effect that the second sentence in this
enactment has entirely abrogated the discretion of this court with respect to
the application of the remedy of qou warranto, as expressed in section 212
of the Code of Civil Procedure, and that it is now mandatory upon us to
dissolved any corporation whenever we find that it has committed any
violation of the Corporation Law, however trivial. In our opinion in this radical
view of the meaning of the enactment is untenable. When the statute says,
"If the violation is committed by a corporation, the same shall, upon such
violation being proved, be dissolved by quo warranto proceedings . . .," the
intention was to indicate that the remedy against the corporation shall be by
action of quo warranto. There was no intention to define the principles
governing said remedy, and it must be understood that in applying the
remedy the court is still controlled by the principles established in immemorial
jurisprudence. The interpretation placed upon this language in the brief of the
Attorney-General would be dangerous in the extreme, since it would actually
place the life of all corporate investments in the official. No corporate
enterprise of any moment can be conducted perpetually without some trivial
misdemeanor against corporate law being committed by some one or other
of its numerous employees. As illustrations of the preposterous effects of the
provision, in the sense contended for by the Attorney-General, the attorneys
for the respondent have called attention to the fact that under section 52 of
the Corporation Law, a business corporation is required to keep a stock book
and a transfer book in which the names of stockholders shall kept in
alphabetical order. Again, under section 94, railroad corporations are
required to cause all employees working on passenger trains or at a station
for passengers to wear a badge on his cap or hat which will indicate his office.
Can it be supposed that the Legislature intended to penalize the violation of
such provisions as these by dissolution of the corporation involved? Evidently
such could not have been the intention; and the only way to avoid the
consequence suggested is to hold, as we now hold, that the provision now
under consideration has not impaired the discretion of this court in applying
the writ of quo warranto.
Another way to put the same conclusion is to say that the expression "shall
be dissolved by quo warrantoproceedings" means in effect, "may be
dissolved by quo warranto proceedings in the discretion of the court." The
proposition that the word "shall" may be construed as "may", when
addressed by the Legislature to the courts, is well supported in jurisprudence.
In the case of Becker vs. Lebanon and M. St. Ry. Co., (188 Pa., 484), the
Supreme Court of Pennsylvania had under consideration a statute providing
as follows:
It shall be the duty of the court . . . to examine, inquire and
ascertain whether such corporation does in fact posses the right
or franchise to do the act from which such alleged injury to private
rights or to the rights and franchises of other corporations results;
and if such rights or franchises have not been conferred upon
such corporations, such courts, it exercising equitable
power, shall, by injunction, at suit of the private parties or other
corporations, restrain such injurious acts.
In an action based on this statute the plaintiff claimed injunctive relief as a
matter of right. But this was denied the court saying:
Notwithstanding, therefore, the use of the imperative "shall" the
injunction is not to be granted unless a proper case for injunction
be made out, in accordance with the principles and practice of
equity. The word "shall" when used by the legislature to a court,
is usually a grant of authority and means "may", and even if it be
intended to be mandatory it must be subject to the necessary
limitation that a proper case has been made out for the exercise
of the power.
Other authorities amply sustain this view (People vs. Nusebaum, 66 N. Y.
Supp., 129, 133; West Wisconsin R. Co. vs. Foley, 94 U. S., 100, 103; 24
Law. Ed., 71; Clancy vs. McElroy, 30 Wash., 567; 70 Pac., 1095;
State vs. West, 3 Ohio State, 509, 511; In re Lent, 40 N. Y. Supp., 570, 572;
16 Misc. Rep., 606; Ludlow vs. Ludlow's Executors, 4 N. J. Law [1 Sothard],
387, 394; Whipple vs. Eddy, 161 Ill., 114;43 N. E., 789, 790;
Borkheim vs. Fireman's Fund Ins. Co., 38 Cal., 505, 506;
Beasley vs. People, 89 Ill., 571, 575; Donnelly vs. Smith, 128 Iowa, 257; 103
N. W., 776).
But section 3 of Act No. 2792 is challenged by the respondent on the ground
that the subject-matter of this section is not expressed in the title of the Act,
with the result that the section is invalid. This criticism is in our opinion well
founded. Section 3 of our organic law (Jones Bill) declares, among other
things, that "No bill which may be enacted into law shall embrace more than
one subject, and that subject shall be expressed in the title of the bill." Any
law or part of a law passed by the Philippine Legislature since this provision
went into effect and offending against its requirement is necessarily void.
Upon examining the entire Act (No. 2792), we find that it is directed to three
ends which are successively dealt with in the first three sections of the Act.
But it will be noted that these three matters all relate to the Corporation Law;
and it is at once apparent that they might properly have been embodied in a
single Act if a title of sufficient unity and generality had been prefixed thereto.
Furthermore, it is obvious, even upon casual inspection, that the subject-
matter of each of the first two sections is expressed and defined with
sufficient precision in the title. With respect to the subject-matter of section 3
the only words in the title which can be taken to refer to the subject-matter of
said section are these, "An Act . . . establishing penalties for certain things,
and for other purposes." These words undoubtedly have sufficient generality
to cover the subject-matter of section 3 of the Act. But this is not enough. The
Jones Law requires that the subject-matter of the bill "shall be expressed in
the title of the bill."
When reference is had to the expression "establishing penalties for certain
things," it is obvious that these words express nothing. The constitutional
provision was undoubtedly adopted in order that the public might be informed
as to what the Legislature is about while bills are in process of passage. The
expression "establishing penalties for certain things" would give no definite
information to anybody as to the project of legislation intended under this
expression. An examination of the decided cases shows that courts have
always been indulgent of the practices of the Legislature with respect to the
form and generality of title, for if extreme refinements were indulged by the
courts, the work of legislation would be unnecessarily hampered. But, as has
been observed by the California court, there must be some reasonable limit
to the generality of titles that will be allowed. The measure of legality is
whether the title is sufficient to give notice of the general subject of the
proposed legislation to the persons and interests likely to be affected.
In Lewis vs. Dunne (134 Cal., 291), the court had before it a statute entitled
"An Act to revise the Code of Civil Procedure of the State of California, by
amending certain sections, repealing others, and adding certain new
sections." This title was held to embrace more than one subject, which were
not sufficiently expressed in the title. In discussing the question the court
said:
* * * It is apparent that the language of the title of the act in
question, in and of itself, express no subject whatever. No one
could tell from the title alone what subject of legislation was dealt
with in the body of the act; such subject so far as the title of the
act informs us, might have been entirely different from anything
to be found in the act itself.
We cannot agree with the contention of some of respondent's
counsel — apparently to some extent countenanced by a few
authorities — that the provision of the constitution in question can
be entirely avoided by the simple device of putting into the title of
an act words which denote a subject "broad" enough to cover
everything. Under that view, the title, "An act concerning the laws
of the state," would be good, and the convention and people who
framed and adopted the constitution would be convicted of the
folly of elaborately constructing a grave constitutional limitation
of legislative power upon a most important subject, which the
legislature could at once circumvent by a mere verbal trick. The
word "subject" is used in the constitution embrace but "one
subject" it necessarily implies — what everybody knows — that
there are numerous subjects of the legislation, and declares that
only one of these subjects shall embraced in any one act. All
subjects cannot be conjured into one subject by the mere magic
of a word in a title.
In Rader vs. Township of Union (39 N. J. L., 509, 515), the Supreme Court
of New Jersey made the following observation:
* * * It is true, that it may be difficult to indicate, by a formula, how
specialized the title of a statute must be; but it is not difficult to
conclude that it must mean something in the way of being a
notice of what is doing. Unless it does not enough that it
embraces the legislative purpose — it must express it; and where
the language is too general, it will accomplish the former, but not
the latter. Thus, a law entitled "An act for a certain purpose,"
would embrace any subject, but would express none, and,
consequently, it would not stand the constitutional test.
The doctrine properly applicable in matters of this kind is, we think, fairly
summed up in a current repository of jurisprudence in the following language:
* * * While it may be difficult to formulate a rule by which to
determine the extent to which the title of a bill must specialize its
object, it may be safely assumed that the title must not only
embrace the subject of proposed legislation, but also express it
clearly and fully enough to give notice of the legislative purpose.
(25 R. C. L., p. 853.)
In dealing with the problem now before us the words "and for other purposes
"found at the end of the caption of Act No. 2792, must be laid completely out
of consideration. They express nothing, and amount to nothing as a
compliance with the constitutional requirement to which attention has been
directed. This expression "(for other purposes") is frequently found in the title
of acts adopted by the Philippine Legislature; and its presence in our laws is
due to the adoption by our Legislature of the style used in Congression
allegation. But it must be remembered that the legislation of Congress is
subject to no constitutional restriction with respect to the title of bills.
Consequently, in Congressional legislation the words "and for other
purposes" at least serve the purpose of admonishing the public that the bill
whose heading contains these words contains legislation upon other
subjects than that expressed in the title. Now, so long as the Philippine
Legislature was subject to no restriction with respect to the title of bills
intended for enactment into general laws, the expression "for other purposes"
could be appropriately used in titles, not precisely for the purpose of
conveying information as to the matter legislated upon, but for the purpose
ad admonishing the public that any bill containing such words in the title
might contain other subjects than that expressed in the definitive part of the
title. But, when congress adopted the Jones Law, the restriction with which
we are now dealing became effective here and the words "for other
purposes" could no longer be appropriately used in the title of legislative bills.
Nevertheless, the custom of using these words has still been followed,
although they can no longer serve to cover matter not germane to the bill in
the title of which they are used. But the futility of adding these words to the
style of any act is now obvious (Cooley, Const. Lims., 8th ed., p. 302)
In the brief for the plaintiff it is intimated that the constitutional restriction
which we have been discussing is more or less of a dead letter in this
jurisdiction; and it seems to be taken for granted that no court would ever
presume to hold a legislative act or part of a legislative act invalid for non-
compliance with the requirement. This is a mistake; and no utterance of this
court can be cited as giving currency to any such notion. On the contrary the
discussion contained in Central Capiz vs. Ramirez (40 Phil., 883), shows that
when a case arises where a violation of the restriction is apparent, the court
has no alternative but to declare the legislation affected thereby to be invalid.
Second cause of action. — The second cause of action is based upon a
charge that the respondent is owning and holding a business lot, with the
structure thereon, in the financial district of the City of Manila is excess of its
reasonable requirements and in contravention of subsection 5 of section 13
of the corporation Law. The facts on which this charge is based appear to be
these:
On August 28, 1913, the respondent purchased 1,413 square meters of land
at the corner of Juan Luna Street and the Muelle de la Industria, in the City
of Manila, immediately adjacent to the building then occupied by the
Hongkong and Shanghai Banking Corporation. At the time the respondent
acquired this lot there stood upon it a building, then nearly fifty years old,
which was occupied in part by the offices of an importing firm and in part by
warehouses of the same firm. The material used in the construction was
Guadalupe stone and hewn timber, and the building contained none of the
facilities usually found in a modern office building.
In purchase of a design which had been formed prior to the purchase of the
property, the directors of the El Hogar Filipino caused the old building to be
demolished; and they erected thereon a modern reinforced concrete office
building. As at first constructed the new building was three stories high in the
main, but in 1920, in order to obtain greater advantage from the use of the
land, an additional story was added to the building, making a structure of four
stories except in one corner where an additional story was place, making it
five stories high over an area of 117.52 square meters. It is admitted in the
plaintiffs brief that this "noble and imposing structure" — to use the words of
the Attorney-General — "has greatly improved the aspect of the banking and
commercial district of Manila and has greatly contributed to the movement
and campaign for the Manila Beautiful." It is also admitted that the competed
building is reasonably proportionate in value and revenue producing capacity
to the value of the land upon which it stands. The total outlay of the
respondent for the land and the improvements thereon was P690,000 and at
this valuation the property is carried on the books of the company, while the
assessed valuation of the land and improvements is at P786,478.
Since the new building was completed the respondent has used about 324
square meters of floor space for its own offices and has rented the remainder
of the office space in said building, consisting of about 3,175 square meters,
to other persons and entities. In the second cause of action of the complaint
it is supposed that the acquisition of this lot, the construction of the new office
building thereon, and the subsequent renting of the same in great part to third
persons, are ultra vires acts on the part of the corporation, and that the
proper penalty to be enforced against it in this action is that if dissolution.
With this contention we are unable to agree. Under subsection 5 of section
13 of the Corporation Law, every corporation has the power to purchase,
hold and lease such real property as the transaction of the lawful business
of the corporation may reasonably and necessarily require. When this
property was acquired in 1916, the business of El Hogar Filipino had
developed to such an extent, and its prospects for the future were such as to
justify its directors in acquiring a lot in the financial district of the City of Manila
and in constructing thereon a suitable building as the site of its offices; and it
cannot be fairly said that the area of the lot — 1,413 square meters — was
in excess of its reasonable requirements. The law expressly declares that
corporations may acquire such real estate as is reasonably necessary to
enable them to carry out the purposes for which they were created; and we
are of the opinion that the owning of a business lot upon which to construct
and maintain its offices is reasonably necessary to a building and loan
association such as the respondent was at the time this property was
acquired. A different ruling on this point would compel important enterprises
to conduct their business exclusively in leased offices — a result which could
serve no useful end but would retard industrial growth and be inimical to the
best interests of society.
We are furthermore of the opinion that, inasmuch as the lot referred to was
lawfully acquired by the respondent, it is entitled to the full beneficial use
thereof. No legitimate principle can discovered which would deny to one
owner the right to enjoy his (or its) property to the same extent that is
conceded to any other owner; and an intention to discriminate between
owners in this respect is not lightly to be imputed to the Legislature. The point
here involved has been the subject of consideration in many decisions of
American courts under statutes even more restrictive than that which prevails
in this jurisdiction; and the conclusion has uniformly been that a corporations
whose business may properly be conducted in a populous center may
acquire an appropriate lot and construct thereon an edifice with facilities in
excess of its own immediate requirements.
Thus in People vs. Pullman's Palace-Car Co. (175 Ill., 125; 64 L. R. A., 366),
it appeared that the respondent corporation owned and controlled a large
ten-story business block in the City of Chicago, worth $2,000,000, and that it
occupied only about one-fourth thereof for its own purposes, leasing the
remainder to others at heavy rentals. The corporate charter merely permitted
the holding of such real estate by the respondent as might be necessary for
the successful prosecution of its business. An attempt was made to obtain
the dissolution of the corporation in a quo warranto proceeding similar to that
now before us, but the remedy was denied.
In Rector vs. Hartford Deposit Co., a question was raised as to the power of
the Deposit Company to erect and own a fourteen-story building —
containing eight storerooms, one hundred suites of offices, and one safety
deposit vault, under a statute authorizing the corporation to possess so much
real estate "as shall be necessary for the transaction of their business." The
court said:
That the appellee company possessed ample power to acquire
real property and construct a building thereon for the purpose of
transacting therein the legitimate business of the corporation is
beyond the range of debate. Nor is the contrary contended, but
the insistence is that, under the guise of erecting a building for
corporate purposes, the appellee company purposely
constructed a much larger building than its business required,
containing many rooms intended to be rented to others for offices
and business purposes, — among them, the basement rooms
contracted to be leased to the appellant, — and that in so doing
it designedly exceeded its corporate powers. The position off
appellant therefore is that the appellee corporation has flagrantly
abused its general power to acquire real estate and construct a
building thereon . . . It was within the general scope of the
express powers of the appellee corporation to own and possess
a building necessary for its proper corporate purposes. In
planning and constructing such a building, as was said in People
vs. Pullman's Palace Car Co., supra, the corporation should not
necessarily be restricted to a building containing the precise
number of rooms its then business might require, and no more,
but that the future probable growth and volume of its business
might be considered and anticipated, and a larger building, and
one containing more rooms than the present volume of business
required be erected, and the rooms not needed might be rented
by the corporation, — provided, of course, such course should
be taken in good faith, and not as a mere evasion of the public
law and the policy of the state relative to the ownership of real
estate by corporations. In such state of case the question is
whether the corporation has abused or excessively and
unjustifiably used the power and authority granted it by the state
to construct buildings and own real estate necessary for its
corporate purposes.
In Home savings building Association vs. Driver (129 Ky., 754), one of the
questions before the court was precisely the same as that now before us.
Upon this the Supreme Court of Kentucky said:
 The third question is, has the association the right to erect,
remodel, or own a building of more than sufficient capacity to
accommodate its own business and to rent out the excess?
There is nothing in the Constitution, charter of the association, or
statutes placing any limitation upon the character of a building
which a corporation may erect as a home in which to conduct its
business. A corporation conducting a business of the character
of that in which appellant is engaged naturally expects its
business to grow and expand from time to time, and, in building
a home it would be exercising but a short-sighted judgment if it
did not make provision for the future by building a home large
enough to take care of its expanding business, and hence, even
if it should build a house larger and roomier than its present
needs or interests require, it would be acting clearly with the
exercise of its corporate right and power. The limitation which the
statute imposes is that proper conduct of its business, but it does
not attempt to place any restriction or limitation upon the right of
the corporation or association as to the character of building it
shall erect on said real estate; and, while the Constitution and the
statutes provide that no corporation shall engage in any business
other than that expressly authorized by its charter, we are of
opinion that, in renting out the unoccupied and unused portions
of the building so erected, the association could not be said to
engaged in any other business than that authorized by its charter.
The renting of the unused portions of the building is a mere
incident in the conduct of its real business. We would not say that
a building association might embark in the business of building
houses and renting or leasing them, but there is quite a difference
in building or renting a house in which to conduct its own
business and leasing the unused portion thereof for the time
being, or until such time as they may be needed by the
association, and in building houses for the purpose of renting or
leasing them. The one might properly be said to be the proper
exercise of a power incident to the conduct of its legitimate
business, whereas the other would be a clear violation of that
provision of the statute which denies to any corporation the right
to conduct any business other than that authorized by its charter.
To hold otherwise would be to charge most of the banking
institutions, trust companies and other corporations, such as title
guaranty companies, etc., doing with violating the law; for it is
known that there are few of such institutions that do not, at times,
rent out or lease the unneeded portions of the building occupied
by them as homes. We do not think that in so doing they are
violating any provisions of the law, but that the renting out of the
unused or unoccupied portions of their buildings is but an incident
in the conduct of their business.
In Wingert vs. First National Bank of Hagerstown, Md. (175 Fed., 739, 741),
a stockholder sought to enjoin the bank from building a six-story building
owned by the bank in the commercial district of Hagerstown of which only
the first story was to be used by the bank, the remaining stories to be rented
out for offices and places of business, on the theory that such action
was ultra vires and in violation of the provisions of the national banking act
confining such corporations to the holding, only, of such real estate "as shall
be necessary for its immediate accommodation in the transaction of its
business."
The injunction was denied, the court adopting the opinion of the lower court
in which the following was said:
'The other ground urged by the complainant is that the proposed
action is violative of the restriction which permits a national bank
to hold only such real estate as shall be necessary for its
immediate accommodation in the transaction of its business, and
that, therefore, the erection of a building which will contain offices
not necessary for the business of the bank is not permitted by the
law, although that method of improving the lot may be the most
beneficial use that can be made of it. It is matter of common
knowledge that the actual practice of national banks is to the
contrary. Where ground is valuable, it may probably be truly said
that the majority of national bank buildings are built with
accommodations in excess of the needs of the bank for the
purpose of lessening the bank's expense by renting out the
unused portion. If that were not allowable, many smaller banks
in cities would be driven to become tenants as the great cost of
the lot would be prohibitive of using it exclusively for the banking
accommodation of a single bank. As indicative of the
interpretation of the law commonly received and acted upon,
reference may be made to the reply of the Comptroller of the
Currency to the injury by the bank in this case asking whether the
law forbids the bank constructing such a building as was
contemplated.
'The reply was follows: "Your letter of the 9th instant received,
stating that the directors contemplate making improvements in
the bank building and inquiring if there is anything in the national
banking laws prohibiting the construction of a building which will
contain floors for offices to be rented out by the bank as well as
the banking room. Your attention is called to the case of Brown
vs. Schleier, 118 Fed., 981 [55 C. C. A, 475], in which the court
held that: 'If the land which a national bank purchases or leases
for the accommodation of its business is very valuable it may
exercise the same rights that belong to other landowners of
improving it in a way that will yield the largest income, lessen its
own rent, and render that part of its funds which are invested in
realty most productive.'" This seems to be the common sense
interpretation of the act of Congress and is the one which
prevails.'
It would seem to be unnecessary to extend the opinion by lengthy citations
upon the point under consideration, butBrown vs. Schleier (118 Fed., 981),
may be cited as being in harmony with the foregoing authorities. In dealing
with the powers of a national bank the court, in this case, said:
When an occasion arises for an investment in real property for
either of the purposes specified in the statute the national bank
act permits banking associations to act as any prudent person
would act in making an investment in real estate, and to exercise
the same measure of judgment and discretion. The act ought not
to be construed in such as way as to compel a national bank,
when it acquires real property for a legitimate purpose, to deal
with it otherwise than a prudent land owner would ordinarily deal
with such property.
In the brief of the Attorney-General reliance is place almost entirely upon two
Illinois cases, namely Africani Home Purchase and Loan Association vs.
Carroll (267 Ill., 380), and First Methodist Episcopal Church of Chicago vs.
Dixon (178 Ill., 260). In our opinion these cases are either distinguishable
from that now before us, or they reflect a view of the law which is incorrect.
At any rate the weight of judicial opinion is so overwhelmingly in favor of
sustaining the validity of the acts alleged in the second cause of action to
have been done by the respondent in excess of its powers that we refrain
from commenting at any length upon said cases. The ground stated in the
second cause of action is in our opinion without merit.
Third cause of action. — Under the third cause of action the respondent is
charged with engaging in activities foreign to the purposes for which the
corporation was created and not reasonable necessary to its legitimate ends.
The specifications under this cause of action relate to three different sorts of
activities. The first consist of the administration of the offices in the El Hogar
building not used by the respondent itself and the renting of such offices to
the public. As stated in the discussion connected with the second cause of
action, the respondent uses only about ten per cent of the office space in the
El Hogar building for its own purposes, and it leases the remainder to
strangers. In the years 1924 and 1925 the respondent received as rent for
the leased portions of the building the sums of P75,395.06 and P58,259.27,
respectively. The activities here criticized clearly fall within the legitimate
powers of the respondent, as shown in what we have said above relative to
the second cause of action. This matter will therefore no longer detain us. If
the respondent had the power to acquire the lot, construct the edifice and
hold it beneficially, as there decided, the beneficial administration by it of
such parts of the building as are let to others must necessarily be lawful.
The second specification under the third cause of action has reference to the
administration and management of properties belonging to delinquent
shareholders of the association. In this connection it appears that in case of
delinquency on the part of its shareholders in the payment of interest,
premium, and dues, the association has been accustomed (pursuant to
clause 8 of its standard mortgage) to take over and manage the mortgaged
property for the purpose of applying the income to the obligations of the
debtor party. For these services the respondent charges a commission at the
rate of 2½ per centum on sums collected. The case for the government
supposes that the only remedy which the respondent has in case of default
on the part of its shareholders is to proceed to enforce collection of the whole
loan in the manner contemplated in section 185 of the Corporation Law. It
will be noted, however, that, according to said section, the association may
treat the whole indebtedness as due, "at the option of the board of directors,"
and this remedy is not made exclusive. We see no reason to doubt the
validity of the clause giving the association the right to take over the property
which constitutes the security for the delinquent debt and to manage it with
a view to the satisfaction of the obligations due to the debtor than the
immediate enforcement of the entire obligation, and the validity of the clause
allowing this course to be taken appears to us to be not open to doubt. The
second specification under this cause of action is therefore without merit, as
was true of the first.
The third specification under this cause of action relates to certain activities
which are described in the following paragraphs contained in the agreed
statements of facts:.
El Hogar Filipino has undertaken the management of some
parcels of improved real estate situated in Manila not under
mortgage to it, but owned by shareholders, and has held itself
out by advertisement as prepared to do so. The number of
properties so managed during the years 1921 to 1925, inclusive,
was as follows:
1921 eight properties
1922 six properties
1923 ten properties
1924 fourteen properties
1925 fourteen properties.
This service is limited to shareholders; but some of the persons
whose properties are so managed for them became
shareholders only to enable them to take advantage thereof.
The services rendered in the management of such improved real
estate by El Hogar Filipino consist in the renting of the same, the
payment of real estate taxes and insurance for the account of the
owner, causing the necessary repairs for upkeep to be made,
and collecting rents due from tenants. For the services so
rendered in the management of such properties El Hogar Filipino
receives compensation in the form of commissions upon the
gross receipts from such properties at rates varying from two and
one-half per centum to five per centum of the sums so collected,
according to the location of the property and the effort involved
in its management.
The work of managing real estate belonging to non-borrowing
shareholders administered by El Hogar Filipino is carried on by
the same members of the staff who attend to the details of the
management of properties administered by the manager of El
Hogar Filipino under the provisions of paragraph 8 of the
standard mortgage form, and of properties bought in on
foreclosure of mortgage.
The practice described in the passage above quoted from the agreed facts
is in our opinion unauthorized by law. Such was the view taken by the bank
examiner of the Treasury Bureau in his report to the Insular Treasurer on
December 21, 1925, wherein the practice in question was criticized. The
administration of property in the manner described is more befitting to the
business of a real estate agent or trust company than to the business of a
building and loan association. The practice to which this criticism is directed
relates of course solely to the management and administration of properties
which are not mortgaged to the association. The circumstance that the owner
of the property may have been required to subscribe to one or more shares
of the association with a view to qualifying him to receive this service is of no
significance. It is a general rule of law that corporations possess only such
express powers. The management and administration of the property of the
shareholders of the corporation is not expressly authorized by law, and we
are unable to see that, upon any fair construction of the law, these activities
are necessary to the exercise of any of the granted powers. The corporation,
upon the point now under the criticism, has clearly extended itself beyond
the legitimate range of its powers. But it does not result that the dissolution
of the corporation is in order, and it will merely be enjoined from further
activities of this sort.
Fourth cause of action. — It appears that among the by laws of the
association there is an article (No. 10) which reads as follows:
The board of directors of the association, by the vote of an
absolute majority of its members, is empowered to cancel shares
and to return to the owner thereof the balance resulting from the
liquidation thereof whenever, by reason of their conduct, or for
any other motive, the continuation as members of the owners of
such shares is not desirable.
This by-law is of course a patent nullity, since it is in direct conflict with the
latter part of section 187 of the Corporation Law, which expressly declares
that the board of directors shall not have the power to force the surrender
and withdrawal of unmatured stock except in case of liquidation of the
corporation or of forfeiture of the stock for delinquency. It is agreed that this
provision of the by-laws has never been enforced, and in fact no attempt has
ever been made by the board of directors to make use of the power therein
conferred. In November, 1923, the Acting Insular Treasurer addressed a
letter to El Hogar Filipino, calling attention to article 10 of its by-laws and
expressing the view that said article was invalid. It was therefore suggested
that the article in question should be eliminated from the by-laws. At the next
meeting of the board of directors the matter was called to their attention and
it was resolved to recommend to the shareholders that in their next annual
meeting the article in question be abrogated. It appears, however, that no
annual meeting of the shareholders called since that date has been attended
by a sufficient number of shareholders to constitute a quorum, with the result
that the provision referred to has no been eliminated from the by-laws, and it
still stands among the by-laws of the association, notwithstanding its patent
conflict with the law.
It is supposed, in the fourth cause of action, that the existence of this article
among the by-laws of the association is a misdemeanor on the part of the
respondent which justifies its dissolution. In this view we are unable to
concur. The obnoxious by-law, as it stands, is a mere nullity, and could not
be enforced even if the directors were to attempt to do so. There is no
provision of law making it a misdemeanor to incorporate an invalid provision
in the by-laws of a corporation; and if there were such, the hazards incident
to corporate effort would certainly be largely increased. There is no merit in
this cause of action.
Fifth cause of action. — In section 31 of the Corporation Law it is declared
that, "at all elections of directors there must be present, either in person or
by representative authorized to act by written proxy, the owners of the
majority of the subscribed capital stock entitled to vote. . . ." Conformably
with this requirement it is declared in article 61 of the by-laws of El Hogar
Filipino that, "the attendance in person or by proxy of shareholders owning
one-half plus one of the shareholders shall be necessary to constitute a
quorum for the election of directors. At the general annual meetings of the El
Hogar Filipino held in the years 1911 and 1912, there was a quorum of
shares present or represented at the meetings and directors were duly
elected accordingly. As the corporation has grown, however, it has been fond
increasingly difficult to get together a quorum of the shareholders, or their
proxies, at the annual meetings; and with the exception of the annual meeting
held in 1917, when a new directorate was elected, the meetings have failed
for lack of quorum. It has been foreseen by the officials in charge of the
respondent that this condition of affairs would lead to embarrassment, and a
special effort was made by the management to induce a sufficient number of
shareholders to attend the annual meeting for February, 1923. In addition to
the publication of notices in the newspapers, as required by the by-laws, a
letter of notification was sent to every shareholder at his last known address,
together with a blank form of proxy to be used in the event the shareholder
could not personally attend the meeting. Notwithstanding these special
efforts the meeting was attended only by shareholders, in person and by
proxy, representing 3,889 shares, out of a total of 106,491 then outstanding
and entitled to vote.
Owing to the failure of a quorum at most of the general meetings since the
respondent has been in existence, it has been the practice of the directors to
fill vacancies in the directorate by choosing suitable persons from among the
stockholders. This custom finds its sanction in article 71 of the by-laws, which
reads as follows:
ART. 71. The directors shall elect from among the shareholders
members to fill the vacancies that may occur in the board of
directors until the election at the general meeting.
The person thus chosen to fill vacancies in the directorate have, it is
admitted, uniformly been experienced and successful business and
professional men of means, enjoying earned incomes of from P12,000 to
P50,000 per annum, with an annual average of P30,000 in addition to such 1913
income as they derive from their properties. Moreover, it appears that several ............................. 15,479.29 27 573.30
of the individuals constituting the original directorate and persons chosen to .....
supply vacancies therein belong to prominent Filipino families, and that they
are more or less related to each other by blood or marriage. In addition to 1914
this it appears that it has been the policy of the directorate to keep thereon ............................. 19,164.72 27 709.80
some member or another of a single prominent American law firm in the city. .....

It is supposed in the statement of the fifth cause of action in the complaint 1915
that the failure of the corporation to hold annual meetings and the filling of ............................. 24,032.85 25 961.31
vacancies in the directorate in the manner described constitute .....
misdemeanors on the part of the respondent which justify the resumption of
the franchise by the Government and dissolution of the corporation; and in 1916
this connection it is charge that the board of directors of the respondent has ............................. 27,539.50 28 983.55
become a permanent and self perpetuating body composed of wealthy men .....
instead of wage earners and persons of moderate means. We are unable to
see the slightest merit in the charge. No fault can be imputed to the
corporation on account of the failure of the shareholders to attend the annual 1917
1,204.8
meetings; and their non-attendance at such meetings is doubtless to be ............................. 31,327.00 26
8
interpreted in part as expressing their satisfaction of the way in which things .....
have been conducted. Upon failure of a quorum at any annual meeting the
directorate naturally holds over and continues to function until another 1918
directorate is chosen and qualified. Unless the law or the charter of a 1,642.9
............................. 32,858.35 20
corporation expressly provides that an office shall become vacant at the 1
.....
expiration of the term of office for which the officer was elected, the general
rule is to allow the officer to holdover until his successor is duly qualified.
Mere failure of a corporation to elect officers does not terminate the terms of 1919
1,729.4
existing officers nor dissolve the corporation (Quitman Oil Company vs. ............................. 36,318.78 21
6
Peacock, 14 Ga. App., 550; Jenkins vs. Baxter, 160 Pa. State, 199; New .....
York B. & E. Ry. Co. vs. Motil, 81 Conn., 466; Hatch vs. Lucky Bill Mining
Company, 71 Pac., 865; Youree vs. Home Town Matual Ins. Company, 180 1920
2,268.4
Missouri, 153; Cassell vs. Lexington, H. and P. Turnpike Road Co., 10 Ky. L. ............................. 63,517.01 28
R., 486). The doctrine above stated finds expressions in article 66 of the by- 6
.....
laws of the respondent which declares in so many words that directors shall
hold office "for the term of one year on until their successors shall have been
1921
elected and taken possession of their offices." 1,472.6
............................. 36,815.33 25
1
.....
It result that the practice of the directorate of filling vacancies by the action
of the directors themselves is valid. Nor can any exception be taken to then 1922
personality of the individuals chosen by the directors to fill vacancies in the 1,725.3
............................. 43,133.73 25
body. Certainly it is no fair criticism to say that they have chosen competent 4
.....
businessmen of financial responsibility instead of electing poor persons to so
responsible a position. The possession of means does not disqualify a man
for filling positions of responsibility in corporate affairs. 1923
1,473.0
............................. 39,773.61 27
9
.....
Sixth cause of action. — Under the sixth cause of action it is alleged that the
directors of El Hogar Filipino, instead of serving without pay, or receiving 1924
nominal pay or a fixed salary, — as the complaint supposes would be proper, 1,486.6
............................. 38,651.92 26
— have been receiving large compensation, varying in amount from time to 1
.....
time, out of the profits of the respondent. The facts relating to this cause of
action are in substance these:
1925
1,373.8
............................. 35,719.27 26
1
Under section 92 of the by-laws of El Hogar Filipino 5 per centum of the net .....
profit shown by the annual balance sheet is distributed to the directors in
proportion to their attendance at meetings of the board. The compensation
paid to the directors from time to time since the organization was organized
It will be note that the compensation above indicated as accruing to the
in 1910 to the end of the year 1925, together with the number of meetings of
directorate as a whole has been divided among the members actually
the board held each year, is exhibited in the following table:
present at the different meetings. As a result of this practice, and the liberal
measure of compensation adopted, we find that the attendance of the
membership at the board meetings has been extraordinarily good. Thus,
Rate during the years 1920 to 1925, inclusive, when the board was composed of
Compensatio Number
per nine members, the attendance has regularly been eight meeting with the
n of
meeting exception of two years when the average attendance was seven. It is insisted
Year paid meeting
in the brief for the Attorney-General that the payment of the compensation
directors s
as a indicated is excessive and prejudicial to he interests of the shareholders at
as a whole held
whole large. For the respondent, attention is directed to the fact that the liberal
policy adopted by the association with respect to the compensation of the
1911 directors has had highly beneficial results, not only in securing a constant
P attendance on the part of the membership, but in obtaining their intelligent
............................. P 4,167.96 25
166.71 attention to the affairs of the association. Certainly, in this connection, the
.....
following words from the report of the government examiners for 1918 to the
Insular Treasurer contain matter worthy of consideration:
1912
............................. 10,511.87 29 362.47
..... The management of the association is entrusted to men of recognized ability
in financial affairs and it is believed that they have long foreseen all possible
future contingencies and that under such men the interests of the
stockholders are duly protected. The steps taken by the directorate to curtail
the influx of unnecessary capital into the association's coffers, as mentioned
above, reveals how the men at grasp the situation and to apply the necessary
remedy as the circumstances were found in the same excellent condition as
in the previous examination.
In so far as this court is concerned the question here before us is not one
concerning the propriety and wisdom of the measure of compensation
adopted by the respondent but rather the question of the validity of the
measure. Upon this point there can, it seems to us, be no difference of
intelligent opinion. The Corporation Law does not undertake to prescribe the
rate of compensation for the directors of corporations. The power to fixed the
compensation they shall receive, if any, is left to the corporation, to be
determined in its by-laws(Act No. 1459, sec. 21). Pursuant to this authority
the compensation for the directors of El Hogar Filipino has been fixed in
section 92 of its by-laws, as already stated. The justice and property of this
provision was a proper matter for the shareholders when the by-laws were
framed; and the circumstance that, with the growth of the corporation, the
amount paid as compensation to the directors has increased beyond what
would probably be necessary to secure adequate service from them is matter
that cannot be corrected in this action; nor can it properly be made a basis
for depriving the respondent of its franchise, or even for enjoining it from
compliance with the provisions of its own by-laws. If a mistake has been
made, or the rule adopted in the by-laws meeting to change the rule. The
remedy, if any, seems to lie rather in publicity and competition, rather than in
a court proceeding. The sixth cause of action is in our opinion without merit.
Seventh cause of action. — It appears that the promoter and organizer of El
Hogar Filipino was Mr. Antonio Melian, and in the early stages of the
organization of the association the board of directors authorized the
association to make a contract with him with regard to the services him
therefor. Pursuant to this authority the president of the corporation, on
January 11, 1911, entered into a written agreement with Mr. Melian, which is
reproduced in the agreed statement of facts and of which the important
clauses are these:
1. The corporation "El Hogar Filipino Sociedad Mutua de
Construccion y Prestamos," and on its behalf its president, Don
Antonio R. Roxas, hereby confers on Don Antonio Melian the
office of manager of said association for the period of one year
from the date of this contract.
2. Don Antonio Melian accepts said office and undertakes to
render the services thereto corresponding for the period of one
year, as prescribed by the by-laws of the corporation, without
salary.
3. Don Antonio Melian furthermore undertakes to pay for his own
account, all the expenses incurred in the organization of the
corporation.
4. Don Antonio Melian further undertakes to lend to the
corporation, without interest the sum of six thousand pesos
(P6,000), Philippine Currency, for the purpose of meeting the
expense of rent, office supplies, etcetera, until such time as the
association has sufficient funds of its own with which to return
this loan: Provided, nevertheless, That the maximum period
thereof shall not exceed three (3) years.
5. Don Antonio Melian undertakes that the capital of the
association shall amount to the sum of four hundred thousand
pesos (P400,000), Philippine currency, par value, during the first
year of its duration.
6. In compensation of the studies made and services rendered
by Don Antonio Melian for its organization, the expenses incurred
by him to that end, and in further consideration of the said loan
of six thousand pesos (P6,000), and of the services to be
rendered by him as manager, and of the obligation assumed by
him that the nominal value of the capital of the association shall
reach the sum of four hundred thousand pesos (P400,000)
during the first year of its duration, the corporation 'El Hogar
Filipino Sociedad Mutua de Construccion y Prestamos' hereby
grants him five per centum (5%) of the net profits to be earned
by it in each year during the period fixed for the duration of the
association by its articles of incorporation; Provided, that this
participation in the profits shall be transmitted to the heirs of
Señor Melian in the event of his death; And provided further, that
the performance of all the obligations assumed by Señor Melian
in favor of the association, in accordance with this contract, shall
and does constitute a condition precedent to the acquisition by
Señor Melian of the right to the said participation in the profits of
the association, unless the non-performance of such obligations
shall be due to a fortuitous event or force majeure.
In conformity with this agreement there was inserted in section 92 of the by-
laws of the association a provision recognizing the rights of Melian, as
founder, to 5 per centum of the net profits shown by the annual balance
sheet, payment of the same to be made to him or his heirs during the life of
the association. It is declared in said article that this portion of the earnings
of the association is conceded to him in compensation for the studies, work
and contributions made by him for the organization of El Hogar Filipino and
the performance on his part of the contract of January 11, 1911, above
quoted. During the whole life of the association, thus far, it has complied with
the obligations assumed by it in the contract above- mentioned; and during
the years 1911 to 1925, inclusive, it paid to him as founder's royalty the sum
of P459,011.19, in addition to compensation received from the association
by him in to remuneration of services to the association in various official
capacities.
As a seventh cause of action it is alleged in the complaint that this royalty of
the founder is "unconscionable, excessive and out of all proportion to the
services rendered, besides being contrary to and incompatible with the spirit
and purpose of building and loan associations." It is not alleged that the
making of this contract was beyond the powers of the association (ultra
vires); nor it alleged that it is vitiated by fraud of any kind in its procurement.
Nevertheless, it is pretended that in making and observing said contract the
respondent committed an offense requiring its dissolution, or, as is otherwise
suggested, that the association should be enjoined from performing the
agreement.
It is our opinion that this contention is entirely without merit. Stated in its true
simplicity, the primary question here is whether the making of a (possibly)
indiscreet contract is a capital offense in a corporation, — a question which
answers itself. No possible doubt exists as to the power of a corporation to
contract for services rendered and to be rendered by a promoter in
connection with organizing and maintaining the corporation. It is true that
contracts with promoters must be characterized by good faith; but could it be
said with certainty, in the light of facts existing at the time this contract was
made, that the compensation therein provided was excessive? If the amount
of the compensation now appears to be a subject of legitimate criticism, this
must be due to the extraordinary development of the association in recent
years.
If the Melian contract had been clearly ultra vires — which is not charged and
is certainly untrue — its continued performance might conceivably be
enjoined in such a proceeding as this; but if the defect from which it suffers
is mere matter for an action because Melian is not a party. It is rudimentary
in law that an action to annul a contract cannot be maintained without joining
both the contracting parties as defendants. Moreover, the proper party to
bring such an action is either the corporation itself, or some shareholder who
has an interest to protect.
The mere fact that the compensation paid under this contract is in excess of
what, in the full light of history, may be considered appropriate is not a proper
consideration for this court, and supplies no ground for interfering with its
performance. In the case of El Hogar Filipino vs. Rafferty (37 Phil., 995),
which was before this court nearly ten years ago, this court held that the El
Hogar Filipino is contract with Mr. Melian did not affect the association's legal
character. The inference is that the contract under consideration was then
considered binding, and it occurred to no one that it was invalid. It would be
a radical step indeed for a court to attempt to substitute its judgment for the
judgment of the contracting parties and to hold, as we are invited to hold
under this cause of action, that the making of such a contract as this removes
the respondent association from the pale of the law. The majority of the court
is of the opinion that our traditional respect for the sanctity of the contract
obligation should prevail over the radical and innovating tendencies which
find acceptance with some and which, if given full rein, would go far to sink
legitimate enterprise in the Islands into the pit of populism and bolshevism.
The seventh count is not sustainable.
Eight cause of action. — Under the fourth cause of action we had case where
the alleged ground for the revocation of the respondent's charter was based
upon the presence in the by-laws of article 10 that was found to be
inconsistent with the express provisions of law. Under the eight cause of
action the alleged ground for putting an end to the corporate life of the
respondent is found in the presence of other articles in the by-laws, namely,
articles 70 and 76, which are alleged to be unlawful but which, as will
presently be seen, are entirely valid. Article 70 of the by-laws in effect
requires that persons elected to the board of directors must be holders of
shares of the paid up value of P5,000 which shall be held as security may be
put up in the behalf of any director by some other holder of shares in the
amount stated. Article 76 of the by-laws declares that the directors waive
their right as shareholders to receive loans from the association.
It is asserted, under the eight cause of action, that article 70 is objectionable
in that, under the requirement for security, a poor member, or wage-earner,
cannot serve as director, irrespective of other qualifications and that as a
matter of fact only men of means actually sit on the board. Article 76 is
criticized on the ground that the provision requiring directors to renounce
their right to loans unreasonably limits their rights and privileges as members.
There is nothing of value in either of theses suggestions. Section 21 of the
Corporation Law expressly gives the power to the corporation to provide in
its by-laws for the qualifications of directors; and the requirement of security
from them for the proper discharge of the duties of their office, in the manner
prescribed in article 70, is highly prudent and in conformity with good
practice. Article 76, prohibiting directors from making loans to themselves, is
of course designed to prevent the possibility of the looting of the corporation
by unscrupulous directors. A more discreet provision to insert in the by-laws
of a building and loan association would be hard to imagine. Clearly, the
eighth cause of action cannot be sustained.
Ninth cause of action. — The specification under this head is in effect that
the respondent has abused its franchise in issuing "special" shares. The
issuance of these shares is allege to be illegal and inconsistent with the plan
and purposes of building and loan associations; and in particular, it is alleged
and inconsistent with the plan and purposes of building and loan
associations; and in particular, it is alleged that they are, in the main, held by
well-to-wage-earners for accumulating their modest savings for the building
of homes.
In the articles of incorporation we find the special shares described as
follows:
"Special" shares shall be issued upon the payment of 80 per cent
of their par value in cash, or in monthly dues of P10. The 20 per
cent remaining of the par value of such shares shall be
completed by the accumulation thereto of their proportionate part
of the profits of the corporation. At the end of each quarter the
holders of special shares shall be entitled to receive in cash such
part of the net profits of the corporation corresponding to the
amount on such date paid in by the holders of special shares, on
account thereof, as shall be determined by the directors, and at
the end of each year the full amount of the net profits available
for distribution corresponding to the special shares. The directors
shall apply such part as they deem advisable to the amortization
of the subscription to capital with respect to shares not fully paid
up, and the remainder of the profits, if any, corresponding to such
shares, shall be delivered to the holders thereof in accordance
with the provision of the by-laws.
The ground for supposing the issuance of the "special" shares to be unlawful
is that special shares are not mentioned in the Corporation Law as one of the
forms of security which may be issued by the association. In the agreed
statement of facts it is said that special shares are issued upon two plans.
By the second, the shareholder, upon subscribing, pays in cash P10 for each
share taken, and undertakes to pay P10 a month, as dues, until the total so
paid in amounts to P160 per share. On December 31, 1925, there were
outstanding 20,844 special shares of a total paid value (including
accumulations ) of P3,680,162.51. The practice of El Hogar Filipino, since
1915, has been to accumulate to each special share, at the end of the year,
one-tenth of the divident declared and to pay the remainder of the divident in
cash to the holders of shares. Since the same year dividend have been
declared on the special and common shares at the rate of 10 per centum per
annum. When the amount paid in upon any special share plus the
accumulated dividends accruing to it, amounts to the par value of the share
(P200), such share matures and ceases to participate further in the earning.
The amount of the par value of the share (P200) is then returned to the
shareholder and the share cancelled. Holders of special and ordinary shares
participate ratably in the dividends declared and distributed, the part
pertaining to each share being computed on the basis of the capital paid in,
plus the accumulated dividends pertaining to each share at the end of the
year. The total number of shares of El Hogar Filipino outstanding on
December 31, 1925, was 125,750, owned by 5,826 shareholders, and
dividend into classes as follows:
Preferred shares .................................. 1,503
Special shares ..................................... 20,884
Ordinary shares .................................. 103,363
The matter of the propriety of the issuance of special shares by El Hogar
Filipino has been before this court in two earlier cases, in both of which the
question has received the fullest consideration from this court. In El Hogar
Filipino vs. Rafferty (37 Phil., 995), it was insisted that the issuance of such
shares constituted a departure on the part of the association from the
principle of mutuality; and it was claimed by the Collector of Internal Revenue
that this rendered the association liable for the income tax to which other
corporate entities are subject. It was held that this contention was untenable
and that El Hogar Filipino was a legitimate building and loan association
notwithstanding the issuance of said shares. In Sevireno vs. El Hogar
Filipino (G. R. No. 24926),2 and the related cases of Gervasio Miraflores and
Gil Lopes against the same entity, it was asserted by the plaintiffs that the
emission of special shares deprived the herein responded of the privileges
and immunities of a building and loan association and that as a consequence
the loans that had been made to the plaintiffs in those cases were usurious.
Upon an elaborate review of the authorities, the court, though divided,
adhered to the principle announced in the earlier case and held that the
issuance of the special shares did not affect the respondent's character as a
building and loan association nor make its loans usurious. In view of the
lengthy discussion contained in the decisions above-mentioned, it would
appear to be an act of supererogation on our part to go over the same ground
again. The discussion will therefore not be repeated, and what is now to be
said should be considered supplemental thereto.
Upon examination of the nature of the special shares in the light of American
usage, it will be found that said shares are precisely the same kind of shares
that, in some American jurisdictions, are generally known as advance
payment shares; in if close attention be paid to the language used in the last
sentence of section 178 of the Corporation Law, it will be found that special
shares where evidently created for the purpose of meeting the condition
cause by the prepayment of dues that is there permitted. The language of
this provision is as follow "payment of dues or interest may be made in
advance, but the corporation shall not allow interest on such advance
payment at a greater rate than six per centum per annum nor for a longer
period than one year." In one sort of special shares the dues are prepaid to
the extent of P160 per share; in the other sort prepayment is made in the
amount of P10 per share, and the subscribers assume the obligation to pay
P10 monthly until P160 shall have been paid.
It will escape notice that the provision quoted say that interest shall not be
allowed on the advance payments at a greater rate than six per centum per
annum nor for a longer period than one year. The word "interest " as there
used must be taken in its true sense of compensation for the used of money
loaned, and it not must not be confused with the dues upon which it is
contemplated that the interest may be paid. Now, in the absence of any
showing to the contrary, we infer that no interest is ever paid by the
association in any amount for the advance payments made on these shares;
and the reason is to be found in the fact that the participation of the special
shares in the earnings of the corporation, in accordance with section 188 of
the Corporation Law, sufficiently compensates the shareholder for the
advance payments made by him; and no other incentive is necessary to
induce inventors to purchase the stock.
It will be observed that the final 20 per centum of the par value of each special
share is not paid for by the shareholder with funds out of the pocket. The
amount is satisfied by applying a portion of the shareholder's participation in
the annual earnings. But as the right of every shareholder to such
participation in the earnings is undeniable, the portion thus annually applied
is as much the property of the shareholder as if it were in fact taken out of
his pocket. It follows that the mission of the special shares does not involve
any violation of the principle that the shares must be sold at par.
From what has been said it will be seen that there is express authority, even
in the very letter of the law, for the emission of advance-payment or "special"
shares, and the argument that these shares are invalid is seen to be
baseless. In addition to this it is satisfactorily demonstrated in Severino vs.
El Hogar Filipino, supra, that even assuming that the statute has not
expressly authorized such shares, yet the association has implied authority
to issue them. The complaint consequently fails also as regards the stated in
the ninth cause of action.
Tenth cause of action. — Under this head of the complaint it is alleged that
the defendant is pursuing a policy of depreciating, at the rate of 10 per
centum per annum, the value of the real properties acquired by it at its sales;
and it is alleged that this rate is excessive. From the agreed statement it
appears that since its organization in 1910 El Hogar Filipino, prior to the end
of the year 1925, had made 1,373 loans to its shareholders secured by first
mortgages on real estate as well as by the pledge of the shares of the
borrowers. In the same period the association has purchased at foreclosure
sales the real estate constituting the security for 54 of the aforesaid loans. In
making these purchases the association has always bid the full amount due
to it from the debtor, after deducting the withdrawal value of the shares
pledged as collateral, with the result that in no case has the shareholder been
called upon to pay a deficiency judgement on foreclosure.
El Hogar Filipino places real estate so purchased in its inventory at actual
cost, as determined by the amount bid on foreclosure sale; and thereafter
until sold the book value of such real estate is depreciated at the rate fixed
by the directors in accordance with their judgment as to each parcel, the
annual average depreciation having varied from nothing to a maximum of
14.138 per cent. The sales thereof, but sales are made for the best prices
obtainable, whether greater or less than the book value.
It is alleged in the complaint that depreciation is charged by the association
at the rate of 10 per centum per annum. The agreed statement of facts on
this point shows that the annual average varies from nothing to a maximum
of something over 14 per centum. We are thus left in the dark as to the
precise depreciation allowed from year to year. It is not claimed for the
Government that the association is without power to allow some
depreciation; and it is quite clear that the board of directors possesses a
discretion in this matter. There is no positive provision of law prohibiting the
association from writing off a reasonable amount for depreciation on its
assets for the purpose of determining its real profits; and article 74 of its by-
laws expressly authorizes the board of directors to determine each year the
amount to be written down upon the expenses of installation and the property
of the corporation. There can be no question that the power to adopt such a
by-law is embraced within the power to make by-laws for the administration
of the corporate affairs of the association and for the management of its
business, as well as the care, control and disposition of its property (Act No.
1459, sec. 13 [7]). But the Attorney-General questions the exercise of the
direction confided to the board; and it is insisted that the excessive
depreciation of the property of the association is objectionable in several
respects, but mainly because it tends to increase unduly the reserves of the
association, thereby frustrating the right of the shareholders to participate
annually and equally in the earnings of the association.
This count for the complaint proceeds, in our opinion, upon an erroneous
notion as to what a court may do in determining the internal policy of a
business corporation. If the criticism contained in the brief of the Attorney-
General upon the practice of the respondent association with respect to
depreciation be well founded, the Legislature should supply the remedy by
defining the extent to which depreciation may be allowed by building and loan
associations. Certainly this court cannot undertake to control the discretion
of the board of directors of the association about an administrative matter as
to which they have legitimate power of action. The tenth cause of action is
therefore not well founded.
Eleventh and twelfth causes of action. — The same comment is appropriate
with respect to the eleventh and twelfth causes of action, which are treated
together in the briefs, and will be here combined. The specification in the
eleventh cause of action is that the respondent maintains excessive reserve
funds, and in the twelfth cause of action that the board of directors has settled
upon the unlawful policy of paying a straight annual dividend of 10 per
centum, regardless of losses suffered and profits made by the corporation
and in contravention of the requirements of section 188 of the Corporation
Law. The facts relating to these two counts in the complaint, as set forth in
the stipulation, are these:
In article 92 of the by-laws of El Hogar Filipino it is provided that 5 per centum
of the net profits earned each year, as shown by the annual balance sheet
shall be carried to a reserve fund. The fund so created is called the General
Reserve. Article 93 of the by-laws authorizes the directors to carry funds to
a special reserve, whenever in their judgment it is advisable to do so,
provided that the annual dividend in the year in which funds are carried to
special reserve exceeds 8 per centum. It appears to have been the policy of
the board of directors for several years past to place in the special reserve
any balance in the profit and loss account after the satisfaction of preferential
charges and the payment of a dividend of 10 per centum to all special and
ordinary shares (with accumulated dividends). As things stood in 1926 the
general reserve contained an amount equivalent to about 5 per centum of
the paid-in value of shared. This fund has never been drawn upon for the
purpose of maintaining the regular annual dividend; but recourse has been
had to the special reserve on three different occasions to make good the
amount necessary to pay dividends. It appears that in the last five years the
reserves have declined from something over 9 per cent to something over 7.
It is insisted in the brief of the Attorney-General that the maintenance of
reserve funds is unnecessary in the case of building and loan associations,
and at any rate the keeping of reserves is inconsistent with section 188 of
the Corporation Law. Moreover, it is said that the practice of the association
in declaring regularly a 10 per cent dividend is in effect a guaranty by the
association of a fixed dividend which is contrary to the intention of the statute.
Upon careful consideration of the questions involved we find no reason to
doubt the right of the respondent to maintain these reserves. It is true that
the corporation law does not expressly grant this power, but we think it is to
be implied. It is a fact of common observation that all commercial enterprises
encounter periods when earnings fall below the average, and the prudent
manager makes provision for such contingencies. To regard all surplus as
profit is to neglect one of the primary canons of good business practice.
Building and loan associations, though among the most solid of financial
institutions, are nevertheless subject to vicissitudes. Fluctuations in the
dividend rate are highly detrimental to any fiscal institutions, while uniformity
in the payments of dividends, continued over long periods, supplies the
surest foundations of public confidence.
The question now under consideration is not new in jurisprudence, for the
American courts have been called upon more than once to consider the
legality of the maintenance of reserves by institutions of this or similar
character.
In Greeff vs. Equitable Life Assurance Society, the court had under
consideration a charter provision of a life insurance company, organized on
the mutual plan, in its relation to the power of the company to provide
reserves. There the statute provided that "the officers of the company, within
sixty days from the expiration of the first five years, from December 31, 1859,
and within the first sixty days of every subsequent period of five years, shall
cause a balance to be struck of the affairs of the company, which shall exhibit
its assets and liabilities, both present and contingent, and also the net
surplus, after deducting a sufficient amount to cover all outstanding risks and
other obligations. Each policy holder shall be credited with an equitable share
of the said surplus."
The court said:
No prudent person would be inclined to take a policy in a
company which had so improvidently conducted its affairs that it
only retained a fund barely sufficient to pay its present liabilities,
and, therefore, was in a condition where any change by the
reduction of interest upon, or depreciation in, the value of its
securities, or any increase of mortality, would render it insolvent
and subject to be placed in the hands of a receiver. The evident
purpose of the provisions of the defendant's charter and policy
relating to this subject was to vest in the directors of the
corporation a discretion to determine the proportion of its surplus
which should be dividend each year.
In a friendly suit tried in a circuit court of Wisconsin in 1916, entitled Boheman
Bldg. and Loan Association vs. Knolt, the court, in commenting on the nature
of these reserves, said:
The apparent function of this fund is to insure the stockholders
against losses. Its purpose is not unlike that of the various forms
of insurance now in such common use. This contribution is as
legitimate an item of expense as are the premiums paid on any
insurance policy. (See Clarks and Chase, Building and Loan
Association, footnote, page 344.)
In commenting on the necessity of such funds, Sundheim says:
It is optional with the association whether to maintain such a fund
or not, but justice and good business policy seem to require it.
The retiring stockholder must be paid the value of his stock in
cash and leave for those remaining a large number of securities
and perhaps some real estate purchased to protect the
associations interest. How much will be realized on these
 securities, or real estate, no human foresight can tell. Further, the
realizing on these securities may entail considerable litigation
and expense. There are many other contingencies which might
cause a shrinkage in the association's assets, such as defective
titles, undisclosed defalcations on the part of an officer, a
miscalculation of assets and liabilities, and many other errors and
omissions which must always be reckoned within the conduct of
human affairs.
The contingent fund is merely insurance against possible loss.
That losses may occur from time to time seems almost inevitable
and it is, therefore, inequitable that the remaining stockholders
should be compelled to accept all securities at par, so, to say the
least, the maintenance of this fund is justified. The association
teaches the duty of providing for the proverbial rainy day. Why
should it not provide for the hour of adversity? The reserve fund
has protected the maturing or withdrawing member during the
period of his membership. In case of loss it has or would have
reimbursed him and, at all times, it has protected him and given
strength and standing to the association. Losses may occur, after
his membership ceases, that arose from some mistake or
mismanagement committed during the period of his membership,
and in fairness and equity the remaining members should have
some protection against this. (Sundheim, Law of Building and
Loan Association, sec. 53.)
The government insists, we thing, upon an interpretation of section 188 of
the Corporation Law that is altogether too strict and literal. From the fact that
the statute provides that profits and losses shall be annually apportioned
among the shareholders it is argued that all earnings should be distributed
without carrying anything to the reserve. But it will be noted that it is provided
in the same section that the profits and losses shall be determined by the
board of directors: and this means that they shall exercise the usual
discretion of good businessmen in allocating a portion of the annual profits
to purposes needful to the welfare of the association. The law contemplates
the distribution of earnings and losses after other legitimate obligations have
been met.
Our conclusion is that the respondent has the power to maintain the reserves
criticized in the eleventh and twelfth counts of the complaint; and at any rate,
if it be supposed that the reserves referred to have become excessive, the
remedy is in the hands of the Legislature. It is no proper function of the court
to arrogate to itself the control of administrative matters which have been
confided to the discretion of the board of directors. The causes of action
under discussion must be pronounced to be without merit.
Thirteenth cause of action. — The specification under this head is, in effect,
that the respondent association has made loans which, to the knowledge of
the associations officers were intended to be used by the borrowers for other
purposes than the building of homes. In this connection it appears that,
though loans have been made by the association exclusively to its
shareholders, no attempt has been made by it to control the borrowers with
respect to the use made of the borrowed funds, the association being content
to see that the security given for the loan in each case is sufficient. On
December 31, 1925, the respondent had five hundred forty-four loans
outstanding secured by mortgages upon real estate and by the pledge of the
borrowers' shares in an amount sufficient at maturity to amortize the loans.
With respect to the nature of the real estate upon which these loans were
made it appears that three hundred fifty-one loans were secured by
mortgages upon city residences, seven by mortgages upon commercial
building in cities, and three mortgages upon unimproved city lots. At the
same time one hundred eighty-three of the loans were secured by mortgages
upon groves, sugar land, and rice land, with a total area of about 7,558
hectares. From information gathered by the association from voluntary
statements of borrowers given at the time of application with respect to the
use intended to be made of the borrowed funds, it appears that the amount
of P693,200 was borrowed to redeem real property from existing mortgages
or pactos de retro, P280,800 to buy real estate, P449,100 to erect buildings,
P24,000 to improve and repair buildings, P1,480,900 for agricultural
purposes, while the amount of P5,763,700 was borrowed for purposes not
disclosed.
Upon these facts an elaborate argument has been constructed in behalf of
the plaintiff to the effect that in making loans for other purposes than the
building of residential houses the association has illegally departed from its
character and made itself amenable to the penalty of dissolution. Aside from
being directly opposed to the decision of this court in Lopez and Javelona vs.
El Hogar Filipino and Registrar of Deeds of Occidental Negros (47 Phil.,
249), this contention finds no substantial support in the prevailing decisions
made in American courts; and our attention has not been directed to a single
case wherein the dissolution of a building and loan association has been
decreed in a quo warranto proceeding because the association allowed its
borrowers to use the loans for other purposes than the acquisition of homes.
The case principally relied upon for the Government appears to be Pfeister
vs. Wheeling Building Association (19 W. Va., 676, 716),which involved the
question whether a building and loan association could recover the full
amount of a note given to it by a member and secured by a mortgage from a
stranger. At the time the case arose there was a statute in force in the State
of West Virginia expressly forbidding building and loan associations to use
or direct their funds for or to any other object or purpose than the buying of
lots or houses or in building and repairing houses, and it was declared that
in case the funds should be improperly directed to other objects, the
offending association should forfeit all rights and privileges as a corporation.
Under the statute so worded the court held that the plaintiff could only recover
the amount actually advanced by it with lawful interest and fines, without
premium; and judgment was given accordingly. The suggestion in that case
that the result would have been the same even in the absence of statute was
mere dictum and is not supported by respectable authority.
Reliance is also placed in the plaintiff's brief upon McCauley vs. Building &
Saving Association. The statute in force in the State of Tennessee at the time
this action arose provided that all loans should be made to the members of
the association at open stated meetings and that the money should be lent
to the highest bidder. Inconsistently with this provision, there was inserted in
the by-laws of the association a provision to the effect that no loan should be
made at a greater premium than 30 per cent, nor at a less premium than 29
7/8 per cent. It was held that this by-law made free and open competition
impossible and that it in effect established a fixed premium. It was
accordingly held, in the case cited, that an association could not recover such
part of the loan as had been applied by it to the satisfaction of a premium of
30 per centum.
We have no criticism to make upon the result reached in either of the two
decisions cited, but it is apparent that much of the discussion contained in
the opinions in those cases does not reflect the doctrine now prevailing in the
United States; and much less are those decisions applicable in this
jurisdiction. There is no statute here expressly declaring that loans may be
made by these associations solely for the purpose of building homes. On the
contrary, the building of homes is mentioned in section 171 of the
Corporation Law as only one among several ends which building and loan
associations are designed to promote. Furthermore, section 181 of the
Corporation Law expressly authorities the Board of directors of the
association from time to time to fix the premium to be charged.
In the brief of the plaintiff a number of excerpts from textbooks and decisions
have been collated in which the idea is developed that the primary design of
building and loan associations should be to help poor people to procure
homes of their own. This beneficent end is undoubtedly served by these
associations, and it is not to be denied that they have been generally fostered
with this end in view. But in this jurisdiction at least the lawmaker has taken
care not to limit the activities of building and loan associations in an exclusive
manner, and the exercise of the broader powers must in the end approve
itself to the business community. Judging from the past history of these
institutions it can be truly said that they have done more to encourage thrift,
economy and saving among the people at large than any other institution of
modern times, not excepting even the saving banks. In this connection Mr.
Sundheim, in a late treatise upon the subject of the law of building and loan
associations, makes the following comment:
They have grown to such an extent in recent years that they no
longer restrict their money to the home buyer, but loan their
money to the mere investor or dealer in real estate. They are the
holder of large mortgages secured upon farms, factories and
other business properties and rows of stores and dwellings. This
is not an abuse of their powers or departure from their main
purposes, but only a natural and proper expansion along healthy
and legitimate lines. (Sundheim, Building and Loan Associations,
sec. 7.)
Speaking of the purpose for which loans may be made, the same author
adds:
Loans are made for the purpose of purchasing a homestead, or
other real estate, or for any lawful purpose or business, but there
is no duty or obligation of the association to inquire for what
purpose the loan is obtained, or to require any stipulation from
 the borrower as to what use he will make of the money, or in any
manner to supervise or control its disbursement. (Sundheim,
Building and Loan Association, sec. 111.)
In Lopez and Javelona vs. El Hogar Filipino and Registrar of Deeds of
Occidental Negros, this court had before it the question whether a loan made
by the respondent association upon the security of a mortgage upon
agricultural land, — where the loan was doubtless used for agricultural
purposes, — was usurious or not; and the case turned upon the point
whether, in making such loans, the association had violated the law and
departed from its fundamental purposes. The conclusion of the court was
that the loan was valid and could be lawfully enforced by a nonjudicial
foreclosure in conformity with the terms of the contract between the
association and the borrowing member. We now find no reason to depart
from the conclusion reached in that case, and it is unnecessary to repeat
what was then said. The thirteenth cause of action must therefore be
pronounced unfounded.
Fourteenth cause of action. — The specification under this head is that the
loans made by the defendant for purposes other than building or acquiring
homes have been extended in extremely large amounts and to wealthy
persons and large companies. In this connection attention is directed to eight
loans made at different times in the last several years to different persons or
entities, ranging in amounts from P120,000 to P390,000 and to two large
loans made to the Roxas Estate and to the Pacific Warehouse Company in
the amounts of P1,122,000 and P2,320,000, respectively. In connection with
the larger of the two after this loan was made the available funds of El Hogar
Filipino were reduced to the point that the association was compelled to take
advantage of certain provisions of its by-laws authorizing the postponement
of the payment of claims resulting from withdrawals, whereas previously the
association had always settled these claims promptly from current funds. At
no time was there apparently any delay in the payment of matured shares;
but in four or five cases there was as much as ten months delay in the
payment of withdrawal applications.
There is little that can be said upon the legal aspects of this cause of action.
In so far, as it relates to the purposes for which these loans were made, the
matter is covered by what was said above with reference to the thirteenth
cause of action; and in so far as it relates to the personality of the borrowers,
the question belongs more directly to the discussion under the sixteenth
cause of action, which will be found below. The point, then, which remains
for consideration here is whether it is a suicidal act on the part of a building
and loan association to make loans in large amount. If the loans which are
here the subject of criticism had been made upon inadequate security,
especially in case of the largest two, the consequences certainly would have
been disastrous to the association in the extreme; but no such fact is alleged;
and it is to be assumed that none of the ten borrowers have defaulted in their
contracts.
Now, it must be admitted that two of these loans at least are of a very large
size, considering the average range of financial transaction in this country;
and the making of the largest loan was followed, as we have already see,
with unpleasant consequences to the association in dealing with current
claims. Nevertheless the agreed statement of facts shoes that all of the loan
referred to are only ten out of a total of five hundred forty-four outstanding on
December 31, 1925; and the average of all the loans taken together is
modest enough. It appears that the chief examiner of banks and corporations
of the Philippine Treasury, after his examination of El Hogar Filipino at the
end of the year 1925, made a report concerning this association as of
January 31, 1926, in which he criticized the Pacific Warehouse Company
loan as being so large that it temporarily crippled the lending power of the
association for some time. This criticism was apparently justified as proper
comment on the activities of the association; but the question for use here to
decide is whether the making of this and the other large loans constitutes
such a misuser of the franchise as would justify us in depriving the
association of its corporate life. This question appears to us to be so simple
as almost to answer itself. The law states no limit with respect to the size of
the loans to be made by the association. That matter is confided to the
discretion of the board of directors; and this court cannot arrogate to itself a
control over the discretion of the chosen officials of the company. If it should
be thought wise in the future to put a limit upon the amount of loans to be
made to a single person or entity, resort should be had to the Legislature; it
is not a matter amenable to judicial control. The fourteenth cause of action is
therefore obviously without merit.
Fifteenth cause of action. — The criticism here comes back to the supposed
misdemeanor of the respondent in maintaining its reserve funds, — a matter
already discussed under the eleventh and twelfth causes of action. Under
the fifteenth cause of action it is claimed that upon the expiration of the
franchise of the association through the effluxion of time, or earlier liquidation
of its business, the accumulated reserves and other properties will accrue to
the founder, or his heirs, and the then directors of the corporation and to
those persons who may at that time to be holders of the ordinary and special
shares of the corporation. In this connection we note that article 95 of the by-
laws reads as follows:
ART. 95. The funds obtained by the liquidation of the association
shall be applied in the first place to the repayment of shares and
the balance, if any, shall be distribute in accordance with the
system established for the distribution of annual profits.
It will be noted that the cause of action with which we are now concerned is
not directed to any positive misdemeanor supposed to have been committed
by the association. It has exclusive relation to what may happen some thirty-
five years hence when the franchise expires, supposing of course that the
corporation should not be reorganized and continued after that date. There
is nothing in article 95 of the by-laws which is, in our opinion, subject to
criticism. The real point of criticism is that upon the final liquidation of the
corporation years hence there may be in existence a reserve fund out of all
proportion to the requirements that may then fall upon it in the liquidation of
the company. It seems to us that this is matter that may be left to the prevision
of the directors or to legislative action if it should be deemed expedient to
require the gradual suppression of the reserve funds as the time for
dissolution approaches. It is no matter for judicial interference, and much less
could the resumption of the franchise on this ground be justified. There is no
merit in the fifteenth cause of action.
Sixteenth cause of action. — This part of the complaint assigns as cause of
action that various loans now outstanding have been made by the
respondent to corporations and partnerships, and that these entities have in
some instances subscribed to shares in the respondent for the sole purpose
of obtaining such loans. In this connection it appears from the stipulation of
facts that of the 5,826 shareholders of El Hogar Filipino, which composed its
membership on December 31, 1925, twenty-eight are juridical entities,
comprising sixteen corporations and fourteen partnerships; while of the five
hundred forty-four loans of the association outstanding on the same date,
nine had been made to corporations an five to partnerships. It is also
admitted that some of these juridical entities became shareholders merely
for the purpose of qualifying themselves to take loans from the association,
and the same is said with respect to many natural persons who have taken
shares in the association. Nothing is said in the agreed statement of facts on
the point whether the corporations and partnerships that have taken loans
from the respondent are qualified by law governing their own organization to
enter into these contracts with the respondent.
In section 173 of the Corporation Law it is declared that "any person" may
become a stockholder in building and loan associations. The word "person"
appears to be here used in its general sense, and there is nothing in the
context to indicate that the expression is used in the restricted sense of both
natural and artificial persons, as indicated in section 2 of the Administrative
Code. We would not say that the word "person" or persons," is to be taken in
this broad sense in every part of the Corporation Law. For instance, it would
seem reasonable to say that the incorporators of a corporation ought to be
natural persons, although in section 6 it is said that five or more "persons",
although in section 6 it is said that five or more "persons," not exceeding
fifteen, may form a private corporation. But the context there, as well as the
common sense of the situation, suggests that natural persons are meant.
When it is said, however, in section 173, that "any person" may become a
stockholder in a building and loan association, no reason is seen why the
phrase may not be taken in its proper broad sense of either a natural or
artificial person. At any rate the question whether these loans and the
attendant subscriptions were properly made involves a consideration of the
power of the subscribing corporations and partnerships to own the stock and
take the loans; and it is not alleged in the complaint that they were without
power in the premises. Of course the mere motive with which subscriptions
are made, whether to qualify the stockholders to take a loan or for some other
reason, is of no moment in determining whether the subscribers were
competent to make the contracts. The result is that we find nothing in the
allegations of the sixteenth cause of action, or in the facts developed in
connection therewith, that would justify us in granting the relief.
Seventeenth cause of action. — Under the seventeenth cause of action, it is
charged that in disposing of real estates purchased by it in the collection of
its loans, the defendant has no various occasions sold some of the said real
estate on credit, transferring the title thereto to the purchaser; that the
properties sold are then mortgaged to the defendant to secure the payment
of the purchase price, said amount being considered as a loan, and carried
as such in the books of the defendant, and that several such obligations are
still outstanding. It is further charged that the persons and entities to which
said properties are sold under the condition charged are not members or
shareholders nor are they made members or shareholders of the defendant.

This part of the complaint is based upon a mere technicality of bookkeeping.

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

In conclusion, the respondent is enjoined in the future from administering real

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

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

 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-43682 March 31, 1938
In Re Liquidation of Mercantile Bank of China.
TAN TIONG TICK, claimant-appellant,
vs.
AMERICAN APOTHECARIES CO., ET AL., claimants-appellees.
Cirilo Lim and Antonio Gonzalez for appellant.
Eusebio Orense and Carmelino G. Alvendia for appellees Chinese Grocers
Asso., et al.
Marcelo Nubla for appellees Ang Cheng Lian, et al.
IMPERIAL, J.:
In the proceedings for the liquidation of the Mercantile Bank of China, the
appellant presented a written claim alleging: that when this bank ceased to
operate on September 19, 1931, his current account in said bank showed a
balance of P9,657.50 in his favor; that on the same date his savings account
in the said bank also showed a balance in his favor of P20,000 plus interest
then due amounting to P194.78; that on the other hand, he owed the bank in
the amount of P13,262.58, the amount of the trust receipts which he signed
because of his withdrawal from the bank of certain merchandise consigned
to him without paying the drafts drawn upon him by the remittors thereof; that
the credits thus described should be set off against each other according to
law, and on such set off being made it appeared that he was still the creditor
of the bank in the sum of P16,589.70. And he asked that the court order the
Bank Commissioner to pay him the aforesaid balance and that the same be
declared as preferred credit. The claim was referred to the commissioner
appointed by the court, who at the same time acted as referee, and this
officer recommended that the balance claimed be paid without interest and
as an ordinary credit. The court approved the recommendation and entered
judgment in the accordance therewith. The claimant took an appeal.
In his report the commissioner classified the claims presented under the
following six groups: "(First) Current accounts, savings and fixed deposits.
(Second) Checks or drafts sold by the Mercantile Bank of China and not paid
by the correspondents or banks against which they were drawn. (Third)
Checks or drafts issued by the Mercantile Bank of China in payment or
reimbursement of drafts or goods sent to it for collection by banks and foreign
commercial houses against merchants or commercial entities of Manila.
(Fourth) Drafts for collection received by the Mercantile Bank of China to be
collected from merchants and commercial entities in Manila and which were
pending collection on the date of the suspension of payments. (Fifth) Claims
of depositors who are at the same time debtor of the Mercantile Bank of
China.(Sixth Various claims." And referring to the claims of the appellant, he
states:
Mr. Tan Tiong Tick claims from the Mercantile Bank of China the amount of
P 27,597.80, the total amount of the following sums which he has in his favor
in said bank including the corresponding interest:
Balance on the current account . . . . . . . . . . . P7,390.11
Balance of savings account No. 2266 . . . . . 20,000.00
Total . . . . . . . . . . . . . . . . . . 27,390.11
Adding to this total the interest also claimed by Mr. Tan Tiong Tick, that is,
P194.78 on the saving account and P12.91 on the current account, the
amount claimed makes a total of P27,597.80.
Notwithstanding the fact that the Bank Commissioner found the claim in
accordance with the books of the Mercantile Bank of China, he declined to
issue the corresponding certificate of proof of claim because the said
claimant has pending in the said bank obligations for accepting draft
amounting to a total of $6 631.29.
At the hearing of this claim, the claimant admitted such pending obligations,
alleging at the same time that to guarantee the payment of drafts accepted
by him, he pledged his bank book No. 2266, which also answered for the
payment of any credit which the said bank may extend to him.
In Exhibit A presented by the claimant as evidence, consisting of a letter
dated November 4, 1931 addressed by Mr. H. J. Belden to the then Bank
Commissioner, Mr. Leo. H. Martin it appears that the said savings account
was constituted for the sole purpose of securing the payment of drafts
against the claimants, the bill of lading of where delivered to him upon trust-
receipts and that according to the records of that bank Mr. Tan Tiong Tick
did not obtain any other accomodation from the bank except the trust-
receipts.
RECOMMENDATION
Having established the existence of such deposits in the name of the bank
alleged by the Bank Commissioner, for the securities of which he constituted
the savings deposit in the amount of P20,000, it is recommended that from
this amount there be deducted the amount of the obligation of P13,778.90
which the claimant acknowledge in favor of the Mercantile Bank of China,
and that the difference, plus the other current account deposit of P7,390.11,
be considered as ordinary credits subject to the equal division of the funds
of the said bank.
As to the interest on said deposits also claimed by Mr. Tan Tiong Tick, the
rejection thereof is recommended in view of the fact that the Bank
Commissioner has not credited any interest to the current and savings
account of the Merchantile Bank of China, and would be unfair that interest,
not credited to the others, be allowed to this claimant.
It will be noted that in the report of the commissioner the credit of the claimant
for the balance of his deposit on current account has been reduced to
P7,390.11, instead of P9,657.50 alleged in his claim, the total balance
recommended in favor of the appellant being P13,611.21, without including
interest, instead of P16,589.70. In his brief the appellant admits the figures
appearing in the report, with the exception of the interest on which we shall
presently dwell.
1. Resolving the claims under the first group the recommendation of this
official to the effect that they declared ordinary credits only, and approved
them as preferred credits. However, in considering the other claims among
them that of that of the appellant, classified under the fifth group, the court
approved the recommendation of the commissioner that they be declared
ordinary credits; in otherwords, the court considered and declared the claim
of the appellant as an ordinary credit just because the latter is at the same
time a debtor of the bank, notwithstanding the fact that his claim is of the
same kind as those classified under the first group, inasmuch as they are
also current account and savings deposits. To this part of the decision is
addressed the appellant's first assignment of error.
In truth if the current account, savings, and fixed deposits are preferred
credits for the reason states by the court in its decision, we see no reason
why the preference should disappear when the depositors are at the same
time debtors of the bank less than their credits. If the ground to declare them
preferred credits is sound, the balances resulting after the set should likewise
be preferred, unless there be a law providing that a set off, when it take place,
produces such an effect, a law which does not exist as far as we know.
But we are of the opinion, for the reason presently to be stated, that current
account and savings deposits are not preferred credits in the cases, like the
present, involving the insolvency and liquidation of a bank, where there are
various creditors and it becomes necessary to ascertain the preference of
various credits.
The court held that these deposits should be governed by the Civil Code,
and applying articles 1758 and 1868 of the said Code, ruled that the so-called
irregular deposits being still in vogue, as Manresa, the commentator,
maintain and as held by this court in the case Rogers vs. Smith, Bell &
Co. (10 Phil., 319), the former are preferred credits because partaking of the
nature of the irregular deposits.
In our opinion, these deposits are essentially merchantile contracts and
should, therefore, be governed by the provisions of the Code of Commerce,
pursuant to its article 2 reading:
ART. 2 Commercial transactions, be they performed by
merchants or not, whether they are specified in this Code or not,
shall be governed by the provisions contained in the same; in the
absence of such provisions, by the commercial customs
generally observed in each place; and in the absence of such
provisions, by the commercial customs generally observed in
each place; and in the absence of both, by those of the common
law.
Commercial transactions shall be considered those enumerated
in this Code and any others of a similar character.
There is cited in support of the application of the Civil Code to these deposits
article 310 of the Code of Commerce providing:
ART. 310. Notwithstanding the provisions of the foregoing
articles, deposits made banks, with general warehouse, with loan
or any other associations, shall be governed in the place by the
by-laws of the same in the second by the provisions of this Code,
and finally by the rules of common law, which are applicable to
all deposits.
But apparently there was a failure to consider that, according to the order
established by the article, the Civil Code or the common law is mentioned
after Code of Commerce, which means that the provisions of the latter Code
should first be applied before resorting to those of the Civil Code which are
supplementary in character.
The Code of Commerce contains express provisions regulating deposits of
the nature under consideration, and they are articles 303 to 310. The first
and the second to the last of the said articles are as follows:
ART. 303. In order that a deposit may be considered commercial,
it is necessary —
1. That the depositary, at least, be a merchant.
2. That the things deposited be commercial objects.
3. That the deposit constitute in itself a commercial transaction,
or be made by reason or as a consequently of commercial
transaction.
ART. 309. Whatever, with the consent of the depositor, the
depositary disposes of the articles on deposit either for himself
or for his business, or for transactions intrusted to him by the
former, the rights and obligations of the depositary and of the
depositor shall cease, and the rules and provisions applicable to
the commercial loans, commissions, or contract which took the
place of the deposit shall be observed.
In accordance with article 309, the so-called current account and savings
deposits have lost the character of deposits properly so-called, and are
converted into simple commercial loans, because the bank disposed of the
funds deposited by the claimant for its ordinary transactions and for the
banking business in which it was engaged. That the bank had the authority
of the claimant to make use of the money deposited on current and savings
account is deducible from the fact that the bank has been paying interest on
both deposits, and the claimant himself asks that he be allowed interest up
to the time when the bank ceased its operations. Moreover, according to
section 125 of the Corporation Law and 9 of Act No. 3154, said bank is
authorized to make use of the current account, savings, and fixed deposits
provided it retains in its treasury a certain percentage of the amounts of said
deposits. Said sections read:
SEC. 125. Every such commercial banking corporation shall at
all times have on hand in lawful money of the Philippines Islands
or of the United States, an amount equal to at least eighteen per
centum of the aggregate amount of its deposits in current which
are payable on demand and of its fixed deposits coming due
within thirty days. Such commercial banking corporations shall
also at all times maintain equal in amount to at least five per
centum of its total savings deposits. The said reserve may be
maintained in the form of lawful money of the Philippines Islands
of the United States, or in bonds issued or guaranteed by the
Government of the Philippines Islands or to the United States. . .
.
The percentage of reserve to deposits in the case of the
Philippine National Bank and Bank of the Philippine Islands is
hereby fixed at eighteen per centum of demand deposits and
fixed deposits payable within thirty days and five per centum of
savings deposits, in the same manner as is prescribed in this
section for commercial banking corporations in general, which
reserve against savings deposit may consists of Philippine
Government of United States Government Bonds.
SEC. 9. Every bank organized under this Act shall at all times
have on hand, in lawful money of the Philippine Islands of the
United States, an amount equal to at least twenty per centum of
the aggregate amount of its deposits. The Treasury certificates
authorized by Act Numbered Three thousand and fifty-eight, and
the term lawful money of the United States shall include gold and
silver certificates of the United States and bank notes issued by
the Federal Reserve Bank.
Therefore, the bank, without the necessity of the claimant consent, was by
law authorized to dispose of the deposits, subject to the limitations indicated.
We, therefore, conclude that the law applicable to the appellant's claim is the
Code of Commerce and that his current and savings account have converted
into simple commercial loans.
2. The next point to decide is the applicable law, if any, to determine the
preference of the appellant's credits, considering that there happens to be
other creditors. Section V of Title I Book IV of the Code of Commerce
contains provisions relative to the rights of creditors in case of bankruptcy
and their respective gradations, but these provisions have been repealed by
section 524 of the Code of Civil Procedure reading as follows:
SEC. 524. No new proceedings to be instituted. — No new
bankrupt proceedings shall be instituted until a new bankruptcy
law shall come into force in the Islands. All existing laws and
other relating to bankruptcy and proceedings therein are hereby
repealed: Provided, That nothing in this section shall be deemed
in any manner to affect pending litigation in bankruptcy
proceedings.
The Philippine Legislature subsequently enacted Act No. 1956, also known
as the Insolvency Law, which took effect on May 20, 1909, containing
provisions regarding preference of credits; but its section 52 provides that all
the provisions of the law shall not apply to corporations engaged principally
in the banking business, and among them should be understood included the
Merchantile Bank of China. Said section provide:
SEC. 48. Merchantile, effect, and any other kind of property
found among the property of the insolvent, the ownership of
which has not been conveyed to him by a legal and irrevocable
title, shall be considered to be the property of other persons shall
be placed at the disposal of its lawful owners on order of the court
made at the hearing in section forty-three or at any ordinary
hearing, if the assignee or any creditor whose right in the estate
of the insolvent has been established shall petition in writing for
such hearing and the court in its discretion shall so order, the
creditors, however, retaining such rights in said property as
belong to the insolvent, and subrogating him whenever they shall
have with all obligations concerning said property.
The following shall be included in this section:
1. Drowy property inestimado and such
property estimado which may remain in the
possession of the husband where the receipt thereof
is matter of record in a public instrument registered
 under the provisions of section twenty-one and
twenty-seven of the Code of Commerce in force.
2. Paraphernal property which the wife may have
acquired by inheritance, legacy, or donation whether
remaining in the form in which it was received or
subrogated or invested in other property, provided
that such investment or subrogation has been
registered in the registro mercantile in accordance
with the provisions of the sections of the Code of
Commerce mentioned in the next preceding
paragraph.
3. Property and effects deposited with the bankrupt,
or administered, least, rented, or held in usufruct by
him.
4. Merchandise in the possession of the bankrupt, on
commission, for purchase, sale, forwarding, or
delivery.
5. Bills of exchange or promissory notes without
indorsement or other expression transferring
ownership remitted to the insolvent for collection and
all other acquired by him for the account of another
person, drawn or indorsed to the remitter direct.
6. Money remitted to the insolvent, otherwise than on
current account, and which is in his possession for
delivery to a definite person in the name and for the
account of the remitter or for the settlement of claims
which are to be met at the insolvent domicile.
7. Amounts due the insolvent for sales of
merchandise on commission, and bills of exchange
and promissory notes delivered therefrom in his
possession, even when the same are not made
payable to the owner of the merchandise sold,
provided it is proven that the obligation to the
insolvent is derived therefrom and that said bills of
exchange and promissory notes were in the
possession of the insolvent for account of the owner
of the merchandise to be cashed and remitted, in due
time, to the said owners; all of which shall be a legal
presumption when the amount involved in any such
shall not been credited on the book of both the owner
of the merchantile and of the insolvent.
8. Merchandise bought on credit by the insolvent so
long as the actual thereof has not been made to him
at his store at any other place stipulated for such
delivery, and merchandise the bills of lading or
shipping receipts of which have been sent him after
the same has been loaded by order of the purchaser
and for his account and risk.
In all cases arising under this paragraph assignees
may retain the merchandise so purchased or claim it
for the creditors by paying the price thereof to the
vendor.
9. Goods or chattels wrongfully taken, converted, or
withheld by the insolvent if still existing in his
possession or the amount of the value thereof.
SEC. 49. All creditors, except those whose debts are duly proved
and allowed shall be entitled to share in the property and estate
pro rata, after the property belonging to other persons referred to
in the last preceding section has been deducted therefrom,
without priority or preference whatever: Provided, That any debt
proved by any person liable as bail, surety, guarantor, or
otherwise, for the debtor, shall not be paid to the person so
providing the same until satisfactory evidence shall be produced
of the payment of such debt by such person so liable, and the
share to which such debt would be entitled may be paid into
court, or otherwise held, for the benefit of the party entitled
thereto, as the court may direct.
SEC. 50. The following are preferred claims which shall be paid
in the order named:
(a) Necessary funeral expenses of the debtor, or of
his wife, or children who are under their parental
authority and have no property of their own, when
approved by the court;
(b) Debts due for personal services rendered the
insolvent by employees, laborers, or domestic
servants immediately preceding the commencement
of proceedings in insolvency;
(c) Compensation due the laborers or their
dependents under the provisions of Act Numbered
Thirty-four hundred and twenty-eight, known as the
Workmen's Compensation Act, as amended by Act
Numbered Thirty-eight hundred and twelve, and
under the provisions of Act Numbered Eighteen
hundred and seventy-four known as the Employers'
Liability Act, and of the other laws providing for
payment of indemnity for damages in cases of labor
accidents;
(d) Legal expenses, and expenses incurred in the
administration of the insolvent estate for the common
interest of the creditors, when properly authorized
and approved by the court;
(e) Debts, taxes and assessments due the Insular
Government;
(f ) Debts, taxes and assessments due to any
province of provinces of the Philippines Islands;
(g) Debts, taxes and assessment due to any
municipality or municipalities of the Philippine
Islands;
All other creditors shall be paid pro rata. (As amended by Act No.
3962.)
ART. 52 . . . The provisions of this Act shall not apply to
corporations engaged principally in the banking business, or to
any other corporation as to which there is any special provisions
of law for its liquidation in case of insolvency.
It appears that even after the enactment of the Insolvency Law there was no
law in this jurisdiction governing the order or preference of credits in case of
insolvency and liquidation of a bank. But the Philippine Legislature
subsequently enacted Act No. 3519, amended various sections of the
Revised Administrative Code, which took effect on February 20, 1929, and
section 1641 of this latter Code. as amended by said Act provides:
SEC. 1641. Distribution of assets. — In the case of the liquidation
of a bank or banking institution, after payment of the costs of the
proceeding, including reasonable expenses, commissions and
fees of the Bank Commissioner, to be allowed by the court, the
Bank Commissioner shall pay the debts of the institution, under
of the court in the order of their legal priority.
From this section 1641 we deduce that the intention of the Philippine
Legislature, in providing that the Bank Commissioner shall pay the debts of
the company by virtue of an order of the court in the order of their priority,
was to enforce the provisions of section 48, 49 and 50 of the Insolvency Law
in the sense that they are made applicable to cases of insolvency or
bankruptcy and liquidation of banks. No other deduction can be made from
the phrase "in the order of their legal priority" employed by the law, for there
being no law establishing any priority in the order of payment of credits, the
legislature could not reasonably refer to any legislation upon the subject,
unless the interpretation above stated is accepted.

Examining now the claims of the appellant, it appears that none of them falls
under any of the cases specified by section 48, 49 and 50 of the Insolvency
Law; wherefore, we conclude that the appellant's claims, consisting of his
current and savings account, are not preferred credits.

3. The commissioner set off the claims of the appellant against what the bank
had against him. The court approved this set off over the objection of the
appellant. The appellees contend that the set off does not lie in this case
because otherwise it would prejudice them and the other creditors in the
liquidation. We hold that the court's ruling is not error. "It may be stated as a
general rule that when a depositor is indebted to a bank, and the debts are
mutual — that is, between the same parties and in the same right — the bank
may apply the deposit, or such portion thereof as may be necessary, to the
payment of the debt due it by the depositor, provided there is no express
agreement to the contrary and the deposit is not specially applicable to some
other particular purposes." (7 Am. Jur., par. 629, p.455; United States vs.
Butterworth-Judson Corp., 267 U.S., 387; National Bank vs. Morgan, 207
Ala.., 65; Bank of Guntersville vs. Crayter, 199 Ala., 699; Tatum vs.
Commercial Bank & T. Co., 193 Ala., 120; Desha Bank & T. Co. vs. Quilling,
118 Ark., 114; Holloway vs. First Nat. Bank, 45 Idaho, 746; Wyman vs. Ft.
Dearborn Nat Bank, 181 Ill., 279; Niblack vs. Park Nat. Bank, 169 Ill., 517;
First Nat Bank vs. Stapf., 165 Ind., 162; Bedford Bank vs. Acoam, 125 Ind.,
584.) The situation referred to by the appellees is inevitable because section
1639 of the Revised Administrative Code, as amended by Act No. 3519,
provides that the Bank Commissioner shall reduce the assets of the bank
into cash and this cannot be done without first liquidating individually the
accounts of the debtors of said bank, and in making this individual liquidation
the debtors are entitled to set off, by way of compensation, their claims
against the bank.

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

5. The last assignment of error has to do with the denial by the court of the
claimant's motion for new trial. No new arguments have been made in its
support and it appears that the assigned error was inserted as a mere
corollary of the preceding ones.

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

Avanceña, C.J., Villa-Real, Abad Santos, Diaz and Horrilleno, JJ., concur.
 Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 89252 May 24, 1993
RAUL SESBREÑO, petitioner,
vs.
HON. COURT OF APPEALS, DELTA MOTORS CORPORATION AND
PILIPINAS BANK, respondents.
Salva, Villanueva & Associates for Delta Motors Corporation.
Reyes, Salazar & Associates for Pilipinas Bank.
FELICIANO, J.:
On 9 February 1981, petitioner Raul Sesbreño made a money market
placement in the amount of P300,000.00 with the Philippine Underwriters
Finance Corporation ("Philfinance"), Cebu Branch; the placement, with a
term of thirty-two (32) days, would mature on 13 March 1981, Philfinance,
also on 9 February 1981, issued the following documents to petitioner:
(a) the Certificate of Confirmation of Sale, "without
recourse," No. 20496 of one (1) Delta Motors
Corporation Promissory Note ("DMC PN") No. 2731
for a term of 32 days at 17.0% per annum;
(b) the Certificate of securities Delivery Receipt No.
16587 indicating the sale of DMC PN No. 2731 to
petitioner, with the notation that the said security was
in custodianship of Pilipinas Bank, as per
Denominated Custodian Receipt ("DCR") No. 10805
dated 9 February 1981; and
(c) post-dated checks payable on 13 March 1981
(i.e., the maturity date of petitioner's investment), with
petitioner as payee, Philfinance as drawer, and
Insular Bank of Asia and America as drawee, in the
total amount of P304,533.33.
On 13 March 1981, petitioner sought to encash the postdated checks issued
by Philfinance. However, the checks were dishonored for having been drawn
against insufficient funds.
On 26 March 1981, Philfinance delivered to petitioner the DCR No. 10805
issued by private respondent Pilipinas Bank ("Pilipinas"). It reads as follows:
PILIPINAS BANK
Makati Stock Exchange Bldg.,
Ayala Avenue, Makati,
Metro Manila
February 9, 1981
———————
VALUE DATE
TO Raul Sesbreño
April 6, 1981
————————
MATURITY DATE
NO. 10805
DENOMINATED CUSTODIAN RECEIPT
This confirms that as a duly Custodian Bank, and
upon instruction of PHILIPPINE UNDERWRITES
FINANCE CORPORATION, we have in our custody
the following securities to you [sic] the extent herein
indicated.
SERIAL MAT. FACE ISSUED REGISTERED AMOUNT
NUMBER DATE VALUE BY HOLDER PAYEE
2731 4-6-81 2,300,833.34 DMC PHIL. 307,933.33
UNDERWRITERS
FINANCE CORP.
We further certify that these securities may be
inspected by you or your duly authorized
representative at any time during regular banking
hours.
Upon your written instructions we shall undertake
physical delivery of the above securities fully
assigned to you should this Denominated
Custodianship Receipt remain outstanding in your
favor thirty (30) days after its maturity.
PILIPINAS BANK
(By Elizabeth De Villa
Illegible Signature)
On 2 April 1981, petitioner approached Ms. Elizabeth de Villa of private
respondent Pilipinas, Makati Branch, and handed her a demand letter
informing the bank that his placement with Philfinance in the amount
reflected in the DCR No. 10805 had remained unpaid and outstanding, and
that he in effect was asking for the physical delivery of the underlying
promissory note. Petitioner then examined the original of the DMC PN No.
2731 and found: that the security had been issued on 10 April 1980; that it
would mature on 6 April 1981; that it had a face value of P2,300,833.33, with
the Philfinance as "payee" and private respondent Delta Motors Corporation
("Delta") as "maker;" and that on face of the promissory note was stamped
"NON NEGOTIABLE." Pilipinas did not deliver the Note, nor any certificate
of participation in respect thereof, to petitioner.
Petitioner later made similar demand letters, dated 3 July 1981 and 3 August
1981,2 again asking private respondent Pilipinas for physical delivery of the
original of DMC PN No. 2731. Pilipinas allegedly referred all of petitioner's
demand letters to Philfinance for written instructions, as has been
supposedly agreed upon in "Securities Custodianship Agreement" between
Pilipinas and Philfinance. Philfinance did not provide the appropriate
instructions; Pilipinas never released DMC PN No. 2731, nor any other
instrument in respect thereof, to petitioner.
Petitioner also made a written demand on 14 July 19813 upon private
respondent Delta for the partial satisfaction of DMC PN No. 2731, explaining
that Philfinance, as payee thereof, had assigned to him said Note to the
extent of P307,933.33. Delta, however, denied any liability to petitioner on
the promissory note, and explained in turn that it had previously agreed with
Philfinance to offset its DMC PN No. 2731 (along with DMC PN No. 2730)
against Philfinance PN No. 143-A issued in favor of Delta.
In the meantime, Philfinance, on 18 June 1981, was placed under the joint
management of the Securities and exchange commission ("SEC") and the
Central Bank. Pilipinas delivered to the SEC DMC PN No. 2731, which to
date apparently remains in the custody of the SEC.4
As petitioner had failed to collect his investment and interest thereon, he filed
on 28 September 1982 an action for damages with the Regional Trial Court
("RTC") of Cebu City, Branch 21, against private respondents Delta and
Pilipinas.5The trial court, in a decision dated 5 August 1987, dismissed the
complaint and counterclaims for lack of merit and for lack of cause of action,
with costs against petitioner.
Petitioner appealed to respondent Court of Appeals in C.A.-G.R. CV No.
15195. In a Decision dated 21 March 1989, the Court of Appeals denied the
appeal and held:6
Be that as it may, from the evidence on record, if
there is anyone that appears liable for the travails of
plaintiff-appellant, it is Philfinance. As correctly
observed by the trial court:
This act of Philfinance in
accepting the investment of
plaintiff and charging it
against DMC PN No. 2731
when its entire face value
was already obligated or
earmarked for set-off or
compensation is difficult to
comprehend and may have
been motivated with bad
faith. Philfinance, therefore,
is solely and legally obligated
to return the investment of
plaintiff, together with its
earnings, and to answer all
the damages plaintiff has
suffered incident thereto.
Unfortunately for plaintiff,
Philfinance was not
impleaded as one of the
defendants in this case at
bar; hence, this Court is
without jurisdiction
pronounce judgement
against it. (p. 11, Decision)
WHEREFORE, finding no reversible error in the
decision appealed from, the same is hereby
affirmed in toto. Cost against plaintiff-appellant.
Petitioner moved for reconsideration of the above Decision, without success.
Hence, this Petition for Review on Certiorari.
After consideration of the allegations contained and issues raised in the
pleadings, the Court resolved to give due course to the petition and required
the parties to file their respective memoranda.7
Petitioner reiterates the assignment of errors he directed at the trial court
decision, and contends that respondent court of Appeals gravely erred: (i) in
concluding that he cannot recover from private respondent Delta his
assigned portion of DMC PN No. 2731; (ii) in failing to hold private
respondent Pilipinas solidarily liable on the DMC PN No. 2731 in view of the
provisions stipulated in DCR No. 10805 issued in favor r of petitioner, and
(iii) in refusing to pierce the veil of corporate entity between Philfinance, and
private respondents Delta and Pilipinas, considering that the three (3) entities
belong to the "Silverio Group of Companies" under the leadership of Mr.
Ricardo Silverio, Sr.8
There are at least two (2) sets of relationships which we need to address:
firstly, the relationship of petitioner vis-a-vis Delta; secondly, the relationship
of petitioner in respect of Pilipinas. Actually, of course, there is a third
relationship that is of critical importance: the relationship of petitioner and
Philfinance. However, since Philfinance has not been impleaded in this case,
neither the trial court nor the Court of Appeals acquired jurisdiction over the
person of Philfinance. It is, consequently, not necessary for present purposes
to deal with this third relationship, except to the extent it necessarily impinges
upon or intersects the first and second relationships.
I.
We consider first the relationship between petitioner and Delta.
The Court of appeals in effect held that petitioner acquired no rights vis-a-
vis Delta in respect of the Delta promissory note (DMC PN No. 2731) which
Philfinance sold "without recourse" to petitioner, to the extent of
P304,533.33. The Court of Appeals said on this point:
Nor could plaintiff-appellant have acquired any right
over DMC PN No. 2731 as the same is "non-
negotiable" as stamped on its face (Exhibit "6"),
negotiation being defined as the transfer of an
instrument from one person to another so as to
constitute the transferee the holder of the instrument
(Sec. 30, Negotiable Instruments Law). A person not
a holder cannot sue on the instrument in his own
name and cannot demand or receive payment
(Section 51, id.)9
Petitioner admits that DMC PN No. 2731 was non-negotiable but contends
that the Note had been validly transferred, in part to him by assignment and
that as a result of such transfer, Delta as debtor-maker of the Note, was
obligated to pay petitioner the portion of that Note assigned to him by the
payee Philfinance.
Delta, however, disputes petitioner's contention and argues:
(1) that DMC PN No. 2731 was not intended to be
negotiated or otherwise transferred by Philfinance as
manifested by the word "non-negotiable" stamp
across the face of the Note10 and because maker
Delta and payee Philfinance intended that this Note
would be offset against the outstanding obligation of
Philfinance represented by Philfinance PN No. 143-
A issued to Delta as payee;
to
(2) that the assignment of DMC PN No. 2731 by
Philfinance was without Delta's consent, if not
against its instructions; and
(3) assuming (arguendo only) that the partial
assignment in favor of petitioner was valid, petitioner
took the Note subject to the defenses available to
Delta, in particular, the offsetting of DMC PN No.
2731 against Philfinance PN No. 143-A.11
We consider Delta's arguments seriatim.
Firstly, it is important to bear in mind that the negotiation of a negotiable
instrument must be distinguished from the assignment or transfer of an
instrument whether that be negotiable or non-negotiable. Only an instrument
qualifying as a negotiable instrument under the relevant statute may
be negotiated either by indorsement thereof coupled with delivery, or by
delivery alone where the negotiable instrument is in bearer form. A
negotiable instrument may, however, instead of being negotiated, also
be assigned or transferred. The legal consequences of negotiation as
distinguished from assignment of a negotiable instrument are, of course,
different. A non-negotiable instrument may, obviously, not be negotiated; but
it may be assigned or transferred, absent an express prohibition against
assignment or transfer written in the face of the instrument:
The words "not negotiable," stamped on the face of
the bill of lading, did not destroy its assignability, but
the sole effect was to exempt the bill from the
statutory provisions relative thereto, and a bill,
though not negotiable, may be transferred by
assignment; the assignee taking subject to the
equities between the original parties.12 (Emphasis
added)
DMC PN No. 2731, while marked "non-negotiable," was not at the same time
stamped "non-transferable" or "non-assignable." It contained no stipulation
which prohibited Philfinance from assigning or transferring, in whole or in
part, that Note.
Delta adduced the "Letter of Agreement" which it had entered into with
Philfinance and which should be quoted in full:
April 10, 1980
 Philippine Underwriters Finance Corp.
Benavidez St., Makati,
Metro Manila.
Attention: Mr. Alfredo O. Banaria
SVP-Treasurer
GENTLEMEN:
This refers to our outstanding placement of
P4,601,666.67 as evidenced by your Promissory
Note No. 143-A, dated April 10, 1980, to mature on
April 6, 1981.
As agreed upon, we enclose our non-negotiable
Promissory Note No. 2730 and 2731 for
P2,000,000.00 each, dated April 10, 1980, to be
offsetted [sic] against your PN No. 143-A upon co-
terminal maturity.
Please deliver the proceeds of our PNs to our
representative, Mr. Eric Castillo.
Very Truly Yours,
(Sgd.)
Florencio B. Biagan
Senior Vice President13
We find nothing in his "Letter of Agreement" which can be reasonably
construed as a prohibition upon Philfinance assigning or transferring all or
part of DMC PN No. 2731, before the maturity thereof. It is scarcely
necessary to add that, even had this "Letter of Agreement" set forth an
explicit prohibition of transfer upon Philfinance, such a prohibition cannot be
invoked against an assignee or transferee of the Note who parted with
valuable consideration in good faith and without notice of such prohibition. It
is not disputed that petitioner was such an assignee or transferee. Our
conclusion on this point is reinforced by the fact that what Philfinance and
Delta were doing by their exchange of their promissory notes was this: Delta
invested, by making a money market placement with Philfinance,
approximately P4,600,000.00 on 10 April 1980; but promptly, on the same
day, borrowed back the bulk of that placement, i.e., P4,000,000.00, by
issuing its two (2) promissory notes: DMC PN No. 2730 and DMC PN No.
2731, both also dated 10 April 1980. Thus, Philfinance was left with not
P4,600,000.00 but only P600,000.00 in cash and the two (2) Delta
promissory notes.
Apropos Delta's complaint that the partial assignment by Philfinance of DMC
PN No. 2731 had been effected without the consent of Delta, we note that
such consent was not necessary for the validity and enforceability of the
assignment in favor of petitioner.14 Delta's argument that Philfinance's sale
or assignment of part of its rights to DMC PN No. 2731 constituted
conventional subrogation, which required its (Delta's) consent, is quite
mistaken. Conventional subrogation, which in the first place is never lightly
inferred,15 must be clearly established by the unequivocal terms of the
substituting obligation or by the evident incompatibility of the new and old
obligations on every point.16 Nothing of the sort is present in the instant case.
It is in fact difficult to be impressed with Delta's complaint, since it released
its DMC PN No. 2731 to Philfinance, an entity engaged in the business of
buying and selling debt instruments and other securities, and more generally,
in money market transactions. In Perez v. Court of Appeals,17 the Court,
speaking through Mme. Justice Herrera, made the following important
statement:
There is another aspect to this case. What is involved
here is a money market transaction. As defined by
Lawrence Smith "the money market is a market
dealing in standardized short-term credit instruments
(involving large amounts) where lenders and
borrowers do not deal directly with each other but
through a middle manor a dealer in the open market."
It involves "commercial papers" which are
instruments "evidencing indebtness of any person or
entity. . ., which are issued, endorsed, sold or
transferred or in any manner conveyed to another
person or entity, with or without recourse". The
fundamental function of the money market device in
its operation is to match and bring together in a most
impersonal manner both the "fund users" and the
"fund suppliers." The money market is an
"impersonal market", free from personal
considerations. "The market mechanism is intended
to provide quick mobility of money and securities."
The impersonal character of the money market
device overlooks the individuals or entities
concerned. The issuer of a commercial paper in the
money market necessarily knows in advance that it
would be expenditiously transacted and transferred
to any investor/lender without need of notice to said
issuer. In practice, no notification is given to the
borrower or issuer of commercial paper of the sale or
transfer to the investor.
xxx xxx xxx
There is need to individuate a money market
transaction, a relatively novel institution in the
Philippine commercial scene. It has been intended to
facilitate the flow and acquisition of capital on an
impersonal basis. And as specifically required by
Presidential Decree No. 678, the investing public
must be given adequate and effective protection in
availing of the credit of a borrower in the commercial
paper market.18(Citations omitted; emphasis
supplied)
We turn to Delta's arguments concerning alleged compensation or offsetting
between DMC PN No. 2731 and Philfinance PN No. 143-A. It is important to
note that at the time Philfinance sold part of its rights under DMC PN No.
2731 to petitioner on 9 February 1981, no compensation had as yet taken
place and indeed none could have taken place. The essential requirements
of compensation are listed in the Civil Code as follows:
Art. 1279. In order that compensation may be proper,
it is necessary:
(1) That each one of the obligors be bound
principally, and that he be at the same time a
principal creditor of the other;
(2) That both debts consists in a sum of money, or if
the things due are consumable, they be of the same
kind, and also of the same quality if the latter has
been stated;
(3) That the two debts are due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention
or controversy, commenced by third persons and
communicated in due time to the debtor. (Emphasis
supplied)
On 9 February 1981, neither DMC PN No. 2731 nor Philfinance PN No. 143-
A was due. This was explicitly recognized by Delta in its 10 April 1980 "Letter
of Agreement" with Philfinance, where Delta acknowledged that the relevant
promissory notes were "to be offsetted (sic) against [Philfinance] PN No. 143-
A upon co-terminal maturity."
As noted, the assignment to petitioner was made on 9 February 1981 or from
forty-nine (49) days before the "co-terminal maturity" date, that is to say,
before any compensation had taken place. Further, the assignment to
petitioner would have prevented compensation had taken place between
Philfinance and Delta, to the extent of P304,533.33, because upon execution
of the assignment in favor of petitioner, Philfinance and Delta would have
ceased to be creditors and debtors of each other in their own right to the
extent of the amount assigned by Philfinance to petitioner. Thus, we
conclude that the assignment effected by Philfinance in favor of petitioner
was a valid one and that petitioner accordingly became owner of DMC PN
No. 2731 to the extent of the portion thereof assigned to him.
The record shows, however, that petitioner notified Delta of the fact of the
assignment to him only on 14 July 1981, 19 that is, after the maturity not only
of the money market placement made by petitioner but also of both DMC PN
No. 2731 and Philfinance PN No. 143-A. In other words, petitioner notified
Delta of his rights as assignee after compensation had taken place by
operation of law because the offsetting instruments had both reached
maturity. It is a firmly settled doctrine that the rights of an assignee are not
any greater that the rights of the assignor, since the assignee is merely
substituted in the place of the assignor 20 and that the assignee acquires his
rights subject to the equities — i.e., the defenses — which the debtor could
have set up against the original assignor before notice of the assignment was
given to the debtor. Article 1285 of the Civil Code provides that:
Art. 1285. The debtor who has consented to the
assignment of rights made by a creditor in favor of a
third person, cannot set up against the assignee the
compensation which would pertain to him against the
assignor, unless the assignor was notified by the
debtor at the time he gave his consent, that he
reserved his right to the compensation.
If the creditor communicated the cession to him but
the debtor did not consent thereto, the latter may set
up the compensation of debts previous to the
cession, but not of subsequent ones.
If the assignment is made without the knowledge of
the debtor, he may set up the compensation of all
credits prior to the same and also later ones until he
had knowledge of the assignment. (Emphasis
supplied)
Article 1626 of the same code states that: "the debtor who, before having
knowledge of the assignment, pays his creditor shall be released from the
obligation." In Sison v. Yap-Tico,21 the Court explained that:
[n]o man is bound to remain a debtor; he may pay to
him with whom he contacted to pay; and if he pay
before notice that his debt has been assigned, the
law holds him exonerated, for the reason that it is the
duty of the person who has acquired a title by transfer
to demand payment of the debt, to give his debt or
notice.22
At the time that Delta was first put to notice of the assignment in petitioner's
favor on 14 July 1981, DMC PN No. 2731 had already been discharged by
compensation. Since the assignor Philfinance could not have then compelled
payment anew by Delta of DMC PN No. 2731, petitioner, as assignee of
Philfinance, is similarly disabled from collecting from Delta the portion of the
Note assigned to him.
It bears some emphasis that petitioner could have notified Delta of the
assignment or sale was effected on 9 February 1981. He could have notified
Delta as soon as his money market placement matured on 13 March 1981
without payment thereof being made by Philfinance; at that time,
compensation had yet to set in and discharge DMC PN No. 2731. Again
petitioner could have notified Delta on 26 March 1981 when petitioner
received from Philfinance the Denominated Custodianship Receipt ("DCR")
No. 10805 issued by private respondent Pilipinas in favor of petitioner.
Petitioner could, in fine, have notified Delta at any time before the maturity
date of DMC PN No. 2731. Because petitioner failed to do so, and because
the record is bare of any indication that Philfinance had itself notified Delta
of the assignment to petitioner, the Court is compelled to uphold the defense
of compensation raised by private respondent Delta. Of course, Philfinance
remains liable to petitioner under the terms of the assignment made by
Philfinance to petitioner.
II.
We turn now to the relationship between petitioner and private respondent
Pilipinas. Petitioner contends that Pilipinas became solidarily liable with
Philfinance and Delta when Pilipinas issued DCR No. 10805 with the
following words:
Upon your written instruction, we [Pilipinas] shall
undertake physical delivery of the above
securities fully assigned to you —.23
The Court is not persuaded. We find nothing in the DCR that establishes an
obligation on the part of Pilipinas to pay petitioner the amount of P307,933.33
nor any assumption of liability in solidum with Philfinance and Delta under
DMC PN No. 2731. We read the DCR as a confirmation on the part of
Pilipinas that:
(1) it has in its custody, as duly constituted custodian
bank, DMC PN No. 2731 of a certain face value, to
mature on 6 April 1981 and payable to the order of
Philfinance;
(2) Pilipinas was, from and after said date of the
assignment by Philfinance to petitioner (9 February
1981), holding that Note on behalf and for the benefit
of petitioner, at least to the extent it had been
assigned to petitioner by payee Philfinance;24
(3) petitioner may inspect the Note either "personally
or by authorized representative", at any time during
regular bank hours; and
(4) upon written instructions of petitioner, Pilipinas
would physically deliver the DMC PN No. 2731 (or a
participation therein to the extent of
P307,933.33) "should this Denominated
Custodianship receipt remain outstanding in
[petitioner's] favor thirty (30) days after its maturity."
Thus, we find nothing written in printers ink on the DCR which could
reasonably be read as converting Pilipinas into an obligor under the terms of
DMC PN No. 2731 assigned to petitioner, either upon maturity thereof or any
other time. We note that both in his complaint and in his testimony before the
trial court, petitioner referred merely to the obligation of private respondent
Pilipinas to effect the physical delivery to him of DMC PN No.
2731.25 Accordingly, petitioner's theory that Pilipinas had assumed a solidary
obligation to pay the amount represented by a portion of the Note assigned
to him by Philfinance, appears to be a new theory constructed only after the
trial court had ruled against him. The solidary liability that petitioner seeks to
impute Pilipinas cannot, however, be lightly inferred. Under article 1207 of
the Civil Code, "there is a solidary liability only when the law or the nature of
the obligation requires solidarity," The record here exhibits no express
assumption of solidary liability vis-a-vis petitioner, on the part of Pilipinas.
Petitioner has not pointed to us to any law which imposed such liability upon
Pilipinas nor has petitioner argued that the very nature of the custodianship
assumed by private respondent Pilipinas necessarily implies solidary liability
under the securities, custody of which was taken by Pilipinas. Accordingly,
we are unable to hold Pilipinas solidarily liable with Philfinance and private
respondent Delta under DMC PN No. 2731.
We do not, however, mean to suggest that Pilipinas has no responsibility and
liability in respect of petitioner under the terms of the DCR. To the contrary,
we find, after prolonged analysis and deliberation, that private respondent
Pilipinas had breached its undertaking under the DCR to petitioner Sesbreño.
We believe and so hold that a contract of deposit was constituted by the act
of Philfinance in designating Pilipinas as custodian or depositary bank. The
depositor was initially Philfinance; the obligation of the depository was owed,
however, to petitioner Sesbreño as beneficiary of the custodianship or
depository agreement. We do not consider that this is a simple case of a
stipulation pour autri. The custodianship or depositary agreement was
established as an integral part of the money market transaction entered into
by petitioner with Philfinance. Petitioner bought a portion of DMC PN No.
2731; Philfinance as assignor-vendor deposited that Note with Pilipinas in
order that the thing sold would be placed outside the control of the vendor.
Indeed, the constituting of the depositary or custodianship agreement was
equivalent to constructive delivery of the Note (to the extent it had been sold
or assigned to petitioner) to petitioner. It will be seen that custodianship
agreements are designed to facilitate transactions in the money market by
providing a basis for confidence on the part of the investors or placers that
the instruments bought by them are effectively taken out of the pocket, as it
were, of the vendors and placed safely beyond their reach, that those
instruments will be there available to the placers of funds should they have
need of them. The depositary in a contract of deposit is obliged to return the
security or the thing deposited upon demand of the depositor (or, in the
presented case, of the beneficiary) of the contract, even though a term for
such return may have been established in the said contract.26 Accordingly,
any stipulation in the contract of deposit or custodianship that runs counter
to the fundamental purpose of that agreement or which was not brought to
the notice of and accepted by the placer-beneficiary, cannot be enforced as
against such beneficiary-placer.
We believe that the position taken above is supported by considerations of
public policy. If there is any party that needs the equalizing protection of the
law in money market transactions, it is the members of the general public
whom place their savings in such market for the purpose of generating
interest revenues.27 The custodian bank, if it is not related either in terms of
equity ownership or management control to the borrower of the funds, or the
commercial paper dealer, is normally a preferred or traditional banker of such
borrower or dealer (here, Philfinance). The custodian bank would have every
incentive to protect the interest of its client the borrower or dealer as against
the placer of funds. The providers of such funds must be safeguarded from
the impact of stipulations privately made between the borrowers or dealers
and the custodian banks, and disclosed to fund-providers only after trouble
has erupted.
affairs of the other two (2) were administered and managed for the benefit of
one. There is simply not enough evidence of record to justify disregarding
the separate corporate personalities of delta and Pilipinas and to hold them
liable for any assumed or undetermined liability of Philfinance to petitioner.28
WHEREFORE, for all the foregoing, the Decision and Resolution of the Court
of Appeals in C.A.-G.R. CV No. 15195 dated 21 march 1989 and 17 July
1989, respectively, are hereby MODIFIED and SET ASIDE, to the extent that
such Decision and Resolution had dismissed petitioner's complaint against
Pilipinas Bank. Private respondent Pilipinas bank is hereby ORDERED to
indemnify petitioner for damages in the amount of P304,533.33, plus legal
interest thereon at the rate of six percent (6%) per annum counted from 2
April 1981. As so modified, the Decision and Resolution of the Court of
Appeals are hereby AFFIRMED. No pronouncement as to costs.
SO ORDERED.

In the case at bar, the custodian-depositary bank Pilipinas refused to deliver

the security deposited with it when petitioner first demanded physical delivery
thereof on 2 April 1981. We must again note, in this connection, that on 2
April 1981, DMC PN No. 2731 had not yet matured and therefore,
compensation or offsetting against Philfinance PN No. 143-A had not yet
taken place. Instead of complying with the demand of the petitioner, Pilipinas
purported to require and await the instructions of Philfinance, in obvious
contravention of its undertaking under the DCR to effect physical delivery of
the Note upon receipt of "written instructions" from petitioner Sesbreño. The
ostensible term written into the DCR (i.e., "should this [DCR] remain
outstanding in your favor thirty [30] days after its maturity") was not a defense
against petitioner's demand for physical surrender of the Note on at least
three grounds: firstly, such term was never brought to the attention of
petitioner Sesbreño at the time the money market placement with Philfinance
was made; secondly, such term runs counter to the very purpose of the
custodianship or depositary agreement as an integral part of a money market
transaction; and thirdly, it is inconsistent with the provisions of Article 1988
of the Civil Code noted above. Indeed, in principle, petitioner became entitled
to demand physical delivery of the Note held by Pilipinas as soon as
petitioner's money market placement matured on 13 March 1981 without
payment from Philfinance.

We conclude, therefore, that private respondent Pilipinas must respond to

petitioner for damages sustained by arising out of its breach of duty. By failing
to deliver the Note to the petitioner as depositor-beneficiary of the thing
deposited, Pilipinas effectively and unlawfully deprived petitioner of the Note
deposited with it. Whether or not Pilipinas itself benefitted from such
conversion or unlawful deprivation inflicted upon petitioner, is of no moment
for present purposes. Prima facie, the damages suffered by petitioner
consisted of P304,533.33, the portion of the DMC PN No. 2731 assigned to
petitioner but lost by him by reason of discharge of the Note by
compensation, plus legal interest of six percent (6%)per annum containing
from 14 March 1981.

The conclusion we have reached is, of course, without prejudice to such right
of reimbursement as Pilipinas may have vis-a-vis Philfinance.

III.

The third principal contention of petitioner — that Philfinance and private

respondents Delta and Pilipinas should be treated as one corporate entity —
need not detain us for long.

In the first place, as already noted, jurisdiction over the person of Philfinance
was never acquired either by the trial court nor by the respondent Court of
Appeals. Petitioner similarly did not seek to implead Philfinance in the
Petition before us.

Secondly, it is not disputed that Philfinance and private respondents Delta

and Pilipinas have been organized as separate corporate entities. Petitioner
asks us to pierce their separate corporate entities, but has been able only to
cite the presence of a common Director — Mr. Ricardo Silverio, Sr., sitting
on the Board of Directors of all three (3) companies. Petitioner has neither
alleged nor proved that one or another of the three (3) concededly related
companies used the other two (2) as mere alter egos or that the corporate
G.R. No. 121413 January 29, 2001
PHILIPPINE COMMERCIAL INTERNATIONAL BANK (formerly
INSULAR BANK OF ASIA AND AMERICA),petitioner,
vs.
COURT OF APPEALS and FORD PHILIPPINES, INC. and CITIBANK,
N.A., respondents.
G.R. No. 121479 January 29, 2001
FORD PHILIPPINES, INC., petitioner-plaintiff,
vs.
COURT OF APPEALS and CITIBANK, N.A. and PHILIPPINE
COMMERCIAL INTERNATIONAL BANK, respondents.
G.R. No. 128604 January 29, 2001
FORD PHILIPPINES, INC., petitioner,
vs.
CITIBANK, N.A., PHILIPPINE COMMERCIAL INTERNATIONAL BANK
and COURT OF APPEALS, respondents.
QUISUMBING, J.:
These consolidated petitions involve several fraudulently negotiated
checks.
The original actions a quo were instituted by Ford Philippines to recover from
the drawee bank, CITIBANK, N.A. (Citibank) and collecting bank, Philippine
Commercial International Bank (PCIBank) [formerly Insular Bank of Asia and
America], the value of several checks payable to the Commissioner of
Internal Revenue, which were embezzled allegedly by an organized
syndicate.1âwphi1.nêt
G.R. Nos. 121413 and 121479 are twin petitions for review of the March 27,
1995 Decision1 of the Court of Appeals in CA-G.R. CV No. 25017, entitled
"Ford Philippines, Inc. vs. Citibank, N.A. and Insular Bank of Asia and
America (now Philipppine Commercial International Bank), and the August
8, 1995 Resolution,2 ordering the collecting bank, Philippine Commercial
International Bank, to pay the amount of Citibank Check No. SN-04867.
In G.R. No. 128604, petitioner Ford Philippines assails the October 15, 1996
Decision3 of the Court of Appeals and its March 5, 1997 Resolution4 in CA-
G.R. No. 28430 entitled "Ford Philippines, Inc. vs. Citibank, N.A. and
Philippine Commercial International Bank," affirming in toto the judgment of
the trial court holding the defendant drawee bank, Citibank, N.A., solely liable
to pay the amount of P12,163,298.10 as damages for the misapplied
proceeds of the plaintiff's Citibanl Check Numbers SN-10597 and 16508.
I. G.R. Nos. 121413 and 121479
The stipulated facts submitted by the parties as accepted by the Court of
Appeals are as follows:
"On October 19, 1977, the plaintiff Ford drew and issued its
Citibank Check No. SN-04867 in the amount of P4,746,114.41,
in favor of the Commissioner of Internal Revenue as payment of
plaintiff;s percentage or manufacturer's sales taxes for the third
quarter of 1977.
The aforesaid check was deposited with the degendant IBAA
(now PCIBank) and was subsequently cleared at the Central
Bank. Upon presentment with the defendant Citibank, the
proceeds of the check was paid to IBAA as collecting or
depository bank.
The proceeds of the same Citibank check of the plaintiff was
never paid to or received by the payee thereof, the Commissioner
of Internal Revenue.
As a consequence, upon demand of the Bureau and/or
Commissioner of Internal Revenue, the plaintiff was compelled
to make a second payment to the Bureau of Internal Revenue of
its percentage/manufacturers' sales taxes for the third quarter of
1977 and that said second payment of plaintiff in the amount of
P4,746,114.41 was duly received by the Bureau of Internal
Revenue.
It is further admitted by defendant Citibank that during the time of
the transactions in question, plaintiff had been maintaining a
checking account with defendant Citibank; that Citibank Check
No. SN-04867 which was drawn and issued by the plaintiff in
favor of the Commissioner of Internal Revenue was a crossed
check in that, on its face were two parallel lines and written in
between said lines was the phrase "Payee's Account Only"; and
that defendant Citibank paid the full face value of the check in the
amount of P4,746,114.41 to the defendant IBAA.
It has been duly established that for the payment of plaintiff's
percentage tax for the last quarter of 1977, the Bureau of Internal
Revenue issued Revenue Tax Receipt No. 18747002, dated
October 20, 1977, designating therein in Muntinlupa, Metro
Manila, as the authorized agent bank of Metrobanl, Alabang
branch to receive the tax payment of the plaintiff.
On December 19, 1977, plaintiff's Citibank Check No. SN-04867,
together with the Revenue Tax Receipt No. 18747002, was
deposited with defendant IBAA, through its Ermita Branch. The
latter accepted the check and sent it to the Central Clearing
House for clearing on the samd day, with the indorsement at the
back "all prior indorsements and/or lack of indorsements
guaranteed." Thereafter, defendant IBAA presented the check
for payment to defendant Citibank on same date, December 19,
1977, and the latter paid the face value of the check in the
amount of P4,746,114.41. Consequently, the amount of
P4,746,114.41 was debited in plaintiff's account with the
defendant Citibank and the check was returned to the plaintiff.
Upon verification, plaintiff discovered that its Citibank Check No.
SN-04867 in the amount of P4,746,114.41 was not paid to the
Commissioner of Internal Revenue. Hence, in separate letters
dated October 26, 1979, addressed to the defendants, the
plaintiff notified the latter that in case it will be re-assessed by the
BIR for the payment of the taxes covered by the said checks,
then plaintiff shall hold the defendants liable for reimbursement
of the face value of the same. Both defendants denied liability
and refused to pay.
In a letter dated February 28, 1980 by the Acting Commissioner
of Internal Revenue addressed to the plaintiff - supposed to be
Exhibit "D", the latter was officially informed, among others, that
its check in the amount of P4, 746,114.41 was not paid to the
government or its authorized agent and instead encashed by
unauthorized persons, hence, plaintiff has to pay the said amount
within fifteen days from receipt of the letter. Upon advice of the
plaintiff's lawyers, plaintiff on March 11, 1982, paid to the Bureau
of Internal Revenue, the amount of P4,746,114.41, representing
payment of plaintiff's percentage tax for the third quarter of 1977.
As a consequence of defendant's refusal to reimburse plaintiff of
the payment it had made for the second time to the BIR of its
percentage taxes, plaintiff filed on January 20, 1983 its original
complaint before this Court.
On December 24, 1985, defendant IBAA was merged with the
Philippine Commercial International Bank (PCI Bank) with the
latter as the surviving entity.
Defendant Citibank maintains that; the payment it made of
plaintiff's Citibank Check No. SN-04867 in the amount of
P4,746,114.41 "was in due course"; it merely relied on the
clearing stamp of the depository/collecting bank, the defendant
 IBAA that "all prior indorsements and/or lack of indorsements
guaranteed"; and the proximate cause of plaintiff's injury is the
gross negligence of defendant IBAA in indorsing the plaintiff's
Citibank check in question.
It is admitted that on December 19, 1977 when the proceeds of
plaintiff's Citibank Check No. SN-048867 was paid to defendant
IBAA as collecting bank, plaintiff was maintaining a checking
account with defendant Citibank."5
Although it was not among the stipulated facts, an investigation by the
National Bureau of Investigation (NBI) revealed that Citibank Check No. SN-
04867 was recalled by Godofredo Rivera, the General Ledger Accountant of
Ford. He purportedly needed to hold back the check because there was an
error in the computation of the tax due to the Bureau of Internal Revenue
(BIR). With Rivera's instruction, PCIBank replaced the check with two of its
own Manager's Checks (MCs). Alleged members of a syndicate later
deposited the two MCs with the Pacific Banking Corporation.
Ford, with leave of court, filed a third-party complaint before the trial court
impleading Pacific Banking Corporation (PBC) and Godofredo Rivera, as
third party defendants. But the court dismissed the complaint against PBC
for lack of cause of action. The course likewise dismissed the third-party
complaint against Godofredo Rivera because he could not be served with
summons as the NBI declared him as a "fugitive from justice".
On June 15, 1989, the trial court rendered its decision, as follows:
"Premises considered, judgment is hereby rendered as follows:
"1. Ordering the defendants Citibank and IBAA (now
PCI Bank), jointly and severally, to pay the plaintiff
the amount of P4,746,114.41 representing the face
value of plaintiff's Citibank Check No. SN-04867, with
interest thereon at the legal rate starting January 20,
1983, the date when the original complaint was filed
until the amount is fully paid, plus costs;
"2. On defendant Citibank's cross-claim: ordering the
cross-defendant IBAA (now PCI Bank) to reimburse
defendant Citibank for whatever amount the latter
has paid or may pay to the plaintiff in accordance with
next preceding paragraph;
"3. The counterclaims asserted by the defendants
against the plaintiff, as well as that asserted by the
cross-defendant against the cross-claimant are
dismissed, for lack of merits; and
"4. With costs against the defendants.
SO ORDERED."6
Not satisfied with the said decision, both defendants, Citibank and PCIBank,
elevated their respective petitions for review on certiorari to the Courts of
Appeals. On March 27, 1995, the appellate court issued its judgment as
follows:
"WHEREFORE, in view of the foregoing, the court AFFIRMS the
appealed decision with modifications.
The court hereby renderes judgment:
1. Dismissing the complaint in Civil Case No. 49287
insofar as defendant Citibank N.A. is concerned;
2. Ordering the defendant IBAA now PCI Bank to
pay the plaintiff the amount of P4,746,114.41
representing the face value of plaintiff's Citibank
Check No. SN-04867, with interest thereon at the
legal rate starting January 20, 1983, the date when
the original complaint was filed until the amount is
fully paid;
3. Dismissing the counterclaims asserted by the
defendants against the plaintiff as well as that
asserted by the cross-defendant against the cross-
claimant, for lack of merits.
Costs against the defendant IBAA (now PCI Bank).
IT IS SO ORDERED."7
PCI Bank moved to reconsider the above-quoted decision of the Court of
Appeals, while Ford filed a "Motion for Partial Reconsideration." Both motions
were denied for lack of merit.
Separately, PCIBank and Ford filed before this Court, petitions for review by
certiorari under Rule 45.
In G.R. No. 121413, PCIBank seeks the reversal of the decision and
resolution of the Twelfth Division of the Court of Appeals contending that it
merely acted on the instruction of Ford and such casue of action had already
prescribed.
PCIBank sets forth the following issues for consideration:
I. Did the respondent court err when, after finding that the
petitioner acted on the check drawn by respondent Ford on the
said respondent's instructions, it nevertheless found the
petitioner liable to the said respondent for the full amount of the
said check.
II. Did the respondent court err when it did not find prescription in
favor of the petitioner.8
In a counter move, Ford filed its petition docketed as G.R. No. 121479,
questioning the same decision and resolution of the Court of Appeals, and
praying for the reinstatement in toto of the decision of the trial court which
found both PCIBank and Citibank jointly and severally liable for the loss.
In G.R. No. 121479, appellant Ford presents the following propositions for
consideration:
I. Respondent Citibank is liable to petitioner Ford considering
that:
1. As drawee bank, respondent Citibank owes to
petitioner Ford, as the drawer of the subject check
and a depositor of respondent Citibank, an absolute
and contractual duty to pay the proceeds of the
subject check only to the payee thereof, the
Commissioner of Internal Revenue.
2. Respondent Citibank failed to observe its duty as
banker with respect to the subject check, which was
crossed and payable to "Payee's Account Only."
3. Respondent Citibank raises an issue for the first
time on appeal; thus the same should not be
considered by the Honorable Court.
4. As correctly held by the trial court, there is no
evidence of gross negligence on the part of petitioner
Ford.9
II. PCI Bank is liable to petitioner Ford considering that:
1. There were no instructions from petitioner Ford to
deliver the proceeds of the subject check to a person
other than the payee named therein, the
 Commissioner of the Bureau of Internal Revenue;
thus, PCIBank's only obligation is to deliver the
proceeds to the Commissioner of the Bureau of
Internal Revenue.10
2. PCIBank which affixed its indorsement on the
subject check ("All prior indorsement and/or lack of
indorsement guaranteed"), is liable as collecting
bank.11
3. PCIBank is barred from raising issues of fact in the
instant proceedings.12
4. Petitioner Ford's cause of action had not
prescribed.13
II. G.R. No. 128604
The same sysndicate apparently embezzled the proceeds of checks
intended, this time, to settle Ford's percentage taxes appertaining to the
second quarter of 1978 and the first quarter of 1979.
The facts as narrated by the Court of Appeals are as follows:
Ford drew Citibank Check No. SN-10597 on July 19, 1978 in the amount of
P5,851,706.37 representing the percentage tax due for the second quarter
of 1978 payable to the Commissioner of Internal Revenue. A BIR Revenue
Tax Receipt No. 28645385 was issued for the said purpose.
On April 20, 1979, Ford drew another Citibank Check No. SN-16508 in the
amount of P6,311,591.73, representing the payment of percentage tax for
the first quarter of 1979 and payable to the Commissioner of Internal
Revenue. Again a BIR Revenue Tax Receipt No. A-1697160 was issued for
the said purpose.
Both checks were "crossed checks" and contain two diagonal lines on its
upper corner between, which were written the words "payable to the payee's
account only."
The checks never reached the payee, CIR. Thus, in a letter dated February
28, 1980, the BIR, Region 4-B, demanded for the said tax payments the
corresponding periods above-mentioned.
As far as the BIR is concernced, the said two BIR Revenue Tax Receipts
were considered "fake and spurious". This anomaly was confirmed by the
NBI upon the initiative of the BIR. The findings forced Ford to pay the BIR a
new, while an action was filed against Citibank and PCIBank for the recovery
of the amount of Citibank Check Numbers SN-10597 and 16508.
The Regional Trial Court of Makati, Branch 57, which tried the case, made
its findings on the modus operandi of the syndicate, as follows:
"A certain Mr. Godofredo Rivera was employed by the plaintiff
FORD as its General Ledger Accountant. As such, he prepared
the plaintiff's check marked Ex. 'A' [Citibank Check No. Sn-
10597] for payment to the BIR. Instead, however, fo delivering
the same of the payee, he passed on the check to a co-
conspirator named Remberto Castro who was a pro-manager of
the San Andres Branch of PCIB.* In connivance with one
Winston Dulay, Castro himself subsequently opened a Checking
Account in the name of a fictitious person denominated as
'Reynaldo reyes' in the Meralco Branch of PCIBank where Dulay
works as Assistant Manager.
After an initial deposit of P100.00 to validate the account, Castro
deposited a worthless Bank of America Check in exactly the
same amount as the first FORD check (Exh. "A", P5,851,706.37)
while this worthless check was coursed through PCIB's main
office enroute to the Central Bank for clearing, replaced this
worthless check with FORD's Exhibit 'A' and accordingly
tampered the accompanying documents to cover the
replacement. As a result, Exhibit 'A' was cleared by defendant
CITIBANK, and the fictitious deposit account of 'Reynaldo Reyes'
was credited at the PCIB Meralco Branch with the total amount
of the FORD check Exhibit 'A'. The same method was again
utilized by the syndicate in profiting from Exh. 'B' [Citibank Check
No. SN-16508] which was subsequently pilfered by Alexis
Marindo, Rivera's Assistant at FORD.
From this 'Reynaldo Reyes' account, Castro drew various checks
distributing the sahres of the other participating conspirators
namely (1) CRISANTO BERNABE, the mastermind who
formulated the method for the embezzlement; (2) RODOLFO R.
DE LEON a customs broker who negotiated the initial contact
between Bernabe, FORD's Godofredo Rivera and PCIB's
Remberto Castro; (3) JUAN VASTILLO who assisted de Leon in
the initial arrangements; (4) GODOFREDO RIVERA, FORD's
accountant who passed on the first check (Exhibit "A") to Castro;
(5) REMERTO CASTRO, PCIB's pro-manager at San Andres
who performed the switching of checks in the clearing process
and opened the fictitious Reynaldo Reyes account at the PCIB
Meralco Branch; (6) WINSTON DULAY, PCIB's Assistant
Manager at its Meralco Branch, who assisted Castro in switching
the checks in the clearing process and facilitated the opening of
the fictitious Reynaldo Reyes' bank account; (7) ALEXIS
MARINDO, Rivera's Assistant at FORD, who gave the second
check (Exh. "B") to Castro; (8) ELEUTERIO JIMENEZ, BIR
Collection Agent who provided the fake and spurious revenue tax
receipts to make it appear that the BIR had received FORD's tax
payments.
Several other persons and entities were utilized by the syndicate
as conduits in the disbursements of the proceeds of the two
checks, but like the aforementioned participants in the
conspiracy, have not been impleaded in the present case. The
manner by which the said funds were distributed among them are
traceable from the record of checks drawn against the original
"Reynaldo Reyes" account and indubitably identify the parties
who illegally benefited therefrom and readily indicate in what
amounts they did so."14
On December 9, 1988, Regional Trial Court of Makati, Branch 57, held
drawee-bank, Citibank, liable for the value of the two checks while adsolving
PCIBank from any liability, disposing as follows:
"WHEREFORE, judgment is hereby rendered sentencing
defendant CITIBANK to reimburse plaintiff FORD the total
amount of P12,163,298.10 prayed for in its complaint, with 6%
interest thereon from date of first written demand until full
payment, plus P300,000.00 attorney's fees and expenses
litigation, and to pay the defendant, PCIB (on its counterclaim to
crossclaim) the sum of P300,000.00 as attorney's fees and costs
of litigation, and pay the costs.
SO ORDERED."15
Both Ford and Citibank appealed to the Court of Appeals which affirmed, in
toto, the decision of the trial court. Hence, this petition.
Petitioner Ford prays that judgment be rendered setting aside the portion of
the Court of Appeals decision and its resolution dated March 5, 1997, with
respect to the dismissal of the complaint against PCIBank and holding
Citibank solely responsible for the proceeds of Citibank Check Numbers SN-
10597 and 16508 for P5,851,706.73 and P6,311,591.73 respectively.
Ford avers that the Court of Appeals erred in dismissing the complaint
against defendant PCIBank considering that:
I. Defendant PCIBank was clearly negligent when it failed to
exercise the diligence required to be exercised by it as a banking
insitution.
II. Defendant PCIBank clearly failed to observe the diligence
required in the selection and supervision of its officers and
employees.
III. Defendant PCIBank was, due to its negligence, clearly liable
for the loss or damage resulting to the plaintiff Ford as a
 consequence of the substitution of the check consistent with
Section 5 of Central Bank Circular No. 580 series of 1977.
IV. Assuming arguedo that defedant PCIBank did not accept,
endorse or negotiate in due course the subject checks, it is liable,
under Article 2154 of the Civil Code, to return the money which it
admits having received, and which was credited to it its Central
bank account.16
The main issue presented for our consideration by these petitions could be
simplified as follows: Has petitioner Ford the right to recover from the
collecting bank (PCIBank) and the drawee bank (Citibank) the value of the
checks intended as payment to the Commissioner of Internal Revenue? Or
has Ford's cause of action already prescribed?
Note that in these cases, the checks were drawn against the drawee bank,
but the title of the person negotiating the same was allegedly defective
because the instrument was obtained by fraud and unlawful means, and the
proceeds of the checks were not remitted to the payee. It was established
that instead of paying the checks to the CIR, for the settlement of the
approprite quarterly percentage taxes of Ford, the checks were diverted and
encashed for the eventual distribution among the mmbers of the syndicate.
As to the unlawful negotiation of the check the applicable law is Section 55
of the Negotiable Instruments Law (NIL), which provides:
"When title defective -- The title of a person who negotiates an
instrument is defective within the meaning of this Act when he
obtained the instrument, or any signature thereto, by fraud,
duress, or fore and fear, or other unlawful means, or for an illegal
consideration, or when he negotiates it in breach of faith or under
such circumstances as amount to a fraud."
Pursuant to this provision, it is vital to show that the negotiation is made by
the perpetator in breach of faith amounting to fraud. The person negotiating
the checks must have gone beyond the authority given by his principal. If the
principal could prove that there was no negligence in the performance of his
duties, he may set up the personal defense to escape liability and recover
from other parties who. Though their own negligence, alowed the
commission of the crime.
In this case, we note that the direct perpetrators of the offense, namely the
embezzlers belonging to a syndicate, are now fugitives from justice. They
have, even if temporarily, escaped liability for the embezzlement of millions
of pesos. We are thus left only with the task of determining who of the present
parties before us must bear the burden of loss of these millions. It all boils
down to thequestion of liability based on the degree of negligence among the
parties concerned.
Foremost, we must resolve whether the injured party, Ford, is guilty of the
"imputed contributory negligence" that would defeat its claim for
reimbursement, bearing ing mind that its employees, Godofredo Rivera and
Alexis Marindo, were among the members of the syndicate.
Citibank points out that Ford allowed its very own employee, Godofredo
Rivera, to negotiate the checks to his co-conspirators, instead of delivering
them to the designated authorized collecting bank (Metrobank-Alabang) of
the payee, CIR. Citibank bewails the fact that Ford was remiss in the
supervision and control of its own employees, inasmuch as it only discovered
the syndicate's activities through the information given by the payee of the
checks after an unreasonable period of time.
PCIBank also blames Ford of negligence when it allegedly authorized
Godofredo Rivera to divert the proceeds of Citibank Check No. SN-04867,
instead of using it to pay the BIR. As to the subsequent run-around of unds
of Citibank Check Nos. SN-10597 and 16508, PCIBank claims that the
proximate cause of the damge to Ford lies in its own officers and employees
who carried out the fradulent schemes and the transactions. These
circumstances were not checked by other officers of the company including
its comptroller or internal auditor. PCIBank contends that the inaction of Ford
despite the enormity of the amount involved was a sheer negligence and
stated that, as between two innocent persons, one of whom must suffer the
consequences of a breach of trust, the one who made it possible, by his act
of negligence, must bear the loss.
For its part, Ford denies any negligence in the performance of its duties. It
avers that there was no evidence presented before the trial court showing
lack of diligence on the part of Ford. And, citing the case of Gempesaw vs.
Court of Appeals,17 Ford argues that even if there was a finding therein that
the drawer was negligent, the drawee bank was still ordered to pay damages.
Furthermore, Ford contends the Godofredo rivera was not authorized to
make any representation in its behalf, specifically, to divert the proceeds of
the checks. It adds that Citibank raised the issue of imputed negligence
against Ford for the first time on appeal. Thus, it should not be considered
by this Court.
On this point, jurisprudence regarding the imputed negligence of employer in
a master-servant relationship is instructive. Since a master may be held for
his servant's wrongful act, the law imputes to the master the act of the
servant, and if that act is negligent or wrongful and proximately results in
injury to a third person, the negligence or wrongful conduct is the negligence
or wrongful conduct of the master, for which he is liable.18 The general rule
is that if the master is injured by the negligence of a third person and by the
concuring contributory negligence of his own servant or agent, the latter's
negligence is imputed to his superior and will defeat the superior's action
against the third person, asuming, of course that the contributory negligence
was the proximate cause of the injury of which complaint is made.19
Accordingly, we need to determine whether or not the action of Godofredo
Rivera, Ford's General Ledger Accountant, and/or Alexis Marindo, his
assistant, was the proximate cause of the loss or damage. AS defined,
proximate cause is that which, in the natural and continuous sequence,
unbroken by any efficient, intervening cause produces the injury and without
the result would not have occurred.20
It appears that although the employees of Ford initiated the transactions
attributable to an organized syndicate, in our view, their actions were not the
proximate cause of encashing the checks payable to the CIR. The degree of
Ford's negligence, if any, could not be characterized as the proximate cause
of the injury to the parties.
The Board of Directors of Ford, we note, did not confirm the request of
Godofredo Rivera to recall Citibank Check No. SN-04867. Rivera's
instruction to replace the said check with PCIBank's Manager's Check was
not in theordinary course of business which could have prompted PCIBank
to validate the same.
As to the preparation of Citibank Checks Nos. SN-10597 and 16508, it was
established that these checks were made payable to the CIR. Both were
crossed checks. These checks were apparently turned around by Ford's
emploees, who were acting on their own personal capacity.
Given these circumstances, the mere fact that the forgery was committed by
a drawer-payor's confidential employee or agent, who by virtue of his position
had unusual facilities for perpertrating the fraud and imposing the forged
paper upon the bank, does notentitle the bank toshift the loss to the drawer-
payor, in the absence of some circumstance raising estoppel against the
drawer.21 This rule likewise applies to the checks fraudulently negotiated or
diverted by the confidential employees who hold them in their possession.
With respect to the negligence of PCIBank in the payment of the three checks
involved, separately, the trial courts found variations between the negotiation
of Citibank Check No. SN-04867 and the misapplication of total proceeds of
Checks SN-10597 and 16508. Therefore, we have to scrutinize, separately,
PCIBank's share of negligence when the syndicate achieved its ultimate
agenda of stealing the proceeds of these checks.
G.R. Nos. 121413 and 121479
Citibank Check No. SN-04867 was deposited at PCIBank through its Ermita
Branch. It was coursed through the ordinary banking transaction, sent to
Central Clearing with the indorsement at the back "all prior indorsements
and/or lack of indorsements guaranteed," and was presented to Citibank for
payment. Thereafter PCIBank, instead of remitting the proceeds to the CIR,
prepared two of its Manager's checks and enabled the syndicate to encash
the same.
On record, PCIBank failed to verify the authority of Mr. Rivera to negotiate
the checks. The neglect of PCIBank employees to verify whether his letter
requesting for the replacement of the Citibank Check No. SN-04867 was duly
authorized, showed lack of care and prudence required in the circumstances.
Furthermore, it was admitted that PCIBank is authorized to collect the
payment of taxpayers in behalf of the BIR. As an agent of BIR, PCIBank is
duty bound to consult its principal regarding the unwarranted instructions
given by the payor or its agent. As aptly stated by the trial court, to wit:
"xxx. Since the questioned crossed check was deposited with
IBAA [now PCIBank], which claimed to be a depository/collecting
bank of BIR, it has the responsibility to make sure that the check
in question is deposited in Payee's account only.
xxx xxx xxx
As agent of the BIR (the payee of the check), defendant IBAA
should receive instructions only from its principal BIR and not
from any other person especially so when that person is not
known to the defendant. It is very imprudent on the part of the
defendant IBAA to just rely on the alleged telephone call of the
one Godofredo Rivera and in his signature considering that the
plaintiff is not a client of the defendant IBAA."
It is a well-settled rule that the relationship between the payee or holder of
commercial paper and the bank to which it is sent for collection is, in the
absence of an argreement to the contrary, that of principal and agent.22 A
bank which receives such paper for collection is the agent of the payee or
holder.23
Even considering arguendo, that the diversion of the amount of a check
payable to the collecting bank in behalf of the designated payee may be
allowed, still such diversion must be properly authorized by the payor.
Otherwise stated, the diversion can be justified only by proof of authority from
the drawer, or that the drawer has clothed his agent with apparent authority
to receive the proceeds of such check.
Citibank further argues that PCI Bank's clearing stamp appearing at the back
of the questioned checks stating that ALL PRIOR INDORSEMENTS
AND/OR LACK OF INDORSEMENTS GURANTEED should render PCIBank
liable because it made it pass through the clearing house and therefore
Citibank had no other option but to pay it. Thus, Citibank had no other option
but to pay it. Thus, Citibank assets that the proximate cause of Ford's injury
is the gross negligence of PCIBank. Since the questione dcrossed check was
deposited with PCIBank, which claimed to be a depository/collecting bank of
the BIR, it had the responsibility to make sure that the check in questions is
deposited in Payee's account only.
Indeed, the crossing of the check with the phrase "Payee's Account Only," is
a warning that the check should be deposited only in the account of the CIR.
Thus, it is the duty of the collecting bank PCIBank to ascertain that the check
be deposited in payee's account only. Therefore, it is the collecting bank
(PCIBank) which is bound to scruninize the check and to know its depositors
before it could make the clearing indorsement "all prior indorsements and/or
lack of indorsement guaranteed".
In Banco de Oro Savings and Mortgage Bank vs. Equitable Banking
Corporation,24 we ruled:
"Anent petitioner's liability on said instruments, this court is in full
accord with the ruling of the PCHC's Board of Directors that:
'In presenting the checks for clearing and for payment, the
defendant made an express guarantee on the validity of "all prior
endorsements." Thus, stamped at the back of the checks are the
defedant's clear warranty: ALL PRIOR ENDORSEMENTS
AND/OR LACK OF ENDORSEMENTS GUARANTEED. Without
such warranty, plaintiff would not have paid on the checks.'
No amount of legal jargon can reverse the clear meaning of
defendant's warranty. As the warranty has proven to be false and
inaccurate, the defendant is liable for any damage arising out of
the falsity of its representation."25
Lastly, banking business requires that the one who first cashes and
negotiates the check must take some percautions to learn whether or not it
is genuine. And if the one cashing the check through indifference or othe
circumstance assists the forger in committing the fraud, he should not be
permitted to retain the proceeds of the check from the drawee whose sole
fault was that it did not discover the forgery or the defect in the title of the
person negotiating the instrument before paying the check. For this reason,
a bank which cashes a check drawn upon another bank, without requiring
proof as to the identity of persons presenting it, or making inquiries with
regard to them, cannot hold the proceeds against the drawee when the
proceeds of the checks were afterwards diverted to the hands of a third party.
In such cases the drawee bank has a right to believe that the cashing bank
(or the collecting bank) had, by the usual proper investigation, satisfied itself
of the authenticity of the negotiation of the checks. Thus, one who encashed
a check which had been forged or diverted and in turn received payment
thereon from the drawee, is guilty of negligence which proximately
contributed to the success of the fraud practiced on the drawee bank. The
latter may recover from the holder the money paid on the check.26
Having established that the collecting bank's negligence is the proximate
cause of the loss, we conclude that PCIBank is liable in the amount
corresponding to the proceeds of Citibank Check No. SN-04867.
G.R. No. 128604
The trial court and the Court of Appeals found that PCIBank had no official
act in the ordinary course of business that would attribute to it the case of the
embezzlement of Citibank Check Numbers SN-10597 and 16508, because
PCIBank did not actually receive nor hold the two Ford checks at all. The trial
court held, thus:
"Neither is there any proof that defendant PCIBank contributed
any official or conscious participation in the process of the
embezzlement. This Court is convinced that the switching
operation (involving the checks while in transit for "clearing")
were the clandestine or hidden actuations performed by the
members of the syndicate in their own personl, covert and private
capacity and done without the knowledge of the defendant
PCIBank…"27
In this case, there was no evidence presented confirming the conscious
particiapation of PCIBank in the embezzlement. As a general rule, however,
a banking corporation is liable for the wrongful or tortuous acts and
declarations of its officers or agents within the course and scope of their
employment.28 A bank will be held liable for the negligence of its officers or
agents when acting within the course and scope of their employment. It may
be liable for the tortuous acts of its officers even as regards that species of
tort of which malice is an essential element. In this case, we find a situation
where the PCIBank appears also to be the victim of the scheme hatched by
a syndicate in which its own management employees had particiapted.
The pro-manager of San Andres Branch of PCIBank, Remberto Castro,
received Citibank Check Numbers SN-10597 and 16508. He passed the
checks to a co-conspirator, an Assistant Manager of PCIBank's Meralco
Branch, who helped Castro open a Checking account of a fictitious person
named "Reynaldo Reyes." Castro deposited a worthless Bank of America
Check in exactly the same amount of Ford checks. The syndicate tampered
with the checks and succeeded in replacing the worthless checks and the
eventual encashment of Citibank Check Nos. SN 10597 and 16508. The
PCIBank Ptro-manager, Castro, and his co-conspirator Assistant Manager
apparently performed their activities using facilities in their official capacity or
authority but for their personal and private gain or benefit.
A bank holding out its officers and agents as worthy of confidence will not be
permitted to profit by the frauds these officers or agents were enabled to
perpetrate in the apparent course of their employment; nor will t be permitted
to shirk its responsibility for such frauds, even though no benefit may accrue
to the bank therefrom. For the general rule is that a bank is liable for the
fraudulent acts or representations of an officer or agent acting within the
course and apparent scope of his employment or authority.29 And if an officer
or employee of a bank, in his official capacity, receives money to satisfy an
evidence of indebetedness lodged with his bank for collection, the bank is
liable for his misappropriation of such sum.30
Moreover, as correctly pointed out by Ford, Section 531 of Central Bank
Circular No. 580, Series of 1977 provides that any theft affecting items in
transit for clearing, shall be for the account of sending bank, which in this
case is PCIBank.
But in this case, responsibility for negligence does not lie on PCIBank's
shoulders alone.
The evidence on record shows that Citibank as drawee bank was likewise
negligent in the performance of its duties. Citibank failed to establish that its
payment of Ford's checjs were made in due course and legally in order. In
its defense, Citibank claims the genuineness and due execution of said
checks, considering that Citibank (1) has no knowledge of any informity in
the issuance of the checks in question (2) coupled by the fact that said
checks were sufficiently funded and (3) the endorsement of the Payee or lack
thereof was guaranteed by PCI Bank (formerly IBAA), thus, it has the
obligation to honor and pay the same.
Our laws on the matter provide that the action upon a written contract must
be brought within ten year from the time the right of action accrues.41 hence,
the reckoning time for the prescriptive period begins when the instrument
was issued and the corresponding check was returned by the bank to its
depositor (normally a month thereafter). Applying the same rule, the cause
of action for the recovery of the proceeds of Citibank Check No. SN 04867
would normally be a month after December 19, 1977, when Citibank paid the
face value of the check in the amount of P4,746,114.41. Since the original
complaint for the cause of action was filed on January 20, 1984, barely six
years had lapsed. Thus, we conclude that Ford's cause of action to recover
the amount of Citibank Check No. SN 04867 was seasonably filed within the
period provided by law.

For its part, Ford contends that Citibank as the drawee bank owes to Ford
an absolute and contractual duty to pay the proceeds of the subject check
only to the payee thereof, the CIR. Citing Section 6232 of the Negotiable
Instruments Law, Ford argues that by accepting the instrument, the acceptro
which is Citibank engages that it will pay according to the tenor of its
acceptance, and that it will pay only to the payee, (the CIR), considering the
fact that here the check was crossed with annotation "Payees Account Only."
As ruled by the Court of Appeals, Citibank must likewise answer for the
damages incurred by Ford on Citibank Checks Numbers SN 10597 and
16508, because of the contractual relationship existing between the two.
Citibank, as the drawee bank breached its contractual obligation with Ford
and such degree of culpability contributed to the damage caused to the latter.
On this score, we agree with the respondent court's ruling.
Citibank should have scrutinized Citibank Check Numbers SN 10597 and
16508 before paying the amount of the proceeds thereof to the collecting
bank of the BIR. One thing is clear from the record: the clearing stamps at
the back of Citibank Check Nos. SN 10597 and 16508 do not bear any
initials. Citibank failed to notice and verify the absence of the clearing
stamps. Had this been duly examined, the switching of the worthless checks
to Citibank Check Nos. 10597 and 16508 would have been discovered in
time. For this reason, Citibank had indeed failed to perform what was
incumbent upon it, which is to ensure that the amount of the checks should
be paid only to its designated payee. The fact that the drawee bank did not
discover the irregularity seasonably, in our view, consitutes negligence in
carrying out the bank's duty to its depositors. The point is that as a business
affected with public interest and because of the nature of its functions, the
bank is under obligation to treat the accounts of its depositors with meticulous
care, always having in mind the fiduciary nature of their relationship.33
Finally, we also find thet Ford is not completely blameless in its failure to
detect the fraud. Failure on the part of the depositor to examine its passbook,
statements of account, and cancelled checks and to give notice within a
reasonable time (or as required by statute) of any discrepancy which it may
in the exercise of due care and diligence find therein, serves to mitigate the
banks' liability by reducing the award of interest from twelve percent (12%)
to six percent (6%) per annum. As provided in Article 1172 of the Civil Code
of the Philippines, respondibility arising from negligence in the performance
of every kind of obligation is also demandable, but such liability may be
regulated by the courts, according to the circumstances. In quasi-delicts, the
contributory negligence of the plaintiff shall reduce the damages that he may
recover.42
WHEREFORE, the assailed Decision and Resolution of the Court of Appeals
in CA-G.R. CV No. 25017 are AFFIRMED. PCIBank, know formerly as
Insular Bank of Asia and America, id declared solely responsible for the loss
of the proceeds of Citibank Check No SN 04867 in the amount
P4,746,114.41, which shall be paid together with six percent (6%) interest
thereon to Ford Philippines Inc. from the date when the original complaint
was filed until said amount is fully paid.
However, the Decision and Resolution of the Court of Appeals in CA-G.R.
No. 28430 are MODIFIED as follows: PCIBank and Citibank are adjudged
liable for and must share the loss, (concerning the proceeds of Citibank
Check Numbers SN 10597 and 16508 totalling P12,163,298.10) on a fifty-
fifty ratio, and each bank is ORDERED to pay Ford Philippines Inc.
P6,081,649.05, with six percent (6%) interest thereon, from the date the
complaint was filed until full payment of said amount.1âwphi1.nêt
Costs against Philippine Commercial International Bank and Citibank N.A.

Thus, invoking the doctrine of comparative negligence, we are of the view SO ORDERED.
that both PCIBank and Citibank failed in their respective obligations and both
were negligent in the selection and supervision of their employees resulting
in the encashment of Citibank Check Nos. SN 10597 AND 16508. Thus, we
are constrained to hold them equally liable for the loss of the proceeds of
said checks issued by Ford in favor of the CIR.

Time and again, we have stressed that banking business is so impressed

with public interest where the trust and confidence of the public in general is
of paramount umportance such that the appropriate standard of diligence
must be very high, if not the highest, degree of diligence.34 A bank's liability
as obligor is not merely vicarious but primary, wherein the defense of
exercise of due diligence in the selection and supervision of its employees is
of no moment.35

Banks handle daily transactions involving millions of pesos.36 By the very

nature of their work the degree of responsibility, care and trustworthiness
expected of their employees and officials is far greater than those of ordinary
clerks and employees.37 Banks are expected to exercise the highest degree
of diligence in the selection and supervision of their employees.38

On the issue of prescription, PCIBank claims that the action of Ford had
prescribed because of its inability to seek judicial relief seasonably,
considering that the alleged negligent act took place prior to December 19,
1977 but the relief was sought only in 1983, or seven years thereafter.

The statute of limitations begins to run when the bank gives the depositor
notice of the payment, which is ordinarily when the check is returned to the
alleged drawer as a voucher with a statement of his account,39 and an action
upon a check is ordinarily governed by the statutory period applicable to
instruments in writing.40
 Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 90027 March 3, 1993
CA AGRO-INDUSTRIAL DEVELOPMENT CORP., petitioner,
vs.
THE HONORABLE COURT OF APPEALS and SECURITY BANK AND
TRUST COMPANY, respondents.
Dolorfino & Dominguez Law Offices for petitioner.
Danilo B. Banares for private respondent.
DAVIDE, JR., J.:
Is the contractual relation between a commercial bank and another party in
a contract of rent of a safety deposit box with respect to its contents placed
by the latter one of bailor and bailee or one of lessor and lessee?
This is the crux of the present controversy.
On 3 July 1979, petitioner (through its President, Sergio Aguirre) and the
spouses Ramon and Paula Pugao entered into an agreement whereby the
former purchased from the latter two (2) parcels of land for a consideration
of P350,625.00. Of this amount, P75,725.00 was paid as downpayment while
the balance was covered by three (3) postdated checks. Among the terms
and conditions of the agreement embodied in a Memorandum of True and
Actual Agreement of Sale of Land were that the titles to the lots shall be
transferred to the petitioner upon full payment of the purchase price and that
the owner's copies of the certificates of titles thereto, Transfer Certificates of
Title (TCT) Nos. 284655 and 292434, shall be deposited in a safety deposit
box of any bank. The same could be withdrawn only upon the joint signatures
of a representative of the petitioner and the Pugaos upon full payment of the
purchase price. Petitioner, through Sergio Aguirre, and the Pugaos then
rented Safety Deposit Box No. 1448 of private respondent Security Bank and
Trust Company, a domestic banking corporation hereinafter referred to as
the respondent Bank. For this purpose, both signed a contract of lease
(Exhibit "2") which contains, inter alia, the following conditions:
13. The bank is not a depositary of the contents of
the safe and it has neither the possession nor control
of the same.
14. The bank has no interest whatsoever in said
contents, except herein expressly provided, and it
assumes absolutely no liability in connection
therewith.1
After the execution of the contract, two (2) renter's keys were given to the
renters — one to Aguirre (for the petitioner) and the other to the Pugaos. A
guard key remained in the possession of the respondent Bank. The safety
deposit box has two (2) keyholes, one for the guard key and the other for the
renter's key, and can be opened only with the use of both keys. Petitioner
claims that the certificates of title were placed inside the said box.
Thereafter, a certain Mrs. Margarita Ramos offered to buy from the petitioner
the two (2) lots at a price of P225.00 per square meter which, as petitioner
alleged in its complaint, translates to a profit of P100.00 per square meter or
a total of P280,500.00 for the entire property. Mrs. Ramos demanded 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 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:
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:
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 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.
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