I.A.1.

Fiduciary Nature of Banking

Westmont Bank v. Myrna Dela Rosa-Ramos, et. al.

This is a Petition for Review under Rule 45 of the 1997 Rules of Court procedure seeking a partial
review of the February 14, 2003 Decision 1 and the October 2, 2003 Resolution2 of the Court of
Appeals (CA), in CA-G.R. CV No. 63983, which modified the September 16, 1998 Decision of the
Regional Trial Court, Branch 7, Manila (RTC) in Civil Case No. 89-17926 entitled, Myrna Dela Rosa-
Ramos v. Westmont Bank, formerly Associated Bank, Domingo Tan, and William Co.

The petition was filed on November 24, 2003 and received by this Court on December 15, 2003. The
case was given due course on February 6, 2008.

The Facts

From 1986, respondent Myrna Dela Rosa-Ramos (Dela Rosa-Ramos) maintained a checking/current
account with the United Overseas Bank Philippines3 (Bank) at the latter’s Sto. Cristo Branch,
Binondo, Manila. In her several transactions with the Bank, Dela Rosa-Ramos got acquainted with
its Signature Verifier, respondent Domingo Tan (Tan).4

In the course of their acquaintance, Tan offered Dela Rosa-Ramos a "special arrangement"5 wherein
he would finance or place sufficient funds in her checking/current account whenever there would be
an overdraft or when the amount of said checks would exceed the balance of her current account. It
was their arrangement to make sure that the checks she would issue would not be dishonored. Tan
offered the service for a fee of P50.00 a day for every P40,000.00 he would finance. This financier-
debtor relationship started in 1987 and lasted until1998.6

In order to guarantee payment for such funding, Dela Rosa-Ramos issued postdated checks covering
the principal amount plus interest as computed by Tan on specified date. There were also times
when she just paid in cash.7 Relative to their said agreement, Dela Rosa-Ramos issued and delivered
to Tan the following Associated Bank checks8 drawn against her current account and payable to
"cash," to wit:

1âwphi1

CHECK NO. CURRENT ACCT. DATE AMOUNT

467322 (Exh. A) 1008-08341-0 May 8, 1988 PhP200,000.00
510290 (Exh. C) 1008-08734-3 June 10, 1988 232,500.00
613307 (Exh. E) 1008-08734-3 June 14, 1988 200,000.00
613306 (Exh. D) 1008-08734-3 July 4, 1988 290,595.00

According to Dela Rosa-Ramos, Check No. 467322 for P200,000.00 was a "stale" guarantee check.
The check was originally dated August 28, 1987 but was altered to make it appear that it was dated
May 8, 1988. Tan then deposited the check in the account of the other respondent, William Co (Co),
despite the obvious superimposed date. As a result, the amount of P200,00.00 or the value indicated
in the check was eventually charged against her checking account.9
Check No. 510290 for P232,500.00, dated June 10, 1988, was issued in payment of cigarettes that
Dela Rosa-Ramos bought from Co. This check allegedly "bounced" so she replaced it with her "good
customer’s check and cash" and gave it to Tan. The latter, however, did not return the bounced check
to her. Instead, he "redeposited" it in Co’s account.10

Check No. 613307 for P200,000.00, was another guarantee check that was also "undated." Dela Rosa-
Ramos claimed that it was Tan who placed the date "June 14, 1988." For this check, an order to stop
payment was issued because of insufficient funds. Expectedly, the words

"PAYMENT STOPPED" were stamped on both sides of the check. This check was not returned to her
either and, instead, it was "redeposited" in Co’s account.11

Check Nos. 510290 and 613307 were both dishonored for insufficient funds.1âwphi1 When Dela
Rosa-Ramos got the opportunity to confront Co regarding their deposit of the two checks, the latter
disclosed that her two checks were deposited in his account to cover for his P432,500.00 cash which
was taken by Tan. Then, with a threat to expose her relationship with a married man, Tan and Co
were able to coerce her to replace the two above-mentioned checks with Check No. 59864812 in the
amount of P432,500.00 which was equivalent to the total amount of the two dishonored checks. 13

Check No. 613306 for P290,595.00, was also undated when delivered to Tan who later placed the
date, July 4, 1988. Dela Rosa-Ramos pointed out that as of July 5, 1988, her checking account had
P121,989.66 which was insufficient to answer for the value of said check. A check of a certain Lee
See Bin in the amount of P170,000.00 was, however, deposited in her checking account. As a result,
Tan was able to encash Check No. 613306 and withdrew her P121,989.66 balance. Later, Dela Rosa-
Ramos found out that the Lee See Bin Check was not funded because the Bank’s bookkeeper
demanded from her the return of the deficiency.14

Claiming that the four checks mentioned were deposited by Tan without her consent, Dela Rosa-
Ramos instituted a complaint15 against Tan and the Bank before the RTC seeking, among other
things, to recover from the Bank the sum of ₱754,689.66 representing the total amount charged or
withdrawn from her current account. Dela Rosa-Ramos subsequently amended her complaint to
include Co.16

During the trial, Tan’s partial direct testimony was ordered stricken off the records because he failed
to complete it and make himself available for cross-examination. Later, it was found out that he had
passed away.17

On September 16, 1998, the RTC resolved the case in this wise:

WHEREFORE, judgment is hereby rendered, sentencing defendant Associated Bank now the
Westmont Bank and defendants – DOMINGO TAN and WILLIAM CO, to pay the plaintiff, jointly
and severally:

1. The sum of P754,689.66, representing plaintiff’s lost deposit, plus interest thereon at the
legal rate of 12% per annum from the filing of the complaint, until fully paid;

2. The sum of P1,000,000.00, as moral damages;

3. The sum equivalent to 10% thereof, as exemplary damages;

4. The sum equivalent to 25% of the total amount due, as and for attorney’s fees; and
 5. Costs.

Defendant’s counterclaims are hereby dismissed for lack of merit.

SO ORDERED.18

Co and the Bank appealed their cases to the CA. As Co failed to file a brief within the period
prescribed, his appeal was dismissed.19 The CA then proceeded to resolve the appeal of the Bank. On
February 14, 2003, the CA rendered its appealed decision, the dispositive portion of which reads:

WHEREFORE, premises considered, Decision dated September 16, 1998 of the Regional Trial Court
of Manila, National Capital Region, Branch 7, in Civil Case No. 89-17926, is hereby AFFIRMED
with the MODIFICATION that: (a) the defendants are liable only for the amount of ₱521,989.00
covering Check Nos. 467322, 613307 and ₱121,989.66 covered by Check No. 613306 and (b) deleting
the award for moral damages and attorney’s fees.

SO ORDERED.20

Still not satisfied, the Bank moved for partial reconsideration. On October 2, 2003, the CA denied it
for lack of merit. In the case of Co, he never appealed the CA decision. Thus, only the Bank is now
before this Court raising the following issues:

I.

WITHOUT DELINEATING THE SOURCE OF THE RESPECTIVE OBLIGATIONS OF

PETITIONER BANK, RESPONDENT TAN AND RESPONDENT CO IN RELATION TO
RESPONDENT DELA ROSA-RAMOS, THE HONORABLE COURT OF APPEALS
UTTERLY AND GRAVELY ERRED WHEN IT SWEEPINGLY AFFIRMED THE
JUDGMENT OF THE HONORABLE TRIAL COURT MAKING THEM JOINTLY AND
SEVERALLY LIABLE FOR THE JUDGMENT AWARD IN FAVOR OF RESPONDENT
DELA ROSA-RAMOS.

II.

THE JUDGMENT AWARD AGAINST PETITIONER BANK UNDER CHECK NO. 467322
(EXH. ‘A’) IS TOTALLY WITHOUT LEGAL BASIS AS THE SAME WAS MERELY BASED
ON SPECULATIVE ASSUMPTION OR PURE SPECULATION.

III.

THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN FINDING THAT THE

ACCOUNT OF RESPONDENT DELA ROSA-RAMOS WAS DEBITED WITH THE FACE
AMOUNT OF CHECK NO. 613307 (EXH. ‘E’) AS SUCH FINDING IS CONTRARY TO THE
FINDING OF THE HONORABLE TRIAL COURT THAT THE SAID CHECK WAS
DISHONORED TOGETHER WITH CHECK NO. 510290 (EXH. ‘C’) FOR THE REASON
THAT BOTH CHECKS WERE DRAWN AGAINST INSUFFICIENT FUNDS.

IV.

NOTWITHSTANDING AND CLEARLY CONTRADICTING ITS VERY FINDING THAT "AS

TO CHECK NO. 613306 (EXH.’D’), THIS COURT OPINES THAT NO MANIFEST
 IRREGULARITY EXISTS," THE HONORABLE COURT OF APPEALS GROSSLY ERRED
WHEN IT ERRONEOUSLY FOUND PETITIONER BANK LIABLE IN THE AMOUNT OF
P121,989.96 COVERED BY SAID CHECK.

V.

ASSUMING ARGUENDO THAT PETITIONER BANK IS LIABLE TO ANSWER FOR THE

ALLEGED DAMAGES SUFFERED BY RESPONDENT DELA ROSA-RAMOS, THE
HONORABLE COURT OF APPEALS GROSSLY ERRED WHEN IT FAILED TO PASS
UPON PETITIONER BANK’S CROSS-CLAIM AGAINST RESPONDENT TAN.21

It must be remembered that public interest is intimately carved into the banking industry because
the primordial concern here is the trust and confidence of the public. This fiduciary nature of every
bank’s relationship with its clients/depositors impels it to exercise the highest degree of care,
definitely more than that of a reasonable man or a good father of a family. 22 It is, therefore, required
to treat the accounts and deposits of these individuals with meticulous care. 23 The rationale behind
this is well-expressed in Sandejas v. Ignacio,24

The banking system has become an indispensable institution in the modern world and plays a vital
role in the economic life of every civilized society – banks have attained a ubiquitous presence among
the people, who have come to regard them with respect and even gratitude and most of all,
confidence, and it is for this reason, banks should guard against injury attributable to negligence or
bad faith on its part.

Considering that banks can only act through their officers and employees, the fiduciary obligation
laid down for these institutions necessarily extends to their employees. Thus, banks must ensure
that their employees observe the same high level of integrity and performance for it is only through
this that banks may meet and comply with their own fiduciary duty. 25 It has been repeatedly held
that "a bank’s liability as an obligor is not merely vicarious, but primary" 26 since they are expected to
observe an equally high degree of diligence, not only in the selection, but also in the supervision of its
employees. Thus, even if it is their employees who are negligent, the bank’s responsibility to its
client remains paramount making its liability to the same to be a direct one.

Guided by the following standard, the Bank, given the fiduciary nature of its relationship with Dela
Rosa- Ramos, should have exerted every effort to safeguard and protect her money which was
deposited and entrusted with it. As found by both the RTC and the CA, Ramos was defrauded and
she lost her money because of the negligence attributable to the Bank and its employees. Indeed, it
was the employees who directly dealt with Dela Rosa-Ramos, but the Bank cannot distance itself
from them. That they were the ones who gained at the expense of Dela Rosa-Ramos will not excuse it
of its fundamental responsibility to her. As stated by the RTC,

The factual circumstances attending the repeated irregular entries and transactions involving the
current account of the plaintiff-appellee is evidently due to, if not connivance, gross negligence of
other bank officers since the repeated assailed transactions could not possibly be committed by
defendant Tan alone considering the fact that the processing of the questioned checks would pass the
hands of various bank officers who positively identified their initials therein. Having a number of
employees commit mistake or gross negligence at the same situation is so puzzling and obviates the
appellant bank’s laxity in hiring and supervising its employees. Hence, this Court is of the opinion
that the appellant bank should be held liable for the damages suffered by the plaintiff-appellee in
the case at bench.27

That matter being settled, the next matter to be determined is the amount of liability of the Bank.
As regards Check No. 467322, the Bank avers that Dela Rosa- Ramos’ acquiesced to the change of
the date in the said check. It argues that her continued acts of dealing and transacting with the
Bank like subsequently issuing checks despite her experience with this check only shows her
acquiescence which is tantamount to giving her consent. Obviously, the Bank has not taken to heart
its fiduciary responsibility to its clients. Rather than ask and wonder why there were indeed
subsequent transactions, the more paramount issue is why the Bank through its several competent
employees and officers, did not stop, double check and ascertain the genuineness of the date of the
check which displayed an obvious alteration. This failure on the part of the Bank makes it liable for
that loss. As the RTC held:

x x x defendant-bank is not faultless in the irregularities of its signature-verifier. In the first place, it
should have readily rejected the obviously altered plaintiff’s P200,000.00-check, thus, avoid its
unwarranted deposit in defendant-Co’s account and its corollary loss from plaintiff’s deposit, had its
other employees, even excepting TAN, performed their duties efficiently and well. x x x 28

The glaring error did not escape the observation of the CA either. On the matter, it hastened to add:

A careful scrutiny of the evidence shows that indeed the date of Check No. 467322 had been
materially altered from August 1987 to May 8, 1988 in accordance with Section 125 of the Negotiable
Instruments Law. It is worthy to take note of the fact that such alteration was not countersigned by
the drawer to make it a valid correction of its date as consented by its drawer as the standard
operating procedure of the appellant bank in such situation as admitted by its Sto. Cristo Branch
manager, Mabini Z. Millan. x x x.29

On Check No. 613307, the Bank argues that the CA erred in considering that the said check was
debited against the account of Dela Rosa-Ramos when the fact was that it was dishonored for having
been drawn against insufficient funds. This means that the check was not charged against her
account.

In this regard, the Court agrees with the Bank. Indeed, the admission made by Dela Rosa-Ramos
that she had to issue a replacement check for Check No. 613307 as well as for Check No. 510290 only
proves that these checks were never paid and charged or debited against her account. The
replacement check is, of course, a totally different matter and is not covered as an issue in this case.

Lastly, with respect to Check No. 613306, the Court agrees with the CA when it found:

x x x that no manifest irregularity exists as shown from the Statement of Accounts for the month of
July 1988 that as of July 4, 1988, the plaintiff-appellee had an outstanding deposit of P121,989.66. It
was also cleared therein that, on July 5, 1988, P170,000.00, through the check of Lee See Bin with
the same UNITED OVERSEAS BANK-Sto. Cristo Branch, was deposited on the account of the
plaintiff-appellee and on the very same day Check No. 613306 in the amount of P290,595.00 was
approved and processed and its equivalent was debited from the account of the plaintiff-appellee
since the check is an ‘on-us’ check which is deposited to an account of another with the same branch
as that of the drawer of the said check, and is considered as good as cash if funded, hence, may be
withdrawn on the very same day it was deposited. 30

The Court has reviewed the findings of the RTC on the matter and agrees with the CA that there
was no irregularity. The burden of proof was on Dela Rosa-Ramos to establish that Lee See Bin was
fictitious and that the money which purportedly came from him was merely simulated. She
unfortunately failed to discharge this burden.
Withal, the Bank should only be made to answer the value of Check No. 467322 in the amount of
P200,000.00 plus the legal rate of interest. This must be further tempered down for there is no
denying that it was Dela Rosa-Ramos who exposed herself to risk when she entered into that "special
arrangement" with Tan. While the Bank reneged on its responsibility to Dela Rosa-Ramos, she is
nevertheless equally guilty of contributory negligence. It has been held that where the bank and a
depositor are equally negligent, they should equally suffer the loss. The two must both bear the
consequences of their mistakes.31 Thus, the Bank should only pay 50% of the actual damages
awarded while Dela Rosa-Ramos should have to shoulder the remaining 50%.

Considering that Tan was primarily responsible for the damages caused to Dela Rosa-Ramos, the
Bank can seek compensation from his estate, subject to the applicable laws and rules.

The reinstatement of deleted damages sought by Dela Rosa-Ramosin her comment may not be
entertained for she did not appeal the CA decision.

WHEREFORE, the petition for review is PARTIALLY GRANTED. The February 14, 2003 Decision
and the October 2, 2003 Resolution of the Court of Appeals in CA-G.R. CV No. 63983 are
MODIFIED. Petitioner United Overseas Bank Philippines (formerly Westmont Bank) is hereby
ordered to pay respondent Myrna Dela Rosa-Ramos the amount of P100,000.00, representing 50% of
the actual damages awarded plus legal interest.

SO ORDERED.

Equitable PCI v. Arcelito Tan

Before this Court is a petition for review on certiorari under Rule 45 of the Rules of Court seeking to
set aside the Decision1 and the Resolution2 of the Court of Appeals (CA) in CA-G.R. CV No. 41928.

The antecedents are as follows:

Respondent Arcelito B.Tan maintained a current and savings account with Philippine Commercial
International Bank (PCIB), now petitioner Equitable PCI Bank. 3 On May 13, 1992, respondent
issued PCIB Check No. 275100 postdated May 30, 19924 in the amount of P34,588.72 in favor of
Sulpicio Lines, Inc. As of May 14, 1992, respondent's balance with petitioner was P35,147.59. On
May 14, 1992, Sulpicio Lines, Inc. deposited the aforesaid check to its account with Solid Bank,
Carbon Branch, Cebu City. After clearing, the amount of the check was immediately debited by
petitioner from respondent's account thereby leaving him with a balance of only P558.87.

Meanwhile, respondent issued three checks from May 9 to May 16, 1992, specifically, PCIB Check
No. 275080 dated May 9, 1992, payable to Agusan del Sur Electric Cooperative Inc. (ASELCO) for
the amount of P6,427.68; PCIB Check No. 275097 dated May 10, 1992 payable to Agusan del Norte
Electric Cooperative Inc., (ANECO) for the amount of P6,472.01; and PCIB Check No. 314104 dated
May 16, 1992 payable in cash for the amount of P10,000.00. When presented for payment, PCIB
Check Nos. 275080, 275097 and 314014 were dishonored for being drawn against insufficient funds.

As a result of the dishonor of Check Nos. 275080 and 275097 which were payable to ASELCO and
ANECO, respectively, the electric power supply for the two mini-sawmills owned and operated by
respondent, located in Talacogon, Agusan del Sur; and in Golden Ribbon, Butuan City, was cut off on
June 1, 1992 and May 28, 1992, respectively, and it was restored only on July 20 and August 24,
1992, respectively.
Due to the foregoing, respondent filed with the Regional Trial Court (RTC) of Cebu City a complaint
against petitioner, praying for payment of losses consisting of unrealized income in the amount
of P1,864,500.00. He also prayed for payment of moral damages, exemplary damages, attorney's fees
and litigation expenses.

Respondent claimed that Check No. 275100 was a postdated check in payment of Bills of Lading Nos.
15, 16 and 17, and that his account with petitioner would have had sufficient funds to cover payment
of the three other checks were it not for the negligence of petitioner in immediately debiting from his
account Check No. 275100, in the amount of P34,588.72, even as the said check was postdated to
May 30, 1992. As a consequence of petitioner's error, which brought about the dishonor of the two
checks paid to ASELCO and ANECO, the electric supply to his two mini-sawmills was cut off, the
business operations thereof were stopped, and purchase orders were not duly served causing
tremendous losses to him.

In its defense, petitioner denied that the questioned check was postdated May 30, 1992 and claimed
that it was a current check dated May 3, 1992. It alleged further that the disconnection of the
electric supply to respondent's sawmills was not due to the dishonor of the checks, but for other
reasons not attributable to the bank.

After trial, the RTC, in its Decision5 dated June 21, 1993, ruled in favor of petitioner and dismissed
the complaint.

Aggrieved by the Decision, respondent filed a Notice of Appeal. 6 In its Decision dated May 31, 2004,
the Court of Appeals reversed the decision of the trial court and directed petitioner to pay
respondent the sum of P1,864,500.00 as actual damages, P50,000.00 by way of moral
damages, P50,000.00 as exemplary damages and attorney's fees in the amount of P30,000.00.
Petitioner filed a motion for reconsideration, which the CA denied in a Resolution dated August 24,
2004.

Hence, the instant petition assigning the following errors:

THE FOURTH DIVISION OF THE COURT OF APPEALS DEFIED OFFICE ORDER NO.
82-04-CG BY HOLDING ON TO THIS CASE AND DECIDING IT INSTEAD OF
UNLOADING IT AND HAVING IT RE-RAFFLED AMONG THE DIVISIONS IN CEBU
CITY.

II

THE COURT OF APPEALS ERRED IN REVERSING THE FINDING OF THE REGIONAL

TRIAL COURT THAT CHECK NO. 275100 WAS DATED MAY 3, 1992.

III

THE COURT OF APPEALS ERRED IN NOT HOLDING THAT RESPONDENT'S WAY OF

WRITING THE DATE ON CHECK NO. 275100 WAS THE PROXIMATE CAUSE OF THE
DISHONOR OF HIS THREE OTHER CHECKS.

IV
 THE COURT OF APPEALS ERRED IN AWARDING ACTUAL DAMAGES, MORAL
DAMAGES, EXEMPLARY DAMAGES AND ATTORNEY'S FEES.

Anent the first issue, petitioner submits that the CA defied Office Order No. 82-04-CG dated April 5,
2004 issued by then CA Presiding Justice Cancio C. Garcia when it failed to unload CA-G.R. CV No.
41928 so that it may be re-raffled among the Divisions in Cebu City.

Office Order No. 82-04-CG7 provides:

xxxx

In view of the reorganization of the different Divisions due to the appointment of eighteen (18) new
Justices to the additional divisions in the cities of Cebu and Cagayan de Oro, the raffle of civil,
criminal and special cases submitted for decision and falling within the jurisdiction of the additional
divisions shall commence on April 6, 2004.

The raffle of newly-filed cases and those for completion likewise falling within the jurisdiction of the
additional divisions, shall start on April 12, 2004.

xxxx

Petitioner alleged that since the aforementioned Office Order directed the raffle of civil, criminal and
special cases submitted for decision and falling within the jurisdiction of the additional divisions on
April 6, 2004, CA-G.R. CV No. 41928 should have been unloaded by the CA's Fourth Division and re-
raffled to the CA's Division in Cebu City instead of deciding the case on May 31, 2004.

Respondent argued that the CA's Fourth Division correctly acted in taking cognizance of the case.
The CA defended its jurisdiction by ruling that cases already submitted for decision as of the
effectivity of Republic Act (R.A.) 8246 8 on February 1, 1997 were no longer included for re-raffle to
the newly-created Visayas and Mindanao Divisions of the CA, conformable to Section 5 of the said
statute.

Petitioner's argument is misplaced. Under Section 3 of R.A. 8246, it is provided that:

Section 3. Section 10 of Batas Pambansa Blg. 129, as amended, is hereby further amended to read as
follows:

Sec. 10. Place of Holding Sessions. — The Court of Appeals shall have its permanent stations as
follows: The first seventeen (17) divisions shall be stationed in the City of Manila for cases coming
from the First to the Fifth Judicial Regions; the Eighteenth, Nineteenth, and Twentieth Divisions
shall be in Cebu City for cases coming from the Sixth, Seventh and Eighth Judicial Regions; the
Twenty-first, Twenty-second and Twenty-third Divisions shall be in Cagayan de Oro City for cases
coming from the Ninth, Tenth, Eleventh, and Twelfth Judicial Regions. Whenever demanded by
public interest, or whenever justified by an increase in case load, the Supreme Court, upon its own
initiative or upon recommendation of the Presiding Justice of the Court of Appeals, may authorize
any division of the Court to hold sessions periodically, or for such periods and at such places as the
Supreme Court may determine, for the purpose of hearing and deciding cases. Trials or hearings in
the Court of Appeals must be continuous and must be completed within three (3) months unless
extended by the Chief Justice of the Supreme Court.

Further, Section 5 of the same Act provides:

Upon the effectivity of this Act, all pending cases, except those which have been submitted for
resolution, shall be referred to the proper division of the Court of Appeals. 9

Although CA-G.R. CV No. 41928 originated from Cebu City and is thus referable to the CA's
Divisions in Cebu City, the said case was already submitted for decision as of July 25, 1994. 10 Hence,
CA-G.R. CV No. 41928, which was already submitted for decision as of the effectivity of R.A.
8246, i.e., February 1, 1997, can no longer be referred to the CA's Division in Cebu City. Thus, the
CA's Former Fourth Division correctly ruled that CA-G.R. CV No. 41928 pending in its division was
not among those cases that had to be re-raffled to the newly-created CA Divisions in the Visayas
Region.

Further, administrative issuances must not override, supplant or modify the law, but must remain
consistent with the law they intend to carry out.11 Thus, Office Order No. 82-04-CG cannot defeat the
provisions of R.A. 8246.

As to the second issue, petitioner maintains that the CA erred in reversing the finding of the RTC
that Check No. 275100 was dated May 3, 1992. Petitioner argued that in arriving at the conclusion
that Check No. 275100 was postdated May 30, 1992, the CA just made a visual examination of the
check, unlike the RTC which verified the truth of respondent's testimony relative to the issuance of
Check No. 275100. Respondent argued that the check was carefully examined by the CA which
correctly found that Check No. 275100 was postdated to May 30, 1992 and not May 3, 1992.

The principle is well established that this Court is not a trier of facts. Therefore, in an appeal by
certiorari under Rule 45 of the Rules of Court, only questions of law may be raised. The resolution of
factual issues is the function of the lower courts whose findings on these matters are received with
respect and are, as a rule, binding on this Court. However, this rule is subject to certain exceptions.
One of these is when the findings of the appellate court are contrary to those of the trial court. 12 Due
to the divergence of the findings of the CA and the RTC, We shall re-examine the facts and evidence
presented before the lower courts.

The RTC ruled that:

xxxx

The issue to be resolved in this case is whether or not the date of PCIB Check No. 275100 is May 3,
1992 as contended by the defendant, or May 30, 1992 as claimed by the plaintiff. The date of the
check is written as follows – 5/3/0/92. From the manner by which the date of the check is written, the
Court cannot really make a pronouncement as to whether the true date of the check is May 3 or May
30, 1992, without inquiring into the background facts leading to the issuance of said check.

According to the plaintiff, the check was issued to Sulpicio Lines in payment of bill of lading nos. 15,
16 and 17. An examination of bill of lading no. 15, however, shows that the same was issued, not in
favor of plaintiff but in favor of Coca Cola Bottlers Philippines, Inc. Bill of Lading No. 16 is issued in
favor of Suson Lumber and not to plaintiff. Likewise, Bill of Lading No. 17 shows that it was issued
to Jazz Cola and not to plaintiff. Furthermore, the receipt for the payment of the freight for the
shipments reflected in these three bills of lading shows that the freight was paid by Coca Cola
Bottlers Philippines, Inc. and not by plaintiff.

Moreover, the said receipt shows that it was paid in cash and not by check. From the foregoing, the
evidence on record does not support the claim of the plaintiff that Check No. 275100 was issued in
payment of bills of lading nos. 15, 16 and 17.
Hence, the conclusion of the Court is that the date of the check was May 3, 1992 and not May 30,
1992.13

xxxx

In fine, the RTC concluded that the check was dated May 3, 1992 and not May 30, 1992, because the
same check was not issued to pay for Bills of Lading Nos. 15, 16 and 17, as respondent claims. The
trial court's conclusion is preposterous and illogical. The purpose for the issuance of the check has no
logical connection with the date of the check. Besides, the trial court need not look into the purpose
for which the check was issued. A reading of Check No. 275100 14 would readily show that it was
dated May 30, 1992. As correctly observed by the CA:

On the first issue, we agree with appellant that appellee Bank apparently erred in misappreciating
the date of Check No. 275100. We have carefully examined the check in question (Exh. DDDD) and
we are convinced that it was indeed postdated to May 30, 1992 and not May 3, 1992 as urged by
appellee. The date written on the check clearly appears as "5/30/1992" (Exh. DDDD-4). The first bar
(/) which separates the numbers "5" and "30" and the second bar (/) which further separates the
number "30" from the year 1992 appear to have been done in heavy, well-defined and bold strokes,
clearly indicating the date of the check as "5/30/1992" which obviously means May 30, 1992. On the
other hand, the alleged bar (/) which appellee points out as allegedly separating the numbers "3" and
"0," thereby leading it to read the date as May 3, 1992, is not actually a bar or a slant but appears to
be more of an unintentional marking or line done with a very light stroke. The presence of the figure
"0" after the number "3" is quite significant. In fact, a close examination thereof would unerringly
show that the said number zero or "0" is connected to the preceeding number "3." In other words, the
drawer of the check wrote the figures "30" in one continuous stroke, thereby contradicting appellee’s
theory that the number "3" is separated from the figure "0" by a bar. Besides, appellee’s theory that
the date of the check is May 3, 1992 is clearly untenable considering the presence of the figure "0"
after "3" and another bar before the year 1992. And if we were to accept appellee’s theory that what
we find to be an unintentional mark or line between the figures "3" and "0" is a bar separating the
two numbers, the date of the check would then appear as "5/3/0/1992, which is simply absurd. Hence,
we cannot go along with appellee’s theory which will lead us to an absurd result. It is therefore our
conclusion that the check was postdated to May 30, 1992 and appellee Bank or its personnel erred in
debiting the amount of the check from appellant’s account even before the check’s due date.
Undoubtedly, had not appellee bank prematurely debited the amount of the check from appellant’s
account before its due date, the two other checks (Exhs. LLLL and GGGG) successively dated May 9,
1992 and May 16, 1992 which were paid by appellant to ASELCO and ANECO, respectively, would
not have been dishonored and the said payees would not have disconnected their supply of electric
power to appellant’s sawmills, and the latter would not have suffered losses.

The law imposes on banks high standards in view of the fiduciary nature of banking. Section 2 of
R.A. 879115decrees:

Declaration of Policy. – The State recognizes the vital role of banks in providing an environment
conducive to the sustained development of the national economy and the fiduciary nature of banking
that requires high standards of integrity and performance. In furtherance thereof, the State shall
promote and maintain a stable and efficient banking and financial system that is globally
competitive, dynamic and responsive to the demands of a developing economy.

Although R.A. 8791 took effect only in the year 2000, the Court had already imposed on banks the
same high standard of diligence required under R.A. 8791 at the time of the untimely debiting of
respondent's account by petitioner in May 1992. In Simex International (Manila), Inc. v. Court of
Appeals,16 which was decided in 1990, the Court held 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.

The diligence required of banks, therefore, is more than that of a good father of a family. 17 In every
case, the depositor expects the bank to treat his account with the utmost fidelity, whether such
account consists only of a few hundred pesos or of millions. The bank must record every single
transaction accurately, down to the last centavo, and as promptly as possible. This has to be done if
the account is to reflect at any given time the amount of money the depositor can dispose of as he
sees fit, confident that the bank will deliver it as and to whomever he directs.18 From the foregoing, it
is clear that petitioner bank did not exercise the degree of diligence that it ought to have exercised in
dealing with its client.

With respect to the third issue, petitioner submits that respondent's way of writing the date on
Check No. 275100 was the proximate cause of the dishonor of his three other checks. Contrary to
petitioner’s view, the Court finds that its negligence is the proximate cause of respondent’s loss.

Proximate cause is that cause which, in a natural and continuous sequence, unbroken by any
efficient intervening cause, produces the injury, and without which the result would not have
occurred.19 The proximate cause of the loss is not respondent's manner of writing the date of the
check, as it was very clear that he intended Check No. 275100 to be dated May 30, 1992 and not May
3, 1992. The proximate cause is petitioner’s own negligence in debiting the account of the respondent
prior to the date as appearing in the check, which resulted in the subsequent dishonor of several
checks issued by the respondent and the disconnection by ASELCO and ANECO of his electric
supply.

The bank on which the check is drawn, known as the drawee bank, is under strict liability to pay to
the order of the payee in accordance with the drawer’s instructions as reflected on the face and by
the terms of the check.20Thus, payment made before the date specified by the drawer is clearly
against the drawee bank's duty to its client.

In its memorandum21 filed before the RTC, petitioner submits that respondent caused confusion on
the true date of the check by writing the date of the check as 5/3/0/92. If, indeed, petitioner was
confused on whether the check was dated May 3 or May 30 because of the "/" which allegedly
separated the number "3" from the "0," petitioner should have required respondent drawer to
countersign the said "/" in order to ascertain the true intent of the drawer before honoring the check.
As a matter of practice, bank tellers would not receive nor honor such checks which they believe to
be unclear, without the counter-signature of its drawer. Petitioner should have exercised the highest
degree of diligence required of it by ascertaining from the respondent the accuracy of the entries
therein, in order to settle the confusion, instead of proceeding to honor and receive the check.

Further, petitioner's branch manager, Pedro D. Tradio, in a letter22 addressed to ANECO, explained
the circumstances surrounding the dishonor of PCIB Check No. 275097. Thus:

June 11, 1992

ANECO
Agusan del Norte

Gentlemen:
This refer (sic) to PCIB Check No. 275097 dated May 16, 1992 in the amount of P6,472.01 payable to
your goodselves issued by Mr. Arcelito B. Tan (MANWOOD Industries) which was returned by PCIB
Mandaue Branch for insufficiency of funds.

Please be advised that the return of the aforesaid check was a result of an earlier negotiation to
PCIB-Mandaue Branch through a deposit made on May 14, 1992 with SOLIDBANK Carbon Branch,
or through Central Bank clearing via Philippine Clearing House Corporation facilities, of a postdated
check which ironically and without bad faith passed undetected through several eyes from the payee
of the check down to the depository bank and finally the drawee bank (PCIB) the aforesaid Check
No. 275097 issued to you would have been honored because it would have been sufficiently funded at
the time it was negotiated. It should be emphasized, however, that Mr. Arcelito B. Tan was in no
way responsible for the dishonor of said PCIB Check No. 275097.

We hope that the foregoing will sufficiently explain the circumstances of the dishonor of PCIB Check
No. 275097 and would clear the name and credit of Mr. Arcelito Tan from any misimpressions which
may have resulted from the dishonor of said check.

Thank you.

xxxx

Although petitioner failed to specify in the letter the other details of this "postdated check," which
passed undetected from the eyes of the payee down to the petitioner drawee bank, the Court finds
that petitioner was evidently referring to no other than Check No. 275100 which was deposited to
Solidbank, and was postdated May 30, 1992. As correctly found by the CA:

In the aforequoted letter of its Manager, appellee Bank expressly acknowledged that Check No.
275097 (Exh. GGGG) which appellant paid to ANECO "was sufficiently funded at the time it was
negotiated," but it was dishonored as a "result of an earlier negotiation to PCIB-Mandaue Branch
through a deposit made on May 14, 1992 with SOLIDBANK xxx xxx xxx of a postdated check which
xxx xxx passed undetected." He further admitted that "Mr. Arcelito B. Tan was in no way
responsible for the dishonor of said PCIB Check No. 275097." Needless to state, since appellee's
Manager has cleared appellant of any fault in the dishonor of the ANECO check, it [necessarily]
follows that responsibility therefor or fault for the dishonor of the check should fall on appellee bank.
Appellee's attempt to extricate itself from its inadvertence must therefore fail in the face of its
Manager's explicit acknowledgment of responsibility for the inadvertent dishonor of the ANECO
check.23

Evidently, the bank's negligence was the result of lack of due care required of its managers and
employees in handling the accounts of its clients. Petitioner was negligent in the selection and
supervision of its employees. In Citibank, N.A. v. Cabamongan,24 the Court ruled:

x x x Banks handle daily transactions involving millions of pesos. By the very nature of their works
the degree of responsibility, care and trustworthiness expected of their employees and officials is far
greater than those of ordinary clerks and employees. Banks are expected to exercise the highest
degree of diligence in the selection and supervision of their employees.

We now resolve the question on the award of actual, moral and exemplary damages, as well as
attorney's fees by the CA to the respondent.

The CA based the award of actual damages in the amount of P1,864,500.00 on the purchase
orders25 submitted by respondent. The CA ruled that:
x x x In the case at bar, appellant [respondent herein] presented adequate evidence to prove losses
consisting of unrealized income that he sustained as a result of the appellee Bank's gross negligence.
Appellant identified certain Purchase Orders from various customers which were not met by reason
of the disruption of the operation of his sawmills when ANECO and ASELCO disconnected their
supply of electricity thereto. x x x

Actual or compensatory damages are those awarded in order to compensate a party for an injury or
loss he suffered. They arise out of a sense of natural justice and are aimed at repairing the wrong
done. Except as provided by law or by stipulation, a party is entitled to an adequate compensation
only for such pecuniary loss as he has duly proven. 26 To recover actual damages, not only must the
amount of loss be capable of proof; it must also be actually proven with a reasonable degree of
certainty, premised upon competent proof or the best evidence obtainable.27

Respondent's claim for damages was based on purchase orders from various customers which were
allegedly not met due to the disruption of the operation of his sawmills. However, aside from the
purchase orders and his testimony, respondent failed to present competent proof on the specific
amount of actual damages he suffered during the entire period his power was cut off. No other
evidence was provided by respondent to show that the foregoing purchase orders were not met or
were canceled by his various customers. The Court cannot simply rely on speculation, conjecture or
guesswork in determining the amount of damages.28

Moreover, an examination of the purchase orders and job orders reveal that the orders were due for
delivery prior to the period when the power supply of respondent's two sawmills was cut off on June
1, 1992 to July 20, 1992 and May 28, 1992 to August 24, 1992, respectively. Purchase Order No.
990629 delivery date is May 4, 1992; Purchase Order No. 926930 delivery date is March 19, 1992;
Purchase Order No. 14779631 is due for delivery on January 31, 1992; Purchase Order No.
7600032 delivery date is February and March 1992; and Job Order No. 1824,33 dated March 18, 1992,
has a 15 days duration of work. Clearly, the disconnection of his electricity during the period May 28,
1992 to August 24, 1992 could not possibly affect his sawmill operations and prior orders therefrom.

Given the dearth of respondent's evidence on the matter, the Court resolves to delete the award of
actual damages rendered by the CA in favor of respondent for his unrealized income.

Nonetheless, in the absence of competent proof on the actual damages suffered, respondent is
entitled to temperate damages. Under Article 2224 of the Civil Code of the Philippines, temperate or
moderate damages, which are more than nominal but less than compensatory damages, may be
recovered when the court finds that some pecuniary loss has been suffered but its amount cannot,
from the nature of the case, be proved with certainty. 34 The allowance of temperate damages when
actual damages were not adequately proven is ultimately a rule drawn from equity, the principle
affording relief to those definitely injured who are unable to prove how definite the injury.35

It is apparent that respondent suffered pecuniary loss. The negligence of petitioner triggered the
disconnection of his electrical supply, which temporarily halted his business operations and the
consequent loss of business opportunity. However, due to the insufficiency of evidence before Us, We
cannot place its amount with certainty. Article 221636 of the Civil Code instructs that assessment of
damages is left to the discretion of the court according to the circumstances of each case. Under the
circumstances, the sum of P50,000.00 as temperate damages is reasonable.

Anent the award of moral damages, it is settled that moral damages are meant to compensate the
claimant for any physical suffering, mental anguish, fright, serious anxiety, besmirched reputation,
wounded feelings, moral shock, social humiliation and similar injuries unjustly caused.37 In
Philippine National Bank v. Court of Appeals,38the Court held that a bank is under obligation to
treat the accounts of its depositors with meticulous care whether such account consists only of a few
hundred pesos or of millions of pesos. Responsibility arising from negligence in the performance of
every kind of obligation is demandable. While petitioner's negligence in that case may not have been
attended with malice and bad faith, the banks' negligence caused respondent to suffer mental
anguish, serious anxiety, embarrassment and humiliation. In said case, We ruled that respondent
therein was entitled to recover reasonable moral damages.1âwphi1

In this case, the unexpected cutting off of respondent's electricity, which resulted in the stoppage of
his business operations, had caused him to suffer humiliation, mental anguish and serious anxiety.
The award of P50,000.00 is reasonable, considering the reputation and social standing of respondent.
As found by the CA, as an accredited supplier, respondent had been reposed with a certain degree of
trust by various reputable and well- established corporations.

On the award of exemplary damages, Article 2229 of the Civil Code states:

Art. 2229. Exemplary or corrective damages are imposed, by way of example or correction for the
public good, in addition to the moral, temperate, liquidated or compensatory damages.

The law allows the grant of exemplary damages to set an example for the public good. The banking
system has become an indispensable institution in the modern world and plays a vital role in the
economic life of every civilized society. Whether as mere passive entities for the safekeeping and
saving of money or as active instruments of business and commerce, banks have attained an
ubiquitous presence among the people, who have come to regard them with respect and even
gratitude and most of all, confidence. For this reason, banks should guard against injury attributable
to negligence or bad faith on its part. Without a doubt, it has been repeatedly emphasized that since
the banking business is impressed with public interest, of paramount importance thereto is the trust
and confidence of the public in general. Consequently, the highest degree of diligence is expected,
and high standards of integrity and performance are even required of it. 39 Petitioner, having failed in
this respect, the award of exemplary damages in the amount of P50,000.00 is in order.

As to the award of attorney's fees, Article 220840 of the Civil Code provides, among others, that
attorney's fees may be recovered when exemplary damages are awarded or when the defendant's act
or omission has compelled the plaintiff to litigate with third persons or to incur expenses to protect
his interest.41 Respondent has been forced to undergo unnecessary trouble and expense to protect his
interest. The Court affirms the appellate court’s award of attorney’s fees in the amount
of P30,000.00.

WHEREFORE, the petition is PARTIALLY GRANTED. The Decision and Resolution of the Court
of Appeals in CA-G.R. CV No. 41928, dated May 31, 2004 and August 24, 2004, respectively,
are AFFIRMED with the following MODIFICATIONS:

1. The award of One Million Eight Hundred Sixty-Four Thousand and Five Hundred Pesos
(P1,864,500.00) as actual damages, in favor of respondent Arcelito B. Tan, is DELETED;
and

2. Petitioner Equitable PCI Bank is instead directed to pay respondent the amount of Fifty
Thousand Pesos (P50,000.00) as temperate damages.

SO ORDERED.
Central Bank of the Philippines v. Citytrust Banking Corporation

Pursuant to Republic Act No. 625, the old Central Bank Law, respondent Citytrust Banking
Corporation (Citytrust), formerly Feati Bank, maintained a demand deposit account with petitioner
Central Bank of the Philippines, now Bangko Sentral ng Pilipinas.

As required, Citytrust furnished petitioner with the names and corresponding signatures of five of
its officers authorized to sign checks and serve as drawers and indorsers for its account. And it
provided petitioner with the list and corresponding signatures of its roving tellers authorized to
withdraw, sign receipts and perform other transactions on its behalf. Petitioner later issued security
identification cards to the roving tellers one of whom was "Rounceval Flores" (Flores).

On July 15, 1977, Flores presented for payment to petitioner’s Senior Teller Iluminada dela Cruz
(Iluminada) two Citytrust checks of even date, payable to Citytrust, one in the amount of P850,000
and the other in the amount of P900,000, both of which were signed and indorsed by Citytrust’s
authorized signatory-drawers.

After the checks were certified by petitioner’s Accounting Department, Iluminada verified them,
prepared the cash transfer slip on which she affixed her signature, stamped the checks with the
notation "Received Payment" and asked Flores to, as he did, sign on the space above such notation.
Instead of signing his name, however, Flores signed as "Rosauro C. Cayabyab" – a fact Iluminada
failed to notice.1avvphi1

Iluminada thereupon sent the cash transfer slip and checks to petitioner’s Cash Department where
an officer verified and compared the drawers’ signatures on the checks against their specimen
signatures provided by Citytrust, and finding the same in order, approved the cash transfer slip and
paid the corresponding amounts to Flores. Petitioner then debited the amount of the checks
totaling P1,750,000 from Citytrust’s demand deposit account.

More than a year and nine months later, Citytrust, by letter dated April 23, 1979, alleging that the
checks were already cancelled because they were stolen, demanded petitioner to restore the amounts
covered thereby to its demand deposit account. Petitioner did not heed the demand, however.

Citytrust later filed a complaint for estafa, with reservation on the filing of a separate civil action,
against Flores. Flores was convicted.

Citytrust thereafter filed before the Regional Trial Court (RTC) of Manila a complaint for recovery of
sum of money with damages against petitioner which it alleged erred in encashing the checks and in
charging the proceeds thereof to its account, despite the lack of authority of "Rosauro C. Cayabyab."

By Decision1 of November 13, 1991, Branch 32 of the RTC of Manila found both Citytrust and
petitioner negligent and accordingly held them equally liable for the loss. Both parties appealed to
the Court of Appeals which, by Decision2 dated July 16, 1999, affirmed the trial court’s decision, it
holding that both parties contributed equally to the fraudulent encashment of the checks, hence,
they should equally share the loss in consonance with Article 2179 3 vis a vis Article 11724 of the Civil
Code.

In arriving at its Decision, the appellate court noted that while "Citytrust failed to take adequate
precautionary measures to prevent the fraudulent encashment of its checks," petitioner was not
entirely blame-free in light of its failure to verify the signature of Citytrust’s agent authorized to
receive payment.
Brushing aside petitioner’s contention that it cannot be sued, the appellate court held that
petitioner’s Charter specifically clothes it with the power to sue and be sued.

Also brushing aside petitioner’s assertion that Citytrust’s reservation of the filing of a separate civil
action against Flores precluded Citytrust from filing the civil action against it, the appellate court
held that the "action for the recovery of sum of money is separate and distinct and is grounded on a
separate cause of action from that of the criminal case for estafa."

Hence, the present appeal, petitioner maintaining that Flores having been an authorized roving
teller, Citytrust is bound by his acts. Also maintaining that it was not negligent in releasing the
proceeds of the checks to Flores, the failure of its teller to properly verify his signature
notwithstanding, petitioner contends that verification could be dispensed with, Flores having been
known to be an authorized roving teller of Citytrust who had had numerous transactions with it
(petitioner) on its (Citytrust’s) behalf for five years prior to the questioned transaction.

Attributing negligence solely to Citytrust, petitioner harps on Citytrust’s allowing Flores to steal the
checks and failing to timely cancel them; allowing Flores to wear the issued identification card
issued by it (petitioner); failing to report Flores’ absence from work on the day of the incident; and
failing to explain the circumstances surrounding the supposed theft and cancellation of the checks.

Drawing attention to Citytrust’s considerable delay in demanding the restoration of the proceeds of
the checks, petitioners argue that, assuming arguendo that its teller was negligent, Citytrust’s
negligence, which preceded that committed by the teller, was the proximate cause of the loss or
fraud.

The petition is bereft of merit.

Petitioner’s teller Iluminada did not verify Flores’ signature on the flimsy excuse that Flores had had
previous transactions with it for a number of years. That circumstance did not excuse the teller from
focusing attention to or at least glancing at Flores as he was signing, and to satisfy herself that the
signature he had just affixed matched that of his specimen signature. Had she done that, she would
have readily been put on notice that Flores was affixing, not his but a fictitious signature.

Given that petitioner is the government body mandated to supervise and regulate banking and other
financial institutions, this Court’s ruling in Consolidated Bank and Trust Corporation v. Court of
Appeals5 illumines:

The contract between the bank and its depositor is governed by the provisions of the Civil Code on
simple loan. Article 1980 of the Civil Code expressly provides that "x x x savings x x x deposits of
money in banks and similar institutions shall be governed by the provisions concerning simple loan."
There is a debtor-creditor relationship between the bank and its depositor. The bank is the debtor
and the depositor is the creditor. The depositor lends the bank money and the bank agrees to pay the
depositor on demand. The savings deposit agreement between the bank and the depositor is the
contract that determines the rights and obligations of the parties.

The law imposes on banks high standards in view of the fiduciary nature of banking. Section 2 of
Republic Act No. 8791 ("RA 8791"), which took effect on 13 June 2000, declares that the State
recognizes the "fiduciary nature of banking that requires high standards of integrity and
performance." This new provision in the general banking law, introduced in 2000, is a statutory
affirmation of Supreme Court decisions, starting with the 1990 case of Simex International v. Court
of Appeals, holding that "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."
This fiduciary relationship means that the bank’s obligation to observe "high standards of integrity
and performance" is deemed written into every deposit agreement between a bank and its depositor.
The fiduciary nature of banking requires banks to assume a degree of diligence higher than that of a
good father of a family. Article 1172 of the Civil Code states that the degree of diligence required of
an obligor is that prescribed by law or contract, and absent such stipulation then the diligence of a
good father of a family. Section 2 of RA 8791 prescribes the statutory diligence required from banks –
that banks must observe "high standards of integrity and performance" in servicing their depositors.
Although RA 8791 took effect almost nine years after the unauthorized withdrawal of the P300,000
from L.C. Diaz’s savings account, jurisprudence at the time of the withdrawal already imposed on
banks the same high standard of diligence required under RA No. 8791. (Emphasis supplied)

Citytrust’s failure to timely examine its account, cancel the checks and notify petitioner of their
alleged loss/theft should mitigate petitioner’s liability, in accordance with Article 2179 of the Civil
Code which provides that if the plaintiff’s negligence was only contributory, the immediate and
proximate cause of the injury being the defendant’s lack of due care, the plaintiff may recover
damages, but the courts shall mitigate the damages to be awarded. For had Citytrust timely
discovered the loss/theft and/or subsequent encashment, their proceeds or part thereof could have
been recovered.

In line with the ruling in Consolidated Bank, the Court deems it proper to allocate the loss between
petitioner and Citytrust on a 60-40 ratio.

WHEREFORE, the assailed Court of Appeals Decision of July 16, 1999 is hereby AFFIRMED with
MODIFICATION, in that petitioner and Citytrust should bear the loss on a 60-40 ratio.

SO ORDERED.

Tan v. Court of Appeals

This petition seeks to set aside the decision of the Court of Appeals dated January 12, 1993 in CA-
G.R. CV No. 31083, entitled Ramon Tan, plaintiff-appellee, vs. Rizal Commercial Banking
Corporation, defendant-appellant, reversing the decision of the Regional Trial Court dated December
28, 1990 ordering respondent bank Rizal Commercial Banking Corporation (RCBC), Binondo
Branch, to pay petitioner damages and attorney's fees in the amount of ONE MILLION THIRTY
FIVE THOUSAND (P1,035,000.00) PESOS.

The following are the uncontroverted facts:

Petitioner Ramon Tan, a trader-businessman and community leader in Puerto Princesa, had
maintained since 1976 Current Account No. 109058068 with respondent bank's Binondo branch. On
March 11, 1988, to avoid carrying cash while enroute to Manila, he secured a Cashier's Check No. L
406000126 from the Philippine Commercial Industrial Bank (PCIB), Puerto Princesa branch, in the
amount of Thirty Thousand (P30,000.00) Pesos, payable to his order. He deposited the check in his
account with RCBC Binondo on March 15. On the same day, RCBC erroneously sent the same
cashier's check for clearing to the Central Bank which was returned for having been "missent" or
"misrouted." 1 The next day, March 16, RCBC debited the amount covered by the same cashier's
check from the account of the petitioner. Respondent bank at this time had not informed the
petitioner of its action which the latter claims he learned of only 42 days after, specifically on March
16, when he received the bank's debit memo.2 Relying on the common knowledge that a cashier's
check was as good as cash, that the usual banking practice that local checks are cleared within three
(3) working days and regional checks within seven (7) working days, and the fact that the cashier's
check was accepted, petitioner issued two (2) personal checks both dated March 18. Check No.
040719 in the name of Go Lac for Five Thousand Five Hundred (P5,5000.00) Pesos was presented on
April 25, 3 more than 30 days from petitioner's deposit date of the cashier's check. Check
No. 040718 in the name of MS Development Trading Corporation for Six Thousand Fifty-Three
Pesos and Seventy Centavos (P6,053.70) was returned twice on March 24, nine (9) days from his
deposit date and again on April 26, twenty-two days after the day the cashier's check was deposited
for insufficiency of funds. 4

Petitioner, alleging to have suffered humiliation and loss of face in the business sector due to the
bounced checks, filed a complaint against RCBC for damages in the Regional Trial Court of Palawan
and Puerto Princesa, Branch 47, docketed as Civil Case No. 2101. 5

During the trial, petitioner sought to prove:

First, that it was RCBC's responsibility to call his attention there and then that he had erroneously
filled the wrong deposit slip at the time he deposited the cashier's check with the respondent bank's
teller and it was negligence on RCBC's part not to have done so; 6

Second, that RCBC had been remiss in the performance of its obligation to the petitioner when it
"missent" the cashier's check to the Central Bank knowing, as it should, that the source of the check,
PCIB, Puerto Princesa Branch, is not included in the areas required to be cleared by the Central
Bank, a fact known to the banking world and surely to the respondent bank; 7

Third, that RCBC upon knowing of its error in "missending" the cashier's check to the Central Bank
did not attempt to rectify its "misclearing" error by clearing it seasonably with PCIB, Puerto
Princesa, thru its own RCBC Puerto Princesa Branch with whom it had direct radio contact; 8

Fourth, that as an old client, with twelve (12) years of good standing then, RCBC should have given
him more consideration by exerting greater diligence in clearing the check with PCIB, Puerto
Princesa, to protect its client's interest; 9

Fifth, that RCBC failed to inform petitioner promptly that the check had not been cleared, despite its
debiting without delay the amount covered by the check from the account of the petitioner and
hastily charging the latter service fees immediately after the return of the "missent checks"; 10 and

Finally, that the bounced checks resulting from RCBC's "misclearing" had put in doubt his
credibility among his business peers and sullied his reputation as a community leader which he had
painstakingly cultivated for years. His community standing as a business-socio-civic leader was a
source of pride for him in his old age of 70. He cited being Chairman of Palawan Boy Scout Council,
2-term President of the Rotary Club of Puerto Princesa, member of Palawan Chamber of Commerce
and Industry, member of the Monitoring Team of the Palawan Integrated Area Development Project,
member of Lion's Club, Philippine Rifle Pistol Association and the Saturday Health Club to justify
his claim for moral damages. 11

In its defense, RCBC disowning any negligence, put the blame for the "misrouting" on the petitioner
for using the wrong check deposit slip. It insisted that the misuse of a local check deposit slip,
instead of a regional check deposit slip, triggered the "misrouting" by RCBC of the cashier's check to
the Central Bank and it was petitioner's negligent "misuse" of a local deposit slip which was the
proximate cause of the "misrouting," thus he should bear the consequence. 12

RCBC alleged that it complied strictly with accepted banking practice when it debited the amount of
P30,000.00 against petitioner's account since under Resolution No. 2202 dated December 21, 1979 of
the Monetary Board, it is a matter of policy to prohibit the drawing against uncollected deposits
(DAUDS) except when the drawings are made against uncollected deposits representing bank
manager's/cashier's/treasurer's checks, treasury warrants, postal money orders and duly funded "on
us" checks which may be permitted at the discretion of each bank. 13Without crediting the P30,000.00
deposit, petitioner's balance before and after was Two Thousand Seven Hundred
Ninety-Two Pesos and the (P2,792.88) Eighty-Eight Centavos. 14 Thus, it dishonored the two (2)
checks amounting to P11,553.70 since they were drawn against insufficient funds. RCBC added that
petitioner had no bills purchase (BP) line which allows a depositor to receive or draw from proceeds
of a check without waiting it to be cleared. Besides, RCBC maintained, had it forwarded the
Cashier's Check to PCIB Puerto Princesa, Palawan, it would take at least twenty (20) working days
for the cashier's check to be cleared and it would take the same length of time to clear the two (2)
personal checks of Tan. 15

RCBC further asseverated it was merely acting as petitioner's collecting agent and it assumed no
responsibility beyond care in selecting correspondents under the theory that where a check is
deposited with a collecting bank the relationship created is that of agency and not creditor-debtor,
thus it cannot be liable. 16

Finally, respondent claimed that serious attempts were made to contact petitioner through the
telephone numbers in the signature specimen card of petitioner but to no avail. 17 The Assistant
Branch Accountant of RCBC Binondo Branch testified that the first telephone number in the card
had been deleted from the phone company's list and that when RCBC tried to contact petitioner's
daughter Evelyn Tan-Banzon thru a certain telephone number and when they asked for Evelyn Tan,
they were told there was no such person. 18

The trial court rendered a decision on December 28, 1990 in petitioner's favor, the dispositive
portion 19 of which reads:

WHEREFORE, premises considered, plaintiff having proven the allegations of his

verified complaint by preponderance of evidence, the court hereby renders judgment
ordering defendant bank, Binondo Branch, Manila, to pay him damages and
attorney's fees in the total amount of P1,035,000.00 Philippine Currency, broken
down as follows: P700,000.00 as moral damages, P200,000.00 as exemplary damages;
P135,000.00 which is 15% of the sum herein awarded to plaintiff, as attorney's fees
and to pay costs of suit.

For having failed to prove by any receipt or writing to underpin it, plaintiff's claim for
actual damage is denied for lack of merit.

IT IS SO ORDERED.

RCBC appealed to the Court of Appeals contending that the trial court erred in holding RCBC liable
to petitioner on account of its alleged negligence and in awarding petitioner moral and exemplary
damages and attorney's fees.

The Court of Appeals on January 12, 1993 rendered a decision 20 with the following decretal portion:

WHEREFORE, and upon all the foregoing, the decision of the court below is
REVERSED and this complaint is DISMISSED without pronouncement as to cost.

The Court of Appeals' decision is based on the following findings: 21

 What appeared to have caused the unfortunate incident was that the plaintiff filled
up the wrong deposit slip which led to the sending of the check to the Central Bank
when the clearing should have been made elsewhere.

But the claim of the plaintiff that he was not advised that the Cashier's check was
missent does not seem to be correct. The evidence indicated that the defendant bank
thru its personnel had called him up thru telephone in the number (No. 60-45-23)
which he gave in his specimen signature card. But it came out, that said telephone
number was no longer active or was already deleted from the list of telephone
numbers.

There was an instruction on the part of the plaintiff for the bank to contact his
daughter, Mrs. Evelyn Tan Banzon and according to the plaintiff, she too, was not
contacted as per his instruction. The evidence, however, indicated that Ms. Evelyn
Tan also could not be contacted at the number supposed to pertain to her as appeared
in the specimen signature card. In other words while there was compliance with the
instructions given by the plaintiff but said instructions were faulty. The plaintiff as a
customer of the bank is under obligation to inform the defendant of any changes in
the telephone numbers to be contacted in the event of any exigency.

All in all, the facts indicate that the refusal of RCBC to credit the amount of
P30,000.00 to the plaintiff's current account is consistent with the accepted banking
practice. As the defendant bank had claimed, under Resolution No. 2202 dated
December 21, 1979 of the Monetary Board, it had been emphatically declared as a
matter of policy that no drawings should be made against uncollected deposits except
when the drawings are made against uncollected deposits representing bank
manager's/cashier's/treasurer's checks, treasury warrants, postal money orders, and
duly funded "on-us" checks as may be permitted at the discretion of each bank.

It is clear that immediate payment without awaiting clearance of a cashier's check is

discretionary with the bank to whom the check is presented and such being the case,
the refusal to allow it as in this case is not to be equated with negligence in the basic
perception that discretion is not demandable as a right. In the instant case, prior to
the deposit of P30,000.00, the plaintiff's account appeared to be only in the amount of
P2,792.98. So the two (2) checks issued by the plaintiff amounting to P11,553.70 had
to be dishonored since they were drawn against insufficient funds.

What the plaintiff should have done, before issuing the two (2) checks, was to await
the clearance of the Cashier's check and his failure to do so is a fault not ascribable to
the defendant who appeared under the circumstance merely to have followed the
usual banking practice.

Petitioner now seeks to reverse the decision of the Court of Appeals and affirm that of the lower
court. He raises the following errors:

1. THE HONORABLE COURT OF APPEALS COMMITTED GROSS AND

MANIFEST ERROR IN CONCLUDING THAT THE NEGLIGENCE WAS
ASCRIBABLE TO HEREIN PETITIONER.

2. THE HONORABLE COURT OF APPEALS GRAVELY ABUSED ITS

DISCRETION IN FINDING THAT THE RESPONDENT BANK HAD NOT BEEN
 REMISS IN THE PERFORMANCE OF ITS OBLIGATIONS TO HEREIN
PETITIONER.

3. THE HONORABLE COURT OF APPEALS COMMITTED GROSS AND

MANIFEST ERROR AND GRAVE ABUSE OF DISCRETION IN REVERSING THE
AWARD OF MORAL AND EXEMPLARY DAMAGES TO THE PETITIONER.

4. THE HONORABLE COURT OF APPEALS COMMITTED GROSS AND

MANIFEST ERROR AND GRAVE ABUSE OF DISCRETION IN NOT AWARDING
ATTORNEY'S FEES TO PETITIONER.

In a most recent case decided by this Court, City Trust Corporation v. The Intermediate Appellate
Court, 22involving damages against City Trust Banking Corporation, the depositor, instead of stating
her correct account number 29000823 inaccurately wrote 2900823. Because of this error, six
postdated checks amounting to P20,209.00 she issued were dishonored for insufficiency of funds. The
Regional Trial Court dismissed the complaint for lack of merit. The Court of Appeals, however, found
the appeal meritorious and ordered the bank to pay nominal damages of P2,000.00, temperate and
moderate damages of P5,000.00 and attorney's fees of P4,000.00. Upon review, this Court quoted
with favor the disquisition of the appellate court:

We cannot uphold the position of defendant. For, even if it be true that there was
error on the part of the plaintiff in omitting a zero in her account number, yet, it is a
fact that her name, Emma E. Herrero, is clearly written on said deposit slip (Exh. B).
This is controlling in determining in whose account the deposit is made or should be
posted. This is so because it is not likely to commit an error in one's name that
merely relying on numbers which are difficult to remember, especially a number with
eight (8) digits as the account numbers of defendant's depositors. We view the use of
numbers as simply for the convenience of the bank but was never intended to
disregard the real name of its depositors. The bank is engaged in business impressed
with public interests, and it is its duty to protect in return its many clients and
depositors who transact business with it. It should not be a matter of the bank alone
receiving deposits, lending out money and collecting interests. It is also its obligation
to see to it that all funds invested with it are properly accounted for and duly posted
in its ledgers.

In the case before Us, we are not persuaded that defendant bank was not free from
blame for the fiasco. In the first place, the teller should not have accepted plaintiff's
deposit without correcting the account number on the deposit slip which, obviously,
was erroneous because, as pointed out by defendant, it contained only seven (7) digits
instead of eight (8). Second, the complete name of plaintiff depositor appears in bold
letters on the deposit slip (Exh. B). There could be no mistaking in her name, and
that the deposit was made in her name, Emma E. Herrero. In fact, defendant's teller
should not have fed her deposit slip to the computer knowing that her account
number written thereon was wrong as it contained only seven (7) digits. As it
happened, according to defendant, plaintiff's deposit had to be consigned to the
suspense accounts pending verification. This, indeed, could have been avoided at the
first instance had the teller of defendant bank performed her duties efficiently and
well. For then she could have readily detected that the account number in the name
of Emma E. Herrero was erroneous and would be rejected by the computer. That is,
or should be, part of the training and standard operating procedure of the bank's
employees. On the other hand, the depositors are not concerned with banking
procedure. That is the responsibility of the bank and its employees. Depositors are only
concerned with the facility of depositing their money, earning interest thereon, if any,
 and withdrawing therefrom, particularly businessmen, like plaintiff, who are
supposed to be always on-the-go. Plaintiff's account is a current account which should
immediately be posted. After all, it does not earn interest. At least, the forbearance
should be commensurated with prompt, efficient and satisfactory service.

Bank clients are supposed to rely on the services extended by the bank, including the
assurance that their deposits will be duly credited them as soon as they are made. For,
any delay in crediting their account can be embarrassing to them as in the case of
plaintiff.

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.
(Emphasis supplied).

In the light of the above-cited case, the respondent bank cannot exculpate itself from liability by
claiming that its depositor "impliedly instructed" the bank to clear his check with the Central Bank
by filling a local check deposit slip. Such posture is disingenuous, to say the least. First, why would
RCBC follow a patently erroneous act born of ignorance or inattention or both. Second, bank
transactions pass through a succession of bank personnel whose duty is to check and countercheck
transactions for possible errors. In the instant case, the teller should not have accepted the local
deposit slip with the cashier's check that on its face was clearly a regional check without calling the
depositor's attention to the mistake at the very moment this was presented to her. Neither should
everyone else down the line who processed the same check for clearing have allowed the check to be
sent to Central Bank. Depositors do not pretend to be past master of banking technicalities, much
more of clearing procedures. As soon as their deposits are accepted by the bank teller, they wholly
repose trust in the bank personnel's mastery of banking, their and the bank's sworn profession of
diligence and meticulousness in giving irreproachable service.

We do not subscribe to RCBC's assertion that petitioner's use of the wrong deposit slip was the
proximate cause of the clearing fiasco and so, petitioner must bear the consequence. In Pilipinas
Bank, v. CA, 23 this Court said:

The bank is not expected to be infallible but, as correctly observed by respondent

Appellate Court, in this instance, it must bear the blame for not discovering the
mistake of its teller despite the established procedure requiring the papers and bank
books to pass through a battery of bank personnel whose duty it is to check and
countercheck them for possible errors. Apparently, the officials and employees tasked
to do that did not perform their duties with due care, . . .

So it is in the instance case, where the conclusion is inevitable that respondent RCBC had been
remiss in the performance of its duty and obligation to its client, as well as to itself. We draw
attention to the fact that the two dishonored checks issued by petitioner, Check No. 040719 and
Check
No. 040718 were presented for payment 24 more than 45 days from the day the cashier's check was
deposited. This gave RCBC more than ample time to have cleared the cashier's check had it
corrected its "missending" the same upon return from Central Bank using the correct slip this time
so it can be cleared properly. Instead, RCBC promptly debited the amount of P30,000.00 against
petitioner's account and left it at that.

We observe, likewise, that RCBC inquired about an Evelyn Tan but no Evelyn Tan-Banzon as
specifically instructed in the same signature card. (Emphasis supplied) 25
RCBC insists that immediate payment without awaiting clearance of a cashier's check is
discretionary with the bank to whom the check is presented and such being the case, its refusal to
immediately pay the cashier's check in this case is not to be equated with negligence on its part. We
find this disturbing and unfortunate.

An ordinary check is not a mere undertaking to pay an amount of money. There is an element of
certainty or assurance that it will be paid upon presentation that is why it is perceived as a
convenient substitute for currency in commercial and financial transactions. The basis of the
perception being confidence. Any practice that destroys that confidence will impair the usefulness of
the check as a currency substitute and create havoc in trade circles and the banking community. 26

Now, what was presented for deposit in the instant cases was not just an ordinary check but a
cashier's check payable to the account of the depositor himself. A cashier's check is a primary
obligation of the issuing bank and accepted in advance by its mere issuance. 27 By its very nature, a
cashier's check is the bank's order to pay drawn upon itself, committing in effect its total resources,
integrity and honor behind the check. A cashier's check by its peculiar character and general use in
the commercial world is regarded substantially to be as good as the money which it represents.28 In
this case, therefore, PCIB by issuing the check created an unconditional credit in favor of any
collecting bank.

All these considered, petitioner's reliance on the layman's perception that a cashier's check is as good
as cash is not entirely misplaced, as it is rooted in practice, tradition, and principle. We see no reason
thus why this so-called discretion was not exercised in favor of petitioner, specially since PCIB and
RCBC are members of the same clearing house group relying on each other's solvency. RCBC could
surely rely on the solvency of PCIB when the latter issued its cashier's check.

On the third and fourth issue, RCBC contends that moral damages cannot be recovered in an action
for breach of contract since under Article 2219 of the New Civil Code, the instant case is not among
those enumerated. For an award of moral damages in a breach of contract, it is imperative that the
party acted in bad faith or fraudulently as provided for in Art. 2220 of the Civil Code, to wit:

Art. 2220. Willful injury to property may be a legal ground for awarding moral
damages if the court should find that, under the circumstances, such damages are
justly due. The same rule applies to breaches of contract where the defendant acted
fraudulently or in bad faith.

In the absence of moral damages, RCBC argues, exemplary damages cannot be awarded under Art.
2225 of the same Code which states:

Exemplary damages or corrective damages are imposed, by way of example or

correction for the public good, in addition to the moral, temperate, liquidated or
compensatory damages.

We hold that petitioner has the right to recover moral damages even if the bank's negligence may not
have been attended with malice and bad faith. In American Express International, Inc. v. IAC, 29 we
held:

While petitioner was not in bad faith, its negligence caused the private respondent to
suffer mental anguish, serious anxiety, embarrassment and humiliation, for which he
is entitled to recover, reasonable moral damages (Art. 2217, Civil Code).
In Zenith Insurance Corporation v. CA, 30 we also said that moral damages are not meant to enrich a
complainant at the expense of defendant. It is only intended to alleviate the moral suffering he has
undergone. In the instant case, we find the award of P700,000.00 as moral damages excessive and,
accordingly, reduce it to one hundred thousand (P100,000.00) pesos. We find the award of exemplary
damages of P200,000.00 unjustified in the absence of malice, bad faith or gross negligence. 31 The
award of reasonable attorney's fees is proper for the petitioner was compelled to litigate to protect
his interest. 32

IN VIEW WHEREOF, we REVERSE the decision of respondent Court of Appeals and hereby order
private respondent RCBC, Binondo Branch, to pay petitioner the amount of one hundred thousand
(P100,000.00) pesos as moral damages and the sum of fifty thousand (P50,000.00) pesos as attorney's
fees, plus costs.

SO ORDERED.

I.A.4.a.1. Nature of Deposits

Consolidated Bank & Trust Corporation v. CA

The Case

Before us is a petition for review of the Decision [1] of the Court of Appeals dated 27 October 1998
and its Resolution dated 11 May 1999. The assailed decision reversed the Decision [2]of the Regional
Trial Court of Manila, Branch 8, absolving petitioner Consolidated Bank and Trust Corporation, now
known as Solidbank Corporation (Solidbank), of any liability. The questioned resolution of the
appellate court denied the motion for reconsideration of Solidbank but modified the decision by
deleting the award of exemplary damages, attorneys fees, expenses of litigation and cost of suit.

The Facts

Solidbank is a domestic banking corporation organized and existing under Philippine

laws. Private respondent L.C. Diaz and Company, CPAs (L.C. Diaz), is a professional partnership
engaged in the practice of accounting.
Sometime in March 1976, L.C. Diaz opened a savings account with Solidbank, designated as
Savings Account No. S/A 200-16872-6.
On 14 August 1991, L.C. Diaz through its cashier, Mercedes Macaraya (Macaraya), filled up a
savings (cash) deposit slip for P990 and a savings (checks) deposit slip for P50.Macaraya instructed
the messenger of L.C. Diaz, Ismael Calapre (Calapre), to deposit the money with Solidbank.
Macaraya also gave Calapre the Solidbank passbook.
Calapre went to Solidbank and presented to Teller No. 6 the two deposit slips and the
passbook. The teller acknowledged receipt of the deposit by returning to Calapre the duplicate copies
of the two deposit slips. Teller No. 6 stamped the deposit slips with the words DUPLICATE and
SAVING TELLER 6 SOLIDBANK HEAD OFFICE. Since the transaction took time and Calapre had
to make another deposit for L.C. Diaz with Allied Bank, he left the passbook with Solidbank. Calapre
then went to Allied Bank. When Calapre returned to Solidbank to retrieve the passbook, Teller No. 6
informed him that somebody got the passbook.[3] Calapre went back to L.C. Diaz and reported the
incident to Macaraya.
 Macaraya immediately prepared a deposit slip in duplicate copies with a check
of P200,000. Macaraya, together with Calapre, went to Solidbank and presented to Teller No. 6 the
deposit slip and check. The teller stamped the words DUPLICATE and SAVING TELLER 6
SOLIDBANK HEAD OFFICE on the duplicate copy of the deposit slip. When Macaraya asked for the
passbook, Teller No. 6 told Macaraya that someone got the passbook but she could not remember to
whom she gave the passbook. When Macaraya asked Teller No. 6 if Calapre got the passbook, Teller
No. 6 answered that someone shorter than Calapre got the passbook. Calapre was then standing
beside Macaraya.
Teller No. 6 handed to Macaraya a deposit slip dated 14 August 1991 for the deposit of a check
for P90,000 drawn on Philippine Banking Corporation (PBC). This PBC check of L.C. Diaz was a
check that it had long closed.[4] PBC subsequently dishonored the check because of insufficient funds
and because the signature in the check differed from PBCs specimen signature. Failing to get back
the passbook, Macaraya went back to her office and reported the matter to the Personnel Manager of
L.C. Diaz, Emmanuel Alvarez.
The following day, 15 August 1991, L.C. Diaz through its Chief Executive Officer, Luis C. Diaz
(Diaz), called up Solidbank to stop any transaction using the same passbook until L.C. Diaz could
open a new account.[5] On the same day, Diaz formally wrote Solidbank to make the same request. It
was also on the same day that L.C. Diaz learned of the unauthorized withdrawal the day before, 14
August 1991, of P300,000 from its savings account. The withdrawal slip for the P300,000 bore the
signatures of the authorized signatories of L.C. Diaz, namely Diaz and Rustico L. Murillo. The
signatories, however, denied signing the withdrawal slip. A certain Noel Tamayo received
the P300,000.
In an Information[6] dated 5 September 1991, L.C. Diaz charged its messenger, Emerano Ilagan
(Ilagan) and one Roscon Verdazola with Estafa through Falsification of Commercial Document. The
Regional Trial Court of Manila dismissed the criminal case after the City Prosecutor filed a Motion
to Dismiss on 4 August 1992.
On 24 August 1992, L.C. Diaz through its counsel demanded from Solidbank the return of its
money. Solidbank refused.
On 25 August 1992, L.C. Diaz filed a Complaint[7] for Recovery of a Sum of Money against
Solidbank with the Regional Trial Court of Manila, Branch 8. After trial, the trial court rendered on
28 December 1994 a decision absolving Solidbank and dismissing the complaint.
L.C. Diaz then appealed[8] to the Court of Appeals. On 27 October 1998, the Court of Appeals
issued its Decision reversing the decision of the trial court.
On 11 May 1999, the Court of Appeals issued its Resolution denying the motion for
reconsideration of Solidbank. The appellate court, however, modified its decision by deleting the
award of exemplary damages and attorneys fees.

The Ruling of the Trial Court

In absolving Solidbank, the trial court applied the rules on savings account written on the
passbook. The rules state that possession of this book shall raise the presumption of ownership and
any payment or payments made by the bank upon the production of the said book and entry therein
of the withdrawal shall have the same effect as if made to the depositor personally. [9]
At the time of the withdrawal, a certain Noel Tamayo was not only in possession of the
passbook, he also presented a withdrawal slip with the signatures of the authorized signatories of
L.C. Diaz. The specimen signatures of these persons were in the signature cards. The teller stamped
the withdrawal slip with the words Saving Teller No. 5. The teller then passed on the withdrawal
slip to Genere Manuel (Manuel) for authentication. Manuel verified the signatures on the
withdrawal slip. The withdrawal slip was then given to another officer who compared the signatures
on the withdrawal slip with the specimen on the signature cards. The trial court concluded that
Solidbank acted with care and observed the rules on savings account when it allowed the withdrawal
of P300,000 from the savings account of L.C. Diaz.
The trial court pointed out that the burden of proof now shifted to L.C. Diaz to prove that the
signatures on the withdrawal slip were forged. The trial court admonished L.C. Diaz for not offering
in evidence the National Bureau of Investigation (NBI) report on the authenticity of the signatures
on the withdrawal slip for P300,000. The trial court believed that L.C. Diaz did not offer this
evidence because it is derogatory to its action.
Another provision of the rules on savings account states that the depositor must keep the
passbook under lock and key.[10] When another person presents the passbook for withdrawal prior to
Solidbanks receipt of the notice of loss of the passbook, that person is considered as the owner of the
passbook. The trial court ruled that the passbook presented during the questioned transaction was
now out of the lock and key and presumptively ready for a business transaction.[11]
Solidbank did not have any participation in the custody and care of the passbook. The trial court
believed that Solidbanks act of allowing the withdrawal of P300,000 was not the direct and
proximate cause of the loss. The trial court held that L.C. Diazs negligence caused the unauthorized
withdrawal. Three facts establish L.C. Diazs negligence: (1) the possession of the passbook by a
person other than the depositor L.C. Diaz; (2) the presentation of a signed withdrawal receipt by an
unauthorized person; and (3) the possession by an unauthorized person of a PBC check long closed
by L.C. Diaz, which check was deposited on the day of the fraudulent withdrawal.
The trial court debunked L.C. Diazs contention that Solidbank did not follow the precautionary
procedures observed by the two parties whenever L.C. Diaz withdrew significant amounts from its
account. L.C. Diaz claimed that a letter must accompany withdrawals of more than P20,000. The
letter must request Solidbank to allow the withdrawal and convert the amount to a managers
check. The bearer must also have a letter authorizing him to withdraw the same amount. Another
person driving a car must accompany the bearer so that he would not walk from Solidbank to the
office in making the withdrawal. The trial court pointed out that L.C. Diaz disregarded these
precautions in its past withdrawal. On 16 July 1991, L.C. Diaz withdrew P82,554 without any
separate letter of authorization or any communication with Solidbank that the money be converted
into a managers check.
The trial court further justified the dismissal of the complaint by holding that the case was a
last ditch effort of L.C. Diaz to recover P300,000 after the dismissal of the criminal case against
Ilagan.
The dispositive portion of the decision of the trial court reads:

IN VIEW OF THE FOREGOING, judgment is hereby rendered DISMISSING the complaint.

The Court further renders judgment in favor of defendant bank pursuant to its counterclaim the
amount of Thirty Thousand Pesos (P30,000.00) as attorneys fees.

With costs against plaintiff.

SO ORDERED.[12]

The Ruling of the Court of Appeals

 The Court of Appeals ruled that Solidbanks negligence was the proximate cause of the
unauthorized withdrawal of P300,000 from the savings account of L.C. Diaz. The appellate court
reached this conclusion after applying the provision of the Civil Code on quasi-delict, to wit:

Article 2176. Whoever by act or omission causes damage to another, there being fault or negligence,
is obliged to pay for the damage done. Such fault or negligence, if there is no pre-existing contractual
relation between the parties, is called a quasi-delict and is governed by the provisions of this chapter.

The appellate court held that the three elements of a quasi-delict are present in this case, namely:
(a) damages suffered by the plaintiff; (b) fault or negligence of the defendant, or some other person
for whose acts he must respond; and (c) the connection of cause and effect between the fault or
negligence of the defendant and the damage incurred by the plaintiff.
The Court of Appeals pointed out that the teller of Solidbank who received the withdrawal slip
for P300,000 allowed the withdrawal without making the necessary inquiry. The appellate court
stated that the teller, who was not presented by Solidbank during trial, should have called up the
depositor because the money to be withdrawn was a significant amount. Had the teller called up L.C.
Diaz, Solidbank would have known that the withdrawal was unauthorized. The teller did not even
verify the identity of the impostor who made the withdrawal. Thus, the appellate court found
Solidbank liable for its negligence in the selection and supervision of its employees.
The appellate court ruled that while L.C. Diaz was also negligent in entrusting its deposits to its
messenger and its messenger in leaving the passbook with the teller, Solidbank could not escape
liability because of the doctrine of last clear chance. Solidbank could have averted the injury suffered
by L.C. Diaz had it called up L.C. Diaz to verify the withdrawal.
The appellate court ruled that the degree of diligence required from Solidbank is more than that
of a good father of a family. The business and functions of banks are affected with public interest.
Banks are obligated to treat the accounts of their depositors with meticulous care, always having in
mind the fiduciary nature of their relationship with their clients. The Court of Appeals found
Solidbank remiss in its duty, violating its fiduciary relationship with L.C. Diaz.
The dispositive portion of the decision of the Court of Appeals reads:

WHEREFORE, premises considered, the decision appealed from is hereby REVERSED and a new
one entered.

1. Ordering defendant-appellee Consolidated Bank and Trust Corporation to pay plaintiff-

appellant the sum of Three Hundred Thousand Pesos (P300,000.00), with interest
thereon at the rate of 12% per annum from the date of filing of the complaint until
paid, the sum of P20,000.00 as exemplary damages, and P20,000.00 as attorneys fees
and expenses of litigation as well as the cost of suit; and

2. Ordering the dismissal of defendant-appellees counterclaim in the amount of P30,000.00

as attorneys fees.

SO ORDERED.[13]

Acting on the motion for reconsideration of Solidbank, the appellate court affirmed its decision but
modified the award of damages. The appellate court deleted the award of exemplary damages and
attorneys fees. Invoking Article 2231[14] of the Civil Code, the appellate court ruled that exemplary
damages could be granted if the defendant acted with gross negligence. Since Solidbank was guilty of
simple negligence only, the award of exemplary damages was not justified. Consequently, the award
of attorneys fees was also disallowed pursuant to Article 2208 of the Civil Code. The expenses of
litigation and cost of suit were also not imposed on Solidbank.
The dispositive portion of the Resolution reads as follows:

WHEREFORE, foregoing considered, our decision dated October 27, 1998 is affirmed with
modification by deleting the award of exemplary damages and attorneys fees, expenses of litigation
and cost of suit.

SO ORDERED.[15]

Hence, this petition.

The Issues

Solidbank seeks the review of the decision and resolution of the Court of Appeals on these
grounds:

I. THE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER BANK

SHOULD SUFFER THE LOSS BECAUSE ITS TELLER SHOULD HAVE FIRST
CALLED PRIVATE RESPONDENT BY TELEPHONE BEFORE IT ALLOWED THE
WITHDRAWAL OF P300,000.00 TO RESPONDENTS MESSENGER EMERANO
ILAGAN, SINCE THERE IS NO AGREEMENT BETWEEN THE PARTIES IN THE
OPERATION OF THE SAVINGS ACCOUNT, NOR IS THERE ANY BANKING
LAW, WHICH MANDATES THAT A BANK TELLER SHOULD FIRST CALL UP
THE DEPOSITOR BEFORE ALLOWING A WITHDRAWAL OF A BIG AMOUNT IN
A SAVINGS ACCOUNT.

II. THE COURT OF APPEALS ERRED IN APPLYING THE DOCTRINE OF LAST CLEAR
CHANCE AND IN HOLDING THAT PETITIONER BANKS TELLER HAD THE
LAST OPPORTUNITY TO WITHHOLD THE WITHDRAWAL WHEN IT IS
UNDISPUTED THAT THE TWO SIGNATURES OF RESPONDENT ON THE
WITHDRAWAL SLIP ARE GENUINE AND PRIVATE RESPONDENTS
PASSBOOK WAS DULY PRESENTED, AND CONTRARIWISE RESPONDENT
WAS NEGLIGENT IN THE SELECTION AND SUPERVISION OF ITS
MESSENGER EMERANO ILAGAN, AND IN THE SAFEKEEPING OF ITS
CHECKS AND OTHER FINANCIAL DOCUMENTS.

III. THE COURT OF APPEALS ERRED IN NOT FINDING THAT THE INSTANT CASE
IS A LAST DITCH EFFORT OF PRIVATE RESPONDENT TO RECOVER
ITS P300,000.00 AFTER FAILING IN ITS EFFORTS TO RECOVER THE SAME
FROM ITS EMPLOYEE EMERANO ILAGAN.

IV. THE COURT OF APPEALS ERRED IN NOT MITIGATING THE DAMAGES

AWARDED AGAINST PETITIONER UNDER ARTICLE 2197 OF THE CIVIL
CODE, NOTWITHSTANDING ITS FINDING THAT PETITIONER BANKS
NEGLIGENCE WAS ONLY CONTRIBUTORY.[16]

The Ruling of the Court

The petition is partly meritorious.

Solidbanks Fiduciary Duty under the Law

The rulings of the trial court and the Court of Appeals conflict on the application of the law. The
trial court pinned the liability on L.C. Diaz based on the provisions of the rules on savings account, a
recognition of the contractual relationship between Solidbank and L.C. Diaz, the latter being a
depositor of the former. On the other hand, the Court of Appeals applied the law on quasi-delict to
determine who between the two parties was ultimately negligent. The law on quasi-delict or culpa
aquiliana is generally applicable when there is no pre-existing contractual relationship between the
parties.
We hold that Solidbank is liable for breach of contract due to negligence, or culpa contractual.
The contract between the bank and its depositor is governed by the provisions of the Civil Code
on simple loan.[17] Article 1980 of the Civil Code expressly provides that x x x savings x x x deposits
of money in banks and similar institutions shall be governed by the provisions concerning simple
loan. There is a debtor-creditor relationship between the bank and its depositor.The bank is the
debtor and the depositor is the creditor. The depositor lends the bank money and the bank agrees to
pay the depositor on demand. The savings deposit agreement between the bank and the depositor is
the contract that determines the rights and obligations of the parties.
The law imposes on banks high standards in view of the fiduciary nature of banking. Section 2
of Republic Act No. 8791 (RA 8791),[18] which took effect on 13 June 2000, declares that the State
recognizes the fiduciary nature of banking that requires high standards of integrity and
performance.[19] This new provision in the general banking law, introduced in 2000, is a statutory
affirmation of Supreme Court decisions, starting with the 1990 case of Simex International v.
Court of Appeals,[20] holding that 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. [21]
This fiduciary relationship means that the banks obligation to observe high standards of
integrity and performance is deemed written into every deposit agreement between a bank and its
depositor. The fiduciary nature of banking requires banks to assume a degree of diligence higher
than that of a good father of a family. Article 1172 of the Civil Code states that the degree of
diligence required of an obligor is that prescribed by law or contract, and absent such stipulation
then the diligence of a good father of a family. [22] Section 2 of RA 8791 prescribes the statutory
diligence required from banks that banks must observe high standards of integrity and performance
in servicing their depositors. Although RA 8791 took effect almost nine years after the unauthorized
withdrawal of the P300,000 from L.C. Diazs savings account, jurisprudence [23] at the time of the
withdrawal already imposed on banks the same high standard of diligence required under RA No.
8791.
However, the fiduciary nature of a bank-depositor relationship does not convert the contract
between the bank and its depositors from a simple loan to a trust agreement, whether express or
implied. Failure by the bank to pay the depositor is failure to pay a simple loan, and not a breach of
trust.[24] The law simply imposes on the bank a higher standard of integrity and performance in
complying with its obligations under the contract of simple loan, beyond those required of non-bank
debtors under a similar contract of simple loan.
The fiduciary nature of banking does not convert a simple loan into a trust agreement because
banks do not accept deposits to enrich depositors but to earn money for themselves. The law allows
banks to offer the lowest possible interest rate to depositors while charging the highest possible
interest rate on their own borrowers. The interest spread or differential belongs to the bank and not
to the depositors who are not cestui que trust of banks. If depositors are cestui que trust of banks,
then the interest spread or income belongs to the depositors, a situation that Congress certainly did
not intend in enacting Section 2 of RA 8791.
Solidbanks Breach of its Contractual Obligation

Article 1172 of the Civil Code provides that responsibility arising from negligence in the
performance of every kind of obligation is demandable. For breach of the savings deposit agreement
due to negligence, or culpa contractual, the bank is liable to its depositor.
Calapre left the passbook with Solidbank because the transaction took time and he had to go to
Allied Bank for another transaction. The passbook was still in the hands of the employees of
Solidbank for the processing of the deposit when Calapre left Solidbank. Solidbanks rules on savings
account require that the deposit book should be carefully guarded by the depositor and kept under
lock and key, if possible. When the passbook is in the possession of Solidbanks tellers during
withdrawals, the law imposes on Solidbank and its tellers an even higher degree of diligence in
safeguarding the passbook.
Likewise, Solidbanks tellers must exercise a high degree of diligence in insuring that they
return the passbook only to the depositor or his authorized representative. The tellers know, or
should know, that the rules on savings account provide that any person in possession of the passbook
is presumptively its owner. If the tellers give the passbook to the wrong person, they would be
clothing that person presumptive ownership of the passbook, facilitating unauthorized withdrawals
by that person. For failing to return the passbook to Calapre, the authorized representative of L.C.
Diaz, Solidbank and Teller No. 6 presumptively failed to observe such high degree of diligence in
safeguarding the passbook, and in insuring its return to the party authorized to receive the same.
In culpa contractual, once the plaintiff proves a breach of contract, there is a presumption that
the defendant was at fault or negligent. The burden is on the defendant to prove that he was not at
fault or negligent. In contrast, in culpa aquiliana the plaintiff has the burden of proving that the
defendant was negligent. In the present case, L.C. Diaz has established that Solidbank breached its
contractual obligation to return the passbook only to the authorized representative of L.C.
Diaz. There is thus a presumption that Solidbank was at fault and its teller was negligent in not
returning the passbook to Calapre. The burden was on Solidbank to prove that there was no
negligence on its part or its employees.
Solidbank failed to discharge its burden. Solidbank did not present to the trial court Teller No.
6, the teller with whom Calapre left the passbook and who was supposed to return the passbook to
him. The record does not indicate that Teller No. 6 verified the identity of the person who retrieved
the passbook. Solidbank also failed to adduce in evidence its standard procedure in verifying the
identity of the person retrieving the passbook, if there is such a procedure, and that Teller No. 6
implemented this procedure in the present case.
Solidbank is bound by the negligence of its employees under the principle of respondeat
superior or command responsibility. The defense of exercising the required diligence in the selection
and supervision of employees is not a complete defense in culpa contractual, unlike in culpa
aquiliana.[25]
The bank must not only exercise high standards of integrity and performance, it must also
insure that its employees do likewise because this is the only way to insure that the bank will comply
with its fiduciary duty. Solidbank failed to present the teller who had the duty to return to Calapre
the passbook, and thus failed to prove that this teller exercised the high standards of integrity and
performance required of Solidbanks employees.

Proximate Cause of the Unauthorized Withdrawal

Another point of disagreement between the trial and appellate courts is the proximate cause of
the unauthorized withdrawal. The trial court believed that L.C. Diazs negligence in not securing its
passbook under lock and key was the proximate cause that allowed the impostor to withdraw
the P300,000. For the appellate court, the proximate cause was the tellers negligence in processing
the withdrawal without first verifying with L.C. Diaz. We do not agree with either court.
Proximate cause is that cause which, in natural and continuous sequence, unbroken by any
efficient intervening cause, produces the injury and without which the result would not have
occurred.[26] Proximate cause is determined by the facts of each case upon mixed considerations of
logic, common sense, policy and precedent.[27]
L.C. Diaz was not at fault that the passbook landed in the hands of the impostor. Solidbank was
in possession of the passbook while it was processing the deposit. After completion of the transaction,
Solidbank had the contractual obligation to return the passbook only to Calapre, the authorized
representative of L.C. Diaz. Solidbank failed to fulfill its contractual obligation because it gave the
passbook to another person.
Solidbanks failure to return the passbook to Calapre made possible the withdrawal of
the P300,000 by the impostor who took possession of the passbook. Under Solidbanks rules on
savings account, mere possession of the passbook raises the presumption of ownership. It was the
negligent act of Solidbanks Teller No. 6 that gave the impostor presumptive ownership of the
passbook. Had the passbook not fallen into the hands of the impostor, the loss of P300,000 would not
have happened. Thus, the proximate cause of the unauthorized withdrawal was Solidbanks
negligence in not returning the passbook to Calapre.
We do not subscribe to the appellate courts theory that the proximate cause of the unauthorized
withdrawal was the tellers failure to call up L.C. Diaz to verify the withdrawal. Solidbank did not
have the duty to call up L.C. Diaz to confirm the withdrawal. There is no arrangement between
Solidbank and L.C. Diaz to this effect. Even the agreement between Solidbank and L.C. Diaz
pertaining to measures that the parties must observe whenever withdrawals of large amounts are
made does not direct Solidbank to call up L.C. Diaz.
There is no law mandating banks to call up their clients whenever their representatives
withdraw significant amounts from their accounts. L.C. Diaz therefore had the burden to prove that
it is the usual practice of Solidbank to call up its clients to verify a withdrawal of a large amount of
money. L.C. Diaz failed to do so.
Teller No. 5 who processed the withdrawal could not have been put on guard to verify the
withdrawal. Prior to the withdrawal of P300,000, the impostor deposited with Teller No. 6
theP90,000 PBC check, which later bounced. The impostor apparently deposited a large amount of
money to deflect suspicion from the withdrawal of a much bigger amount of money. The appellate
court thus erred when it imposed on Solidbank the duty to call up L.C. Diaz to confirm the
withdrawal when no law requires this from banks and when the teller had no reason to be suspicious
of the transaction.
Solidbank continues to foist the defense that Ilagan made the withdrawal. Solidbank claims
that since Ilagan was also a messenger of L.C. Diaz, he was familiar with its teller so that there was
no more need for the teller to verify the withdrawal. Solidbank relies on the following statements in
the Booking and Information Sheet of Emerano Ilagan:

xxx Ilagan also had with him (before the withdrawal) a forged check of PBC and indicated the
amount of P90,000 which he deposited in favor of L.C. Diaz and Company. After successfully
withdrawing this large sum of money, accused Ilagan gave alias Rey (Noel Tamayo) his share of the
loot. Ilagan then hired a taxicab in the amount of P1,000 to transport him (Ilagan) to his home
province at Bauan, Batangas.Ilagan extravagantly and lavishly spent his money but a big part of his
loot was wasted in cockfight and horse racing. Ilagan was apprehended and meekly admitted his
guilt.[28] (Emphasis supplied.)
 L.C. Diaz refutes Solidbanks contention by pointing out that the person who withdrew
the P300,000 was a certain Noel Tamayo. Both the trial and appellate courts stated that this Noel
Tamayo presented the passbook with the withdrawal slip.
We uphold the finding of the trial and appellate courts that a certain Noel Tamayo withdrew
the P300,000. The Court is not a trier of facts. We find no justifiable reason to reverse the factual
finding of the trial court and the Court of Appeals. The tellers who processed the deposit of
the P90,000 check and the withdrawal of the P300,000 were not presented during trial to
substantiate Solidbanks claim that Ilagan deposited the check and made the questioned
withdrawal. Moreover, the entry quoted by Solidbank does not categorically state that Ilagan
presented the withdrawal slip and the passbook.

Doctrine of Last Clear Chance

The doctrine of last clear chance states that where both parties are negligent but the negligent
act of one is appreciably later than that of the other, or where it is impossible to determine whose
fault or negligence caused the loss, the one who had the last clear opportunity to avoid the loss but
failed to do so, is chargeable with the loss.[29] Stated differently, the antecedent negligence of the
plaintiff does not preclude him from recovering damages caused by the supervening negligence of the
defendant, who had the last fair chance to prevent the impending harm by the exercise of due
diligence.[30]
We do not apply the doctrine of last clear chance to the present case. Solidbank is liable for
breach of contract due to negligence in the performance of its contractual obligation to L.C. Diaz.
This is a case of culpa contractual, where neither the contributory negligence of the plaintiff nor his
last clear chance to avoid the loss, would exonerate the defendant from liability. [31]Such contributory
negligence or last clear chance by the plaintiff merely serves to reduce the recovery of damages by
the plaintiff but does not exculpate the defendant from his breach of contract. [32]

Mitigated Damages

Under Article 1172, liability (for culpa contractual) may be regulated by the courts, according to
the circumstances. This means that if the defendant exercised the proper diligence in the selection
and supervision of its employee, or if the plaintiff was guilty of contributory negligence, then the
courts may reduce the award of damages. In this case, L.C. Diaz was guilty of contributory
negligence in allowing a withdrawal slip signed by its authorized signatories to fall into the hands of
an impostor. Thus, the liability of Solidbank should be reduced.
In Philippine Bank of Commerce v. Court of Appeals,[33] where the Court held the depositor
guilty of contributory negligence, we allocated the damages between the depositor and the bank on a
40-60 ratio. Applying the same ruling to this case, we hold that L.C. Diaz must shoulder 40% of the
actual damages awarded by the appellate court. Solidbank must pay the other 60% of the actual
damages.
WHEREFORE, the decision of the Court of Appeals
is AFFIRMED with MODIFICATION. Petitioner Solidbank Corporation shall pay private
respondent L.C. Diaz and Company, CPAs only 60% of the actual damages awarded by the Court of
Appeals. The remaining 40% of the actual damages shall be borne by private respondent L.C. Diaz
and Company, CPAs.Proportionate costs.
SO ORDERED.
Teofisto Guingona, Jr. v. City Fiscal of Manila

This is a petition for prohibition and injunction with a prayer for the immediate issuance of
restraining order and/or writ of preliminary injunction filed by petitioners on March 26, 1982.

On March 31, 1982, by virtue of a court resolution issued by this Court on the same date, a
temporary restraining order was duly issued ordering the respondents, their officers, agents,
representatives and/or person or persons acting upon their (respondents') orders or in their place or
stead to refrain from proceeding with the preliminary investigation in Case No. 8131938 of the Office
of the City Fiscal of Manila (pp. 47-48, rec.). On January 24, 1983, private respondent Clement
David filed a motion to lift restraining order which was denied in the resolution of this Court dated
May 18, 1983.

As can be gleaned from the above, the instant petition seeks to prohibit public respondents from
proceeding with the preliminary investigation of I.S. No. 81-31938, in which petitioners were
charged by private respondent Clement David, with estafa and violation of Central Bank Circular
No. 364 and related regulations regarding foreign exchange transactions principally, on the ground
of lack of jurisdiction in that the allegations of the charged, as well as the testimony of private
respondent's principal witness and the evidence through said witness, showed that petitioners'
obligation is civil in nature.

For purposes of brevity, We hereby adopt the antecedent facts narrated by the Solicitor General in
its Comment dated June 28,1982, as follows:têñ.£îhqwâ£

On December 23,1981, private respondent David filed I.S. No. 81-31938 in the Office
of the City Fiscal of Manila, which case was assigned to respondent Lota for
preliminary investigation (Petition, p. 8).

In I.S. No. 81-31938, David charged petitioners (together with one Robert Marshall
and the following directors of the Nation Savings and Loan Association, Inc., namely
Homero Gonzales, Juan Merino, Flavio Macasaet, Victor Gomez, Jr., Perfecto
Manalac, Jaime V. Paz, Paulino B. Dionisio, and one John Doe) with estafa and
violation of Central Bank Circular No. 364 and related Central Bank regulations on
foreign exchange transactions, allegedly committed as follows (Petition, Annex
"A"):têñ.£îhqwâ£

"From March 20, 1979 to March, 1981, David invested with the
Nation Savings and Loan Association, (hereinafter called NSLA) the
sum of P1,145,546.20 on nine deposits, P13,531.94 on savings account
deposits (jointly with his sister, Denise Kuhne), US$10,000.00 on
time deposit, US$15,000.00 under a receipt and guarantee of
payment and US$50,000.00 under a receipt dated June 8, 1980 (au
jointly with Denise Kuhne), that David was induced into making the
aforestated investments by Robert Marshall an Australian national
who was allegedly a close associate of petitioner Guingona Jr., then
NSLA President, petitioner Martin, then NSLA Executive Vice-
President of NSLA and petitioner Santos, then NSLA General
Manager; that on March 21, 1981 N LA was placed under
receivership by the Central Bank, so that David filed claims
therewith for his investments and those of his sister; that on July 22,
1981 David received a report from the Central Bank that only
P305,821.92 of those investments were entered in the records of
 NSLA; that, therefore, the respondents in I.S. No. 81-31938
misappropriated the balance of the investments, at the same time
violating Central Bank Circular No. 364 and related Central Bank
regulations on foreign exchange transactions; that after demands,
petitioner Guingona Jr. paid only P200,000.00, thereby reducing the
amounts misappropriated to P959,078.14 and US$75,000.00."

Petitioners, Martin and Santos, filed a joint counter-affidavit (Petition, Annex' B') in
which they stated the following.têñ.£îhqwâ£

"That Martin became President of NSLA in March 1978 (after the

resignation of Guingona, Jr.) and served as such until October 30,
1980, while Santos was General Manager up to November 1980; that
because NSLA was urgently in need of funds and at David's
insistence, his investments were treated as special- accounts with
interest above the legal rate, an recorded in separate confidential
documents only a portion of which were to be reported because he did
not want the Australian government to tax his total earnings (nor) to
know his total investments; that all transactions with David were
recorded except the sum of US$15,000.00 which was a personal loan
of Santos; that David's check for US$50,000.00 was cleared through
Guingona, Jr.'s dollar account because NSLA did not have one, that a
draft of US$30,000.00 was placed in the name of one Paz Roces
because of a pending transaction with her; that the Philippine
Deposit Insurance Corporation had already reimbursed David within
the legal limits; that majority of the stockholders of NSLA had filed
Special Proceedings No. 82-1695 in the Court of First Instance to
contest its (NSLA's) closure; that after NSLA was placed under
receivership, Martin executed a promissory note in David's favor and
caused the transfer to him of a nine and on behalf (9 1/2) carat
diamond ring with a net value of P510,000.00; and, that the liabilities
of NSLA to David were civil in nature."

Petitioner, Guingona, Jr., in his counter-affidavit (Petition, Annex' C') stated the
following:têñ.£îhqwâ£

"That he had no hand whatsoever in the transactions between David

and NSLA since he (Guingona Jr.) had resigned as NSLA president in
March 1978, or prior to those transactions; that he assumed a portion
o; the liabilities of NSLA to David because of the latter's insistence
that he placed his investments with NSLA because of his faith in
Guingona, Jr.; that in a Promissory Note dated June 17, 1981
(Petition, Annex "D") he (Guingona, Jr.) bound himself to pay David
the sums of P668.307.01 and US$37,500.00 in stated installments;
that he (Guingona, Jr.) secured payment of those amounts with
second mortgages over two (2) parcels of land under a deed of Second
Real Estate Mortgage (Petition, Annex "E") in which it was provided
that the mortgage over one (1) parcel shall be cancelled upon
payment of one-half of the obligation to David; that he (Guingona, Jr.)
paid P200,000.00 and tendered another P300,000.00 which David
refused to accept, hence, he (Guingona, Jr.) filed Civil Case No. Q-
33865 in the Court of First Instance of Rizal at Quezon City, to effect
 the release of the mortgage over one (1) of the two parcels of land
conveyed to David under second mortgages."

At the inception of the preliminary investigation before respondent Lota, petitioners

moved to dismiss the charges against them for lack of jurisdiction because David's
claims allegedly comprised a purely civil obligation which was itself novated. Fiscal
Lota denied the motion to dismiss (Petition, p. 8).

But, after the presentation of David's principal witness, petitioners filed the instant
petition because: (a) the production of the Promisory Notes, Banker's Acceptance,
Certificates of Time Deposits and Savings Account allegedly showed that the
transactions between David and NSLA were simple loans, i.e., civil obligations on the
part of NSLA which were novated when Guingona, Jr. and Martin assumed them;
and (b) David's principal witness allegedly testified that the duplicate originals of the
aforesaid instruments of indebtedness were all on file with NSLA, contrary to David's
claim that some of his investments were not record (Petition, pp. 8-9).

Petitioners alleged that they did not exhaust available administrative remedies
because to do so would be futile (Petition, p. 9) [pp. 153-157, rec.].

As correctly pointed out by the Solicitor General, the sole issue for resolution is whether public
respondents acted without jurisdiction when they investigated the charges (estafa and violation of
CB Circular No. 364 and related regulations regarding foreign exchange transactions) subject matter
of I.S. No. 81-31938.

There is merit in the contention of the petitioners that their liability is civil in nature and therefore,
public respondents have no jurisdiction over the charge of estafa.

A casual perusal of the December 23, 1981 affidavit. complaint filed in the Office of the City Fiscal of
Manila by private respondent David against petitioners Teopisto Guingona, Jr., Antonio I. Martin
and Teresita G. Santos, together with one Robert Marshall and the other directors of the Nation
Savings and Loan Association, will show that from March 20, 1979 to March, 1981, private
respondent David, together with his sister, Denise Kuhne, invested with the Nation Savings and
Loan Association the sum of P1,145,546.20 on time deposits covered by Bankers Acceptances and
Certificates of Time Deposits and the sum of P13,531.94 on savings account deposits covered by
passbook nos. 6-632 and 29-742, or a total of P1,159,078.14 (pp. 15-16, roc.). It appears further that
private respondent David, together with his sister, made investments in the aforesaid bank in the
amount of US$75,000.00 (p. 17, rec.).

Moreover, the records reveal that when the aforesaid bank was placed under receivership on March
21, 1981, petitioners Guingona and Martin, upon the request of private respondent David, assumed
the obligation of the bank to private respondent David by executing on June 17, 1981 a joint
promissory note in favor of private respondent acknowledging an indebtedness of Pl,336,614.02 and
US$75,000.00 (p. 80, rec.). This promissory note was based on the statement of account as of June
30, 1981 prepared by the private respondent (p. 81, rec.). The amount of indebtedness assumed
appears to be bigger than the original claim because of the added interest and the inclusion of other
deposits of private respondent's sister in the amount of P116,613.20.

Thereafter, or on July 17, 1981, petitioners Guingona and Martin agreed to divide the said
indebtedness, and petitioner Guingona executed another promissory note antedated to June 17, 1981
whereby he personally acknowledged an indebtedness of P668,307.01 (1/2 of P1,336,614.02) and
US$37,500.00 (1/2 of US$75,000.00) in favor of private respondent (p. 25, rec.). The aforesaid
promissory notes were executed as a result of deposits made by Clement David and Denise Kuhne
with the Nation Savings and Loan Association.

Furthermore, the various pleadings and documents filed by private respondent David, before this
Court indisputably show that he has indeed invested his money on time and savings deposits with
the Nation Savings and Loan Association.

It must be pointed out that when private respondent David invested his money on nine. and savings
deposits with the aforesaid bank, the contract that was perfected was a contract of simple loan
or mutuum and not a contract of deposit. Thus, Article 1980 of the New Civil Code provides
that:têñ.£îhqwâ£

Article 1980. Fixed, savings, and current deposits of-money in banks and similar
institutions shall be governed by the provisions concerning simple loan.

In the case of Central Bank of the Philippines vs. Morfe (63 SCRA 114,119 [1975], We
said:têñ.£îhqwâ£

It should be noted that fixed, savings, and current deposits of money in banks and
similar institutions are hat true deposits. are considered simple loans and, as such,
are not preferred credits (Art. 1980 Civil Code; In re Liquidation of Mercantile Batik
of China Tan Tiong Tick vs. American Apothecaries Co., 66 Phil 414; Pacific Coast
Biscuit Co. vs. Chinese Grocers Association 65 Phil. 375; Fletcher American National
Bank vs. Ang Chong UM 66 PWL 385; Pacific Commercial Co. vs. American
Apothecaries Co., 65 PhiL 429; Gopoco Grocery vs. Pacific Coast Biscuit CO.,65 Phil.
443)."

This Court also declared in the recent case of Serrano vs. Central Bank of the Philippines (96 SCRA
102 [1980]) that:têñ.£îhqwâ£

Bank deposits are in the nature of irregular deposits. They are really 'loans because
they earn interest. All kinds of bank deposits, whether fixed, savings, or current are
to be treated as loans and are to be covered by the law on loans (Art. 1980 Civil Code
Gullas vs. Phil. National Bank, 62 Phil. 519). Current and saving deposits, are loans
to a bank because it can use the same. The petitioner here in making time deposits
that earn interests will respondent Overseas Bank of Manila was in reality a creditor
of the respondent Bank and not a depositor. The respondent Bank was in turn a
debtor of petitioner. Failure of the respondent Bank to honor the time deposit is
failure to pay its obligation as a debtor and not a breach of trust arising from a
depositary's failure to return the subject matter of the deposit (Emphasis supplied).

Hence, the relationship between the private respondent and the Nation Savings and Loan
Association is that of creditor and debtor; consequently, the ownership of the amount deposited was
transmitted to the Bank upon the perfection of the contract and it can make use of the amount
deposited for its banking operations, such as to pay interests on deposits and to pay withdrawals.
While the Bank has the obligation to return the amount deposited, it has, however, no obligation to
return or deliver the same money that was deposited. And, the failure of the Bank to return the
amount deposited will not constitute estafa through misappropriation punishable under Article 315,
par. l(b) of the Revised Penal Code, but it will only give rise to civil liability over which the public
respondents have no- jurisdiction.

WE have already laid down the rule that:têñ.£îhqwâ£

 In order that a person can be convicted under the above-quoted provision, it must be
proven that he has the obligation to deliver or return the some money, goods or
personal property that he receivedPetitioners had no such obligation to return the
same money, i.e., the bills or coins, which they received from private respondents.
This is so because as clearly as stated in criminal complaints, the related civil
complaints and the supporting sworn statements, the sums of money that petitioners
received were loans.

The nature of simple loan is defined in Articles 1933 and 1953 of the Civil
Code.têñ.£îhqwâ£

"Art. 1933. — By the contract of loan, one of the parties delivers to

another, either something not consumable so that the latter may use
the same for a certain time- and return it, in which case the contract
is called a commodatum; or money or other consumable thing, upon
the condition that the same amount of the same kind and quality shall
he paid in which case the contract is simply called a loan or mutuum.

"Commodatum is essentially gratuitous.

"Simple loan may be gratuitous or with a stipulation to pay interest.

"In commodatum the bailor retains the ownership of the thing loaned
while in simple loan, ownership passes to the borrower.

"Art. 1953. — A person who receives a loan of money or any other

fungible thing acquires the ownership thereof, and is bound to pay to
the creditor an equal amount of the same kind and quality."

It can be readily noted from the above-quoted provisions that in simple loan
(mutuum), as contrasted to commodatum the borrower acquires ownership of the
money, goods or personal property borrowed Being the owner, the borrower can
dispose of the thing borrowed (Article 248, Civil Code) and his act will not be
considered misappropriation thereof' (Yam vs. Malik, 94 SCRA 30, 34 [1979];
Emphasis supplied).

But even granting that the failure of the bank to pay the time and savings deposits of private
respondent David would constitute a violation of paragraph 1(b) of Article 315 of the Revised Penal
Code, nevertheless any incipient criminal liability was deemed avoided, because when the aforesaid
bank was placed under receivership by the Central Bank, petitioners Guingona and Martin assumed
the obligation of the bank to private respondent David, thereby resulting in the novation of the
original contractual obligation arising from deposit into a contract of loan and converting the original
trust relation between the bank and private respondent David into an ordinary debtor-creditor
relation between the petitioners and private respondent. Consequently, the failure of the bank or
petitioners Guingona and Martin to pay the deposits of private respondent would not constitute a
breach of trust but would merely be a failure to pay the obligation as a debtor.

Moreover, while it is true that novation does not extinguish criminal liability, it may however,
prevent the rise of criminal liability as long as it occurs prior to the filing of the criminal information
in court. Thus, in Gonzales vs. Serrano ( 25 SCRA 64, 69 [1968]) We held that:têñ.£îhqwâ£
 As pointed out in People vs. Nery, novation prior to the filing of the criminal
information — as in the case at bar — may convert the relation between the parties
into an ordinary creditor-debtor relation, and place the complainant in estoppel to
insist on the original transaction or "cast doubt on the true nature" thereof.

Again, in the latest case of Ong vs. Court of Appeals (L-58476, 124 SCRA 578, 580-581 [1983] ), this
Court reiterated the ruling in People vs. Nery ( 10 SCRA 244 [1964] ), declaring that:têñ.£îhqwâ£

The novation theory may perhaps apply prior to the filling of the criminal
information in court by the state prosecutors because up to that time the original
trust relation may be converted by the parties into an ordinary creditor-debtor
situation, thereby placing the complainant in estoppel to insist on the original trust.
But after the justice authorities have taken cognizance of the crime and instituted
action in court, the offended party may no longer divest the prosecution of its power
to exact the criminal liability, as distinguished from the civil. The crime being an
offense against the state, only the latter can renounce it (People vs. Gervacio, 54 Off.
Gaz. 2898; People vs. Velasco, 42 Phil. 76; U.S. vs. Montanes, 8 Phil. 620).

It may be observed in this regard that novation is not one of the means recognized by
the Penal Code whereby criminal liability can be extinguished; hence, the role of
novation may only be to either prevent the rise of criminal habihty or to cast doubt
on the true nature of the original basic transaction, whether or not it was such that
its breach would not give rise to penal responsibility, as when money loaned is made
to appear as a deposit, or other similar disguise is resorted to (cf. Abeto vs. People, 90
Phil. 581; U.S. vs. Villareal, 27 Phil. 481).

In the case at bar, there is no dispute that petitioners Guingona and Martin executed a promissory
note on June 17, 1981 assuming the obligation of the bank to private respondent David; while the
criminal complaint for estafa was filed on December 23, 1981 with the Office of the City Fiscal.
Hence, it is clear that novation occurred long before the filing of the criminal complaint with the
Office of the City Fiscal.

Consequently, as aforestated, any incipient criminal liability would be avoided but there will still be
a civil liability on the part of petitioners Guingona and Martin to pay the assumed obligation.

Petitioners herein were likewise charged with violation of Section 3 of Central Bank Circular No. 364
and other related regulations regarding foreign exchange transactions by accepting foreign currency
deposit in the amount of US$75,000.00 without authority from the Central Bank. They contend
however, that the US dollars intended by respondent David for deposit were all converted into
Philippine currency before acceptance and deposit into Nation Savings and Loan Association.

Petitioners' contention is worthy of behelf for the following reasons:

1. It appears from the records that when respondent David was about to make a deposit of bank
draft issued in his name in the amount of US$50,000.00 with the Nation Savings and Loan
Association, the same had to be cleared first and converted into Philippine currency. Accordingly, the
bank draft was endorsed by respondent David to petitioner Guingona, who in turn deposited it to his
dollar account with the Security Bank and Trust Company. Petitioner Guingona merely
accommodated the request of the Nation Savings and loan Association in order to clear the bank
draft through his dollar account because the bank did not have a dollar account. Immediately after
the bank draft was cleared, petitioner Guingona authorized Nation Savings and Loan Association to
withdraw the same in order to be utilized by the bank for its operations.
2. It is safe to assume that the U.S. dollars were converted first into Philippine pesos before they
were accepted and deposited in Nation Savings and Loan Association, because the bank is presumed
to have followed the ordinary course of the business which is to accept deposits in Philippine
currency only, and that the transaction was regular and fair, in the absence of a clear and convincing
evidence to the contrary (see paragraphs p and q,Sec. 5, Rule 131, Rules of Court).

3. Respondent David has not denied the aforesaid contention of herein petitioners despite the fact
that it was raised. in petitioners' reply filed on May 7, 1982 to private respondent's comment and in
the July 27, 1982 reply to public respondents' comment and reiterated in petitioners' memorandum
filed on October 30, 1982, thereby adding more support to the conclusion that the US$75,000.00 were
really converted into Philippine currency before they were accepted and deposited into Nation
Savings and Loan Association. Considering that this might adversely affect his case, respondent
David should have promptly denied petitioners' allegation.

In conclusion, considering that the liability of the petitioners is purely civil in nature and that there
is no clear showing that they engaged in foreign exchange transactions, We hold that the public
respondents acted without jurisdiction when they investigated the charges against the petitioners.
Consequently, public respondents should be restrained from further proceeding with the criminal
case for to allow the case to continue, even if the petitioners could have appealed to the Ministry of
Justice, would work great injustice to petitioners and would render meaningless the proper
administration of justice.

While as a rule, the prosecution in a criminal offense cannot be the subject of prohibition and
injunction, this court has recognized the resort to the extraordinary writs of prohibition and
injunction in extreme cases, thus:têñ.£îhqwâ£

On the issue of whether a writ of injunction can restrain the proceedings in Criminal
Case No. 3140, the general rule is that "ordinarily, criminal prosecution may not be
blocked by court prohibition or injunction." Exceptions, however, are allowed in the
following instances:têñ.£îhqwâ£

"1. for the orderly administration of justice;

"2. to prevent the use of the strong arm of the law in an oppressive
and vindictive manner;

"3. to avoid multiplicity of actions;

"4. to afford adequate protection to constitutional rights;

"5. in proper cases, because the statute relied upon is

unconstitutional or was held invalid" ( Primicias vs. Municipality of
Urdaneta, Pangasinan, 93 SCRA 462, 469-470 [1979]; citing Ramos
vs. Torres, 25 SCRA 557 [1968]; and Hernandez vs. Albano, 19 SCRA
95, 96 [1967]).

Likewise, in Lopez vs. The City Judge, et al. ( 18 SCRA 616, 621-622 [1966]), We held
that:têñ.£îhqwâ£

The writs of certiorari and prohibition, as extraordinary legal remedies, are in the
ultimate analysis, intended to annul void proceedings; to prevent the unlawful and
oppressive exercise of legal authority and to provide for a fair and orderly
 administration of justice. Thus, in Yu Kong Eng vs. Trinidad, 47 Phil. 385, We took
cognizance of a petition for certiorari and prohibition although the accused in the
case could have appealed in due time from the order complained of, our action in the
premises being based on the public welfare policy the advancement of public policy.
In Dimayuga vs. Fajardo, 43 Phil. 304, We also admitted a petition to restrain the
prosecution of certain chiropractors although, if convicted, they could have appealed.
We gave due course to their petition for the orderly administration of justice and to
avoid possible oppression by the strong arm of the law. And in Arevalo vs.
Nepomuceno, 63 Phil. 627, the petition for certiorari challenging the trial court's
action admitting an amended information was sustained despite the availability of
appeal at the proper time.

WHEREFORE, THE PETITION IS HEREBY GRANTED; THE TEMPORARY RESTRAINING

ORDER PREVIOUSLY ISSUED IS MADE PERMANENT. COSTS AGAINST THE PRIVATE
RESPONDENT.

SO ORDERED.

Associated Bank v. Vicente Henry Tan

While banks are granted by law the right to debit the value of a dishonored check from a depositor’s
account, they must do so with the highest degree of care, so as not to prejudice the depositor unduly.

The Case

Before us is a Petition for Review1 under Rule 45 of the Rules of Court, assailing the January 27,
2003 Decision2of the Court of Appeals (CA) in CA-GR CV No. 56292. The CA disposed as follows:

"WHEREFORE, premises considered, the Decision dated December 3, 1996, of the Regional
Trial Court of Cabanatuan City, Third Judicial Region, Branch 26, in Civil Case No. 892-AF
is hereby AFFIRMED. Costs against the [petitioner]."3

The Facts

The CA narrated the antecedents as follows:

"Vicente Henry Tan (hereafter TAN) is a businessman and a regular depositor-creditor of the
Associated Bank (hereinafter referred to as the BANK). Sometime in September 1990, he
deposited a postdated UCPB check with the said BANK in the amount of P101,000.00 issued
to him by a certain Willy Cheng from Tarlac. The check was duly entered in his bank record
thereby making his balance in the amount of P297,000.00, as of October 1, 1990, from his
original deposit of P196,000.00. Allegedly, upon advice and instruction of the BANK that
the P101,000.00 check was already cleared and backed up by sufficient funds, TAN, on the
same date, withdrew the sum of P240,000.00, leaving a balance of P57,793.45. A day after,
TAN deposited the amount of P50,000.00 making his existing balance in the amount
of P107,793.45, because he has issued several checks to his business partners, to wit:

CHECK NUMBERS DATE AMOUNT

a. 138814 Sept. 29, 1990 P9,000.00
b. 138804 Oct. 8, 1990 9,350.00
 c. 138787 Sept. 30, 1990 6,360.00
d. 138847 Sept. 29, 1990 21,850.00
e. 167054 Sept. 29, 1990 4,093.40
f. 138792 ` Sept. 29, 1990 3,546.00
g. 138774 Oct. 2, 1990 6,600.00
h. 167072 Oct. 10, 1990 9,908.00
i. 168802 Oct. 10, 1990 3,650.00

"However, his suppliers and business partners went back to him alleging that the checks he
issued bounced for insufficiency of funds. Thereafter, TAN, thru his lawyer, informed the
BANK to take positive steps regarding the matter for he has adequate and sufficient funds to
pay the amount of the subject checks. Nonetheless, the BANK did not bother nor offer any
apology regarding the incident. Consequently, TAN, as plaintiff, filed a Complaint for
Damages on December 19, 1990, with the Regional Trial Court of Cabanatuan City, Third
Judicial Region, docketed as Civil Case No. 892-AF, against the BANK, as defendant.

"In his [C]omplaint, [respondent] maintained that he ha[d] sufficient funds to pay the subject
checks and alleged that his suppliers decreased in number for lack of trust. As he has been in
the business community for quite a time and has established a good record of reputation and
probity, plaintiff claimed that he suffered embarrassment, humiliation, besmirched
reputation, mental anxieties and sleepless nights because of the said unfortunate incident.
[Respondent] further averred that he continuously lost profits in the amount of P250,000.00.
[Respondent] therefore prayed for exemplary damages and that [petitioner] be ordered to pay
him the sum of P1,000,000.00 by way of moral damages, P250,000.00 as lost
profits, P50,000.00 as attorney’s fees plus 25% of the amount claimed including P1,000.00
per court appearance.

"Meanwhile, [petitioner] filed a Motion to Dismiss on February 7, 1991, but the same was
denied for lack of merit in an Order dated March 7, 1991. Thereafter, [petitioner] BANK on
March 20, 1991 filed its Answer denying, among others, the allegations of [respondent] and
alleged that no banking institution would give an assurance to any of its client/depositor that
the check deposited by him had already been cleared and backed up by sufficient funds but it
could only presume that the same has been honored by the drawee bank in view of the lapse
of time that ordinarily takes for a check to be cleared. For its part, [petitioner] alleged that
on October 2, 1990, it gave notice to the [respondent] as to the return of his UCPB check
deposit in the amount of P101,000.00, hence, on even date, [respondent] deposited the
amount of P50,000.00 to cover the returned check.

"By way of affirmative defense, [petitioner] averred that [respondent] had no cause of action
against it and argued that it has all the right to debit the account of the [respondent] by
reason of the dishonor of the check deposited by the [respondent] which was withdrawn by
him prior to its clearing. [Petitioner] further averred that it has no liability with respect to
the clearing of deposited checks as the clearing is being undertaken by the Central Bank and
in accepting [the] check deposit, it merely obligates itself as depositor’s collecting agent
subject to actual payment by the drawee bank. [Petitioner] therefore prayed that
[respondent] be ordered to pay it the amount of P1,000,000.00 by way of loss of
goodwill, P7,000.00 as acceptance fee plus P500.00 per appearance and by way of attorney’s
fees.

"Considering that Westmont Bank has taken over the management of the affairs/properties
of the BANK, [respondent] on October 10, 1996, filed an Amended Complaint reiterating
 substantially his allegations in the original complaint, except that the name of the previous
defendant ASSOCIATED BANK is now WESTMONT BANK.

"Trial ensured and thereafter, the court rendered its Decision dated December 3, 1996 in favor of the
[respondent] and against the [petitioner], ordering the latter to pay the [respondent] the sum
of P100,000.00 by way of moral damages, P75,000.00 as exemplary damages, P25,000.00 as
attorney’s fees, plus the costs of this suit. In making said ruling, it was shown that [respondent] was
not officially informed about the debiting of the P101,000.00 [from] his existing balance and that the
BANK merely allowed the [respondent] to use the fund prior to clearing merely for accommodation
because the BANK considered him as one of its valued clients. The trial court ruled that the bank
manager was negligent in handling the particular checking account of the [respondent] stating that
such lapses caused all the inconveniences to the [respondent]. The trial court also took into
consideration that [respondent’s] mother was originally maintaining with the x x x BANK [a] current
account as well as [a] time deposit, but [o]n one occasion, although his mother made a deposit, the
same was not credited in her favor but in the name of another."4

Petitioner appealed to the CA on the issues of whether it was within its rights, as collecting bank, to
debit the account of its client for a dishonored check; and whether it had informed respondent about
the dishonor prior to debiting his account.

Ruling of the Court of Appeals

Affirming the trial court, the CA ruled that the bank should not have authorized the withdrawal of
the value of the deposited check prior to its clearing. Having done so, contrary to its obligation to
treat respondent’s account with meticulous care, the bank violated its own policy. It thereby took
upon itself the obligation to officially inform respondent of the status of his account before
unilaterally debiting the amount of P101,000. Without such notice, it is estopped from blaming him
for failing to fund his account.

The CA opined that, had the P101,000 not been debited, respondent would have had sufficient funds
for the postdated checks he had issued. Thus, the supposed accommodation accorded by petitioner to
him is the proximate cause of his business woes and shame, for which it is liable for damages.

Because of the bank’s negligence, the CA awarded respondent moral damages of P100,000. It also
granted him exemplary damages of P75,000 and attorney’s fees of P25,000.

Hence this Petition.5

Issue

In its Memorandum, petitioner raises the sole issue of "whether or not the petitioner, which is acting
as a collecting bank, has the right to debit the account of its client for a check deposit which was
dishonored by the drawee bank."6

The Court’s Ruling

The Petition has no merit.

Sole Issue:

Debit of Depositor’s Account

Petitioner-bank contends that its rights and obligations under the present set of facts were
misappreciated by the CA. It insists that its right to debit the amount of the dishonored check from
the account of respondent is clear and unmistakable. Even assuming that it did not give him notice
that the check had been dishonored, such right remains immediately enforceable.

In particular, petitioner argues that the check deposit slip accomplished by respondent on September
17, 1990, expressly stipulated that the bank was obligating itself merely as the depositor’s collecting
agent and -- until such time as actual payment would be made to it -- it was reserving the right to
charge against the depositor’s account any amount previously credited. Respondent was allowed to
withdraw the amount of the check prior to clearing, merely as an act of accommodation, it added.

At the outset, we stress that the trial court’s factual findings that were affirmed by the CA are not
subject to review by this Court.7 As petitioner itself takes no issue with those findings, we need only
to determine the legal consequence, based on the established facts.

Right of Setoff

A bank generally has a right of setoff over the deposits therein for the payment of any withdrawals
on the part of a depositor.8 The right of a collecting bank to debit a client’s account for the value of a
dishonored check that has previously been credited has fairly been established by jurisprudence. To
begin with, Article 1980 of the Civil Code provides that "[f]ixed, savings, and current deposits of
money in banks and similar institutions shall be governed by the provisions concerning simple loan."

Hence, the relationship between banks and depositors has been held to be that of creditor and
debtor.9 Thus, legal compensation under Article 127810 of the Civil Code may take place "when all
the requisites mentioned in Article 1279 are present,"11 as follows:

"(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 consist 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 be 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."12

Nonetheless, the real issue here is not so much the right of petitioner to debit respondent’s account
but, rather, the manner in which it exercised such right. The Court has held that even while the
right of setoff is conceded, separate is the question of whether that remedy has properly been
exercised.13

The liability of petitioner in this case ultimately revolves around the issue of whether it properly
exercised its right of setoff. The determination thereof hinges, in turn, on the bank’s role and
obligations, first, as respondent’s depositary bank; and second, as collecting agent for the check in
question.

Obligation as Depositary Bank

In BPI v. Casa Montessori,14 the Court has emphasized that the banking business is impressed with
public interest. "Consequently, the highest degree of diligence is expected, and high standards of
integrity and performance are even required of it. By the nature of its functions, a bank is under
obligation to treat the accounts of its depositors with meticulous care." 15

Also affirming this long standing doctrine, Philippine Bank of Commerce v. Court of Appeals 16 has
held that "the degree of diligence required of banks is more than that of a good father of a family
where the fiduciary nature of their relationship with their depositors is concerned." 17 Indeed, the
banking business is vested with the trust and confidence of the public; hence the "appropriate
standard of diligence must be very high, if not the highest, degree of diligence." 18 The standard
applies, regardless of whether the account consists of only a few hundred pesos or of millions. 19

The fiduciary nature of banking, previously imposed by case law, 20 is now enshrined in Republic Act
No. 8791 or the General Banking Law of 2000. Section 2 of the law specifically says that the State
recognizes the "fiduciary nature of banking that requires high standards of integrity and
performance."

Did petitioner treat respondent’s account with the highest degree of care? From all indications, it did
not.

It is undisputed -- nay, even admitted -- that purportedly as an act of accommodation to a valued

client, petitioner allowed the withdrawal of the face value of the deposited check prior to its clearing.
That act certainly disregarded the clearance requirement of the banking system. Such a practice is
unusual, because a check is not legal tender or money; 21 and its value can properly be transferred to
a depositor’s account only after the check has been cleared by the drawee bank. 22

Under ordinary banking practice, after receiving a check deposit, a bank either immediately credit
the amount to a depositor’s account; or infuse value to that account only after the drawee bank shall
have paid such amount.23Before the check shall have been cleared for deposit, the collecting bank can
only "assume" at its own risk -- as herein petitioner did -- that the check would be cleared and paid
out.

Reasonable business practice and prudence, moreover, dictated that petitioner should not have
authorized the withdrawal by respondent of P240,000 on October 1, 1990, as this amount was over
and above his outstanding cleared balance of P196,793.45.24 Hence, the lower courts correctly
appreciated the evidence in his favor.

Obligation as Collecting Agent

Indeed, the bank deposit slip expressed this reservation:

"In receiving items on deposit, this Bank obligates itself only as the Depositor’s Collecting
agent, assuming no responsibility beyond carefulness in selecting correspondents, and until
such time as actual payments shall have come to its possession, this Bank reserves the right
to charge back to the Depositor’s account any amounts previously credited whether or not the
deposited item is returned. x x x."25

However, this reservation is not enough to insulate the bank from any liability. In the past, we have
expressed doubt about the binding force of such conditions unilaterally imposed by a bank without
the consent of the depositor.26 It is indeed arguable that "in signing the deposit slip, the depositor
does so only to identify himself and not to agree to the conditions set forth at the back of the deposit
slip."27
Further, by the express terms of the stipulation, petitioner took upon itself certain obligations as
respondent’s agent, consonant with the well-settled rule that the relationship between the payee or
holder of a commercial paper and the collecting bank is that of principal and agent. 28 Under Article
190929 of the Civil Code, such bank could be held liable not only for fraud, but also for negligence.

As a general rule, a bank is liable for the wrongful or tortuous acts and declarations of its officers or
agents within the course and scope of their employment.30 Due to the very nature of their business,
banks are expected to exercise the highest degree of diligence in the selection and supervision of
their employees.31 Jurisprudence has established that the lack of diligence of a servant is imputed to
the negligence of the employer, when the negligent or wrongful act of the former proximately results
in an injury to a third person;32 in this case, the depositor.

The manager of the bank’s Cabanatuan branch, Consorcia Santiago, categorically admitted that she
and the employees under her control had breached bank policies. They admittedly breached those
policies when, without clearance from the drawee bank in Baguio, they allowed respondent to
withdraw on October 1, 1990, the amount of the check deposited. Santiago testified that respondent
"was not officially informed about the debiting of the P101,000 from his existing balance of P170,000
on October 2, 1990 x x x."33

Being the branch manager, Santiago clearly acted within the scope of her authority in authorizing
the withdrawal and the subsequent debiting without notice. Accordingly, what remains to be
determined is whether her actions proximately caused respondent’s injury. Proximate cause is that
which -- in a natural and continuous sequence, unbroken by any efficient intervening cause --
produces the injury, and without which the result would not have occurred.34

Let us go back to the facts as they unfolded. It is undeniable that the bank’s premature
authorization of the withdrawal by respondent on October 1, 1990, triggered -- in rapid succession
and in a natural sequence -- the debiting of his account, the fall of his account balance to insufficient
levels, and the subsequent dishonor of his own checks for lack of funds. The CA correctly noted thus:

"x x x [T]he depositor x x x withdrew his money upon the advice by [petitioner] that his
money was already cleared. Without such advice, [respondent] would not have withdrawn
the sum of P240,000.00. Therefore, it cannot be denied that it was [petitioner’s] fault which
allowed [respondent] to withdraw a huge sum which he believed was already his.

"To emphasize, it is beyond cavil that [respondent] had sufficient funds for the check. Had
the P101,000.00 not [been] debited, the subject checks would not have been dishonored.
Hence, we can say that [respondent’s] injury arose from the dishonor of his well-funded
checks. x x x."35

Aggravating matters, petitioner failed to show that it had immediately and duly informed
respondent of the debiting of his account. Nonetheless, it argues that the giving of notice was
discernible from his act of depositing P50,000 on October 2, 1990, to augment his account and allow
the debiting. This argument deserves short shrift.

First, notice was proper and ought to be expected. By the bank manager’s account, respondent was
considered a "valued client" whose checks had always been sufficiently funded from 1987 to
1990,36 until the October imbroglio. Thus, he deserved nothing less than an official notice of the
precarious condition of his account.
Second, under the provisions of the Negotiable Instruments Law regarding the liability of a general
indorser37 and the procedure for a notice of dishonor, 38 it was incumbent on the bank to give proper
notice to respondent. In Gullas v. National Bank,39 the Court emphasized:

"x x x [A] general indorser of a negotiable instrument engages that if the instrument – the
check in this case – is dishonored and the necessary proceedings for its dishonor are duly
taken, he will pay the amount thereof to the holder (Sec. 66) It has been held by a long line of
authorities that notice of dishonor is necessary to charge an indorser and that the right of
action against him does not accrue until the notice is given.

"x x x. The fact we believe is undeniable that prior to the mailing of notice of dishonor, and
without waiting for any action by Gullas, the bank made use of the money standing in his
account to make good for the treasury warrant. At this point recall that Gullas was merely an
indorser and had issued checks in good faith. As to a depositor who has funds sufficient to
meet payment of a check drawn by him in favor of a third party, it has been held that he has a
right of action against the bank for its refusal to pay such a check in the absence of notice to
him that the bank has applied the funds so deposited in extinguishment of past due claims
held against him. (Callahan vs. Bank of Anderson [1904], 2 Ann. Cas., 203.) However this
may be, as to an indorser the situation is different, and notice should actually have been given
him in order that he might protect his interests."40

Third, regarding the deposit of P50,000 made by respondent on October 2, 1990, we fully subscribe to
the CA’s observations that it was not unusual for a well-reputed businessman like him, who
"ordinarily takes note of the amount of money he takes and releases," to immediately deposit money
in his current account to answer for the postdated checks he had issued.41

Damages

Inasmuch as petitioner does not contest the basis for the award of damages and attorney’s fees, we
will no longer address these matters.

WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against
petitioner.

SO ORDERED.

Central Bank v. Morfe

This case involves the question of whether a final judgment for the payment of a time deposit in a
savings bank which judgment was obtained after the bank was declared insolvent, is a preferred
claim against the bank. The question arises under the following facts:

On February 18,1969 the Monetary Board found the Fidelity Savings Bank to be insolvent. The
Board directed the Superintendent of Banks to take charge of its assets, forbade it to do business and
instructed the Central Bank Legal Counsel to take legal actions (Resolution No. 350).

On December 9, 1969 the Board involved to seek the court's assistant and supervision in the
liquidation of the ban The resolution implemented only on January 25, 1972, when his Central Bank
of the Philippines filed the corresponding petition for assistance and supervision in the Court of First
Instance of Manila (Civil Case No. 86005 assigned to Branch XIII).
Prior to the institution of the liquidation proceeding but after the declaration of insolvency, or,
specifically, sometime in March, 1971, the spouses Job Elizes and Marcela P. Elizes filed a complaint
in the Court of First Instance of Manila against the Fidelity Savings Bank for the recovery of the
sum of P50, 584 as the balance of their time deposits (Civil Case No. 82520 assigned to Branch I).

In the judgment rendered in that case on December 13, 1972 the Fidelity Savings Bank was ordered
to pay the Elizes spouses the sum of P50,584 plus accumulated interest.

In another case, assigned to Branch XXX of the Court of First Instance of Manila, the spouses
Augusta A. Padilla and Adelaida Padilla secured on April 14, 1972 a judgment against the Fidelity
Savings Bank for the sums of P80,000 as the balance of their time deposits, plus interests, P70,000
as moral and exemplary damages and P9,600 as attorney's fees (Civil Case No. 84200 where the
action was filed on September 6, 1971).

In its orders of August 20, 1973 and February 25, 1974, the lower court (Branch XIII having
cognizance of the liquidation proceeding), upon motions of the Elizes and Padilla spouses and over
the opposition of the Central Bank, directed the latter as liquidator, to pay their time deposits
as preferred judgments, evidenced by final judgments, within the meaning of article 2244(14)(b) of
the Civil Code, if there are enough funds in the liquidator's custody in excess of the credits more
preferred under section 30 of the Central Bank Law in relation to articles 2244 and 2251 of the Civil
Code.

From the said order, the Central Bank appealed to this Court by certiorari. It contends that the final
judgments secured by the Elizes and Padilla spouses do not enjoy any preference because (a) they
were rendered after the Fidelity Savings Bank was declared insolvent and (b) under the charter of
the Central Bank and the General Banking Law, no final judgment can be validly obtained against
an insolvent bank.

Republic Act No. 265 provides:têñ.£îhqwâ£

SEC. 29. Proceeding upon insolvency.—Whenever upon examination by the

Superintendent or his examiners or agents into the condition of any banking
institution, it shall be disclosed that the condition of the same is one of insolvency, or
that its continuance in business would involve probable loss to its depositors or
creditors, it shall be the duty of the Superintendent forthwith, in writing to inform
the Monetary Board of the facts, and the Board, upon finding the statements of the
Superintendent to be true, shall forthwith forbid the institution to do business in the
Philippines and shall take charge of its assets and proceeds according to law.

The Monetary Board shall thereupon determine within thirty days whether the
institution may be reorganized or otherwise placed in such a condition so that it may
be permitted to resume business with safety to its creditors and shall prescribe the
conditions under which such resumption of business shall take place. In such case
the expenses and fees in the administration of the institution shall be determined by
the Board and shall be paid to the Central Bank out of the assets of such banking
institution.

At any time within ten days after the Monetary Board has taken charge of the assets
of any banking institution, such institution may apply to the Court of First Instance
for an order requiring the Monetary Board to show cause why it should not be
enjoined from continuing such charge of its assets, and the court may direct the
Board to refrain from further proceedings and to surrender charge of its assets.
 If the Monetary Board shall determine that the banking institution cannot resume
business with safety to its creditors, it shall, by the Office of the Solicitor General, file
a petition in the Court of First Instance reciting the proceedings which have been
taken and praying the assistance and supervision of the court in the liquidation of
the affairs of the same. The Superintendent shall thereafter, upon order of the
Monetary Board and under the supervision of the court and with all convenient
speed, convert the assets of the banking institution to money.

SEC. 30. Distribution of assets.—In case of liquidation of a banking institution, after

payment of the costs of the proceedings, including reasonable expenses and fees of
the Central Bank to be allowed by the court, the Central Bank shall pay the debts of
such institution, under the order of the court, in accordance with their legal priority.

The General Banking Act, Republic Act No. 337, provides:têñ.£îhqwâ£

SEC. 85. Any director or officer of any banking institution who receives or permits or
causes to be received in said bank any deposit, or who pays out or permits or causes
to be paid out any funds of said bank, or who transfers or permits or causes to be
transferred any securities or property of said bank, after said bank becomes
insolvent, shall be punished by fine of not less than one thousand nor more than ten
thousand pesos and by imprisonment for not less than two nor more than ten years.

The Civil Code provides:têñ.£îhqwâ£

ART. 2237. Insolvency shall be governed by special laws insofar as they are not
inconsistent with this Code. (n)

ART. 2244. With reference to other property, real and personal, of the debtor, the
following claims or credits shall be preferred in the order named:

xxx xxx xxx

(14) Credits which, without special privilege, appear in (a) a public instrument; or (b)
in a final judgment, if they have been the subject of litigation. These credits shall
have preference among themselves in the order of priority of the dates of the
instruments and of the judgments, respectively. (1924a)

ART. 2251. Those credits which do not enjoy any preference with respect to specific
property, and those which enjoy preference, as to the amount not paid, shall be
satisfied according to the following rules:

(1) In the order established in article 2244;

(2) Common credits referred to in article 2245 shall be paid pro rata regardless of
dates. (1929a)

The trial court or, to be exact, the liquidation court noted that there is no provision in the charter of
the Central Bank in the General Banking Law (Republic Acts Nos. 265 and 337, respectively) which
suspends or abates civil actions against an insolvent bank pending in courts other than the
liquidation court. It reasoned out that, because such actions are not suspended, judgments against
insolvent banks could be considered as preferred credits under article 2244(14)(b) of the Civil Code.
It further noted that, in contrast with the Central Act, section 18 of the Insolvency Law provides that
upon the issuance by the court of an order declaring a person insolvent "all civil proceedings against
the said insolvent shall be stayed."

The liquidation court directed the Central Bank to honor the writs of execution issued by Branches I
and XXX for the enforcement of the judgments obtained by the Elizes and Padilla spouses. It
suggested that, after satisfaction of the judgment the Central Bank, as liquidator, should include
said judgments in the list of preferred credits contained in the "Project of Distribution" "with the
notation "already paid" "

On the other hand, the Central Bank argues that after the Monetary Board has declared that a bank
is insolvent and has ordered it to cease operations, the Board becomes the trustee of its assets "for
the equal benefit of all the creditors, including the depositors". The Central Bank cites the ruling
that "the assets of an insolvent banking institution are held in trust for the equal benefit of all
creditors, and after its insolvency, one cannot obtain an advantage or a preference over another by
an attachment, execution or otherwise" (Rohr vs. Stanton Trust & Savings Bank, 76 Mont. 248, 245
Pac. 947).

The stand of the Central Bank is that all depositors and creditors of the insolvent bank should file
their actions with the liquidation court. In support of that view it cites the provision that the
Insolvency Law does not apply to banks (last sentence, sec. 52 of Act No. 1956).

It also invokes the provision penalizing a director officer of a bank who disburses, or allows
disbursement, of the funds of the bank after it becomes insolvent (Sec. 85, General Banking Act,
Republic Act No. 337). It cites the ruling that "a creditor of an insolvent state bank in the hands of a
liquidator who recovered a judgment against it is not entitled to a preference for (by) the mere fact
that he is a judgment creditor" (Thomas H. Briggs & Sons, Inc. vs. Allen, 207 N. Carolina 10, 175 S.
E. 838, Braver Liquidation of Financial Institutions, p. 922).

It should be noted that fixed, savings, and current deposits of money in banks and similar
institutions are not true deposits. They are considered simple loans and, as such, are not preferred
credits (Art. 1980, Civil Code; In re Liquidation of Mercantile Bank of China: Tan Tiong Tick vs.
American Apothecaries Co., 65 Phil. 414; Pacific Coast Biscuit Co. vs. Chinese Grocers Association,
65 Phil. 375; Fletcher American National Bank vs. Ang Cheng Lian, 65 Phil. 385; Pacific Commercial
Co. vs. American Apothecaries Co., 65 Phil. 429; Gopoco Grocery vs. Pacific Coast Biscuit Co., 65
Phil. 443).

The aforequoted section 29 of the Central Bank's charter explicitly provides that when a bank is
found to be insolvent, the Monetary Board shall forbid it to do business and shall take charge of its
assets. The Board in its Resolution No. 350 dated February 18,1969 banned the Fidelity Savings
Bank from doing business. It took charge of the bank's assets. Evidently, one purpose in prohibiting
the insolvent bank from doing business is to prevent some depositors from having an undue or
fraudulent preference over other creditors and depositors.

That purpose would be nullified if, as in this case, after the bank is declared insolvent, suits by some
depositors could be maintained and judgments would be rendered for the payment of their deposits
and then such judgments would be considered preferred credits under article 2244 (14) (b) of the
Civil Code.

We are of the opinion that such judgments cannot be considered preferred and that article
2244(14)(b) does not apply to judgments for the payment of the deposits in an insolvent savings bank
which were obtained after the declaration of insolvency.
A contrary rule or practice would be productive of injustice, mischief and confusion. To recognize
such judgments as entitled to priority would mean that depositors in insolvent banks, after learning
that the bank is insolvent as shown by the fact that it can no longer pay withdrawals or that it has
closed its doors or has been enjoined by the Monetary Board from doing business, would rush to the
courts to secure judgments for the payment of their deposits.

In such an eventuality, the courts would be swamped with suits of that character. Some of the
judgments would be default judgments. Depositors armed with such judgments would pester the
liquidation court with claims for preference on the basis of article 2244(14)(b). Less alert depositors
would be prejudiced. That inequitable situation could not have been contemplated by the framers of
section 29.

The Rohr case (supra) supplies some illumination on the disposition of the instant case. It appears in
that case that the Stanton Trust & Savings Bank of Great Falls closed its doors to business on July
9, 1923. On November 7,1924 the bank (then already under liquidation) issued to William Rohr a
certificate stating that he was entitled to claim from the bank $1,191.72 and that he was entitled to
dividends thereon. Later, Rohr sued the bank for the payment of his claim. The bank demurred to
the complaint. The trial court sustained the demurrer. Rohr appealed. In affirming the order
sustaining the demurrer, the Supreme Court of Montana said:têñ.£îhqwâ£

The general principle of equity that the assets of an insolvent are to he distributed
ratably among general creditors applies with full force to the distribution of the
assets of a bank. A general depositor of a bank is merely a general creditor, and, as
such, is not entitled to any preference or priority over other general creditors.

The assets of a bank in process of liquidation are held in trust for the equal benefit of
all creditors, and one cannot be permitted to obtain an advantage or preference over
another by an attachment, execution or otherwise. A disputed claim of a creditor may
be adjudicated, but those whose claims are recognized and admitted may not
successfully maintain action thereon. So to permit would defeat the very purpose of
the liquidation of a bank whether being voluntarily accomplished or through the
intervention of a receiver.

xxx xxx xxx

The available assets of such a bank are held in trust, and so conserved that each
depositor or other creditor shall receive payment or dividend according to the amount
of his debt, and that none of equal class shall receive any advantage or preference
over another.

And with respect to a national bank under voluntary liquidation, the court noted in the Rohr case
that the assets of such a bank "become a trust fund, to be administered for the benefit of all creditors
pro rata and, while the bank retains its corporate existence, and may be sued, the effect of a
judgment obtained against it by a creditor is only to fix the amount of debt. He can acquire no lien
which will give him any preference or advantage over other general creditors. (245 Pac. 249). *

Considering that the deposits in question, in their inception, were not preferred credits, it does not
seem logical and just that they should be raised to the category of preferred credits simply because
the depositors, taking advantage of the long interval between the declaration of insolvency and the
filing of the petition for judicial assistance and supervision, were able to secure judgments for the
payment of their time deposits.
The judicial declaration that the said deposits were payable to the depositors, as indisputably they
were due, could not have given the Elizes and Padilla spouses a priority over the other depositors
whose deposits were likewise indisputably due and owing from the insolvent bank but who did not
want to incur litigation expenses in securing a judgment for the payment of the deposits.

The circumstance that the Fidelity Savings Bank, having stopped operations since February 19,
1969, was forbidden to do business (and that ban would include the payment of time deposits)
implies that suits for the payment of such deposits were prohibited. What was directly prohibited
should not be encompassed indirectly. (See Maurello vs. Broadway Bank & Trust Co. of Paterson 176
Atl. 391, 114 N.J.L. 167).

It is noteworthy that in the trial court's order of October 3, 1972, which contains the Bank
Liquidation Rules and Regulations, it indicated in step III the procedure for processing the claims
against the insolvent bank. In Step IV, the court directed the Central Bank, as liquidator, to submit
a Project of Distribution which should include "a list of the preferred credits to be paid in full in the
order of priorities established in Articles 2241, 2242, 2243, 2246 and 2247" of the Civil Code (note
that article 2244 was not mentioned). There is no cogent reason why the Elizes and Padilla spouses
should not adhere to the procedure outlined in the said rules and regulations.

WHEREFORE, the lower court's orders of August 20, 1973 and February 25, 1974 are reversed and
set aside. No costs.

SO ORDERED.

I.A.4.a.2. Secrecy of Bank Deposits

Philippine National Bank v. Gancayco

The principal question presented in this case is whether a bank can be compelled to disclose the
records of accounts of a depositor who is under investigation for unexplained wealth.

This question arose when defendants Emilio A. Gancayco and Florentino Flor, as special prosecutors
of the Department of Justice, required the plaintiff Philippine National Bank to produce at a hearing
to be held at 10 a.m. on February 20, 1961 the records of the bank deposits of Ernesto T. Jimenez,
former administrator of the Agricultural Credit and Cooperative Administration, who was then
under investigation for unexplained wealth. In declining to reveal its records, the plaintiff bank
invoked Republic Act No. 1405 which provides:

SEC. 2. All deposits of whatever nature with banks or banking institutions in the Philippines
including investments in bonds issued by the Government of the Philippines, its political
subdivisions and its instrumentalities, are hereby considered as of an absolutely confidential
nature and may not be examined, inquired or looked into by any person, government official,
bureau or office, except upon written permission of the depositor, or in cases of impeachment,
or upon order of a competent court in cases of bribery or dereliction of duty of public officials,
or in cases where the money deposited or invested is the subject matter of the litigation.

The plaintiff bank also called attention to the penal provision of the law which reads:

SEC. 5. Any violation of this law will subject the offender upon conviction, to an
imprisonment of not more than five years or a fine of not more than twenty thousand pesos
or both, in the discretion of the court.
On the other hand, the defendants cited the Anti-Graft and Corrupt Practices Act (Republic Act No.
3019) in support of their claim of authority and demanded anew that plaintiff Eduardo Z.
Romualdez, as bank president, produce the records or he would be prosecuted for contempt. The law
invoked by the defendant states:

SEC. 8. Dismissal due to unexplained wealth. — If in accordance with the provisions of

Republic Act Numbered One thousand three hundred seventy-nine, a public official has been
found to have acquired during his incumbency, whether in his name or in the name of other
persons, an amount of property and/or money manifestly out of proportion to his salary and
to his other lawful income, that fact shall be a ground for dismissal or removal. Properties in
the name of the spouse and unmarried children of such public official may be taken into
consideration, when their acquisition through legitimate means cannot be satisfactorily
shown. Bank deposits shall be taken into consideration in the enforcement of this section,
notwithstanding any provision of law to the contrary.

Because of the threat of prosecution, plaintiffs filed an action for declaratory judgment in the Manila
Court of First Instance. After trial, during which Senator Arturo M. Tolentino, author of the Anti-
Graft and Corrupt Practices Act testified, the court rendered judgment, sustaining the power of the
defendants to compel the disclosure of bank accounts of ACCFA Administrator Jimenez. The court
said that, by enacting section 8 of, the Anti-Graft and Corrupt Practices Act, Congress clearly
intended to provide an additional ground for the examination of bank deposits. Without such
provision, the court added prosecutors would be hampered if not altogether frustrated in the
prosecution of those charged with having acquired unexplained wealth while in public
office.1awphîl.nèt

From that judgment, plaintiffs appealed to this Court. In brief, plaintiffs' position is that section 8 of
the Anti-Graft Law "simply means that such bank deposits may be included or added to the assets of
the Government official or employee for the purpose of computing his unexplained wealth if and
when the same are discovered or revealed in the manner authorized by Section 2 of Republic Act
1405, which are (1) Upon written permission of the depositor; (2) In cases of impeachment; (3) Upon
order of a competent court in cases of bribery or dereliction of duty of public officials; and (4) In cases
where the money deposited or invested is the subject matter of the litigation."

In support of their position, plaintiffs contend, first, that the Anti-Graft Law (which took effect on
August 17, 1960) is a general law which cannot be deemed to have impliedly repealed section 2 of
Republic Act No. 1405 (which took effect on Sept. 9, 1955), because of the rule that repeals by
implication are not favored. Second, they argue that to construe section 8 of the Anti-Graft Law as
allowing inquiry into bank deposits would be to negate the policy expressed in section 1 of Republic
Act No. 1405 which is "to give encouragement to the people to deposit their money in banking
institutions and to discourage private hoarding so that the same may be utilized by banks in
authorized loans to assist in the economic development of the country."

Contrary to their claim that their position effects a reconciliation of the provisions of the two laws,
plaintiffs are actually making the provisions of Republic Act No. 1405 prevail over those of the Anti-
Graft Law, because even without the latter law the balance standing to the depositor's credit can be
considered provided its disclosure is made in any of the cases provided in Republic Act No. 1405.

The truth is that these laws are so repugnant to each other than no reconciliation is possible. Thus,
while Republic Act No. 1405 provides that bank deposits are "absolutely confidential ... and
[therefore] may not be examined, inquired or looked into," except in those cases enumerated therein,
the Anti-Graft Law directs in mandatory terms that bank deposits "shall be taken into consideration
in the enforcement of this section, notwithstanding any provision of law to the contrary." The only
conclusion possible is that section 8 of the Anti-Graft Law is intended to amend section 2 of Republic
Act No. 1405 by providing additional exception to the rule against the disclosure of bank deposits.

Indeed, it is said that if the new law is inconsistent with or repugnant to the old law, the
presumption against the intent to repeal by implication is overthrown because the inconsistency or
repugnancy reveals an intent to repeal the existing law. And whether a statute, either in its entirety
or in part, has been repealed by implication is ultimately a matter of legislative intent. (Crawford,
The Construction of Statutes, Secs. 309-310. Cf. Iloilo Palay and Corn Planters Ass'n v. Feliciano,
G.R. No. L-24022, March 3, 1965).

The recent case of People v. De Venecia, G.R. No. L-20808, July 31, 1965 invites comparison with this
case. There it was held:

The result is that although sec. 54 [Rev. Election Code] prohibits a classified civil service
employee from aiding any candidate, sec. 29 [Civil Service Act of 1959] allows such classified
employee to express his views on current political problems or issues, or to mention the name
of his candidate for public office, even if such expression of views or mention of names may
result in aiding one particular candidate. In other words, the last paragraph of sec. 29 is an
exception to sec. 54; at most, an amendment to sec. 54.

With regard to the claim that disclosure would be contrary to the policy making bank deposits
confidential, it is enough to point out that while section 2 of Republic Act 1405 declares bank
deposits to be "absolutely confidential," it nevertheless allows such disclosure in the following
instances: (1) Upon written permission of the depositor; (2) In cases of impeachment; (3) Upon order
of a competent court in cases of bribery or dereliction of duty of public officials; (4) In cases where the
money deposited is the subject matter of the litigation. Cases of unexplained wealth are similar to
cases of bribery or dereliction of duty and no reason is seen why these two classes of cases cannot be
excepted from the rule making bank deposits confidential. The policy as to one cannot be different
from the policy as to the other. This policy express the motion that a public office is a public trust
and any person who enters upon its discharge does so with the full knowledge that his life, so far as
relevant to his duty, is open to public scrutiny.

WHEREFORE, the decision appealed from is affirmed, without pronouncement as to costs.

BSB Group Inc. v. Sally Go

This is a Petition for Review under Rule 45 of the Rules of Court assailing the Decision of the Court
of Appeals in CA-G.R. SP No. 876001 dated April 20, 2005, which reversed and set aside the
September 13, 20042 and November 5, 20043 Orders issued by the Regional Trial Court of Manila,
Branch 364 in Criminal Case No. 02-202158 for qualified theft. The said orders, in turn, respectively
denied the motion filed by herein respondent Sally Go for the suppression of the testimonial and
documentary evidence relative to a Security Bank account, and denied reconsideration.

The basic antecedents are no longer disputed.

Petitioner, the BSB Group, Inc., is a duly organized domestic corporation presided by its herein
representative, Ricardo Bangayan (Bangayan). Respondent Sally Go, alternatively referred to as
Sally Sia Go and Sally Go-Bangayan, is Bangayan’s wife, who was employed in the company as a
cashier, and was engaged, among others, to receive and account for the payments made by the
various customers of the company.
In 2002, Bangayan filed with the Manila Prosecutor’s Office a complaint for estafa and/or qualified
theft5 against respondent, alleging that several checks6 representing the aggregate amount
of P1,534,135.50 issued by the company’s customers in payment of their obligation were, instead of
being turned over to the company’s coffers, indorsed by respondent who deposited the same to her
personal banking account maintained at Security Bank and Trust Company (Security Bank) in
Divisoria, Manila Branch.7 Upon a finding that the evidence adduced was uncontroverted, the
assistant city prosecutor recommended the filing of the Information for qualified theft against
respondent.8

Accordingly, respondent was charged before the Regional Trial Court of Manila, Branch 36, in an
Information, the inculpatory portion of which reads:

That in or about or sometime during the period comprised (sic) between January 1988 [and] October
1989, inclusive, in the City of Manila, Philippines, the said accused did then and there willfully,
unlawfully and feloniously with intent [to] gain and without the knowledge and consent of the owner
thereof, take, steal and carry away cash money in the total amount of P1,534,135.50 belonging to
BSB GROUP OF COMPANIES represented by RICARDO BANGAYAN, to the damage and prejudice
of said owner in the aforesaid amount of P1,534,135.50, Philippine currency.

That in the commission of the said offense, said accused acted with grave abuse of confidence, being
then employed as cashier by said complainant at the time of the commission of the said offense and
as such she was entrusted with the said amount of money.

Contrary to law.9

Respondent entered a negative plea when arraigned. 10 The trial ensued. On the premise that
respondent had allegedly encashed the subject checks and deposited the corresponding amounts
thereof to her personal banking account, the prosecution moved for the issuance of subpoena duces
tecum /ad testificandum against the respective managers or records custodians of Security Bank’s
Divisoria Branch, as well as of the Asian Savings Bank (now Metropolitan Bank & Trust Co.
[Metrobank]), in Jose Abad Santos, Tondo, Manila Branch. 11 The trial court granted the motion and
issued the corresponding subpoena.12

Respondent filed a motion to quash the subpoena dated November 4, 2003, addressed to Metrobank,
noting to the court that in the complaint-affidavit filed with the prosecutor, there was no mention
made of the said bank account, to which respondent, in addition to the Security Bank account
identified as Account No. 01-14-006, allegedly deposited the proceeds of the supposed checks.
Interestingly, while respondent characterized the Metrobank account as irrelevant to the case, she,
in the same motion, nevertheless waived her objection to the irrelevancy of the Security Bank
account mentioned in the same complaint-affidavit, inasmuch as she was admittedly willing to
address the allegations with respect thereto.13

Petitioner, opposing respondent’s move, argued for the relevancy of the Metrobank account on the
ground that the complaint-affidavit showed that there were two checks which respondent allegedly
deposited in an account with the said bank.14 To this, respondent filed a supplemental motion to
quash, invoking the absolutely confidential nature of the Metrobank account under the provisions of
Republic Act (R.A.) No. 1405.15 The trial court did not sustain respondent; hence, it denied the
motion to quash for lack of merit.16

Meanwhile, the prosecution was able to present in court the testimony of Elenita Marasigan
(Marasigan), the representative of Security Bank. In a nutshell, Marasigan’s testimony sought to
prove that between 1988 and 1989, respondent, while engaged as cashier at the BSB Group, Inc.,
was able to run away with the checks issued to the company by its customers, endorse the same, and
credit the corresponding amounts to her personal deposit account with Security Bank. In the course
of the testimony, the subject checks were presented to Marasigan for identification and marking as
the same checks received by respondent, endorsed, and then deposited in her personal account with
Security Bank.17 But before the testimony could be completed, respondent filed a Motion to
Suppress,18 seeking the exclusion of Marasigan’s testimony and accompanying documents thus far
received, bearing on the subject Security Bank account. This time respondent invokes, in addition to
irrelevancy, the privilege of confidentiality under R.A. No. 1405.

The trial court, nevertheless, denied the motion in its September 13, 2004 Order. 19 A motion for
reconsideration was subsequently filed, but it was also denied in the Order dated November 5,
2004.20 These two orders are the subject of the instant case.

Aggrieved, and believing that the trial court gravely abused its discretion in acting the way it did,
respondent elevated the matter to the Court of Appeals via a petition for certiorari under Rule 65.
Finding merit in the petition, the Court of Appeals reversed and set aside the assailed orders of the
trial court in its April 20, 2005 Decision.21The decision reads:

WHEREFORE, the petition is hereby GRANTED. The assailed orders dated September 13, 2004 and
November 5, 2004 are REVERSED and SET ASIDE. The testimony of the SBTC representative is
ordered stricken from the records.

SO ORDERED.22

With the denial of its motion for reconsideration,23 petitioner is now before the Court pleading the
same issues as those raised before the lower courts.

In this Petition24 under Rule 45, petitioner averred in the main that the Court of Appeals had
seriously erred in reversing the assailed orders of the trial court, and in effect striking out
Marasigan’s testimony dealing with respondent’s deposit account with Security Bank. 25 It asserted
that apart from the fact that the said evidence had a direct relation to the subject matter of the case
for qualified theft and, hence, brings the case under one of the exceptions to the coverage of
confidentiality under R.A. 1405.26 Petitioner believed that what constituted the subject matter in
litigation was to be determined by the allegations in the information and, in this respect, it alluded
to the assailed November 5, 2004 Order of the trial court, which declared to be erroneous the
limitation of the present inquiry merely to what was contained in the information. 27

For her part, respondent claimed that the money represented by the Security Bank account was
neither relevant nor material to the case, because nothing in the criminal information suggested that
the money therein deposited was the subject matter of the case. She invited particular attention to
that portion of the criminal Information which averred that she has stolen and carried away cash
money in the total amount of P1,534,135.50. She advanced the notion that the term "cash money"
stated in the Information was not synonymous with the checks she was purported to have stolen
from petitioner and deposited in her personal banking account. Thus, the checks which the
prosecution had Marasigan identify, as well as the testimony itself of Marasigan, should be
suppressed by the trial court at least for violating respondent’s right to due process.28 More in point,
respondent opined that admitting the testimony of Marasigan, as well as the evidence pertaining to
the Security Bank account, would violate the secrecy rule under R.A. No. 1405. 29

In its reply, petitioner asserted the sufficiency of the allegations in the criminal Information for
qualified theft, as the same has sufficiently alleged the elements of the offense charged. It posits that
through Marasigan’s testimony, the Court would be able to establish that the checks involved, copies
of which were attached to the complaint-affidavit filed with the prosecutor, had indeed been received
by respondent as cashier, but were, thereafter, deposited by the latter to her personal account with
Security Bank. Petitioner held that the checks represented the cash money stolen by respondent
and, hence, the subject matter in this case is not only the cash amount represented by the checks
supposedly stolen by respondent, but also the checks themselves. 30

We derive from the conflicting advocacies of the parties that the issue for resolution is whether the
testimony of Marasigan and the accompanying documents are irrelevant to the case, and whether
they are also violative of the absolutely confidential nature of bank deposits and, hence, excluded by
operation of R.A. No. 1405. The question of admissibility of the evidence thus comes to the fore. And
the Court, after deliberative estimation, finds the subject evidence to be indeed inadmissible.

Prefatorily, fundamental is the precept in all criminal prosecutions, that the constitutive acts of the
offense must be established with unwavering exactitude and moral certainty because this is the
critical and only requisite to a finding of guilt. 31 Theft is present when a person, with intent to gain
but without violence against or intimidation of persons or force upon things, takes the personal
property of another without the latter’s consent. It is qualified when, among others, and as alleged in
the instant case, it is committed with abuse of confidence. 32 The prosecution of this offense
necessarily focuses on the existence of the following elements: (a) there was taking of personal
property belonging to another; (b) the taking was done with intent to gain; (c) the taking was done
without the consent of the owner; (d) the taking was done without violence against or intimidation of
persons or force upon things; and (e) it was done with abuse of confidence. 33 In turn, whether these
elements concur in a way that overcomes the presumption of guiltlessness, is a question that must
pass the test of relevancy and competency in accordance with Section 3 34 Rule 128 of the Rules of
Court.

Thus, whether these pieces of evidence sought to be suppressed in this case the testimony of
Marasigan, as well as the checks purported to have been stolen and deposited in respondent’s
Security Bank account are relevant, is to be addressed by considering whether they have such
direct relation to the fact in issue as to induce belief in its existence or non-existence; or whether
they relate collaterally to a fact from which, by process of logic, an inference may be made as to the
existence or non-existence of the fact in issue.35

The fact in issue appears to be that respondent has taken away cash in the amount of P1,534,135.50
from the coffers of petitioner. In support of this allegation, petitioner seeks to establish the existence
of the elemental act of taking by adducing evidence that respondent, at several times between 1988
and 1989, deposited some of its checks to her personal account with Security Bank. Petitioner
addresses the incongruence between the allegation of theft of cash in the Information, on the one
hand, and the evidence that respondent had first stolen the checks and deposited the same in her
banking account, on the other hand, by impressing upon the Court that there obtains no difference
between cash and check for purposes of prosecuting respondent for theft of cash. Petitioner is
mistaken.

In theft, the act of unlawful taking connotes deprivation of personal property of one by another with
intent to gain, and it is immaterial that the offender is able or unable to freely dispose of the
property stolen because the deprivation relative to the offended party has already ensued from such
act of execution.36 The allegation of theft of money, hence, necessitates that evidence presented must
have a tendency to prove that the offender has unlawfully taken money belonging to another.
Interestingly, petitioner has taken pains in attempting to draw a connection between the evidence
subject of the instant review, and the allegation of theft in the Information by claiming that
respondent had fraudulently deposited the checks in her own name. But this line of argument works
more prejudice than favor, because it in effect, seeks to establish the commission, not of theft, but
rather of some other crime probably estafa.

Moreover, that there is no difference between cash and check is true in other instances. In estafa by
conversion, for instance, whether the thing converted is cash or check, is immaterial in relation to
the formal allegation in an information for that offense; a check, after all, while not regarded as legal
tender, is normally accepted under commercial usage as a substitute for cash, and the credit it
represents in stated monetary value is properly capable of appropriation. And it is in this respect
that what the offender does with the check subsequent to the act of unlawfully taking it becomes
material inasmuch as this offense is a continuing one. 37 In other words, in pursuing a case for this
offense, the prosecution may establish its cause by the presentation of the checks involved. These
checks would then constitute the best evidence to establish their contents and to prove the elemental
act of conversion in support of the proposition that the offender has indeed indorsed the same in his
own name.38

Theft, however, is not of such character. Thus, for our purposes, as the Information in this case
accuses respondent of having stolen cash, proof tending to establish that respondent has actualized
her criminal intent by indorsing the checks and depositing the proceeds thereof in her personal
account, becomes not only irrelevant but also immaterial and, on that score, inadmissible in
evidence.

We now address the issue of whether the admission of Marasigan’s testimony on the particulars of
respondent’s account with Security Bank, as well as of the corresponding evidence of the checks
allegedly deposited in said account, constitutes an unallowable inquiry under R.A. 1405.

It is conceded that while the fundamental law has not bothered with the triviality of specifically
addressing privacy rights relative to banking accounts, there, nevertheless, exists in our jurisdiction
a legitimate expectation of privacy governing such accounts. The source of this right of expectation is
statutory, and it is found in R.A. No. 1405,39otherwise known as the Bank Secrecy Act of 1955. 40

R.A. No. 1405 has two allied purposes. It hopes to discourage private hoarding and at the same time
encourage the people to deposit their money in banking institutions, so that it may be utilized by
way of authorized loans and thereby assist in economic development. 41 Owing to this piece of
legislation, the confidentiality of bank deposits remains to be a basic state policy in the
Philippines.42 Section 2 of the law institutionalized this policy by characterizing as absolutely
confidential in general all deposits of whatever nature with banks and other financial institutions in
the country. It declares:

Section 2. All deposits of whatever nature with banks or banking institutions in the Philippines
including investments in bonds issued by the Government of the Philippines, its political
subdivisions and its instrumentalities, are hereby considered as of an absolutely confidential nature
and may not be examined, inquired or looked into by any person, government official, bureau or
office, except upon written permission of the depositor, or in cases of impeachment, or upon order of
a competent court in cases of bribery or dereliction of duty of public officials, or in cases where the
money deposited or invested is the subject matter of the litigation.1avvphi1

Subsequent statutory enactments43 have expanded the list of exceptions to this policy yet the secrecy
of bank deposits still lies as the general rule, falling as it does within the legally recognized zones of
privacy.44 There is, in fact, much disfavor to construing these primary and supplemental exceptions
in a manner that would authorize unbridled discretion, whether governmental or otherwise, in
utilizing these exceptions as authority for unwarranted inquiry into bank accounts. It is then
perceivable that the present legal order is obliged to conserve the absolutely confidential nature of
bank deposits.45

The measure of protection afforded by the law has been explained in China Banking Corporation v.
Ortega.46That case principally addressed the issue of whether the prohibition against an
examination of bank deposits precludes garnishment in satisfaction of a judgment. Ruling on that
issue in the negative, the Court found guidance in the relevant portions of the legislative
deliberations on Senate Bill No. 351 and House Bill No. 3977, which later became the Bank Secrecy
Act, and it held that the absolute confidentiality rule in R.A. No. 1405 actually aims at protection
from unwarranted inquiry or investigation if the purpose of such inquiry or investigation is merely to
determine the existence and nature, as well as the amount of the deposit in any given bank account.
Thus,

x x x The lower court did not order an examination of or inquiry into the deposit of B&B Forest
Development Corporation, as contemplated in the law. It merely required Tan Kim Liong to inform
the court whether or not the defendant B&B Forest Development Corporation had a deposit in the
China Banking Corporation only for purposes of the garnishment issued by it, so that the bank
would hold the same intact and not allow any withdrawal until further order. It will be noted from
the discussion of the conference committee report on Senate Bill No. 351 and House Bill No.
3977which later became Republic Act No. 1405, that it was not the intention of the lawmakers to
place banks deposits beyond the reach of execution to satisfy a final judgmentThus:

x x x Mr. Marcos: Now, for purposes of the record, I should like the Chairman of the Committee on
Ways and Means to clarify this further. Suppose an individual has a tax case. He is being held liable
by the Bureau of Internal Revenue [(BIR)] or, say, P1,000.00 worth of tax liability, and because of
this the deposit of this individual [has been] attached by the [BIR].

Mr. Ramos: The attachment will only apply after the court has pronounced sentence declaring the
liability of such person. But where the primary aim is to determine whether he has a bank deposit in
order to bring about a proper assessment by the [BIR], such inquiry is not allowed by this proposed
law.

Mr. Marcos: But under our rules of procedure and under the Civil Code, the attachment or
garnishment of money deposited is allowed. Let us assume for instance that there is a preliminary
attachment which is for garnishment or for holding liable all moneys deposited belonging to a certain
individual, but such attachment or garnishment will bring out into the open the value of such
deposit. Is that prohibited by... the law?

Mr. Ramos: It is only prohibited to the extent that the inquiry... is made only for the purpose of
satisfying a tax liability already declared for the protection of the right in favor of the government;
but when the object is merely to inquire whether he has a deposit or not for purposes of taxation,
then this is fully covered by the law. x x x

Mr. Marcos: The law prohibits a mere investigation into the existence and the amount of the deposit.

Mr. Ramos: Into the very nature of such deposit. x x x 47

In taking exclusion from the coverage of the confidentiality rule, petitioner in the instant case posits
that the account maintained by respondent with Security Bank contains the proceeds of the checks
that she has fraudulently appropriated to herself and, thus, falls under one of the exceptions in
Section 2 of R.A. No. 1405 that the money kept in said account is the subject matter in litigation.
To highlight this thesis, petitioner avers, citing Mathay v. Consolidated Bank and Trust Co., 48 that
the subject matter of the action refers to the physical facts; the things real or personal; the money,
lands, chattels and the like, in relation to which the suit is prosecuted, which in the instant case
should refer to the money deposited in the Security Bank account. 49 On the surface, however, it
seems that petitioner’s theory is valid to a point, yet a deeper treatment tends to show that it has
argued quite off-tangentially. This, because, while Mathay did explain what the subject matter of an
action is, it nevertheless did so only to determine whether the class suit in that case was properly
brought to the court.

What indeed constitutes the subject matter in litigation in relation to Section 2 of R.A. No. 1405 has
been pointedly and amply addressed in Union Bank of the Philippines v. Court of Appeals, 50 in which
the Court noted that the inquiry into bank deposits allowable under R.A. No. 1405 must be premised
on the fact that the money deposited in the account is itself the subject of the action.51 Given this
perspective, we deduce that the subject matter of the action in the case at bar is to be determined
from the indictment that charges respondent with the offense, and not from the evidence sought by
the prosecution to be admitted into the records. In the criminal Information filed with the trial court,
respondent, unqualifiedly and in plain language, is charged with qualified theft by abusing
petitioner’s trust and confidence and stealing cash in the amount of P1,534,135.50. The said
Information makes no factual allegation that in some material way involves the checks subject of the
testimonial and documentary evidence sought to be suppressed. Neither do the allegations in said
Information make mention of the supposed bank account in which the funds represented by the
checks have allegedly been kept.

In other words, it can hardly be inferred from the indictment itself that the Security Bank account is
the ostensible subject of the prosecution’s inquiry. Without needlessly expanding the scope of what is
plainly alleged in the Information, the subject matter of the action in this case is the money
amounting to P1,534,135.50 alleged to have been stolen by respondent, and not the money
equivalent of the checks which are sought to be admitted in evidence. Thus, it is that, which the
prosecution is bound to prove with its evidence, and no other.

It comes clear that the admission of testimonial and documentary evidence relative to respondent’s
Security Bank account serves no other purpose than to establish the existence of such account, its
nature and the amount kept in it. It constitutes an attempt by the prosecution at an impermissible
inquiry into a bank deposit account the privacy and confidentiality of which is protected by law. On
this score alone, the objection posed by respondent in her motion to suppress should have indeed put
an end to the controversy at the very first instance it was raised before the trial court.

In sum, we hold that the testimony of Marasigan on the particulars of respondent’s supposed bank
account with Security Bank and the documentary evidence represented by the checks adduced in
support thereof, are not only incompetent for being excluded by operation of R.A. No. 1405. They are
likewise irrelevant to the case, inasmuch as they do not appear to have any logical and reasonable
connection to the prosecution of respondent for qualified theft. We find full merit in and affirm
respondent’s objection to the evidence of the prosecution. The Court of Appeals was, therefore,
correct in reversing the assailed orders of the trial court.

A final note. In any given jurisdiction where the right of privacy extends its scope to include an
individual’s financial privacy rights and personal financial matters, there is an intermediate or
heightened scrutiny given by courts and legislators to laws infringing such rights. 52 Should there be
doubts in upholding the absolutely confidential nature of bank deposits against affirming the
authority to inquire into such accounts, then such doubts must be resolved in favor of the former.
This attitude persists unless congress lifts its finger to reverse the general state policy respecting the
absolutely confidential nature of bank deposits.53
WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals in CA-G.R. SP No.
87600 dated April 20, 2005, reversing the September 13, 2004 and November 5, 2004 Orders of the
Regional Trial Court of Manila, Branch 36 in Criminal Case No. 02-202158, is AFFIRMED.

SO ORDERED.

Republic of the Philippines v. Hon. Antonio M. Eugenio Jr.

The present petition for certiorari and prohibition under Rule 65 assails the orders and resolutions
issued by two different courts in two different cases. The courts and cases in question are the
Regional Trial Court of Manila, Branch 24, which heard SP Case No. 06-1142001 and the Court of
Appeals, Tenth Division, which heared CA-G.R. SP No. 95198.2 Both cases arose as part of the
aftermath of the ruling of this Court in Agan v. PIATCO3nullifying the concession agreement
awarded to the Philippine International Airport Terminal Corporation (PIATCO) over the Ninoy
Aquino International Airport – International Passenger Terminal 3 (NAIA 3) Project.

I.

Following the promulgation of Agan, a series of investigations concerning the award of the NAIA 3
contracts to PIATCO were undertaken by the Ombudsman and the Compliance and Investigation
Staff (CIS) of petitioner Anti-Money Laundering Council (AMLC). On 24 May 2005, the Office of the
Solicitor General (OSG) wrote the AMLC requesting the latter’s assistance "in obtaining more
evidence to completely reveal the financial trail of corruption surrounding the [NAIA 3] Project," and
also noting that petitioner Republic of the Philippines was presently defending itself in two
international arbitration cases filed in relation to the NAIA 3 Project. 4 The CIS conducted an
intelligence database search on the financial transactions of certain individuals involved in the
award, including respondent Pantaleon Alvarez (Alvarez) who had been the Chairman of the PBAC
Technical Committee, NAIA-IPT3 Project.5 By this time, Alvarez had already been charged by the
Ombudsman with violation of Section 3(j) of R.A. No. 3019. 6 The search revealed that Alvarez
maintained eight (8) bank accounts with six (6) different banks. 7

On 27 June 2005, the AMLC issued Resolution No. 75, Series of 2005,8 whereby the Council resolved
to authorize the Executive Director of the AMLC "to sign and verify an application to inquire into
and/or examine the [deposits] or investments of Pantaleon Alvarez, Wilfredo Trinidad, Alfredo
Liongson, and Cheng Yong, and their related web of accounts wherever these may be found, as
defined under Rule 10.4 of the Revised Implementing Rules and Regulations;" and to authorize the
AMLC Secretariat "to conduct an inquiry into subject accounts once the Regional Trial Court grants
the application to inquire into and/or examine the bank accounts" of those four individuals. 9 The
resolution enumerated the particular bank accounts of Alvarez, Wilfredo Trinidad (Trinidad),
Alfredo Liongson (Liongson) and Cheng Yong which were to be the subject of the inquiry. 10 The
rationale for the said resolution was founded on the cited findings of the CIS that amounts were
transferred from a Hong Kong bank account owned by Jetstream Pacific Ltd. Account to bank
accounts in the Philippines maintained by Liongson and Cheng Yong. 11 The Resolution also noted
that "[b]y awarding the contract to PIATCO despite its lack of financial capacity, Pantaleon Alvarez
caused undue injury to the government by giving PIATCO unwarranted benefits, advantage, or
preference in the discharge of his official administrative functions through manifest partiality,
evident bad faith, or gross inexcusable negligence, in violation of Section 3(e) of Republic Act No.
3019."12

Under the authority granted by the Resolution, the AMLC filed an application to inquire into or
examine the deposits or investments of Alvarez, Trinidad, Liongson and Cheng Yong before the RTC
of Makati, Branch 138, presided by Judge (now Court of Appeals Justice) Sixto Marella, Jr. The
application was docketed as AMLC No. 05-005.13 The Makati RTC heard the testimony of the Deputy
Director of the AMLC, Richard David C. Funk II, and received the documentary evidence of the
AMLC.14 Thereafter, on 4 July 2005, the Makati RTC rendered an Order (Makati RTC bank inquiry
order) granting the AMLC the authority to inquire and examine the subject bank accounts of
Alvarez, Trinidad, Liongson and Cheng Yong, the trial court being satisfied that there existed
"[p]robable cause [to] believe that the deposits in various bank accounts, details of which appear in
paragraph 1 of the Application, are related to the offense of violation of Anti-Graft and Corrupt
Practices Act now the subject of criminal prosecution before the Sandiganbayan as attested to by the
Informations, Exhibits C, D, E, F, and G."15Pursuant to the Makati RTC bank inquiry order, the CIS
proceeded to inquire and examine the deposits, investments and related web accounts of the four. 16

Meanwhile, the Special Prosecutor of the Office of the Ombudsman, Dennis Villa-Ignacio, wrote a
letter dated 2 November 2005, requesting the AMLC to investigate the accounts of Alvarez, PIATCO,
and several other entities involved in the nullified contract. The letter adverted to probable cause to
believe that the bank accounts "were used in the commission of unlawful activities that were
committed" in relation to the criminal cases then pending before the Sandiganbayan. 17 Attached to
the letter was a memorandum "on why the investigation of the [accounts] is necessary in the
prosecution of the above criminal cases before the Sandiganbayan."18

In response to the letter of the Special Prosecutor, the AMLC promulgated on 9 December 2005
Resolution No. 121 Series of 2005,19 which authorized the executive director of the AMLC to inquire
into and examine the accounts named in the letter, including one maintained by Alvarez with DBS
Bank and two other accounts in the name of Cheng Yong with Metrobank. The Resolution
characterized the memorandum attached to the Special Prosecutor’s letter as "extensively
justif[ying] the existence of probable cause that the bank accounts of the persons and entities
mentioned in the letter are related to the unlawful activity of violation of Sections 3(g) and 3(e) of
Rep. Act No. 3019, as amended."20

Following the December 2005 AMLC Resolution, the Republic, through the AMLC, filed an
application21 before the Manila RTC to inquire into and/or examine thirteen (13) accounts and two
(2) related web of accounts alleged as having been used to facilitate corruption in the NAIA 3 Project.
Among said accounts were the DBS Bank account of Alvarez and the Metrobank accounts of Cheng
Yong. The case was raffled to Manila RTC, Branch 24, presided by respondent Judge Antonio
Eugenio, Jr., and docketed as SP Case No. 06-114200.

On 12 January 2006, the Manila RTC issued an Order (Manila RTC bank inquiry order) granting
the Ex ParteApplication expressing therein "[that] the allegations in said application to be impressed
with merit, and in conformity with Section 11 of R.A. No. 9160, as amended, otherwise known as the
Anti-Money Laundering Act (AMLA) of 2001 and Rules 11.1 and 11.2 of the Revised Implementing
Rules and Regulations."22 Authority was thus granted to the AMLC to inquire into the bank accounts
listed therein.

On 25 January 2006, Alvarez, through counsel, entered his appearance 23 before the Manila RTC in
SP Case No. 06-114200 and filed an Urgent Motion to Stay Enforcement of Order of January 12,
2006.24 Alvarez alleged that he fortuitously learned of the bank inquiry order, which was issued
following an ex parte application, and he argued that nothing in R.A. No. 9160 authorized the AMLC
to seek the authority to inquire into bank accounts ex parte.25 The day after Alvarez filed his motion,
26 January 2006, the Manila RTC issued an Order 26 staying the enforcement of its bank inquiry
order and giving the Republic five (5) days to respond to Alvarez’s motion.

The Republic filed an Omnibus Motion for Reconsideration 27 of the 26 January 2006 Manila RTC
Order and likewise sought to strike out Alvarez’s motion that led to the issuance of said order. For
his part, Alvarez filed a Reply and Motion to Dismiss28 the application for bank inquiry order. On 2
May 2006, the Manila RTC issued an Omnibus Order 29 granting the Republic’s Motion for
Reconsideration, denying Alvarez’s motion to dismiss and reinstating "in full force and effect" the
Order dated 12 January 2006. In the omnibus order, the Manila RTC reiterated that the material
allegations in the application for bank inquiry order filed by the Republic stood as "the probable
cause for the investigation and examination of the bank accounts and investments of the
respondents."30

Alvarez filed on 10 May 2006 an Urgent Motion 31 expressing his apprehension that the AMLC would
immediately enforce the omnibus order and would thereby render the motion for reconsideration he
intended to file as moot and academic; thus he sought that the Republic be refrained from enforcing
the omnibus order in the meantime. Acting on this motion, the Manila RTC, on 11 May 2006, issued
an Order32 requiring the OSG to file a comment/opposition and reminding the parties that judgments
and orders become final and executory upon the expiration of fifteen (15) days from receipt thereof,
as it is the period within which a motion for reconsideration could be filed. Alvarez filed his Motion
for Reconsideration33 of the omnibus order on 15 May 2006, but the motion was denied by the Manila
RTC in an Order34 dated 5 July 2006.

On 11 July 2006, Alvarez filed an Urgent Motion and Manifestation 35 wherein he manifested having
received reliable information that the AMLC was about to implement the Manila RTC bank inquiry
order even though he was intending to appeal from it. On the premise that only a final and executory
judgment or order could be executed or implemented, Alvarez sought that the AMLC be immediately
ordered to refrain from enforcing the Manila RTC bank inquiry order.

On 12 July 2006, the Manila RTC, acting on Alvarez’s latest motion, issued an Order 36 directing the
AMLC "to refrain from enforcing the order dated January 12, 2006 until the expiration of the period
to appeal, without any appeal having been filed." On the same day, Alvarez filed a Notice of
Appeal37 with the Manila RTC.

On 24 July 2006, Alvarez filed an Urgent Ex Parte Motion for Clarification.38 Therein, he alleged
having learned that the AMLC had began to inquire into the bank accounts of the other persons
mentioned in the application for bank inquiry order filed by the Republic.39 Considering that the
Manila RTC bank inquiry order was issued ex parte, without notice to those other persons, Alvarez
prayed that the AMLC be ordered to refrain from inquiring into any of the other bank deposits and
alleged web of accounts enumerated in AMLC’s application with the RTC; and that the AMLC be
directed to refrain from using, disclosing or publishing in any proceeding or venue any information
or document obtained in violation of the 11 May 2006 RTC Order. 40

On 25 July 2006, or one day after Alvarez filed his motion, the Manila RTC issued an
Order41 wherein it clarified that "the Ex Parte Order of this Court dated January 12, 2006 can not be
implemented against the deposits or accounts of any of the persons enumerated in the AMLC
Application until the appeal of movant Alvarez is finally resolved, otherwise, the appeal would be
rendered moot and academic or even nugatory."42 In addition, the AMLC was ordered "not to disclose
or publish any information or document found or obtained in [v]iolation of the May 11, 2006 Order of
this Court."43 The Manila RTC reasoned that the other persons mentioned in AMLC’s application
were not served with the court’s 12 January 2006 Order. This 25 July 2006 Manila RTC Order is the
first of the four rulings being assailed through this petition.

In response, the Republic filed an Urgent Omnibus Motion for Reconsideration 44 dated 27 July 2006,
urging that it be allowed to immediately enforce the bank inquiry order against Alvarez and that
Alvarez’s notice of appeal be expunged from the records since appeal from an order of inquiry is
disallowed under the Anti money Laundering Act (AMLA).
Meanwhile, respondent Lilia Cheng filed with the Court of Appeals a Petition for Certiorari,
Prohibition and Mandamus with Application for TRO and/or Writ of Preliminary Injunction 45 dated
10 July 2006, directed against the Republic of the Philippines through the AMLC, Manila RTC
Judge Eugenio, Jr. and Makati RTC Judge Marella, Jr.. She identified herself as the wife of Cheng
Yong46 with whom she jointly owns a conjugal bank account with Citibank that is covered by the
Makati RTC bank inquiry order, and two conjugal bank accounts with Metrobank that are covered
by the Manila RTC bank inquiry order. Lilia Cheng imputed grave abuse of discretion on the part of
the Makati and Manila RTCs in granting AMLC’s ex parte applications for a bank inquiry order,
arguing among others that the ex parte applications violated her constitutional right to due process,
that the bank inquiry order under the AMLA can only be granted in connection with violations of the
AMLA and that the AMLA can not apply to bank accounts opened and transactions entered into
prior to the effectivity of the AMLA or to bank accounts located outside the Philippines.47

On 1 August 2006, the Court of Appeals, acting on Lilia Cheng’s petition, issued a Temporary
Restraining Order48enjoining the Manila and Makati trial courts from implementing, enforcing or
executing the respective bank inquiry orders previously issued, and the AMLC from enforcing and
implementing such orders. On even date, the Manila RTC issued an Order 49 resolving to hold in
abeyance the resolution of the urgent omnibus motion for reconsideration then pending before it
until the resolution of Lilia Cheng’s petition for certiorari with the Court of Appeals. The Court of
Appeals Resolution directing the issuance of the temporary restraining order is the second of the four
rulings assailed in the present petition.

The third assailed ruling50 was issued on 15 August 2006 by the Manila RTC, acting on the Urgent
Motion for Clarification51 dated 14 August 2006 filed by Alvarez. It appears that the 1 August 2006
Manila RTC Order had amended its previous 25 July 2006 Order by deleting the last paragraph
which stated that the AMLC "should not disclose or publish any information or document found or
obtained in violation of the May 11, 2006 Order of this Court." 52 In this new motion, Alvarez argued
that the deletion of that paragraph would allow the AMLC to implement the bank inquiry orders and
publish whatever information it might obtain thereupon even before the final orders of the Manila
RTC could become final and executory.53 In the 15 August 2006 Order, the Manila RTC reiterated
that the bank inquiry order it had issued could not be implemented or enforced by the AMLC or any
of its representatives until the appeal therefrom was finally resolved and that any enforcement
thereof would be unauthorized.54

The present Consolidated Petition55 for certiorari and prohibition under Rule 65 was filed on 2
October 2006, assailing the two Orders of the Manila RTC dated 25 July and 15 August 2006 and the
Temporary Restraining Order dated 1 August 2006 of the Court of Appeals. Through an Urgent
Manifestation and Motion56 dated 9 October 2006, petitioner informed the Court that on 22
September 2006, the Court of Appeals hearing Lilia Cheng’s petition had granted a writ of
preliminary injunction in her favor.57 Thereafter, petitioner sought as well the nullification of the 22
September 2006 Resolution of the Court of Appeals, thereby constituting the fourth ruling assailed
in the instant petition.58

The Court had initially granted a Temporary Restraining Order 59 dated 6 October 2006 and later on
a Supplemental Temporary Restraining Order60 dated 13 October 2006 in petitioner’s favor,
enjoining the implementation of the assailed rulings of the Manila RTC and the Court of Appeals.
However, on respondents’ motion, the Court, through a Resolution 61 dated 11 December 2006,
suspended the implementation of the restraining orders it had earlier issued.

Oral arguments were held on 17 January 2007. The Court consolidated the issues for argument as
follows:
 1. Did the RTC-Manila, in issuing the Orders dated 25 July 2006 and 15 August 2006 which
deferred the implementation of its Order dated 12 January 2006, and the Court of Appeals,
in issuing its Resolution dated 1 August 2006, which ordered the status quo in relation to the
1 July 2005 Order of the RTC-Makati and the 12 January 2006 Order of the RTC-Manila,
both of which authorized the examination of bank accounts under Section 11 of Rep. Act No.
9160 (AMLA), commit grave abuse of discretion?

(a) Is an application for an order authorizing inquiry into or examination of bank

accounts or investments under Section 11 of the AMLA ex-parte in nature or one
which requires notice and hearing?

(b) What legal procedures and standards should be observed in the conduct of the
proceedings for the issuance of said order?

(c) Is such order susceptible to legal challenges and judicial review?

2. Is it proper for this Court at this time and in this case to inquire into and pass upon the
validity of the 1 July 2005 Order of the RTC-Makati and the 12 January 2006 Order of the
RTC-Manila, considering the pendency of CA G.R. SP No. 95-198 (Lilia Cheng v. Republic)
wherein the validity of both orders was challenged?62

After the oral arguments, the parties were directed to file their respective memoranda, which they
did,63 and the petition was thereafter deemed submitted for resolution.

II.

Petitioner’s general advocacy is that the bank inquiry orders issued by the Manila and Makati RTCs
are valid and immediately enforceable whereas the assailed rulings, which effectively stayed the
enforcement of the Manila and Makati RTCs bank inquiry orders, are sullied with grave abuse of
discretion. These conclusions flow from the posture that a bank inquiry order, issued upon a finding
of probable cause, may be issued ex parte and, once issued, is immediately executory. Petitioner
further argues that the information obtained following the bank inquiry is necessarily beneficial, if
not indispensable, to the AMLC in discharging its awesome responsibility regarding the effective
implementation of the AMLA and that any restraint in the disclosure of such information to
appropriate agencies or other judicial fora would render meaningless the relief supplied by the bank
inquiry order.

Petitioner raises particular arguments questioning Lilia Cheng’s right to seek injunctive relief before
the Court of Appeals, noting that not one of the bank inquiry orders is directed against her. Her
"cryptic assertion" that she is the wife of Cheng Yong cannot, according to petitioner, "metamorphose
into the requisite legal standing to seek redress for an imagined injury or to maintain an action in
behalf of another." In the same breath, petitioner argues that Alvarez cannot assert any violation of
the right to financial privacy in behalf of other persons whose bank accounts are being inquired into,
particularly those other persons named in the Makati RTC bank inquiry order who did not take any
step to oppose such orders before the courts.

Ostensibly, the proximate question before the Court is whether a bank inquiry order issued in
accordance with Section 10 of the AMLA may be stayed by injunction. Yet in arguing that it does,
petitioner relies on what it posits as the final and immediately executory character of the bank
inquiry orders issued by the Manila and Makati RTCs. Implicit in that position is the notion that the
inquiry orders are valid, and such notion is susceptible to review and validation based on what
appears on the face of the orders and the applications which triggered their issuance, as well as the
provisions of the AMLA governing the issuance of such orders. Indeed, to test the viability of
petitioner’s argument, the Court will have to be satisfied that the subject inquiry orders are valid in
the first place. However, even from a cursory examination of the applications for inquiry order and
the orders themselves, it is evident that the orders are not in accordance with law.

III.

A brief overview of the AMLA is called for.

Money laundering has been generally defined by the International Criminal Police Organization
(Interpol) `as "any act or attempted act to conceal or disguise the identity of illegally obtained
proceeds so that they appear to have originated from legitimate sources."64 Even before the passage
of the AMLA, the problem was addressed by the Philippine government through the issuance of
various circulars by the Bangko Sentral ng Pilipinas. Yet ultimately, legislative proscription was
necessary, especially with the inclusion of the Philippines in the Financial Action Task Force’s list of
non-cooperative countries and territories in the fight against money laundering.65 The original
AMLA, Republic Act (R.A.) No. 9160, was passed in 2001. It was amended by R.A. No. 9194 in 2003.

Section 4 of the AMLA states that "[m]oney laundering is a crime whereby the proceeds of an
unlawful activity as [defined in the law] are transacted, thereby making them appear to have
originated from legitimate sources."66The section further provides the three modes through which
the crime of money laundering is committed. Section 7 creates the AMLC and defines its powers,
which generally relate to the enforcement of the AMLA provisions and the initiation of legal actions
authorized in the AMLA such as civil forefeiture proceedings and complaints for the prosecution of
money laundering offenses.67

In addition to providing for the definition and penalties for the crime of money laundering, the
AMLA also authorizes certain provisional remedies that would aid the AMLC in the enforcement of
the AMLA. These are the "freeze order" authorized under Section 10, and the "bank inquiry order"
authorized under Section 11.

Respondents posit that a bank inquiry order under Section 11 may be obtained only upon the pre-
existence of a money laundering offense case already filed before the courts. 68 The conclusion is
based on the phrase "upon order of any competent court in cases of violation of this Act," the word
"cases" generally understood as referring to actual cases pending with the courts.

We are unconvinced by this proposition, and agree instead with the then Solicitor General who
conceded that the use of the phrase "in cases of" was unfortunate, yet submitted that it should be
interpreted to mean "in the event there are violations" of the AMLA, and not that there are already
cases pending in court concerning such violations.69 If the contrary position is adopted, then the bank
inquiry order would be limited in purpose as a tool in aid of litigation of live cases, and wholly inutile
as a means for the government to ascertain whether there is sufficient evidence to sustain an
intended prosecution of the account holder for violation of the AMLA. Should that be the situation, in
all likelihood the AMLC would be virtually deprived of its character as a discovery tool, and thus
would become less circumspect in filing complaints against suspect account holders. After all, under
such set-up the preferred strategy would be to allow or even encourage the indiscriminate filing of
complaints under the AMLA with the hope or expectation that the evidence of money laundering
would somehow surface during the trial. Since the AMLC could not make use of the bank inquiry
order to determine whether there is evidentiary basis to prosecute the suspected malefactors, not
filing any case at all would not be an alternative. Such unwholesome set-up should not come to pass.
Thus Section 11 cannot be interpreted in a way that would emasculate the remedy it has established
and encourage the unfounded initiation of complaints for money laundering.
Still, even if the bank inquiry order may be availed of without need of a pre-existing case under the
AMLA, it does not follow that such order may be availed of ex parte. There are several reasons why
the AMLA does not generally sanction ex parte applications and issuances of the bank inquiry order.

IV.

It is evident that Section 11 does not specifically authorize, as a general rule, the issuance ex parte of
the bank inquiry order. We quote the provision in full:

SEC. 11. Authority to Inquire into Bank Deposits. ― Notwithstanding the provisions of
Republic Act No. 1405, as amended, Republic Act No. 6426, as amended, Republic Act No.
8791, and other laws, the AMLC may inquire into or examine any particular deposit or
investment with any banking institution or non bank financial institution upon order of any
competent court in cases of violation of this Act, when it has been established that there
is probable cause that the deposits or investments are related to an unlawful
activity as defined in Section 3(i) hereof or a money laundering offense under
Section 4 hereof, except that no court order shall be required in cases involving
unlawful activities defined in Sections 3(i)1, (2) and (12).

To ensure compliance with this Act, the Bangko Sentral ng Pilipinas (BSP) may inquire into
or examine any deposit of investment with any banking institution or non bank financial
institution when the examination is made in the course of a periodic or special examination,
in accordance with the rules of examination of the BSP.70 (Emphasis supplied)

Of course, Section 11 also allows the AMLC to inquire into bank accounts without having to obtain a
judicial order in cases where there is probable cause that the deposits or investments are related to
kidnapping for ransom,71certain violations of the Comprehensive Dangerous Drugs Act of
2002,72 hijacking and other violations under R.A. No. 6235, destructive arson and murder. Since such
special circumstances do not apply in this case, there is no need for us to pass comment on this
proviso. Suffice it to say, the proviso contemplates a situation distinct from that which presently
confronts us, and for purposes of the succeeding discussion, our reference to Section 11 of the AMLA
excludes said proviso.

In the instances where a court order is required for the issuance of the bank inquiry order, nothing
in Section 11 specifically authorizes that such court order may be issued ex parte. It might be argued
that this silence does not preclude the ex parte issuance of the bank inquiry order since the same is
not prohibited under Section 11. Yet this argument falls when the immediately preceding provision,
Section 10, is examined.

SEC. 10. Freezing of Monetary Instrument or Property. ― The Court of Appeals,

upon application ex parteby the AMLC and after determination that probable
cause exists that any monetary instrument or property is in any way related to an unlawful
activity as defined in Section 3(i) hereof, may issue a freeze order which shall be
effective immediately. The freeze order shall be for a period of twenty (20) days unless
extended by the court.73

Although oriented towards different purposes, the freeze order under Section 10 and the bank
inquiry order under Section 11 are similar in that they are extraordinary provisional reliefs which
the AMLC may avail of to effectively combat and prosecute money laundering offenses. Crucially,
Section 10 uses specific language to authorize an ex parte application for the provisional relief
therein, a circumstance absent in Section 11. If indeed the legislature had intended to authorize ex
parte proceedings for the issuance of the bank inquiry order, then it could have easily expressed such
intent in the law, as it did with the freeze order under Section 10.

Even more tellingly, the current language of Sections 10 and 11 of the AMLA was crafted at the
same time, through the passage of R.A. No. 9194. Prior to the amendatory law, it was the AMLC, not
the Court of Appeals, which had authority to issue a freeze order, whereas a bank inquiry order
always then required, without exception, an order from a competent court. 74 It was through the same
enactment that ex parte proceedings were introduced for the first time into the AMLA, in the case of
the freeze order which now can only be issued by the Court of Appeals. It certainly would have been
convenient, through the same amendatory law, to allow a similar ex parte procedure in the case of a
bank inquiry order had Congress been so minded. Yet nothing in the provision itself, or even the
available legislative record, explicitly points to an ex parte judicial procedure in the application for a
bank inquiry order, unlike in the case of the freeze order.

That the AMLA does not contemplate ex parte proceedings in applications for bank inquiry orders is
confirmed by the present implementing rules and regulations of the AMLA, promulgated upon the
passage of R.A. No. 9194. With respect to freeze orders under Section 10, the implementing rules do
expressly provide that the applications for freeze orders be filed ex parte,75 but no similar clearance is
granted in the case of inquiry orders under Section 11. 76 These implementing rules were
promulgated by the Bangko Sentral ng Pilipinas, the Insurance Commission and the Securities and
Exchange Commission,77 and if it was the true belief of these institutions that inquiry orders could
be issued ex parte similar to freeze orders, language to that effect would have been incorporated in
the said Rules. This is stressed not because the implementing rules could authorize ex
parteapplications for inquiry orders despite the absence of statutory basis, but rather because the
framers of the law had no intention to allow such ex parte applications.

Even the Rules of Procedure adopted by this Court in A.M. No. 05-11-04-SC78 to enforce the
provisions of the AMLA specifically authorize ex parte applications with respect to freeze orders
under Section 1079 but make no similar authorization with respect to bank inquiry orders under
Section 11.

The Court could divine the sense in allowing ex parte proceedings under Section 10 and in
proscribing the same under Section 11. A freeze order under Section 10 on the one hand is aimed at
preserving monetary instruments or property in any way deemed related to unlawful activities as
defined in Section 3(i) of the AMLA. The owner of such monetary instruments or property would
thus be inhibited from utilizing the same for the duration of the freeze order. To make such freeze
order anteceded by a judicial proceeding with notice to the account holder would allow for or lead to
the dissipation of such funds even before the order could be issued.

On the other hand, a bank inquiry order under Section 11 does not necessitate any form of physical
seizure of property of the account holder. What the bank inquiry order authorizes is the examination
of the particular deposits or investments in banking institutions or non-bank financial institutions.
The monetary instruments or property deposited with such banks or financial institutions are not
seized in a physical sense, but are examined on particular details such as the account holder’s record
of deposits and transactions. Unlike the assets subject of the freeze order, the records to be inspected
under a bank inquiry order cannot be physically seized or hidden by the account holder. Said records
are in the possession of the bank and therefore cannot be destroyed at the instance of the account
holder alone as that would require the extraordinary cooperation and devotion of the bank.

Interestingly, petitioner’s memorandum does not attempt to demonstrate before the Court that the
bank inquiry order under Section 11 may be issued ex parte, although the petition itself did devote
some space for that argument. The petition argues that the bank inquiry order is "a special and
peculiar remedy, drastic in its name, and made necessary because of a public necessity… [t]hus, by
its very nature, the application for an order or inquiry must necessarily, be ex parte." This argument
is insufficient justification in light of the clear disinclination of Congress to allow the issuance ex
parte of bank inquiry orders under Section 11, in contrast to the legislature’s clear inclination to
allow the ex parte grant of freeze orders under Section 10.

Without doubt, a requirement that the application for a bank inquiry order be done with notice to
the account holder will alert the latter that there is a plan to inspect his bank account on the belief
that the funds therein are involved in an unlawful activity or money laundering offense. 80 Still, the
account holder so alerted will in fact be unable to do anything to conceal or cleanse his bank account
records of suspicious or anomalous transactions, at least not without the whole-hearted cooperation
of the bank, which inherently has no vested interest to aid the account holder in such manner.

V.

The necessary implication of this finding that Section 11 of the AMLA does not generally authorize
the issuance ex parte of the bank inquiry order would be that such orders cannot be issued unless
notice is given to the owners of the account, allowing them the opportunity to contest the issuance of
the order. Without such a consequence, the legislated distinction between ex parte proceedings under
Section 10 and those which are not ex parte under Section 11 would be lost and rendered useless.

There certainly is fertile ground to contest the issuance of an ex parte order. Section 11 itself requires
that it be established that "there is probable cause that the deposits or investments are related to
unlawful activities," and it obviously is the court which stands as arbiter whether there is indeed
such probable cause. The process of inquiring into the existence of probable cause would involve the
function of determination reposed on the trial court. Determination clearly implies a function of
adjudication on the part of the trial court, and not a mechanical application of a standard pre-
determination by some other body. The word "determination" implies deliberation and is, in normal
legal contemplation, equivalent to "the decision of a court of justice." 81

The court receiving the application for inquiry order cannot simply take the AMLC’s word that
probable cause exists that the deposits or investments are related to an unlawful activity. It will
have to exercise its

own determinative function in order to be convinced of such fact. The account holder would be
certainly capable of contesting such probable cause if given the opportunity to be apprised of the
pending application to inquire into his account; hence a notice requirement would not be an empty
spectacle. It may be so that the process of obtaining the inquiry order may become more cumbersome
or prolonged because of the notice requirement, yet we fail to see any unreasonable burden cast by
such circumstance. After all, as earlier stated, requiring notice to the account holder should not, in
any way, compromise the integrity of the bank records subject of the inquiry which remain in the
possession and control of the bank.

Petitioner argues that a bank inquiry order necessitates a finding of probable cause, a characteristic
similar to a search warrant which is applied to and heard ex parte. We have examined the supposed
analogy between a search warrant and a bank inquiry order yet we remain to be unconvinced by
petitioner.

The Constitution and the Rules of Court prescribe particular requirements attaching to search
warrants that are not imposed by the AMLA with respect to bank inquiry orders. A constitutional
warrant requires that the judge personally examine under oath or affirmation the complainant and
the witnesses he may produce,82 such examination being in the form of searching questions and
answers.83 Those are impositions which the legislative did not specifically prescribe as to the bank
inquiry order under the AMLA, and we cannot find sufficient legal basis to apply them to Section 11
of the AMLA. Simply put, a bank inquiry order is not a search warrant or warrant of arrest as it
contemplates a direct object but not the seizure of persons or property.

Even as the Constitution and the Rules of Court impose a high procedural standard for the
determination of probable cause for the issuance of search warrants which Congress chose not to
prescribe for the bank inquiry order under the AMLA, Congress nonetheless disallowed ex
parte applications for the inquiry order. We can discern that in exchange for these procedural
standards normally applied to search warrants, Congress chose instead to legislate a right to notice
and a right to be heard— characteristics of judicial proceedings which are not ex parte. Absent any
demonstrable constitutional infirmity, there is no reason for us to dispute such legislative policy
choices.

VI.

The Court’s construction of Section 11 of the AMLA is undoubtedly influenced by right to privacy
considerations. If sustained, petitioner’s argument that a bank account may be inspected by the
government following an ex parteproceeding about which the depositor would know nothing would
have significant implications on the right to privacy, a right innately cherished by all
notwithstanding the legally recognized exceptions thereto. The notion that the government could be
so empowered is cause for concern of any individual who values the right to privacy which, after all,
embodies even the right to be "let alone," the most comprehensive of rights and the right most valued
by civilized people.84

One might assume that the constitutional dimension of the right to privacy, as applied to bank
deposits, warrants our present inquiry. We decline to do so. Admittedly, that question has proved
controversial in American jurisprudence. Notably, the United States Supreme Court in U.S. v.
Miller85 held that there was no legitimate expectation of privacy as to the bank records of a
depositor.86 Moreover, the text of our Constitution has not bothered with the triviality of allocating
specific rights peculiar to bank deposits.

However, sufficient for our purposes, we can assert there is a right to privacy governing bank
accounts in the Philippines, and that such right finds application to the case at bar. The source of
such right is statutory, expressed as it is in R.A. No. 1405 otherwise known as the Bank Secrecy Act
of 1955. The right to privacy is enshrined in Section 2 of that law, to wit:

SECTION 2. All deposits of whatever nature with banks or banking institutions in

the Philippines including investments in bonds issued by the Government of the
Philippines, its political subdivisions and its instrumentalities, are hereby
considered as of an absolutely confidential nature and may not be examined, inquired
or looked into by any person, government official, bureau or office, except upon written
permission of the depositor, or in cases of impeachment, or upon order of a competent court
in cases of bribery or dereliction of duty of public officials, or in cases where the money
deposited or invested is the subject matter of the litigation. (Emphasis supplied)

Because of the Bank Secrecy Act, the confidentiality of bank deposits remains a basic state policy in
the Philippines.87 Subsequent laws, including the AMLA, may have added exceptions to the Bank
Secrecy Act, yet the secrecy of bank deposits still lies as the general rule. It falls within the zones of
privacy recognized by our laws.88The framers of the 1987 Constitution likewise recognized that bank
accounts are not covered by either the right to information 89 under Section 7, Article III or under the
requirement of full public disclosure90 under Section 28, Article II.91 Unless the Bank Secrecy Act is
repealed or

amended, the legal order is obliged to conserve the absolutely confidential nature of Philippine bank
deposits.

Any exception to the rule of absolute confidentiality must be specifically legislated. Section 2 of the
Bank Secrecy Act itself prescribes exceptions whereby these bank accounts may be examined by "any
person, government official, bureau or office"; namely when: (1) upon written permission of the
depositor; (2) in cases of impeachment; (3) the examination of bank accounts is upon order of a
competent court in cases of bribery or dereliction of duty of public officials; and (4) the money
deposited or invested is the subject matter of the litigation. Section 8 of R.A. Act No. 3019, the Anti-
Graft and Corrupt Practices Act, has been recognized by this Court as constituting an additional
exception to the rule of absolute confidentiality, 92 and there have been other similar recognitions as
well.93

The AMLA also provides exceptions to the Bank Secrecy Act. Under Section 11, the AMLC may
inquire into a bank account upon order of any competent court in cases of violation of the AMLA, it
having been established that there is probable cause that the deposits or investments are related to
unlawful activities as defined in Section 3(i) of the law, or a money laundering offense under Section
4 thereof. Further, in instances where there is probable cause that the deposits or investments are
related to kidnapping for ransom,94 certain violations of the Comprehensive Dangerous Drugs Act of
2002,95 hijacking and other violations under R.A. No. 6235, destructive arson and murder, then there
is no need for the AMLC to obtain a court order before it could inquire into such accounts.

It cannot be successfully argued the proceedings relating to the bank inquiry order under Section 11
of the AMLA is a "litigation" encompassed in one of the exceptions to the Bank Secrecy Act which is
when "the money deposited or invested is the subject matter of the litigation." The orientation of the
bank inquiry order is simply to serve as a provisional relief or remedy. As earlier stated, the
application for such does not entail a full-blown trial.

Nevertheless, just because the AMLA establishes additional exceptions to the Bank Secrecy Act it
does not mean that the later law has dispensed with the general principle established in the older
law that "[a]ll deposits of whatever nature with banks or banking institutions in the Philippines x x
x are hereby considered as of an absolutely confidential nature." 96 Indeed, by force of statute, all
bank deposits are absolutely confidential, and that nature is unaltered even by the legislated
exceptions referred to above. There is disfavor towards construing these exceptions in such a manner
that would authorize unlimited discretion on the part of the government or of any party seeking to
enforce those exceptions and inquire into bank deposits. If there are doubts in upholding the
absolutely confidential nature of bank deposits against affirming the authority to inquire into such
accounts, then such doubts must be resolved in favor of the former. Such a stance would persist
unless Congress passes a law reversing the general state policy of preserving the absolutely
confidential nature of Philippine bank accounts.

The presence of this statutory right to privacy addresses at least one of the arguments raised by
petitioner, that Lilia Cheng had no personality to assail the inquiry orders before the Court of
Appeals because she was not the subject of said orders. AMLC Resolution No. 75, which served as
the basis in the successful application for the Makati inquiry order, expressly adverts to Citibank
Account No. 88576248 "owned by Cheng Yong and/or Lilia G. Cheng with Citibank N.A.," 97 whereas
Lilia Cheng’s petition before the Court of Appeals is accompanied by a certification from Metrobank
that Account Nos. 300852436-0 and 700149801-7, both of which are among the subjects of the Manila
inquiry order, are accounts in the name of "Yong Cheng or Lilia Cheng."98 Petitioner does not
specifically deny that Lilia Cheng holds rights of ownership over the three said accounts, laying focus
instead on the fact that she was not named as a subject of either the Makati or Manila RTC inquiry
orders. We are reasonably convinced that Lilia Cheng has sufficiently demonstrated her joint
ownership of the three accounts, and such conclusion leads us to acknowledge that she has the
standing to assail via certiorari the inquiry orders authorizing the examination of her bank accounts
as the orders interfere with her statutory right to maintain the secrecy of said accounts.

While petitioner would premise that the inquiry into Lilia Cheng’s accounts finds root in Section 11
of the AMLA, it cannot be denied that the authority to inquire under Section 11 is only exceptional in
character, contrary as it is to the general rule preserving the secrecy of bank deposits. Even though
she may not have been the subject of the inquiry orders, her bank accounts nevertheless were, and
she thus has the standing to vindicate the right to secrecy that attaches to said accounts and their
owners. This statutory right to privacy will not prevent the courts from authorizing the inquiry
anyway upon the fulfillment of the requirements set forth under Section 11 of the AMLA or Section 2
of the Bank Secrecy Act; at the same time, the owner of the accounts have the right to challenge
whether the requirements were indeed complied with.

VII.

There is a final point of concern which needs to be addressed. Lilia Cheng argues that the AMLA,
being a substantive penal statute, has no retroactive effect and the bank inquiry order could not
apply to deposits or investments opened prior to the effectivity of Rep. Act No. 9164, or on 17 October
2001. Thus, she concludes, her subject bank accounts, opened between 1989 to 1990, could not be the
subject of the bank inquiry order lest there be a violation of the constitutional prohibition against ex
post facto laws.

No ex post facto law may be enacted,99 and no law may be construed in such fashion as to permit a
criminal prosecution offensive to the ex post facto clause. As applied to the AMLA, it is plain that no
person may be prosecuted under the penal provisions of the AMLA for acts committed prior to the
enactment of the law on 17 October 2001. As much was understood by the lawmakers since they
deliberated upon the AMLA, and indeed there is no serious dispute on that point.

Does the proscription against ex post facto laws apply to the interpretation of Section 11, a provision
which does not provide for a penal sanction but which merely authorizes the inspection of suspect
accounts and deposits? The answer is in the affirmative. In this jurisdiction, we have defined an ex
post facto law as one which either:

(1) makes criminal an act done before the passage of the law and which was innocent when
done, and punishes such an act;

(2) aggravates a crime, or makes it greater than it was, when committed;

(3) changes the punishment and inflicts a greater punishment than the law annexed to the
crime when committed;

(4) alters the legal rules of evidence, and authorizes conviction upon less or different
testimony than the law required at the time of the commission of the offense;

(5) assuming to regulate civil rights and remedies only, in effect imposes penalty or
deprivation of a right for something which when done was lawful; and
 (6) deprives a person accused of a crime of some lawful protection to which he has
become entitled, such as the protection of a former conviction or acquittal, or a
proclamation of amnesty.(Emphasis supplied)100

Prior to the enactment of the AMLA, the fact that bank accounts or deposits were involved in
activities later on enumerated in Section 3 of the law did not, by itself, remove such accounts from
the shelter of absolute confidentiality. Prior to the AMLA, in order that bank accounts could be
examined, there was need to secure either the written permission of the depositor or a court order
authorizing such examination, assuming that they were involved in cases of bribery or dereliction of
duty of public officials, or in a case where the money deposited or invested was itself the subject
matter of the litigation. The passage of the AMLA stripped another layer off the rule on absolute
confidentiality that provided a measure of lawful protection to the account holder. For that reason,
the application of the bank inquiry order as a means of inquiring into records of transactions entered
into prior to the passage of the AMLA would be constitutionally infirm, offensive as it is to the ex
post facto clause.

Still, we must note that the position submitted by Lilia Cheng is much broader than what we are
willing to affirm. She argues that the proscription against ex post facto laws goes as far as to prohibit
any inquiry into deposits or investments included in bank accounts opened prior to the effectivity of
the AMLA even if the suspect transactions were entered into when the law had already taken effect.
The Court recognizes that if this argument were to be affirmed, it would create a horrible loophole in
the AMLA that would in turn supply the means to fearlessly engage in money laundering in the
Philippines; all that the criminal has to do is to make sure that the money laundering activity is
facilitated through a bank account opened prior to 2001. Lilia Cheng admits that "actual money
launderers could utilize the ex post facto provision of the Constitution as a shield" but that the
remedy lay with Congress to amend the law. We can hardly presume that Congress intended to
enact a self-defeating law in the first place, and the courts are inhibited from such a construction by
the cardinal rule that "a law should be interpreted with a view to upholding rather than destroying
it."101

Besides, nowhere in the legislative record cited by Lilia Cheng does it appear that there was an
unequivocal intent to exempt from the bank inquiry order all bank accounts opened prior to the
passage of the AMLA. There is a cited exchange between Representatives Ronaldo Zamora and
Jaime Lopez where the latter confirmed to the former that "deposits are supposed to be exempted
from scrutiny or monitoring if they are already in place as of the time the law is enacted." 102 That
statement does indicate that transactions already in place when the AMLA was passed are indeed
exempt from scrutiny through a bank inquiry order, but it cannot yield any interpretation that
records of transactions undertaken after the enactment of the AMLA are similarly exempt. Due to
the absence of cited authority from the legislative record that unqualifiedly supports respondent
Lilia Cheng’s thesis, there is no cause for us to sustain her interpretation of the AMLA, fatal as it is
to the anima of that law.

IX.

We are well aware that Lilia Cheng’s petition presently pending before the Court of Appeals likewise
assails the validity of the subject bank inquiry orders and precisely seeks the annulment of said
orders. Our current declarations may indeed have the effect of preempting that0 petition. Still, in
order for this Court to rule on the petition at bar which insists on the enforceability of the said bank
inquiry orders, it is necessary for us to consider and rule on the same question which after all is a
pure question of law.

WHEREFORE, the PETITION is DISMISSED. No pronouncement as to costs. SO ORDERED.

GSIS v. CA

The subject of this petition for certiorari is the Decision 1 of the Court of Appeals in CA-G.R. SP No.
82647 allowing the quashal by the Regional Trial Court (RTC) of Makati of a subpoena for the
production of bank ledger. This case is incident to Civil Case No. 99-1853, which is the main case for
collection of sum of money with damages filed by Industrial Bank of Korea, Tong Yang Merchant
Bank, First Merchant Banking Corporation, Land Bank of the Philippines, and Westmont Bank
(now United Overseas Bank), collectively known as "the Banks" against Domsat Holdings, Inc.
(Domsat) and the Government Service Insurance System (GSIS). Said case stemmed from a Loan
Agreement,2 whereby the Banks agreed to lend United States (U.S.) $11 Million to Domsat for the
purpose of financing the lease and/or purchase of a Gorizon Satellite from the International
Organization of Space Communications (Intersputnik).3

The controversy originated from a surety agreement by which Domsat obtained a surety bond from
GSIS to secure the payment of the loan from the Banks. We quote the terms of the Surety Bond in its
entirety.4

Republic of the Philippines

GOVERNMENT SERVICE INSURANCE SYSTEM
GENERAL INSURANCE FUND
GSIS Headquarters, Financial Center
Roxas Boulevard, Pasay City

G(16) GIF Bond 027461

SURETYBOND

KNOW ALL MEN BY THESE PRESENTS:

That we, DOMSAT HOLDINGS, INC., represented by its President as PRINCIPAL, and the
GOVERNMENT SERVICE INSURANCE SYSTEM, as Administrator of the GENERAL
INSURANCE FUND, a corporation duly organized and existing under and by virtue of the laws of
the Philippines, with principal office in the City of Pasay, Metro Manila, Philippines as SURETY,
are held and firmly bound unto the OBLIGEES: LAND BANK OF THE PHILIPPINES, 7th Floor,
Land Bank Bldg. IV. 313 Sen. Gil J. Puyat Avenue, Makati City; WESTMONT BANK, 411 Quintin
Paredes St., Binondo, Manila: TONG YANG MERCHANT BANK, 185, 2-Ka, Ulchi-ro, Chungk-ku,
Seoul, Korea; INDUSTRIAL BANK OF KOREA, 50, 2-Ga, Ulchi-ro, Chung-gu, Seoul, Korea; and
FIRST MERCHANT BANKING CORPORATION, 199-40, 2-Ga, Euliji-ro, Jung-gu, Seoul, Korea, in
the sum, of US $ ELEVEN MILLION DOLLARS ($11,000,000.00) for the payment of which sum,
well and truly to be made, we bind ourselves, our heirs, executors, administrators, successors and
assigns, jointly and severally, firmly by these presents.

THE CONDITIONS OF THE OBLIGATION ARE AS FOLLOWS:

WHEREAS, the above bounden PRINCIPAL, on the 12th day of December, 1996 entered into a
contract agreement with the aforementioned OBLIGEES to fully and faithfully

Guarantee the repayment of the principal and interest on the loan granted the PRINCIPAL to be
used for the financing of the two (2) year lease of a Russian Satellite from INTERSPUTNIK, in
accordance with the terms and conditions of the credit package entered into by the parties.
This bond shall remain valid and effective until the loan including interest has been fully paid and
liquidated,

a copy of which contract/agreement is hereto attached and made part hereof;

WHEREAS, the aforementioned OBLIGEES require said PRINCIPAL to give a good and sufficient
bond in the above stated sum to secure the full and faithful performance on his part of said
contract/agreement.

NOW, THEREFORE, if the PRINCIPAL shall well and truly perform and fulfill all the
undertakings, covenants, terms, conditions, and agreements stipulated in said contract/agreements,
then this obligation shall be null and void; otherwise, it shall remain in full force and effect.

WITNESS OUR HANDS AND SEALS this 13th day of December 1996 at Pasay City, Philippines.

DOMSAT HOLDINGS, INC. GOVERNMENT SERVICE INSURANCE SYSTEM

Principal General Insurance Fund

By: By:

CAPT. RODRIGO A. SILVERIO AMALIO A. MALLARI

President Senior Vice-President
General Insurance Group

When Domsat failed to pay the loan, GSIS refused to comply with its obligation reasoning that
Domsat did not use the loan proceeds for the payment of rental for the satellite. GSIS alleged that
Domsat, with Westmont Bank as the conduit, transferred the U.S. $11 Million loan proceeds from
the Industrial Bank of Korea to Citibank New York account of Westmont Bank and from there to the
Binondo Branch of Westmont Bank.5 The Banks filed a complaint before the RTC of Makati against
Domsat and GSIS.

In the course of the hearing, GSIS requested for the issuance of a subpoena duces tecum to the
custodian of records of Westmont Bank to produce the following documents:

1. Ledger covering the account of DOMSAT Holdings, Inc. with Westmont Bank (now United
Overseas Bank), any and all documents, records, files, books, deeds, papers, notes and other
data and materials relating to the account or transactions of DOMSAT Holdings, Inc. with or
through the Westmont Bank (now United Overseas Bank) for the period January 1997 to
December 2002, in his/her direct or indirect possession, custody or control (whether actual or
constructive), whether in his/her capacity as Custodian of Records or otherwise;

2. All applications for cashier’s/ manager’s checks and bank transfers funded by the account
of DOMSAT Holdings, Inc. with or through the Westmont Bank (now United Overseas Bank)
for the period January 1997 to December 2002, and all other data and materials covering
said applications, in his/her direct or indirect possession, custody or control (whether actual
or constructive), whether in his/her capacity as Custodian of Records or otherwise;

3. Ledger covering the account of Philippine Agila Satellite, Inc. with Westmont Bank (now
United Overseas Bank), any and all documents, records, files, books, deeds, papers, notes
and other data and materials relating to the account or transactions of Philippine Agila
Satellite, Inc. with or through the Westmont bank (now United Overseas Bank) for the
 period January 1997 to December 2002, in his/her direct or indirect possession, custody or
control (whether actual or constructive), whether in his/her capacity as Custodian of Records
or otherwise;

4. All applications for cashier’s/manager’s checks funded by the account of Philippine Agila
Satellite, Inc. with or through the Westmont Bank (now United Overseas Bank) for the
period January 1997 to December 2002, and all other data and materials covering said
applications, in his/her direct or indirect possession, custody or control (whether actual or
constructive), whether in his/her capacity as Custodian of Records or otherwise. 6

The RTC issued a subpoena decus tecum on 21 November 2002. 7 A motion to quash was filed by the
banks on three grounds: 1) the subpoena is unreasonable, oppressive and does not establish the
relevance of the documents sought; 2) request for the documents will violate the Law on Secrecy of
Bank Deposits; and 3) GSIS failed to advance the reasonable cost of production of the
documents.8 Domsat also joined the banks’ motion to quash through its Manifestation/Comment. 9 On
9 April 2003, the RTC issued an Order denying the motion to quash for lack of merit. We quote the
pertinent portion of the Order, thus:

After a careful consideration of the arguments of the parties, the Court did not find merit in the
motion.

The serious objection appears to be that the subpoena is violative of the Law on Secrecy of Bank
Deposit, as amended. The law declares bank deposits to be "absolutely confidential" except: x x x (6)
In cases where the money deposited or invested is the subject matter of the litigation.

The case at bench is for the collection of a sum of money from defendants that obtained a loan from
the plaintiff. The loan was secured by defendant GSIS which was the surety. It is the contention of
defendant GSIS that the proceeds of the loan was deviated to purposes other than to what the loan
was extended. The quashal of the subpoena would deny defendant GSIS its right to prove its
defenses.

WHEREFORE, for lack of merit the motion is DENIED.10

On 26 June 2003, another Order was issued by the RTC denying the motion for reconsideration filed
by the banks.11 On 1 September 2003 however, the trial court granted the second motion for
reconsideration filed by the banks. The previous subpoenas issued were consequently quashed.12 The
trial court invoked the ruling in Intengan v. Court of Appeals, 13 where it was ruled that foreign
currency deposits are absolutely confidential and may be examined only when there is a written
permission from the depositor. The motion for reconsideration filed by GSIS was denied on 30
December 2003.

Hence, these assailed orders are the subject of the petition for certiorari before the Court of Appeals.
GSIS raised the following arguments in support of its petition:

I.

Respondent Judge acted with grave abuse of discretion when it favorably considered respondent
banks’ (second) Motion for Reconsideration dated July 9, 2003 despite the fact that it did not contain
a notice of hearing and was therefore a mere scrap of paper.

II.
Respondent judge capriciously and arbitrarily ignored Section 2 of the Foreign Currency Deposit Act
(RA 6426) in ruling in his Orders dated September 1 and December 30, 2003 that the
US$11,000,000.00 deposit in the account of respondent Domsat in Westmont Bank is covered by the
secrecy of bank deposit.

III.

Since both respondent banks and respondent Domsat have disclosed during the trial the
US$11,000,000.00 deposit, it is no longer secret and confidential, and petitioner GSIS’ right to
inquire into what happened to such deposit can not be suppressed. 14

The Court of Appeals addressed these issues in seriatim.

The Court of Appeals resorted to a liberal interpretation of the rules to avoid miscarriage of justice
when it allowed the filing and acceptance of the second motion for reconsideration. The appellate
court also underscored the fact that GSIS did not raise the defect of lack of notice in its opposition to
the second motion for reconsideration. The appellate court held that failure to timely object to the
admission of a defective motion is considered a waiver of its right to do so.

The Court of Appeals declared that Domsat’s deposit in Westmont Bank is covered by Republic Act
No. 6426 or the Bank Secrecy Law. We quote the pertinent portion of the Decision:

It is our considered opinion that Domsat’s deposit of $11,000,000.00 in Westmont Bank is covered by
the Bank Secrecy Law, as such it cannot be examined, inquired or looked into without the written
consent of its owner. The ruling in Van Twest vs. Court of Appeals was rendered during the
effectivity of CB Circular No. 960, Series of 1983, under Sec. 102 thereof, transfer to foreign currency
deposit account or receipt from another foreign currency deposit account, whether for payment of
legitimate obligation or otherwise, are not eligible for deposit under the System.

CB Circular No. 960 has since been superseded by CB Circular 1318 and later by CB Circular 1389.
Section 102 of Circular 960 has not been re-enacted in the later Circulars. What is applicable now is
the decision in Intengan vs. Court of Appeals where the Supreme Court has ruled that the under
R.A. 6426 there is only a single exception to the secrecy of foreign currency deposits, that is,
disclosure is allowed only upon the written permission of the depositor. Petitioner, therefore, had
inappropriately invoked the provisions of Central Bank (CB) Circular Nos. 343 which has already
been superseded by more recently issued CB Circulars. CB Circular 343 requires the surrender to
the banking system of foreign exchange, including proceeds of foreign borrowings. This requirement,
however, can no longer be found in later circulars.

In its Reply to respondent banks’ comment, petitioner appears to have conceded that what is
applicable in this case is CB Circular 1389. Obviously, under CB 1389, proceeds of foreign
borrowings are no longer required to be surrendered to the banking system.

Undaunted, petitioner now argues that paragraph 2, Section 27 of CB Circular 1389 is applicable
because Domsat’s $11,000,000.00 loan from respondent banks was intended to be paid to a foreign
supplier Intersputnik and, therefore, should have been paid directly to Intersputnik and not
deposited into Westmont Bank. The fact that it was deposited to the local bank Westmont Bank,
petitioner claims violates the circular and makes the deposit lose its confidentiality status under
R.A. 6426. However, a reading of the entire Section 27 of CB Circular 1389 reveals that the portion
quoted by the petitioner refers only to the procedure/conditions of drawdown for service of debts
using foreign exchange. The above-said provision relied upon by the petitioner does not in any
manner prescribe the conditions before any foreign currency deposit can be entitled to the
confidentiality provisions of R.A. 6426.15

Anent the third issue, the Court of Appeals ruled that the testimony of the incumbent president of
Westmont Bank is not the written consent contemplated by Republic Act No. 6426.

The Court of Appeals however upheld the issuance of subpoena praying for the production of
applications for cashier’s or manager’s checks by Domsat through Westmont Bank, as well as a copy
of an Agreement and/or Contract and/or Memorandum between Domsat and/or Philippine Agila
Satellite and Intersputnik for the acquisition and/or lease of a Gorizon Satellite. The appellate court
believed that the production of these documents does not involve the examination of Domsat’s
account since it will never be known how much money was deposited into it or withdrawn therefrom
and how much remains therein.

On 29 February 2008, the Court of Appeals rendered the assailed Decision, the decretal portion of
which reads:

WHEREFORE, the petition is partially GRANTED. Accordingly, the assailed Order dated December
30, 2003 is hereby modified in that the quashal of the subpoena for the production of Domsat’s bank
ledger in Westmont Bank is upheld while respondent court is hereby ordered to issue subpoena
duces tecum ad testificandum directing the records custodian of Westmont Bank to bring to court the
following documents:

a) applications for cashier’s or manager’s checks by respondent Domsat through Westmont

Bank from January 1997 to December 2002;

b) bank transfers by respondent Domsat through Westmont Bank from January 1997 to
December 2002; and

c) copy of an agreement and/or contract and/or memorandum between respondent Domsat

and/or Philippine Agila Satellite and Intersputnik for the acquisition and/or lease of a
Gorizon satellite.

No pronouncement as to costs.16

GSIS filed a motion for reconsideration which the Court of Appeals denied on 19 June 2009. Thus,
the instant petition ascribing grave abuse of discretion on the part of the Court of Appeals in ruling
that Domsat’s deposit with Westmont Bank cannot be examined and in finding that the banks’
second motion for reconsideration in Civil Case No. 99-1853 is procedurally acceptable.17

This Court notes that GSIS filed a petition for certiorari under Rule 65 of the Rules of Court to assail
the Decision and Resolution of the Court of Appeals. Petitioner availed of the improper remedy as
the appeal from a final disposition of the Court of Appeals is a petition for review under Rule 45 and
not a special civil action under Rule 65.18 Certiorari under Rule 65 lies only when there is no appeal,
nor plain, speedy and adequate remedy in the ordinary course of law. That action is not a substitute
for a lost appeal in general; it is not allowed when a party to a case fails to appeal a judgment to the
proper forum.19 Where an appeal is available, certiorari will not prosper even if the ground therefor
is grave abuse of discretion. Accordingly, when a party adopts an improper remedy, his petition may
be dismissed outright.20lauuphil

Yet, even if this procedural infirmity is discarded for the broader interest of justice, the petition
sorely lacks merit.
GSIS insists that Domsat’s deposit with Westmont Bank can be examined and inquired into. It
anchored its argument on Republic Act No. 1405 or the "Law on Secrecy of Bank Deposits," which
allows the disclosure of bank deposits in cases where the money deposited is the subject matter of
the litigation. GSIS asserts that the subject matter of the litigation is the U.S. $11 Million obtained
by Domsat from the Banks to supposedly finance the lease of a Russian satellite from Intersputnik.
Whether or not it should be held liable as a surety for the principal amount of U.S. $11 Million, GSIS
contends, is contingent upon whether Domsat indeed utilized the amount to lease a Russian satellite
as agreed in the Surety Bond Agreement. Hence, GSIS argues that the whereabouts of the U.S. $11
Million is the subject matter of the case and the disclosure of bank deposits relating to the U.S. $11
Million should be allowed.

GSIS also contends that the concerted refusal of Domsat and the banks to divulge the whereabouts
of the U.S. $11 Million will greatly prejudice and burden the GSIS pension fund considering that a
substantial portion of this fund is earmarked every year to cover the surety bond issued.

Lastly, GSIS defends the acceptance by the trial court of the second motion for reconsideration filed
by the banks on the grounds that it is pro forma and did not conform to the notice requirements of
Section 4, Rule 15 of the Rules of Civil Procedure.21

Domsat denies the allegations of GSIS and reiterates that it did not give a categorical or affirmative
written consent or permission to GSIS to examine its bank statements with Westmont Bank.

The Banks maintain that Republic Act No. 1405 is not the applicable law in the instant case because
the Domsat deposit is a foreign currency deposit, thus covered by Republic Act No. 6426. Under said
law, only the consent of the depositor shall serve as the exception for the disclosure of his/her
deposit.

The Banks counter the arguments of GSIS as a mere rehash of its previous arguments before the
Court of Appeals. They justify the issuance of the subpoena as an interlocutory matter which may be
reconsidered anytime and that the pro forma rule has no application to interlocutory orders.

It appears that only GSIS appealed the ruling of the Court of Appeals pertaining to the quashal of
the subpoena for the production of Domsat’s bank ledger with Westmont Bank. Since neither Domsat
nor the Banks interposed an appeal from the other portions of the decision, particularly for the
production of applications for cashier’s or manager’s checks by Domsat through Westmont Bank, as
well as a copy of an agreement and/or contract and/or memorandum between Domsat and/or
Philippine Agila Satellite and Intersputnik for the acquisition and/or lease of a Gorizon satellite, the
latter became final and executory.

GSIS invokes Republic Act No. 1405 to justify the issuance of the subpoena while the banks cite
Republic Act No. 6426 to oppose it. The core issue is which of the two laws should apply in the
instant case.

Republic Act No. 1405 was enacted in 1955. Section 2 thereof was first amended by Presidential
Decree No. 1792 in 1981 and further amended by Republic Act No. 7653 in 1993. It now reads:

Section 2. All deposits of whatever nature with banks or banking institutions in the Philippines
including investments in bonds issued by the Government of the Philippines, its political
subdivisions and its instrumentalities, are hereby considered as of an absolutely confidential nature
and may not be examined, inquired or looked into by any person, government official, bureau or
office, except upon written permission of the depositor, or in cases of impeachment, or upon order of
a competent court in cases of bribery or dereliction of duty of public officials, or in cases where the
money deposited or invested is the subject matter of the litigation.

Section 8 of Republic Act No. 6426, which was enacted in 1974, and amended by Presidential Decree
No. 1035 and later by Presidential Decree No. 1246, provides:

Section 8. Secrecy of Foreign Currency Deposits. – All foreign currency deposits authorized under
this Act, as amended by Presidential Decree No. 1035, as well as foreign currency deposits
authorized under Presidential Decree No. 1034, are hereby declared as and considered of an
absolutely confidential nature and, except upon the written permission of the depositor, in no
instance shall foreign currency deposits be examined, inquired or looked into by any person,
government official, bureau or office whether judicial or administrative or legislative or any other
entity whether public or private; Provided, however, That said foreign currency deposits shall be
exempt from attachment, garnishment, or any other order or process of any court, legislative body,
government agency or any administrative body whatsoever. (As amended by PD No. 1035, and
further amended by PD No. 1246, prom. Nov. 21, 1977.)

On the one hand, Republic Act No. 1405 provides for four (4) exceptions when records of deposits
may be disclosed. These are under any of the following instances: a) upon written permission of the
depositor, (b) in cases of impeachment, (c) upon order of a competent court in the case of bribery or
dereliction of duty of public officials or, (d) when the money deposited or invested is the subject
matter of the litigation, and e) in cases of violation of the Anti-Money Laundering Act (AMLA), the
Anti-Money Laundering Council (AMLC) may inquire into a bank account upon order of any
competent court.22 On the other hand, the lone exception to the non-disclosure of foreign currency
deposits, under Republic Act No. 6426, is disclosure upon the written permission of the depositor.

These two laws both support the confidentiality of bank deposits. There is no conflict between them.
Republic Act No. 1405 was enacted for the purpose of giving encouragement to the people to deposit
their money in banking institutions and to discourage private hoarding so that the same may be
properly utilized by banks in authorized loans to assist in the economic development of the
country.23 It covers all bank deposits in the Philippines and no distinction was made between
domestic and foreign deposits. Thus, Republic Act No. 1405 is considered a law of general
application. On the other hand, Republic Act No. 6426 was intended to encourage deposits from
foreign lenders and investors.24 It is a special law designed especially for foreign currency deposits in
the Philippines. A general law does not nullify a specific or special law. Generalia specialibus non
derogant.25 Therefore, it is beyond cavil that Republic Act No. 6426 applies in this case.

Intengan v. Court of Appeals affirmed the above-cited principle and categorically declared that for
foreign currency deposits, such as U.S. dollar deposits, the applicable law is Republic Act No. 6426.

In said case, Citibank filed an action against its officers for persuading their clients to transfer their
dollar deposits to competitor banks. Bank records, including dollar deposits of petitioners, purporting
to establish the deception practiced by the officers, were annexed to the complaint. Petitioners now
complained that Citibank violated Republic Act No. 1405. This Court ruled that since the accounts in
question are U.S. dollar deposits, the applicable law therefore is not Republic Act No. 1405 but
Republic Act No. 6426.

The above pronouncement was reiterated in China Banking Corporation v. Court of Appeals, 26 where
respondent accused his daughter of stealing his dollar deposits with Citibank. The latter allegedly
received the checks from Citibank and deposited them to her account in China Bank. The subject
checks were presented in evidence. A subpoena was issued to employees of China Bank to testify on
these checks. China Bank argued that the Citibank dollar checks with both respondent and/or her
daughter as payees, deposited with China Bank, may not be looked into under the law on secrecy of
foreign currency deposits. This Court highlighted the exception to the non-disclosure of foreign
currency deposits, i.e., in the case of a written permission of the depositor, and ruled that
respondent, as owner of the funds unlawfully taken and which are undisputably now deposited with
China Bank, he has the right to inquire into the said deposits.

Applying Section 8 of Republic Act No. 6426, absent the written permission from Domsat, Westmont
Bank cannot be legally compelled to disclose the bank deposits of Domsat, otherwise, it might expose
itself to criminal liability under the same act.27

The basis for the application of subpoena is to prove that the loan intended for Domsat by the Banks
and guaranteed by GSIS, was diverted to a purpose other than that stated in the surety bond. The
Banks, however, argue that GSIS is in fact liable to them for the proper applications of the loan
proceeds and not vice-versa. We are however not prepared to rule on the merits of this case lest we
pre-empt the findings of the lower courts on the matter.

The third issue raised by GSIS was properly addressed by the appellate court. The appellate court
maintained that the judge may, in the exercise of his sound discretion, grant the second motion for
reconsideration despite its being pro forma. The appellate court correctly relied on precedents where
this Court set aside technicality in favor of substantive justice. Furthermore, the appellate court
accurately pointed out that petitioner did not assail the defect of lack of notice in its opposition to the
second motion of reconsideration, thus it can be considered a waiver of the defect.

WHEREFORE, the petition for certiorari is DISMISSED. The Decision dated 29 February 2008 and
19 June 2009 Resolution of the Court of Appeals are hereby AFFIRMED.

SO ORDERED.

Intengan v. CA

Before us is a petition for review on certiorari, seeking the reversal of the Decision1 dated July 8,
1996 of the former Fifteenth Division2 of the Court of Appeals in CA-G.R. SP No. 37577 as well as its
Resolution3 dated April 16, 1997 denying petitioners’ motion for reconsideration. The appellate court,
in its Decision, sustained a resolution of the Department of Justice ordering the withdrawal of
informations for violation of Republic Act No. 1405 against private respondents.

The facts are:

On September 21, 1993, Citibank filed a complaint for violation of section 31, 4 in relation to section
1445 of the Corporation Code against two (2) of its officers, Dante L. Santos and Marilou Genuino.
Attached to the complaint was an affidavit6 executed by private respondent Vic Lim, a vice-president
of Citibank. Pertinent portions of his affidavit are quoted hereunder:

2.1 Sometime this year, the higher management of Citibank, N.A. assigned me to assist in the
investigation of certain anomalous/highly irregular activities of the Treasurer of the Global
Consumer Group of the bank, namely, Dante L. Santos and the Asst. Vice President in the office of
Mr. Dante L. Santos, namely Ms. Marilou (also called Malou) Genuino. Ms. Marilou Genuino apart
from being an Assistant Vice President in the office of Mr. Dante L. Santos also performed the duties
of an Account Officer. An Account Officer in the office of Mr. Dante L. Santos personally attends to
clients of the bank in the effort to persuade clients to place and keep their monies in the products of
Citibank, NA., such as peso and dollar deposits, mortgage backed securities and money placements,
among others.
xxx xxx xxx

4.1 The investigation in which I was asked to participate was undertaken because the bank had
found records/evidence showing that Mr. Dante L. Santos and Ms. Malou Genuino, contrary to their
disclosures and the aforementioned bank policy, appeared to have been actively engaged in business
endeavors that were in conflict with the business of the bank. It was found that with the use of two
(2) companies in which they have personal financial interest, namely Torrance Development
Corporation and Global Pacific Corporation, they managed or caused existing bank clients/depositors
to divert their money from Citibank, N.A., such as those placed in peso and dollar deposits and
money placements, to products offered by other companies that were commanding higher rate of
yields. This was done by first transferring bank clients’ monies to Torrance and Global which in turn
placed the monies of the bank clients in securities, shares of stock and other certificates of third
parties. It also appeared that out of these transactions, Mr. Dante L. Santos and Ms. Marilou
Genuino derived substantial financial gains.

5.1 In the course of the investigation, I was able to determine that the bank clients which Mr. Santos
and Ms. Genuino helped/caused to divert their deposits/money placements with Citibank, NA. to
Torrance and Global (their family corporations) for subsequent investment in securities, shares of
stocks and debt papers in other companies were as follows:

xxx

b) Carmen Intengan

xxx

d) Rosario Neri

xxx

i) Rita Brawner

All the above persons/parties have long standing accounts with Citibank, N.A. in savings/dollar
deposits and/or in trust accounts and/or money placements.

As evidence, Lim annexed bank records purporting to establish the deception practiced by Santos
and Genuino. Some of the documents pertained to the dollar deposits of petitioners Carmen Ll.
Intengan, Rosario Ll. Neri, and Rita P. Brawner, as follows:

a) Annex "A-6"7 - an "Application for Money Transfer" in the amount of US $140,000.00,

executed by Intengan in favor of Citibank $ S/A No. 24367796, to be debited from her
Account No. 22543341;

b) Annex "A-7"8 - a "Money Transfer Slip" in the amount of US $45,996.30, executed by

Brawner in favor of Citibank $ S/A No. 24367796, to be debited from her Account No.
22543236; and

c) Annex "A-9"9 - an "Application for Money Transfer" in the amount of US $100,000.00,

executed by Neri in favor of Citibank $ S/A No. 24367796, to be debited from her Account No.
24501018.
In turn, private respondent Joven Reyes, vice-president/business manager of the Global Consumer
Banking Group of Citibank, admits to having authorized Lim to state the names of the clients
involved and to attach the pertinent bank records, including those of petitioners’. 10 He states that
private respondents Aziz Rajkotwala and William Ferguson, Citibank, N.A. Global Consumer
Banking Country Business Manager and Country Corporate Officer, respectively, had no hand in the
disclosure, and that he did so upon the advice of counsel.

In his memorandum, the Solicitor General described the scheme as having been conducted in this
manner:

First step: Santos and/or Genuino would tell the bank client that they knew of financial products of
other companies that were yielding higher rates of interests in which the bank client can place his
money. Acting on this information, the bank client would then authorize the transfer of his funds
from his Citibank account to the Citibank account of either Torrance or Global.

The transfer of the Citibank client’s deposits was done through the accomplishment of either an
Application For Manager’s Checks or a Term Investment Application in favor of Global or Torrance
that was prepared/filed by Genuino herself.

Upon approval of the Application for Manager’s Checks or Term Investment Application, the funds of
the bank client covered thereof were then deposited in the Citibank accounts of Torrance and/or
Global.

Second step: Once the said fund transfers had been effected, Global and/or Torrance would then
issue its/ their checks drawn against its/their Citibank accounts in favor of the other companies
whose financial products, such as securities, shares of stocks and other certificates, were offering
higher yields.

Third step: On maturity date(s) of the placements made by Torrance and/or Global in the other
companies, using the monies of the Citibank client, the other companies would then. return the
placements to Global and/or Torrance with the corresponding interests earned.

Fourth step: Upon receipt by Global and/or Torrance of the remittances from the other companies,
Global and/or Torrance would then issue its/their own checks drawn against their Citibank accounts
in favor of Santos and Genuino.

The amounts covered by the checks represent the shares of Santos and Genuino in the margins
Global and/or Torrance had realized out of the placements [using the diverted monies of the Citibank
clients] made with the other companies.

Fifth step: At the same time, Global and/or Torrance would also issue its/their check(s) drawn
against its/their Citibank accounts in favor of the bank client.

The check(s) cover the principal amount (or parts thereof) which the Citibank client had previously
transferred, with the help of Santos and/or Genuino, from his Citibank account to the Citibank
account(s) of Global and/or Torrance for placement in the other companies, plus the interests or
earnings his placements in other companies had made less the spreads made by Global, Torrance,
Santos and Genuino.

The complaints which were docketed as I.S. Nos. 93-9969, 93-10058 and 94-1215 were subsequently
amended to include a charge of estafa under Article 315, paragraph 1(b)11 of the Revised Penal Code.
As an incident to the foregoing, petitioners filed respective motions for the exclusion and physical
withdrawal of their bank records that were attached to Lim’s affidavit.

In due time, Lim and Reyes filed their respective counter-affidavits.12 In separate Memoranda dated
March 8, 1994 and March 15, 1994 2nd Assistant Provincial Prosecutor Hermino T. Ubana, Sr.
recommended the dismissal of petitioners’ complaints. The recommendation was overruled by
Provincial Prosecutor Mauro M. Castro who, in a Resolution dated August 18, 1994, 13 directed the
filing of informations against private respondents for alleged violation of Republic Act No. 1405,
otherwise known as the Bank Secrecy Law.

Private respondents’ counsel then filed an appeal before the Department of Justice (DOJ). On
November 17, 1994, then DOJ Secretary Franklin M. Drilon issued a Resolution 14 ordering, inter
alia, the withdrawal of the aforesaid informations against private respondents. Petitioners’ motion
for reconsideration15 was denied by DOJ Acting Secretary Demetrio G. Demetria in a Resolution
dated March 6, 1995.16

Initially, petitioners sought the reversal of the DOJ resolutions via a petition
for certiorari and mandamus filed with this Court, docketed as G.R. No. 119999-120001. However,
the former First Division of this Court, in a Resolution dated June 5, 1995, 17 referred the matter to
the Court of the Appeals, on the basis of the latter tribunal’s concurrent jurisdiction to issue the
extraordinary writs therein prayed for. The petition was docketed as CA-G.R. SP No. 37577 in the
Court of Appeals.

On July 8, 1996, the Court of Appeals rendered judgment dismissing the petition in CA-G.R. SP No.
37577 and declared therein, as follows:

Clearly, the disclosure of petitioners’ deposits was necessary to establish the allegation that Santos
and Genuino had violated Section 31 of the Corporation Code in acquiring "any interest adverse to
the corporation in respect of any matter which has been reposed in him in confidence." To
substantiate the alleged scheme of Santos and Genuino, private respondents had to present the
records of the monies which were manipulated by the two officers which included the bank records of
herein petitioners.

Although petitioners were not the parties involved in IS. No. 93-8469, their accounts were relevant
to the complete prosecution of the case against Santos and Genuino and the respondent DOJ
properly ruled that the disclosure of the same falls under the last exception of R.A. No. 1405. That
ruling is consistent with the principle laid down in the case of Mellon Bank, N.A. vs. Magsino (190
SCRA 633) where the Supreme Court allowed the testimonies on the bank deposits of someone not a
party to the case as it found that said bank deposits were material or relevant to the allegations in
the complaint. Significantly, therefore, as long as the bank deposits are material to the case,
although not necessarily the direct subject matter thereof, a disclosure of the same is proper and
falls within the scope of the exceptions provided for by R.A. No. 1405.

xxx xxx xxx

Moreover, the language of the law itself is clear and cannot be subject to different interpretations. A
reading of the provision itself would readily reveal that the exception "or in cases where the money
deposited or invested is the subject matter of the litigation" is not qualified by the phrase "upon
order of competent Court" which refers only to cases of bribery or dereliction of duty of public
officials.
Petitioners’ motion for reconsideration was similarly denied in a Resolution dated April 16, 1997.
Appeal was made in due time to this Court.

The instant petition was actually denied by the former Third Division of this Court in a
Resolution18 dated July 16, 1997, on the ground that petitioners had failed to show that a reversible
error had been committed. On motion, however, the petition was reinstated 19 and eventually given
due course.20

In assailing the appellate court’s findings, petitioners assert that the disclosure of their bank records
was unwarranted and illegal for the following reasons:

I.

IN BLATANT VIOLATION OF R.A. NO. 1405, PRIVATE RESPONDENTS ILLEGALLY MADE

DISCLOSURES OF PETITIONERS’ CONFIDENTIAL BANK DEPOSITS FOR THEIR SELFISH
ENDS IN PROSECUTING THEIR COMPLAINT IN IS. NO. 93-8469 THAT DID NOT INVOLVE
PETITIONERS.

II.

PRIVATE RESPONDENTS’ DISCLOSURES DO NOT FALL UNDER THE FOURTH EXCEPTION

OF R.A. NO. 1405 (i.e., "in cases where the money deposited or invested is the subject matter of the
litigation"), NOR UNDER ANY OTHER EXCEPTION:

(1)

PETITIONERS’ DEPOSITS ARE NOT INVOLVED IN ANY LITIGATION BETWEEN

PETITIONERS AND RESPONDENTS. THERE IS NO LITIGATION BETWEEN THE
PARTIES, MUCH LESS ONE INVOLVING PETITIONERS’ DEPOSITS AS THE SUBJECT
MATTER THEREOF.

(2)

EVEN ASSUMING ARGUENDO THAT THERE IS A LITIGATION INVOLVING

PETITIONERS’ DEPOSITS AS THE SUBJECT MATTER THEREOF, PRIVATE
RESPONDENTS’ DISCLOSURES OF PETITIONERS’ DEPOSITS ARE NEVERTHELESS
ILLEGAL FOR WANT OF THE REQUISITE COURT ORDER, IN VIOLATION OF R.A. NO.
1405.

III.

THEREFORE, PETITIONERS ARE ENTITLED TO PROSECUTE PRIVATE RESPONDENTS FOR

VIOLATIONS OF R.A. NO. 1405 FOR HAVING ILLEGALLY DISCLOSED PETITIONERS’
CONFIDENTIAL BANK DEPOSITS AND RECORDS IN IS. NO. 93-8469.

Apart from the reversal of the decision and resolution of the appellate court as well as the
resolutions of the Department of Justice, petitioners pray that the latter agency be directed to issue
a resolution ordering the Provincial Prosecutor of Rizal to file the corresponding informations for
violation of Republic Act No. 1405 against private respondents.

The petition is not meritorious.

Actually, this case should have been studied more carefully by all concerned. The finest legal minds
in the country - from the parties’ respective counsel, the Provincial Prosecutor, the Department of
Justice, the Solicitor General, and the Court of Appeals - all appear to have overlooked a single
fact which dictates the outcome of the entire controversy. A circumspect review of the record shows
us the reason. The accounts in question are U.S. dollar deposits; consequently, the applicable law
is not Republic Act No. 1405 but Republic Act (RA) No. 6426, known as the "Foreign Currency
Deposit Act of the Philippines," section 8 of which provides:

Sec. 8. Secrecy of Foreign Currency Deposits.- All foreign currency deposits authorized under this
Act, as amended by Presidential Decree No. 1035, as well as foreign currency deposits authorized
under Presidential Decree No. 1034, are hereby declared as and considered of an absolutely
confidential nature and, except upon the written permission of the depositor, in no instance shall such
foreign currency deposits be examined, inquired or looked into by any person, government official
bureau or office whether judicial or administrative or legislative or any other entity whether public or
private: Provided, however, that said foreign currency deposits shall be exempt from attachment,
garnishment, or any other order or process of any court, legislative body, government agency or any
administrative body whatsoever.21 (italics supplied)

Thus, under R.A. No. 6426 there is only a single exception to the secrecy of foreign currency deposits,
that is, disclosure is allowed only upon the written permission of the depositor. Incidentally, the acts
of private respondents complained of happened before the enactment on September 29, 2001 of R.A.
No. 9160 otherwise known as the Anti-Money Laundering Act of 2001.

A case for violation of Republic Act No. 6426 should have been the proper case brought against
private respondents. Private respondents Lim and Reyes admitted that they had disclosed details of
petitioners’ dollar deposits without the latter’s written permission. It does not matter if that such
disclosure was necessary to establish Citibank’s case against Dante L. Santos and Marilou Genuino.
Lim’s act of disclosing details of petitioners’ bank records regarding their foreign currency deposits,
with the authority of Reyes, would appear to belong to that species of criminal acts punishable by
special laws, called malum prohibitum. In this regard, it has been held that:

While it is true that, as a rule and on principles of abstract justice, men are not and should not be
held criminally responsible for acts committed by them without guilty knowledge and criminal or at
least evil intent xxx, the courts have always recognized the power of the legislature, on grounds of
public policy and compelled by necessity, "the great master of things," to forbid in a limited class of
cases the doing of certain acts, and to make their commission criminal without regard to the intent of
the doer. xxx In such cases no judicial authority has the power to require, in the enforcement of the
law, such knowledge or motive to be shown. As was said in the case of State vs. McBrayer xxx:

‘It is a mistaken notion that positive, willful intent, as distinguished from a mere intent, to violate
the criminal law, is an essential ingredient in every criminal offense, and that where there is the
absence of such intent there is no offense; this is especially so as to statutory offenses. When the
statute plainly forbids an act to be done, and it is done by some person, the law implies conclusively
the guilty intent, although the offender was honestly mistaken as to the meaning of the law he
violates. When the language is plain and positive, and the offense is not made to depend upon the
positive, willful intent and purpose, nothing is left to interpretation.’ 22

Ordinarily, the dismissal of the instant petition would have been without prejudice to the filing of
the proper charges against private respondents. The matter would have ended here were it not for
the intervention of time, specifically the lapse thereof. So as not to unduly prolong the settlement of
the case, we are constrained to rule on a material issue even though it was not raised by the parties.
We refer to the issue of prescription.
Republic Act No. 6426 being a special law, the provisions of Act No. 3326,23 as amended by Act No.
3763, are applicable:

SECTION 1. Violations penalized by special acts shall, unless otherwise provided in such acts,
prescribe in accordance with the following rules: (a) after a year for offences punished only by a fine
or by imprisonment for not more than one month, or both: (b) after four years for those punished by
imprisonment for more than one month, but less than two years; (c) after eight years for those
punished by imprisonment for two years or more, but less than six years; and (d) after twelve years
for any other offence punished by imprisonment for six years or more, except the crime of treason,
which shall prescribe after twenty years: Provided, however, That all offences against any law or
part of law administered by the Bureau of Internal Revenue shall prescribe after five years.
Violations penalized by municipal ordinances shall prescribe after two months.

Violations of the regulations or conditions of certificates of public convenience issued by the Public
Service Commission shall prescribe after two months.

SEC. 2. Prescription shall begin to run from the day of the commission of the violation of the law,
and if the same be not known at the time, from the discovery thereof and the institution of judicial
proceedings for its investigation and punishment.

The prescription shall be interrupted when proceedings are instituted against the guilty person, and
shall begin to run again if the proceedings are dismissed for reasons not constituting
jeopardy.1âwphi1

A violation of Republic Act No. 6426 shall subject the offender to imprisonment of not less than one
year nor more than five years, or by a fine of not less than five thousand pesos nor more than twenty-
five thousand pesos, or both.24 Applying Act No. 3326, the offense prescribes in eight years.25 Per
available records, private respondents may no longer be haled before the courts for violation of
Republic Act No. 6426. Private respondent Vic Lim made the disclosure in September of 1993 in his
affidavit submitted before the Provincial Fiscal.26 In her complaint-affidavit,27 Intengan stated that
she learned of the revelation of the details of her foreign currency bank account on October 14, 1993.
On the other hand, Neri asserts that she discovered the disclosure on October 24, 1993.28As to
Brawner, the material date is January 5, 1994.29 Based on any of these dates, prescription has set
in.30

The filing of the complaint or information in the case at bar for alleged violation of Republic Act No.
1405 did not have the effect of tolling the prescriptive period. For it is the filing of the complaint or
information corresponding to the correct offense which produces that effect. 31

It may well be argued that the foregoing disquisition would leave petitioners with no remedy in law.
We point out, however, that the confidentiality of foreign currency deposits mandated by Republic
Act No. 6426, as amended by Presidential Decree No. 1246, came into effect as far back as
1977. Hence, ignorance thereof cannot be pretended. On one hand, the existence of laws is a matter
of mandatory judicial notice;32 on the other, ignorantia legis non excusat.33 Even during the pendency
of this appeal, nothing prevented the petitioners from filing a complaint charging the correct offense
against private respondents. This was not done, as everyone involved was content to submit the case
on the basis of an alleged violation of Republic Act No. 1405 (Bank Secrecy Law), however,
incorrectly invoked.34

WHEREFORE, the petition is hereby DENIED. No pronouncement as to costs.

SO ORDERED.
I.A.4.b.10. Foreclosure of Real Estate Mortgage

Central Bank v. CA

This is a petition for review on certiorari to set aside as null and void the decision of the Court of
Appeals, in C.A.-G.R. No. 52253-R dated February 11, 1977, modifying the decision dated February
15, 1972 of the Court of First Instance of Agusan, which dismissed the petition of respondent
Sulpicio M. Tolentino for injunction, specific performance or rescission, and damages with
preliminary injunction.

On April 28, 1965, Island Savings Bank, upon favorable recommendation of its legal department,
approved the loan application for P80,000.00 of Sulpicio M. Tolentino, who, as a security for the loan,
executed on the same day a real estate mortgage over his 100-hectare land located in Cubo, Las
Nieves, Agusan, and covered by TCT No. T-305, and which mortgage was annotated on the said title
the next day. The approved loan application called for a lump sum P80,000.00 loan, repayable in
semi-annual installments for a period of 3 years, with 12% annual interest. It was required that
Sulpicio M. Tolentino shall use the loan proceeds solely as an additional capital to develop his other
property into a subdivision.

On May 22, 1965, a mere P17,000.00 partial release of the P80,000.00 loan was made by the Bank;
and Sulpicio M. Tolentino and his wife Edita Tolentino signed a promissory note for P17,000.00 at
12% annual interest, payable within 3 years from the date of execution of the contract at semi-
annual installments of P3,459.00 (p. 64, rec.). An advance interest for the P80,000.00 loan covering a
6-month period amounting to P4,800.00 was deducted from the partial release of P17,000.00. But
this pre-deducted interest was refunded to Sulpicio M. Tolentino on July 23, 1965, after being
informed by the Bank that there was no fund yet available for the release of the P63,000.00 balance
(p. 47, rec.). The Bank, thru its vice-president and treasurer, promised repeatedly the release of the
P63,000.00 balance (p. 113, rec.).

On August 13, 1965, the Monetary Board of the Central Bank, after finding Island Savings Bank
was suffering liquidity problems, issued Resolution No. 1049, which provides:

In view of the chronic reserve deficiencies of the Island Savings Bank against its
deposit liabilities, the Board, by unanimous vote, decided as follows:

1) To prohibit the bank from making new loans and investments [except investments
in government securities] excluding extensions or renewals of already approved
loans, provided that such extensions or renewals shall be subject to review by the
Superintendent of Banks, who may impose such limitations as may be necessary to
insure correction of the bank's deficiency as soon as possible;

xxx xxx xxx

(p. 46, rec.).

On June 14, 1968, the Monetary Board, after finding thatIsland Savings Bank failed to put up the
required capital to restore its solvency, issued Resolution No. 967 which prohibited Island Savings
Bank from doing business in the Philippines and instructed the Acting Superintendent of Banks to
take charge of the assets of Island Savings Bank (pp. 48-49, rec).
On August 1, 1968, Island Savings Bank, in view of non-payment of the P17,000.00 covered by the
promissory note, filed an application for the extra-judicial foreclosure of the real estate mortgage
covering the 100-hectare land of Sulpicio M. Tolentino; and the sheriff scheduled the auction for
January 22, 1969.

On January 20, 1969, Sulpicio M. Tolentino filed a petition with the Court of First Instance of
Agusan for injunction, specific performance or rescission and damages with preliminary injunction,
alleging that since Island Savings Bank failed to deliver the P63,000.00 balance of the P80,000.00
loan, he is entitled to specific performance by ordering Island Savings Bank to deliver the P63,000.00
with interest of 12% per annum from April 28, 1965, and if said balance cannot be delivered, to
rescind the real estate mortgage (pp. 32-43, rec.).

On January 21, 1969, the trial court, upon the filing of a P5,000.00 surety bond, issued a temporary
restraining order enjoining the Island Savings Bank from continuing with the foreclosure of the
mortgage (pp. 86-87, rec.).

On January 29, 1969, the trial court admitted the answer in intervention praying for the dismissal of
the petition of Sulpicio M. Tolentino and the setting aside of the restraining order, filed by the
Central Bank and by the Acting Superintendent of Banks (pp. 65-76, rec.).

On February 15, 1972, the trial court, after trial on the merits rendered its decision, finding
unmeritorious the petition of Sulpicio M. Tolentino, ordering him to pay Island Savings Bank the
amount of PI 7 000.00 plus legal interest and legal charges due thereon, and lifting the restraining
order so that the sheriff may proceed with the foreclosure (pp. 135-136. rec.

On February 11, 1977, the Court of Appeals, on appeal by Sulpicio M. Tolentino, modified the Court
of First Instance decision by affirming the dismissal of Sulpicio M. Tolentino's petition for specific
performance, but it ruled that Island Savings Bank can neither foreclose the real estate mortgage
nor collect the P17,000.00 loan pp. 30-:31. rec.).

Hence, this instant petition by the central Bank.

The issues are:

1. Can the action of Sulpicio M. Tolentino for specific performance prosper?

2. Is Sulpicio M. Tolentino liable to pay the P17,000.00 debt covered by the

promissory note?

3. If Sulpicio M. Tolentino's liability to pay the P17,000.00 subsists, can his real
estate mortgage be foreclosed to satisfy said amount?

When Island Savings Bank and Sulpicio M. Tolentino entered into an P80,000.00 loan agreement on
April 28, 1965, they undertook reciprocal obligations. In reciprocal obligations, the obligation or
promise of each party is the consideration for that of the other (Penaco vs. Ruaya, 110 SCRA 46
[1981]; Vda. de Quirino vs, Pelarca 29 SCRA 1 [1969]); and when one party has performed or is ready
and willing to perform his part of the contract, the other party who has not performed or is not ready
and willing to perform incurs in delay (Art. 1169 of the Civil Code). The promise of Sulpicio M.
Tolentino to pay was the consideration for the obligation of Island Savings Bank to furnish the
P80,000.00 loan. When Sulpicio M. Tolentino executed a real estate mortgage on April 28, 1965, he
signified his willingness to pay the P80,000.00 loan. From such date, the obligation of Island Savings
Bank to furnish the P80,000.00 loan accrued. Thus, the Bank's delay in furnishing the entire loan
started on April 28, 1965, and lasted for a period of 3 years or when the Monetary Board of the
Central Bank issued Resolution No. 967 on June 14, 1968, which prohibited Island Savings Bank
from doing further business. Such prohibition made it legally impossible for Island Savings Bank to
furnish the P63,000.00 balance of the P80,000.00 loan. The power of the Monetary Board to take over
insolvent banks for the protection of the public is recognized by Section 29 of R.A. No. 265, which
took effect on June 15, 1948, the validity of which is not in question.

The Board Resolution No. 1049 issued on August 13,1965 cannot interrupt the default of Island
Savings Bank in complying with its obligation of releasing the P63,000.00 balance because said
resolution merely prohibited the Bank from making new loans and investments, and nowhere did it
prohibit island Savings Bank from releasing the balance of loan agreements previously contracted.
Besides, the mere pecuniary inability to fulfill an engagement does not discharge the obligation of
the contract, nor does it constitute any defense to a decree of specific performance (Gutierrez Repide
vs. Afzelius and Afzelius, 39 Phil. 190 [1918]). And, the mere fact of insolvency of a debtor is never
an excuse for the non-fulfillment of an obligation but 'instead it is taken as a breach of the contract
by him (vol. 17A, 1974 ed., CJS p. 650)

The fact that Sulpicio M. Tolentino demanded and accepted the refund of the pre-deducted interest
amounting to P4,800.00 for the supposed P80,000.00 loan covering a 6-month period cannot be taken
as a waiver of his right to collect the P63,000.00 balance. The act of Island Savings Bank, in asking
the advance interest for 6 months on the supposed P80,000.00 loan, was improper considering that
only P17,000.00 out of the P80,000.00 loan was released. A person cannot be legally charged interest
for a non-existing debt. Thus, the receipt by Sulpicio M. 'Tolentino of the pre-deducted interest was
an exercise of his right to it, which right exist independently of his right to demand the completion of
the P80,000.00 loan. The exercise of one right does not affect, much less neutralize, the exercise of
the other.

The alleged discovery by Island Savings Bank of the over-valuation of the loan collateral cannot
exempt it from complying with its reciprocal obligation to furnish the entire P80,000.00 loan. 'This
Court previously ruled that bank officials and employees are expected to exercise caution and
prudence in the discharge of their functions (Rural Bank of Caloocan, Inc. vs. C.A., 104 SCRA 151
[1981]). It is the obligation of the bank's officials and employees that before they approve the loan
application of their customers, they must investigate the existence and evaluation of the properties
being offered as a loan security. The recent rush of events where collaterals for bank loans turn out
to be non-existent or grossly over-valued underscore the importance of this responsibility. The mere
reliance by bank officials and employees on their customer's representation regarding the loan
collateral being offered as loan security is a patent non-performance of this responsibility. If ever
bank officials and employees totally reIy on the representation of their customers as to the valuation
of the loan collateral, the bank shall bear the risk in case the collateral turn out to be over-valued.
The representation made by the customer is immaterial to the bank's responsibility to conduct its
own investigation. Furthermore, the lower court, on objections of' Sulpicio M. Tolentino, had enjoined
petitioners from presenting proof on the alleged over-valuation because of their failure to raise the
same in their pleadings (pp. 198-199, t.s.n. Sept. 15. 1971). The lower court's action is sanctioned by
the Rules of Court, Section 2, Rule 9, which states that "defenses and objections not pleaded either in
a motion to dismiss or in the answer are deemed waived." Petitioners, thus, cannot raise the same
issue before the Supreme Court.

Since Island Savings Bank was in default in fulfilling its reciprocal obligation under their loan
agreement, Sulpicio M. Tolentino, under Article 1191 of the Civil Code, may choose between specific
performance or rescission with damages in either case. But since Island Savings Bank is now
prohibited from doing further business by Monetary Board Resolution No. 967, WE cannot grant
specific performance in favor of Sulpicio M, Tolentino.
Rescission is the only alternative remedy left. WE rule, however, that rescission is only for the
P63,000.00 balance of the P80,000.00 loan, because the bank is in default only insofar as such
amount is concerned, as there is no doubt that the bank failed to give the P63,000.00. As far as the
partial release of P17,000.00, which Sulpicio M. Tolentino accepted and executed a promissory note
to cover it, the bank was deemed to have complied with its reciprocal obligation to furnish a
P17,000.00 loan. The promissory note gave rise to Sulpicio M. Tolentino's reciprocal obligation to pay
the P17,000.00 loan when it falls due. His failure to pay the overdue amortizations under the
promissory note made him a party in default, hence not entitled to rescission (Article 1191 of the
Civil Code). If there is a right to rescind the promissory note, it shall belong to the aggrieved party,
that is, Island Savings Bank. If Tolentino had not signed a promissory note setting the date for
payment of P17,000.00 within 3 years, he would be entitled to ask for rescission of the entire loan
because he cannot possibly be in default as there was no date for him to perform his reciprocal
obligation to pay.

Since both parties were in default in the performance of their respective reciprocal obligations, that
is, Island Savings Bank failed to comply with its obligation to furnish the entire loan and Sulpicio M.
Tolentino failed to comply with his obligation to pay his P17,000.00 debt within 3 years as
stipulated, they are both liable for damages.

Article 1192 of the Civil Code provides that in case both parties have committed a breach of their
reciprocal obligations, the liability of the first infractor shall be equitably tempered by the courts.
WE rule that the liability of Island Savings Bank for damages in not furnishing the entire loan is
offset by the liability of Sulpicio M. Tolentino for damages, in the form of penalties and surcharges,
for not paying his overdue P17,000.00 debt. The liability of Sulpicio M. Tolentino for interest on his
PI 7,000.00 debt shall not be included in offsetting the liabilities of both parties. Since Sulpicio M.
Tolentino derived some benefit for his use of the P17,000.00, it is just that he should account for the
interest thereon.

WE hold, however, that the real estate mortgage of Sulpicio M. Tolentino cannot be entirely
foreclosed to satisfy his P 17,000.00 debt.

The consideration of the accessory contract of real estate mortgage is the same as that of the
principal contract (Banco de Oro vs. Bayuga, 93 SCRA 443 [1979]). For the debtor, the consideration
of his obligation to pay is the existence of a debt. Thus, in the accessory contract of real estate
mortgage, the consideration of the debtor in furnishing the mortgage is the existence of a valid,
voidable, or unenforceable debt (Art. 2086, in relation to Art, 2052, of the Civil Code).

The fact that when Sulpicio M. 'Tolentino executed his real estate mortgage, no consideration was
then in existence, as there was no debt yet because Island Savings Bank had not made any release
on the loan, does not make the real estate mortgage void for lack of consideration. It is not necessary
that any consideration should pass at the time of the execution of the contract of real mortgage
(Bonnevie vs. C.A., 125 SCRA 122 [1983]). lt may either be a prior or subsequent matter. But when
the consideration is subsequent to the mortgage, the mortgage can take effect only when the debt
secured by it is created as a binding contract to pay (Parks vs, Sherman, Vol. 176 N.W. p. 583, cited
in the 8th ed., Jones on Mortgage, Vol. 2, pp. 5-6). And, when there is partial failure of consideration,
the mortgage becomes unenforceable to the extent of such failure (Dow. et al. vs. Poore, Vol. 172 N.E.
p. 82, cited in Vol. 59, 1974 ed. CJS, p. 138). Where the indebtedness actually owing to the holder of
the mortgage is less than the sum named in the mortgage, the mortgage cannot be enforced for more
than the actual sum due (Metropolitan Life Ins. Co. vs. Peterson, Vol. 19, F(2d) p. 88, cited in 5th ed.,
Wiltsie on Mortgage, Vol. 1, P. 180).
Since Island Savings Bank failed to furnish the P63,000.00 balance of the P8O,000.00 loan, the real
estate mortgage of Sulpicio M. Tolentino became unenforceable to such extent. P63,000.00 is 78.75%
of P80,000.00, hence the real estate mortgage covering 100 hectares is unenforceable to the extent of
78.75 hectares. The mortgage covering the remainder of 21.25 hectares subsists as a security for the
P17,000.00 debt. 21.25 hectares is more than sufficient to secure a P17,000.00 debt.

The rule of indivisibility of a real estate mortgage provided for by Article 2089 of the Civil Code is
inapplicable to the facts of this case.

Article 2089 provides:

A pledge or mortgage is indivisible even though the debt may be divided among the
successors in interest of the debtor or creditor.

Therefore, the debtor's heirs who has paid a part of the debt can not ask for the
proportionate extinguishment of the pledge or mortgage as long as the debt is not
completely satisfied.

Neither can the creditor's heir who have received his share of the debt return the
pledge or cancel the mortgage, to the prejudice of other heirs who have not been paid.

The rule of indivisibility of the mortgage as outlined by Article 2089 above-quoted presupposes
several heirs of the debtor or creditor which does not obtain in this case. Hence, the rule of
indivisibility of a mortgage cannot apply

WHEREFORE, THE DECISION OF THE COURT OF APPEALS DATED FEBRUARY 11, 1977 IS
HEREBY MODIFIED, AND

1. SULPICIO M. TOLENTINO IS HEREBY ORDERED TO PAY IN FAVOR OF HEREIN

PETITIONERS THE SUM OF P17.000.00, PLUS P41,210.00 REPRESENTING 12% INTEREST
PER ANNUM COVERING THE PERIOD FROM MAY 22, 1965 TO AUGUST 22, 1985, AND 12%
INTEREST ON THE TOTAL AMOUNT COUNTED FROM AUGUST 22, 1985 UNTIL PAID;

2. IN CASE SULPICIO M. TOLENTINO FAILS TO PAY, HIS REAL ESTATE MORTGAGE

COVERING 21.25 HECTARES SHALL BE FORECLOSED TO SATISFY HIS TOTAL
INDEBTEDNESS; AND

3. THE REAL ESTATE MORTGAGE COVERING 78.75 HECTARES IS HEREBY DECLARED

UNEN FORCEABLE AND IS HEREBY ORDERED RELEASED IN FAVOR OF SULPICIO M.
TOLENTINO.

NO COSTS. SO ORDERED.

Prudential Bank v. Alviar

Before us is a petition for review on certiorari under Rule 45 of the Rules of Court. Petitioner
Prudential Bank seeks the reversal of the Decision1 of the Court of Appeals dated 27 September 2001
in CA-G.R. CV No. 59543 affirming the Decision of the Regional Trial Court (RTC) of Pasig City,
Branch 160, in favor of respondents.
Respondents, spouses Don A. Alviar and Georgia B. Alviar, are the registered owners of a parcel of
land in San Juan, Metro Manila, covered by Transfer Certificate of Title (TCT) No. 438157 of the
Register of Deeds of Rizal. On 10 July 1975, they executed a deed of real estate mortgage in favor of
petitioner Prudential Bank to secure the payment of a loan worth P250,000.00.2 This mortgage was
annotated at the back of TCT No. 438157. On 4 August 1975, respondents executed the
corresponding promissory note, PN BD#75/C-252, covering the said loan, which provides that the
loan matured on 4 August 1976 at an interest rate of 12% per annum with a 2% service charge, and
that the note is secured by a real estate mortgage as aforementioned. 3 Significantly, the real estate
mortgage contained the following clause:

That for and in consideration of certain loans, overdraft and other credit accommodations obtained
from the Mortgagee by the Mortgagor and/or ________________ hereinafter referred to, irrespective of
number, as DEBTOR, and to secure the payment of the same and those that may hereafter be
obtained, the principal or all of which is hereby fixed at Two Hundred Fifty Thousand (P250,000.00)
Pesos, Philippine Currency, as well as those that the Mortgagee may extend to the Mortgagor and/or
DEBTOR, including interest and expenses or any other obligation owing to the Mortgagee, whether
direct or indirect, principal or secondary as appears in the accounts, books and records of the
Mortgagee, the Mortgagor does hereby transfer and convey by way of mortgage unto the Mortgagee,
its successors or assigns, the parcels of land which are described in the list inserted on the back of
this document, and/or appended hereto, together with all the buildings and improvements now
existing or which may hereafter be erected or constructed thereon, of which the Mortgagor declares
that he/it is the absolute owner free from all liens and incumbrances. . . . 4

On 22 October 1976, Don Alviar executed another promissory note, PN BD#76/C-345

for P2,640,000.00, secured by D/A SFDX #129, signifying that the loan was secured by a "hold-out"
on the mortgagor’s foreign currency savings account with the bank under Account No. 129, and that
the mortgagor’s passbook is to be surrendered to the bank until the amount secured by the "hold-out"
is settled.5

On 27 December 1976, respondent spouses executed for Donalco Trading, Inc., of which the husband
and wife were President and Chairman of the Board and Vice President, 6 respectively, PN BD#76/C-
430 covering P545,000.000. As provided in the note, the loan is secured by "Clean-Phase out TOD CA
3923," which means that the temporary overdraft incurred by Donalco Trading, Inc. with petitioner
is to be converted into an ordinary loan in compliance with a Central Bank circular directing the
discontinuance of overdrafts.7

On 16 March 1977, petitioner wrote Donalco Trading, Inc., informing the latter of its approval of a
straight loan of P545,000.00, the proceeds of which shall be used to liquidate the outstanding loan
of P545,000.00 TOD. The letter likewise mentioned that the securities for the loan were the deed of
assignment on two promissory notes executed by Bancom Realty Corporation with Deed of
Guarantee in favor of A.U. Valencia and Co. and the chattel mortgage on various heavy and
transportation equipment.8

On 06 March 1979, respondents paid petitioner P2,000,000.00, to be applied to the obligations of

G.B. Alviar Realty and Development, Inc. and for the release of the real estate mortgage for
the P450,000.00 loan covering the two (2) lots located at Vam Buren and Madison Streets, North
Greenhills, San Juan, Metro Manila. The payment was acknowledged by petitioner who accordingly
released the mortgage over the two properties.9

On 15 January 1980, petitioner moved for the extrajudicial foreclosure of the mortgage on the
property covered by TCT No. 438157. Per petitioner’s computation, respondents had the total
obligation of P1,608,256.68, covering the three (3) promissory notes, to wit: PN BD#75/C-252
for P250,000.00, PN BD#76/C-345 for P382,680.83, and PN BD#76/C-340 for P545,000.00, plus
assessed past due interests and penalty charges. The public auction sale of the mortgaged property
was set on 15 January 1980.10

Respondents filed a complaint for damages with a prayer for the issuance of a writ of preliminary
injunction with the RTC of Pasig,11 claiming that they have paid their principal loan secured by the
mortgaged property, and thus the mortgage should not be foreclosed. For its part, petitioner averred
that the payment of P2,000,000.00 made on 6 March 1979 was not a payment made by respondents,
but by G.B. Alviar Realty and Development Inc., which has a separate loan with the bank secured by
a separate mortgage.12

On 15 March 1994, the trial court dismissed the complaint and ordered the Sheriff to proceed with
the extra-judicial foreclosure.13 Respondents sought reconsideration of the decision. 14 On 24 August
1994, the trial court issued an Order setting aside its earlier decision and awarded attorney’s fees to
respondents.15 It found that only the P250,000.00 loan is secured by the mortgage on the land
covered by TCT No. 438157. On the other hand, the P382,680.83 loan is secured by the foreign
currency deposit account of Don A. Alviar, while the P545,000.00 obligation was an unsecured loan,
being a mere conversion of the temporary overdraft of Donalco Trading, Inc. in compliance with a
Central Bank circular. According to the trial court, the "blanket mortgage clause" relied upon by
petitioner applies only to future loans obtained by the mortgagors, and not by parties other than the
said mortgagors, such as Donalco Trading, Inc., for which respondents merely signed as officers
thereof.

On appeal to the Court of Appeals, petitioner made the following assignment of errors:

I. The trial court erred in holding that the real estate mortgage covers only the promissory note
BD#75/C-252 for the sum of P250,000.00.

II. The trial court erred in holding that the promissory note BD#76/C-345 for P2,640,000.00
(P382,680.83 outstanding principal balance) is not covered by the real estate mortgage by expressed
agreement.

III. The trial court erred in holding that Promissory Note BD#76/C-430 for P545,000.00 is not
covered by the real estate mortgage.

IV. The trial court erred in holding that the real estate mortgage is a contract of adhesion.

V. The trial court erred in holding defendant-appellant liable to pay plaintiffs-appellees attorney’s
fees for P20,000.00.16

The Court of Appeals affirmed the Order of the trial court but deleted the award of attorney’s
fees.17 It ruled that while a continuing loan or credit accommodation based on only one security or
mortgage is a common practice in financial and commercial institutions, such agreement must be
clear and unequivocal. In the instant case, the parties executed different promissory notes agreeing
to a particular security for each loan. Thus, the appellate court ruled that the extrajudicial
foreclosure sale of the property for the three loans is improper. 18

The Court of Appeals, however, found that respondents have not yet paid the P250,000.00 covered by
PN BD#75/C-252 since the payment of P2,000,000.00 adverted to by respondents was issued for the
obligations of G.B. Alviar Realty and Development, Inc. 19
Aggrieved, petitioner filed the instant petition, reiterating the assignment of errors raised in the
Court of Appeals as grounds herein.

Petitioner maintains that the "blanket mortgage clause" or the "dragnet clause" in the real estate
mortgage expressly covers not only the P250,000.00 under PN BD#75/C-252, but also the two other
promissory notes included in the application for extrajudicial foreclosure of real estate
mortgage.20 Thus, it claims that it acted within the terms of the mortgage contract when it filed its
petition for extrajudicial foreclosure of real estate mortgage. Petitioner relies on the cases of Lim
Julian v. Lutero,21 Tad-Y v. Philippine National Bank,22 Quimson v. Philippine National Bank, 23 C &
C Commercial v. Philippine National Bank,24 Mojica v. Court of Appeals,25 andChina Banking
Corporation v. Court of Appeals,26 all of which upheld the validity of mortgage contracts securing
future advancements.

Anent the Court of Appeals’ conclusion that the parties did not intend to include PN BD#76/C-345 in
the real estate mortgage because the same was specifically secured by a foreign currency deposit
account, petitioner states that there is no law or rule which prohibits an obligation from being
covered by more than one security.27Besides, respondents even continued to withdraw from the same
foreign currency account even while the promissory note was still outstanding, strengthening the
belief that it was the real estate mortgage that principally secured all of respondents’ promissory
notes.28 As for PN BD#76/C-345, which the Court of Appeals found to be exclusively secured by the
Clean-Phase out TOD 3923, petitioner posits that such security is not exclusive, as the "dragnet
clause" of the real estate mortgage covers all the obligations of the respondents. 29

Moreover, petitioner insists that respondents attempt to evade foreclosure by the expediency of
stating that the promissory notes were executed by them not in their personal capacity but as
corporate officers. It claims that PN BD#76/C-430 was in fact for home construction and personal
consumption of respondents. Thus, it states that there is a need to pierce the veil of corporate
fiction.30

Finally, petitioner alleges that the mortgage contract was executed by respondents with knowledge
and understanding of the "dragnet clause," being highly educated individuals, seasoned
businesspersons, and political personalities. 31 There was no oppressive use of superior bargaining
power in the execution of the promissory notes and the real estate mortgage. 32

For their part, respondents claim that the "dragnet clause" cannot be applied to the subsequent
loans extended to Don Alviar and Donalco Trading, Inc. since these loans are covered by separate
promissory notes that expressly provide for a different form of security. 33 They reiterate the holding
of the trial court that the "blanket mortgage clause" would apply only to loans obtained jointly by
respondents, and not to loans obtained by other parties. 34Respondents also place a premium on the
finding of the lower courts that the real estate mortgage clause is a contract of adhesion and must be
strictly construed against petitioner bank.35

The instant case thus poses the following issues pertaining to: (i) the validity of the "blanket
mortgage clause" or the "dragnet clause"; (ii) the coverage of the "blanket mortgage clause"; and
consequently, (iii) the propriety of seeking foreclosure of the mortgaged property for the non-
payment of the three loans.

At this point, it is important to note that one of the loans sought to be included in the "blanket
mortgage clause" was obtained by respondents for Donalco Trading, Inc. Indeed, PN BD#76/C-430
was executed by respondents on behalf of Donalco Trading, Inc. and not in their personal capacity.
Petitioner asks the Court to pierce the veil of corporate fiction and hold respondents liable even for
obligations they incurred for the corporation. The mortgage contract states that the mortgage covers
"as well as those that the Mortgagee may extend to the Mortgagor and/or DEBTOR, including
interest and expenses or any other obligation owing to the Mortgagee, whether direct or indirect,
principal or secondary." Well-settled is the rule that a corporation has a personality separate and
distinct from that of its officers and stockholders. Officers of a corporation are not personally liable
for their acts as such officers unless it is shown that they have exceeded their authority.36 However,
the legal fiction that a corporation has a personality separate and distinct from stockholders and
members may be disregarded if it is used as a means to perpetuate fraud or an illegal act or as a
vehicle for the evasion of an existing obligation, the circumvention of statutes, or to confuse
legitimate issues.37 PN BD#76/C-430, being an obligation of Donalco Trading, Inc., and not of the
respondents, is not within the contemplation of the "blanket mortgage clause." Moreover, petitioner
is unable to show that respondents are hiding behind the corporate structure to evade payment of
their obligations. Save for the notation in the promissory note that the loan was for house
construction and personal consumption, there is no proof showing that the loan was indeed for
respondents’ personal consumption. Besides, petitioner agreed to the terms of the promissory note. If
respondents were indeed the real parties to the loan, petitioner, a big, well-established institution of
long standing that it is, should have insisted that the note be made in the name of respondents
themselves, and not to Donalco Trading Inc., and that they sign the note in their personal capacity
and not as officers of the corporation.

Now on the main issues.

A "blanket mortgage clause," also known as a "dragnet clause" in American jurisprudence, is one
which is specifically phrased to subsume all debts of past or future origins. Such clauses are
"carefully scrutinized and strictly construed." 38 Mortgages of this character enable the parties to
provide continuous dealings, the nature or extent of which may not be known or anticipated at the
time, and they avoid the expense and inconvenience of executing a new security on each new
transaction.39 A "dragnet clause" operates as a convenience and accommodation to the borrowers as
it makes available additional funds without their having to execute additional security documents,
thereby saving time, travel, loan closing costs, costs of extra legal services, recording fees, et
cetera.40 Indeed, it has been settled in a long line of decisions that mortgages given to secure future
advancements are valid and legal contracts,41 and the amounts named as consideration in said
contracts do not limit the amount for which the mortgage may stand as security if from the four
corners of the instrument the intent to secure future and other indebtedness can be gathered. 42

The "blanket mortgage clause" in the instant case states:

That for and in consideration of certain loans, overdraft and other credit accommodations obtained
from the Mortgagee by the Mortgagor and/or ________________ hereinafter referred to, irrespective of
number, as DEBTOR, and to secure the payment of the same and those that may hereafter be
obtained, the principal or all of which is hereby fixed at Two Hundred Fifty Thousand
(P250,000.00) Pesos, Philippine Currency, as well as those that the Mortgagee may extend to
the Mortgagor and/or DEBTOR, including interest and expenses or any other obligation
owing to the Mortgagee, whether direct or indirect, principal or secondary as appears in
the accounts, books and records of the Mortgagee, the Mortgagor does hereby transfer and convey by
way of mortgage unto the Mortgagee, its successors or assigns, the parcels of land which are
described in the list inserted on the back of this document, and/or appended hereto, together with all
the buildings and improvements now existing or which may hereafter be erected or constructed
thereon, of which the Mortgagor declares that he/it is the absolute owner free from all liens and
incumbrances. . . .43 (Emphasis supplied.)

Thus, contrary to the finding of the Court of Appeals, petitioner and respondents intended the real
estate mortgage to secure not only the P250,000.00 loan from the petitioner, but also future credit
facilities and advancements that may be obtained by the respondents. The terms of the above
provision being clear and unambiguous, there is neither need nor excuse to construe it otherwise.

The cases cited by petitioner, while affirming the validity of "dragnet clauses" or "blanket mortgage
clauses," are of a different factual milieu from the instant case. There, the subsequent loans were not
covered by any security other than that for the mortgage deeds which uniformly contained the
"dragnet clause."

In the case at bar, the subsequent loans obtained by respondents were secured by other securities,
thus: PN BD#76/C-345, executed by Don Alviar was secured by a "hold-out" on his foreign currency
savings account, while PN BD#76/C-430, executed by respondents for Donalco Trading, Inc., was
secured by "Clean-Phase out TOD CA 3923" and eventually by a deed of assignment on two
promissory notes executed by Bancom Realty Corporation with Deed of Guarantee in favor of A.U.
Valencia and Co., and by a chattel mortgage on various heavy and transportation equipment. The
matter of PN BD#76/C-430 has already been discussed. Thus, the critical issue is whether the
"blanket mortgage" clause applies even to subsequent advancements for which other securities were
intended, or particularly, to PN BD#76/C-345.

Under American jurisprudence, two schools of thought have emerged on this question. One school
advocates that a "dragnet clause" so worded as to be broad enough to cover all other debts in addition
to the one specifically secured will be construed to cover a different debt, although such other debt is
secured by another mortgage.44The contrary thinking maintains that a mortgage with such a clause
will not secure a note that expresses on its face that it is otherwise secured as to its entirety, at least
to anything other than a deficiency after exhausting the security specified therein, 45 such deficiency
being an indebtedness within the meaning of the mortgage, in the absence of a special contract
excluding it from the arrangement.46

The latter school represents the better position. The parties having conformed to the "blanket
mortgage clause" or "dragnet clause," it is reasonable to conclude that they also agreed to an implied
understanding that subsequent loans need not be secured by other securities, as the subsequent
loans will be secured by the first mortgage. In other words, the sufficiency of the first security is a
corollary component of the "dragnet clause." But of course, there is no prohibition, as in the mortgage
contract in issue, against contractually requiring other securities for the subsequent loans. Thus,
when the mortgagor takes another loan for which another security was given it could not be inferred
that such loan was made in reliance solely on the original security with the "dragnet clause," but
rather, on the new security given. This is the "reliance on the security test."

Hence, based on the "reliance on the security test," the California court in the cited case made an
inquiry whether the second loan was made in reliance on the original security containing a "dragnet
clause." Accordingly, finding a different security was taken for the second loan no intent that the
parties relied on the security of the first loan could be inferred, so it was held. The rationale
involved, the court said, was that the "dragnet clause" in the first security instrument constituted a
continuing offer by the borrower to secure further loans under the security of the first security
instrument, and that when the lender accepted a different security he did not accept the offer. 47

In another case, it was held that a mortgage with a "dragnet clause" is an "offer" by the mortgagor to
the bank to provide the security of the mortgage for advances of and when they were made. Thus, it
was concluded that the "offer" was not accepted by the bank when a subsequent advance was made
because (1) the second note was secured by a chattel mortgage on certain vehicles, and the clause
therein stated that the note was secured by such chattel mortgage; (2) there was no reference in the
second note or chattel mortgage indicating a connection between the real estate mortgage and the
advance; (3) the mortgagor signed the real estate mortgage by her name alone, whereas the second
note and chattel mortgage were signed by the mortgagor doing business under an assumed name;
and (4) there was no allegation by the bank, and apparently no proof, that it relied on the security of
the real estate mortgage in making the advance.48

Indeed, in some instances, it has been held that in the absence of clear, supportive evidence of a
contrary intention, a mortgage containing a "dragnet clause" will not be extended to cover future
advances unless the document evidencing the subsequent advance refers to the mortgage as
providing security therefor.49

It was therefore improper for petitioner in this case to seek foreclosure of the mortgaged property
because of non-payment of all the three promissory notes. While the existence and validity of the
"dragnet clause" cannot be denied, there is a need to respect the existence of the other security given
for PN BD#76/C-345. The foreclosure of the mortgaged property should only be for the P250,000.00
loan covered by PN BD#75/C-252, and for any amount not covered by the security for the second
promissory note. As held in one case, where deeds absolute in form were executed to secure any and
all kinds of indebtedness that might subsequently become due, a balance due on a note, after
exhausting the special security given for the payment of such note, was in the absence of a special
agreement to the contrary, within the protection of the mortgage, notwithstanding the giving of the
special security.50 This is recognition that while the "dragnet clause" subsists, the security
specifically executed for subsequent loans must first be exhausted before the mortgaged property can
be resorted to.

One other crucial point. The mortgage contract, as well as the promissory notes subject of this case,
is a contract of adhesion, to which respondents’ only participation was the affixing of their signatures
or "adhesion" thereto.51 A contract of adhesion is one in which a party imposes a ready-made form of
contract which the other party may accept or reject, but which the latter cannot modify.52

The real estate mortgage in issue appears in a standard form, drafted and prepared solely by
petitioner, and which, according to jurisprudence must be strictly construed against the party
responsible for its preparation.53 If the parties intended that the "blanket mortgage clause" shall
cover subsequent advancement secured by separate securities, then the same should have been
indicated in the mortgage contract. Consequently, any ambiguity is to be taken contra proferentum,
that is, construed against the party who caused the ambiguity which could have avoided it by the
exercise of a little more care.54 To be more emphatic, any ambiguity in a contract whose terms are
susceptible of different interpretations must be read against the party who drafted it,55 which is the
petitioner in this case.

Even the promissory notes in issue were made on standard forms prepared by petitioner, and as such
are likewise contracts of adhesion. Being of such nature, the same should be interpreted strictly
against petitioner and with even more reason since having been accomplished by respondents in the
presence of petitioner’s personnel and approved by its manager, they could not have been unaware of
the import and extent of such contracts.

Petitioner, however, is not without recourse. Both the Court of Appeals and the trial court found that
respondents have not yet paid the P250,000.00, and gave no credence to their claim that they paid
the said amount when they paid petitioner P2,000,000.00. Thus, the mortgaged property could still
be properly subjected to foreclosure proceedings for the unpaid P250,000.00 loan, and as mentioned
earlier, for any deficiency after D/A SFDX#129, security for PN BD#76/C-345, has been exhausted,
subject of course to defenses which are available to respondents.

WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals in CA-G.R. CV No.
59543 is AFFIRMED.Costs against petitioner. SO ORDERED.
Republic Planters Bank v. Sarmiento

This is an appeal by certiorari under Rule 45 of the 1997 Rules of Civil Procedure assailing the
Decision1 of the Court of Appeals in CA-G.R. CV No. 74451. The Court of Appeals’ decision affirmed
the decision2 of the Regional Trial Court (RTC) of Parañaque City, Branch 258, which ordered
petitioner Maybank Philippines, Inc. (Maybank) to execute in favor of respondents a deed of
redemption covering two pieces of mortgaged realty and rescinded the deeds of sale executed by
Maybank in favor of petitioner Philmay Property, Inc. (Philmay) and Clara Fabra (Fabra).

As found by the Court of Appeals, the factual antecedents are as follows:

On 13 March 1979, respondents spouses Vivencio and Jesusa Sarmiento, their son, Jose, and the
latter’s spouse, Elizabeth, executed a promissory note, obligating themselves to pay Maybank, then
known as Republic Planters Bank, the amount of P80,000.00 due 360 days after date plus interest at
the rate of 12 percent per annum.3

Earlier, on 9 March 1979, all four respondents executed a Real Estate Mortgage over two parcels of
land covered by OCT No. 5781 and TCT No. 145850 and registered under the names of respondents
Jesusa and Jose, respectively. The mortgage secured the payment of the principal loan of P80,000.00
and all other obligations, overdrafts and other credit accommodations obtained and those that may
be obtained in the future from Maybank.4

On 8 April 1980, Vivencio for himself and as attorney-in-fact of Jesusa and Jose, executed a
promissory note in which he undertook to pay the amount of P100,000.00 plus 14% interest per
annum on or before April 1981.5 In the same month, all four respondents executed an amendment to
the real estate mortgage changing the consideration of the mortgage from P80,000.00 to P100,000.00
but adopting all the terms and conditions of the previous mortgage as integral parts of the later one. 6

Vivencio was the owner of V. Sarmiento Rattan Furniture, a sole proprietorship engaged in export
business. On various occasions in 1981, he incurred loan obligations from Maybank by way of export
advances. As of 08 September 1982, the debts incurred under the export bills transactions
totaled P1,281,748.03.

On 3 September 1981, Vivencio, Jose and Elizabeth executed a Suretyship Agreement, 7 whereby
they agreed to be solidarily liable with V. Sarmiento Rattan Furniture for the payment
of P100,000.00 plus all obligations which the latter incurred or would incur from Maybank.

Respondents defaulted in the payment of the export advances, prompting Maybank to institute an
extrajudicial foreclosure of the real estate mortgage on 9 November 1982. At the foreclosure sale,
Maybank was awarded the property for its bid of P254,000.00 and issued a certificate of sale. The
certificate of sale was registered with the Register of Deeds on 04 March 1983. 8

Maricel Sarmiento, sister of respondent Jose, purchased a manager’s check from Maybank in the
amount of P300,000.00 on 21 July 1983.9 A week later, respondent Jesusa deposited the amount
of P12,000.00.10Maybank treated the total amount of P312,000.00 as a deposit and did not grant
respondents’ request for certificate of redemption releasing the foreclosed property. Sometime in
November 1983, Maybank demanded the payment of all outstanding loans under the export bills
transactions. On 3 December 1983, respondents tendered the amount of P302,333.33 in the name of
V. Sarmiento Rattan Furniture.
On 4 July 1990, Maybank consolidated its ownership over the foreclosed property. On 12 November
1997, Maybank and Philmay executed a deed of absolute sale, transferring ownership of the
foreclosed property to the latter. On 15 July 1998, Philmay sold the same to Fabra.

On 3 September 1998, respondents Vivencio and Jose instituted an action for specific performance
against Maybank, Philmay and Fabra. The Complaint, 11 docketed as Civil Case No. 98-0323, prayed
for judgment directing Maybank to execute a deed of redemption in favor of respondents and
revoking the subsequent sale of the property to Philmay and Fabra. During the pendency of the trial,
Fabra died and was substituted by Kim Caro as the legal representative of the former’s heirs.

On 8 January 2002, the RTC rendered a Decision, the dispositive portion of which reads:

WHEREFORE, viewed in the light of the foregoing, the plaintiffs having been able to
preponderantly prove their case against the defendants, judgment for specific performance is
hereby rendered ordering defendant Maybank to execute in favor of the plaintiffs a Deed of
Redemption covering the two (2) parcels of land formerly embraced in and covered by
Transfer Certificates of Title Nos. 5281 and 145850 of the Register of Deeds of the City of
Parañaque together with all the improvements existing thereon free from all liens and
encumbrances and once accomplished, to immediately deliver the said document to plaintiffs.

Likewise, the Deed of Sale executed by Republic Planters Bank, now Maybank, in favor of
Philmay Property, Inc., and thereafter, from Philmay Property, Inc. to Clara Fabra, are
hereby revoked and rescinded as well as Certificate of Title No. 139161 registered in the
latter’s name for being null and void.

So also, Phimay Property is hereby directed to reimburse Clara Fabra, now represented by
Kim Caro, the amount of P4,200,000.00[,] representing the purchase price of the property
plus interest thereon at the legal rate computed from the filing of the complaint until fully
paid.

Defendants are likewise ordered to pay plaintiffs jointly and severally the following, to wit:

1. The amount of P100,000.00 as moral damages;

2. The amount of P50,000.00 as exemplary damages;

3. The amount of P100,000.00 as and by way of attorney’s fees; and

4. The cost of suit.

The counterclaims of the defendants are DISMISSED.

SO ORDERED.12

The RTC based its finding that respondents were able to tender to Maybank within the redemption
period the redemption price of P312,000.00 on the testimony of respondent Jose on and the official
bank receipts evidencing the separate payments totaling said amount made by Maricel Sarmiento
and respondent Jesusa. Upon this finding, the trial court held that Maybank had no justifiable legal
reason to refuse the execution of documents reconveying the titles of the mortgaged property to
respondents. Thus, the trial court concluded that the subsequent transfers of the mortgaged property
to Philmay and then to Fabra were void because Maybank had not acquired any rights thereto in the
first place. The trial court, however, declared Fabra as a purchaser in good faith and, therefore,
entitled to reimbursement of the purchase price.

The RTC rejected Maybank’s defense that the suretyship agreement signed by respondents Vivencio,
Jose and Elizabeth also constituted the mortgaged property as security for the export advances
incurred in the name of V. Sarmiento Rattan Furniture because the real estate mortgage documents
were signed by respondents in their personal capacity, whereas the suretyship agreement was signed
by Vivencio in his capacity as manager of V. Sarmiento Rattan Furniture. The trial court noted that
the suretyship agreement was not even annotated in the titles of the mortgaged property.

On 12 December 2005, the Court of Appeals rendered the assailed Decision affirming the trial court’s
judgment, particularly the latter’s finding that respondents made a valid tender of the redemption
price and that the export advances in the name of V. Sarmiento Rattan Furniture did not belong to
the species of obligations secured by the real estate mortgage. Furthermore, the appellate court
construed as a contract of adhesion the proviso in the mortgage contract that included "interest and
expenses or any other obligation owing to the Mortgagee, whether direct or indirect, principal or
secondary, as appears in the accounts, books and records of the Mortgagee." 13Describing the same as
a "dragnet clause," the appellate court held that it should be carefully scrutinized and strictly
construed.

Only petitioners Maybank and Philmay appealed from the decision of the Court of Appeals. In the
instant petition, they raise the following arguments:

THE TRIAL COURT AND THE COURT OF APPEALS ERRED IN FINDING THAT
PETITIONERS HAVE PROPERLY REDEEMED THE FORECLOSED PROPERTIES.

THE TRIAL COURT AND COURT OF APPEALS ERRED IN NOT TREATING

RESPONDENTS’ EXPORT ADVANCES AS SECURED BY THE REAL ESTATE
MORTGAGE AND THUS SHOULD ALSO BE PAID.

THE TRIAL COURT AND COURT OF APPEALS ERRED IN NOT RULING THAT THE
RESPONDENTS’ CLAIM IS ALREADY BARRED BY LACHES.

THE TRIAL COURT AND COURT OF APPEALS ERRED IN NOT CONSIDERING AND
FINDING THAT PHILMAY AND DEFENDANT CLARA FABRA ARE BUYERS IN GOOD
FAITH.

THE LOWER COURT AND THE COURT OF APPEALS ERRED IN FINDING THAT
MAYBANK ACTED IN BAD FAITH.

RESPONDENTS ARE NOT ENTITLED TO MORAL AND EXEMPLARY DAMAGES AS

WELL AS ATTORNEY’S FEES.14

In a nutshell, the instant petition raises the issue of whether the deposits made by respondents
constituted a valid tender of the redemption price. Essential to the resolution of this issue is the
determination of the amount of indebtedness that respondents were legally obligated to satisfy in
order to consider the payment thereof as a valid redemption of the foreclosed property.

Maybank argues that respondents’ outstanding obligation amounted to more than P1 million as of
the date of the foreclosure sale. Hence, the tender by respondents of an amount less than that did not
constitute a valid redemption of the foreclosed property. For their part, respondents contend that the
factual finding of both the trial court and the Court of Appeals to the effect that they were able to
make a valid tender of the redemption price, is binding on this Court.

The petition is meritorious.

The crux of the controversy pertains not to the amount of redemption price tendered by respondents
but rather to the sufficiency of the amount tendered that would warrant the redemption of the
foreclosed property. The determination of whether the amount tendered by respondents was enough
to redeem the foreclosed property calls for the ascertainment of the liabilities covered and secured by
the mortgage based on the text of the mortgage deed. Both the trial court and the appellate court
concurred in concluding that the export advances obtained by respondent Vivencio from Maybank
did not belong to the species of obligations secured by the mortgage and that, hence, respondents’
tender of an amount exceeding the principal loan of P100,000.00 was sufficient. Whether or not this
conclusion is correct is a question of law15 that is within the purview of a Rule 45 petition.

The real estate mortgage provides:

xxx

That, for and in consideration of certain loans, overdrafts and other credit accommodations
obtained from the Mortgagee, and to secure the payment of the same and those that
may hereafter be obtained, the principal of all of which is hereby fixed as EIGHTY
THOUSAND ONLY Pesos (P80,000.00), Philippine Currency, as well as those that the
Mortgagee may extend to the Mortgagor, including interest and expenses or any
other obligation owing to the Mortgagee, whether direct or indirect, principal or
secondary, as appears in the accounts, books and records of the Mortgagee, the Mortgagor
does hereby transfer and convey by way of mortgage unto the Mortgagee, its successor or
assigns, the parcels of land which are described in the list inserted on the back of this
document, and/or appended hereto; x x x (Emphasis supplied) 16

The aforementioned clause is a "blanket mortgage clause." A blanket mortgage clause, also known as
a dragnet clause in American jurisprudence, is one that is specifically phrased to subsume all debts
of past or future origins. Such clauses are carefully scrutinized and strictly construed. Mortgages of
this character enable the parties to provide continuous dealings, the nature or extent of which may
not be known or anticipated at the time, and they avoid the expense and inconvenience of executing
a new security on each new transaction. A dragnet clause operates as a convenience and
accommodation to the borrowers as it makes available additional funds without their having to
execute additional security documents, thereby saving time, travel, loan closing costs, costs of extra
legal services, recording fees, etc.17

It is basic in the interpretation and construction of contracts that the literal meaning of the
stipulations shall control if the terms of the contract are clear and leave no doubt on the intention of
the contracting parties.18 It is only when the words appear to contravene the evident intention of the
parties that the latter shall prevail over the former. The real nature of a contract may be determined
from the express terms of the agreement and from the contemporaneous and subsequent acts of the
parties thereto.19

Although at the time of the execution of the real estate mortgage the export advances had not yet
been incurred and the principal obligation was fixed at P80,000.00 and thereafter amended
to P100,000.00, the express tenor of the mortgage contract contemplated the inclusion of future loans
and obligations obtained from Maybank to be secured by the mortgaged property. Nothing in the
mortgage contract would suggest that the parties actually intended to limit the security to only the
principal amount of the loan fixed therein. The stipulations of the mortgage contract being clear,
there is no necessity to ascertain the real intention of the parties. Be that as it may, nothing in the
records would reveal that by the parties’ acts contemporaneous and subsequent to the execution of
the real estate mortgage, they intended to be bound by terms and conditions other than those
provided in the mortgage contract.

The trial court reached the conclusion that the export advances were excluded from the security of
the real estate mortgage based on the theory that respondent Vivencio agreed to be bound as surety
for the payment of the export advances in his capacity as manager of V. Sarmiento Rattan Furniture,
whereas he signed the real estate mortgage in his personal capacity.

This theory is defensible if V. Sarmiento Rattan Furniture were a corporation having a personality
distinct and separate from its corporate officers and Vivencio signed merely as a corporate
representative of V. Sarmiento Rattan Furniture. Even then, a corporate officer may still be held
personally liable for the debts of the corporation if he bound himself to pay the debt of the
corporation under a separate contract of surety or guaranty.

For its part, the Court of Appeals opined that the dragnet clause in the subject real estate mortgage
should be strictly construed and, therefore, the subsequent export advances obtained from Maybank
should not be included in the obligation secured by the mortgage contract.

It is well settled that mortgages given to secure future advancements or loans are valid and legal
contracts, and that the amounts named as consideration in said contracts do not limit the amount for
which the mortgage may stand as security if from the four corners of the instrument the intent to
secure future and other indebtedness can be gathered. 20 A mortgage given to secure advancements is
a continuing security and is not discharged by repayment of the amount named in the mortgage,
until the full amount of the advancements is paid.21

At the time of the foreclosure sale of the mortgaged property, the outstanding obligation arising from
the export bills transactions had already amounted to more than P1 million. In accordance with
Section 78 of the General Banking Act, as amended,22 then governing the foreclosure of the
mortgaged property, redemption may only be made by paying the amount due under the mortgage
deed within one year from the sale of the property. Since respondents failed to satisfy the full
amount of the indebtedness to Maybank, the latter was justified in refusing to grant respondents’
demand for redemption of the foreclosed property.

WHEREFORE, the instant petition for review on certiorari is GRANTED and the Decision of the
Court of Appeals in CA-G.R. CV No. 74451 is hereby REVERSED and SET ASIDE. The complaint in
Civil Case No. 98-0323 before the Regional Trial Court, Branch 258, Parañaque City is DISMISSED.
Costs against respondents.

SO ORDERED.

CIR v. UCPB

This is an action involving a disputed assessment for deficiencies in the payment of creditable
withholding tax and documentary stamps tax due from a foreclosure sale.

The Facts and the Case

Respondent United Coconut Planters Bank (UCPB) granted loans of P68,840,000.00
and P335,000,000.00 to George C. Co, Go Tong Electrical Supply Co., Inc., and Tesco Realty Co. that
the borrowers caused to be secured by several real estate mortgages. When the latter later failed to
pay their loans, UCPB filed a petition for extrajudicial foreclosure of the mortgaged properties.
Pursuant to that petition, on December 31, 2001 a notary public for Manila held a public auction sale
of the mortgaged properties. UCPB made the highest winning bid of P504,785,000.00 for the whole
lot.

On January 4, 2002 the notary public submitted the Certificate of Sale to the Executive Judge of
Regional Trial Court (RTC) of Manila for his approval. 1 But, on February 18, 2002 the executive
judge returned it with instruction to the notary public to explain an inconsistency in the tax
declaration of one mortgaged property. The executive judge further ordered the notary public to show
proof of payment of the Sheriff’s percentage of the bid price. 2 The notary public complied.3 On March
1, 2002 the executive judge finally signed the certificate of sale and approved its issuance to UCPB
as the highest bidder.4

On June 18, 2002 UCPB presented the certificate of sale to the Register of Deeds of Manila for
annotation on the transfer certificates of title of the foreclosed properties. On July 5, 2002 the bank
paid creditable withholding taxes (CWT) of P28,640,700.00 and documentary stamp taxes (DST)
of P7,160,165.00 in relation to the extrajudicial foreclosure sale. It then submitted an affidavit of
consolidation of ownership to the Bureau of Internal Revenue (BIR) with proof of tax payments and
other documents in support of the bank’s application for a tax clearance certificate and certificate
authorizing registration.

Petitioner Commissioner of Internal Revenue (CIR), however, charged UCPB with late payment of
the corresponding DST and CWT, citing Section 2.58 of Revenue Regulation 2-98, which stated that
the CWT must be paid within 10 days after the end of each month, and Section 5 of Revenue
Regulation 06-01, which required payment of DST within five days after the close of the month when
the taxable document was made, signed, accepted or transferred. These taxes accrued upon the lapse
of the redemption period of the mortgaged properties. The CIR pointed out that the mortgagor, a
juridical person, had three months after foreclosure within which to redeem the properties. 5

The CIR theorized that the three-month redemption period was to be counted from the date of the
foreclosure sale. Here, he said, the redemption period lapsed three months from December 31, 2001
or on March 31, 2002. Thus, UCPB was in default for having paid the CWT and DST only on July 5,
2002. For this reason the CIR issued a Pre-Assessment Notice6 and, subsequently, a Final
Assessment Notice7 to UCPB for deficiency CWT of P8,617,210.00 and deficiency DST
of P2,173,051.75.

UCPB protested the assessment. It claimed that the redemption period lapsed on June 1, 2002 or
three months after the executive judge of Manila approved the issuance of the certificate of sale.
"Foreclosure" under Section 47 of the General Banking Law, said UCPB, referred to the date of
approval by the executive judge, and not the date of the auction sale. But the CIR denied UCPB’s
protest, prompting UCPB to file a petition for review with the CTA in CTA Case 7164.

On July 26, 2006 the CTA Second Division set aside the decision of the CIR and held that the
redemption period lapsed three months after the executive judge approved the certificate of sale. It
said that "foreclosure" under the law referred to the whole process of foreclosure which included the
approval and issuance of the certificate of sale. There was no sale to speak of which could be taxed
prior to such approval and issuance. Since the executive judge approved the issuance only on March
1, 2002, the redemption period expired on June 1, 2002. Hence, UCPB’s payments of CWT and DST
in early July were well within the prescribed period. On appeal to the CTA En Banc in CTA EB 234,
the latter affirmed the decision of the Second Division on June 5, 2007. With the denial of its motion
for reconsideration, petitioner has taken recourse to this Court via a petition for review on certiorari.

Issue

The key issue in this case is whether or not the three-month redemption period for juridical persons
should be reckoned from the date of the auction sale.

Ruling

The CIR argues that he has the more reasonable position: the redemption period should be reckoned
from the date of the auction sale for, otherwise, the taxing authority would be left at the mercy of the
executive judge who may unnecessarily delay the approval of the certificate of sale and thus prevent
the early payment of taxes.

But the Supreme Court had occasion under its resolution in Administrative Matter 99-10-05-08 to
rule that the certificate of sale shall issue only upon approval of the executive judge who must, in the
interest of fairness, first determine that the requirements for extrajudicial foreclosures have been
strictly followed. For instance, in United Coconut Planters Bank v. Yap, 9 this Court sustained a
judge’s resolution requiring payment of notarial commission as a condition for the issuance of the
certificate of sale to the highest bidder.

Here, the executive judge approved the issuance of the certificate of sale to UCPB on March 1, 2002.
Consequently, the three-month redemption period ended only on June 1, 2002. Only on this date
then did the deadline for payment of CWT and DST on the extrajudicial foreclosure sale become due.

Under Section 2.58 of Revenue Regulation 2-98, the CWT return and payment become due within 10
days after the end of each month, except for taxes withheld for the month of December of each year,
which shall be filed on or before January 15 of the following year. On the other hand, under Section 5
of Revenue Regulation 06-01, the DST return and payment become due within five days after the
close of the month when the taxable document was made, signed, accepted, or transferred.

The BIR confirmed and summarized the above provisions under Revenue Memorandum Circular 58-
2008 in this manner:

[I]f the property is an ordinary asset of the mortgagor, the creditable expanded withholding tax shall
be due and paid within ten (10) days following the end of the month in which the redemption period
expires. x x x Moreover, the payment of the documentary stamp tax and the filing of the return
thereof shall have to be made within five (5) days from the end of the month when the redemption
period expires.1avvphi1

UCPB had, therefore, until July 10, 2002 to pay the CWT and July 5, 2002 to pay the DST. Since it
paid both taxes on July 5, 2002, it is not liable for deficiencies. Thus, the Court finds no reason to
reverse the decision of the CTA.

Besides, on August 15, 2008, the Bureau of Internal Revenue issued Revenue Memorandum Circular
58-2008 10which clarified among others, the time within which to reckon the redemption period of
real estate mortgages. It reads:

For purposes of reckoning the one-year redemption period in the case of individual mortgagors, or
the three-month redemption period for juridical persons/mortgagors, the same shall be
reckoned from the date of the confirmation of the auction sale which is the date when the
certificate of sale is issued.

The CIR must have in the meantime conceded the unreasonableness of the previous position it had
taken on this matter.

WHEREFORE, the petition is DENIED.

SO ORDERED.

GC Dalton Industries, Inc. v. EPCI Bank

In 1999, respondent Equitable PCI Bank extended a P30-million credit line to Camden Industries,
Inc. (CII) allowing the latter to avail of several loans (covered by promissory notes) and to purchase
trust receipts. To facilitate collection, CII executed a "hold-out" agreement in favor of respondent
authorizing it to deduct from its savings account any amounts due. To guarantee payment, petitioner
GC Dalton Industries, Inc. executed a third-party mortgage of its real properties in Quezon City1 and
Malolos, Bulacan2 as security for CII’s loans.3

CII did not pay its obligations despite respondent’s demands. By 2003, its outstanding consolidated
promissory notes and unpaid trust receipts had reached a staggering P68,149,132.40.4

Consequently, respondent filed a petition for extrajudicial foreclosure of petitioner’s Bulacan

properties in the Regional Trial Court (RTC) of Bulacan on May 7, 2004.5 On August 3, 2004, the
mortgaged properties were sold at a public auction where respondent was declared the highest
bidder. Consequently, a certificate of sale6 was issued in respondent’s favor on August 3, 2004.

On September 13, 2004, respondent filed the certificate of sale and an affidavit of consolidation of
ownership7 in the Register of Deeds of Bulacan pursuant to Section 47 of the General Banking
Law.8 Hence, petitioner’s TCTs covering the Bulacan properties were cancelled and new ones were
issued in the name of respondent.9

In view of the foregoing, respondent filed an ex parte motion for the issuance of a writ of
possession10 in the RTC Bulacan, Branch 10 on January 10, 2005.11

Previously, however, on August 4, 2004, CII had filed an action for specific performance and
damages12 in the RTC of Pasig, Branch 71 (Pasig RTC), asserting that it had allegedly paid its
obligation in full to respondent.13 CII sought to compel respondent to render an accounting in order
to prove that the bank fraudulently foreclosed on petitioner’s mortgaged properties.

Because respondent allegedly failed to appear during the trial, the Pasig RTC rendered a decision on
March 30, 200514 based on the evidence presented by CII. It found that, while CII’s past due
obligation amounted only to P14,426,485.66 as of November 30, 2002, respondent had deducted a
total of P108,563,388.06 from CII’s savings account. Thus, the Pasig RTC ordered respondent: (1) to
return to CII the "overpayment" with legal interest of 12% per annum amounting to P94,136,902.40;
(2) to compensate it for lost profits amounting to P2,000,000 per month starting August 2004 with
legal interest of 12% per annum until full payment and (3) to return the TCTs covering the
mortgaged properties to petitioner. It likewise awarded CII P2,000,000 and P300,000, respectively,
as moral and exemplary damages and P500,000 as attorney’s fees.
Respondent filed a notice of appeal. CII, on the other hand, moved for the immediate entry and
execution of the abovementioned decision.

In an order dated December 7, 2005, 15 the Pasig RTC dismissed respondent’s notice of appeal due to
its failure to pay the appellate docket fees. It likewise found respondent guilty of forum-shopping for
filing the petition for the issuance of a writ of possession in the Bulacan RTC. Thus, the Pasig RTC
ordered the immediate entry of its March 30, 2005 decision.16

Meanwhile, in view of the pending case in the Pasig RTC, petitioner opposed respondent’s ex
parte motion for the issuance of a writ of possession in the Bulacan RTC. It claimed that respondent
was guilty of fraud and forum-shopping, and that it was not informed of the foreclosure.
Furthermore, respondent fraudulently foreclosed on the properties since the Pasig RTC had not yet
determined whether CII indeed failed to pay its obligations.

In an order dated December 10, 2005, the Bulacan RTC granted the motion and a writ of possession
was issued in respondent’s favor on December 19, 2005.

Petitioner immediately assailed the December 10, 2005 order of the Bulacan RTC via a petition for
certiorari in the Court of Appeals (CA). It claimed that the order violated Section 14, Article VIII of
the Constitution17 which requires that every decision must clearly and distinctly state its factual and
legal bases. In a resolution dated January 13, 2006, 18 the CA dismissed the petition for lack of merit
on the ground that an order involving the issuance of a writ of possession is not a judgment on the
merits, hence, not covered by the requirement of Section 14, Article VIII of the Constitution.

Petitioner elevated the matter to this Court, assailing the January 13, 2006 resolution of the CA. It
insists that the December 10, 2005 order of the Bulacan RTC was void as it was bereft of factual and
legal bases.1avvphi1

Petitioner likewise cites the conflict between the December 10, 2005 order of the Bulacan RTC and
the December 7, 2005 order of the Pasig RTC. Petitioner claims that, since the Pasig RTC already
ordered the entry of its March 30, 2005 decision (in turn ordering respondent to return TCT No.
351231 and all such other owner’s documents of title as may have been placed in its possession by
virtue of the subject trust receipt and loan transactions), the same was already final and executory.
Thus, inasmuch as CII had supposedly paid respondent in full, it was erroneous for the Bulacan RTC
to order the issuance of a writ of possession to respondent.

Respondent, on the other hand, asserts that petitioner is raising a question of fact as it essentially
assails the propriety of the issuance of the writ of possession. It likewise points out that petitioner
did not truthfully disclose the status of the March 30, 2005 decision of the Pasig RTC because, in an
order dated April 4, 2006, the Pasig RTC partially reconsidered its December 7, 2005 order and gave
due course to respondent’s notice of appeal. (The propriety of the said April 4, 2006 order is still
pending review in the CA.)

We deny the petition.

The issuance of a writ of possession to a purchaser in an extrajudicial foreclosure is summary and

ministerial in nature as such proceeding is merely an incident in the transfer of title. 19 The trial
court does not exercise discretion in the issuance thereof. 20 For this reason, an order for the issuance
of a writ of possession is not the judgment on the merits contemplated by Section 14, Article VIII of
the Constitution. Hence, the CA correctly upheld the December 10, 2005 order of the Bulacan RTC.
Furthermore, the mortgagor loses all legal interest over the foreclosed property after the expiration
of the redemption period.21 Under Section 47 of the General Banking Law, 22 if the mortgagor is
a juridical person, it can exercise the right to redeem the foreclosed property until, but not after, the
registration of the certificate of foreclosure sale within three months after foreclosure, whichever is
earlier. Thereafter, such mortgagor loses its right of redemption.

Respondent filed the certificate of sale and affidavit of consolidation with the Register of Deeds of
Bulacan on September 13, 2004. This terminated the redemption period granted by Section 47 of the
General Banking Law. Because consolidation of title becomes a right upon the expiration of the
redemption period,23 respondent became the owner of the foreclosed properties. 24 Therefore, when
petitioner opposed the ex parte motion for the issuance of the writ of possession on January 10, 2005
in the Bulacan RTC, it no longer had any legal interest in the Bulacan properties.

Nevertheless, even if the ownership of the Bulacan properties had already been consolidated in the
name of respondent, petitioner still had, and could have availed of, the remedy provided in Section 8
of Act 3135.25 It could have filed a petition to annul the August 3, 2004 auction sale and to cancel the
December 19, 2005 writ of possession,26 within 30 days after respondent was given possession. 27 But
it did not. Thus, inasmuch as the 30-day period to avail of the said remedy had already lapsed,
petitioner could no longer assail the validity of the August 3, 2004 sale.

Any question regarding the validity of the mortgage or its foreclosure cannot be a legal ground for
the refusal to issue a writ of possession. Regardless of whether or not there is a pending suit for the
annulment of the mortgage or the foreclosure itself, the purchaser is entitled to a writ of possession,
without prejudice, of course, to the eventual outcome of the pending annulment case. 28

Needless to say, petitioner committed a misstep by completely relying and pinning all its hopes for
relief on its complaint for specific performance and damages in the Pasig RTC, 29 instead of resorting
to the remedy of annulment (of the auction sale and writ of possession) under Section 8 of Act 3135
in the Bulacan RTC.

WHEREFORE, the petition is hereby DENIED.

Costs against petitioner.

SO ORDERED.

AsiaTrust Development Bank v. Tuble

Before this Court is a Petition for Review on Certiorari under Rule 45 of the Revised Rules of Court,
seeking to review the Court of Appeals (CA) 28 March 2008 Decision and 30 July 2008 Resolution in
CA-G.R. CV No. 87410. The CA affirmed the Regional Trial Court (RTC) Decision of 15 May 2006 in
Civil Case No. 67973, which granted to respondent the refund of P845,805.491 representing the
amount he had paid in excess of the redemption price.

The antecedent facts are as follows: 2

Respondent Carmelo H. Tuble, who served as the vice-president of petitioner Asiatrust Development
Bank, availed himself of the car incentive plan and loan privileges offered by the bank. He was also
entitled to the bank’s Senior Managers Deferred Incentive Plan (DIP).
Respondent acquired a Nissan Vanette through the company’s car incentive plan. The arrangement
was made to appear as a lease agreement requiring only the payment of monthly rentals.
Accordingly, the lease would be terminated in case of the employee’s resignation or retirement prior
to full payment of the price.

As regards the loan privileges, Tuble obtained three separate loans. The first, a real estate loan
evidenced by the 18 January 1993 Promissory Note No. 0142 3 with maturity date of 1 January 1999,
was secured by a mortgage over his property covered by Transfer Certificate of Title No. T 145794.
No interest on this loan was indicated.

The second was a consumption loan, evidenced by the 10 January 1994 Promissory Note No.
01434 with the maturity date of 31 January 1995 and interest at 18% per annum. Aside from the
said indebtedness, Tuble allegedly obtained a salary loan, his third loan.

On 30 March 1995, he resigned. Subsequently, he was given the option to either return the vehicle
without any further obligation or retain the unit and pay its remaining book value.

Respondent had the following obligations to the bank after his retirement: (1) the purchase or return
of the Nissan Vanette; (2) P100,000 as consumption loan; (3) P421,800 as real estate loan; and
(4) P16,250 as salary loan.5

In turn, petitioner owed Tuble (1) his pro-rata share in the DIP, which was to be issued after the
bank had given the resigned employee’s clearance; and (2) P25,797.35 representing his final salary
and corresponding 13th month pay.

Respondent claimed that since he and the bank were debtors and creditors of each other, the
offsetting of loans could legally take place. He then asked the bank to simply compute his DIP and
apply his receivables to his outstanding loans.6 However, instead of heeding his request, the bank
sent him a 1 June 1995 demand letter7obliging him to pay his debts. The bank also required him to
return the Nissan Vanette. Despite this demand, the vehicle was not surrendered.

On 14 August 1995, Tuble wrote the bank again to follow up his request to offset the loans. This
letter was not immediately acted upon. It was only on 13 October 1995 that the bank finally allowed
the offsetting of his various claims and liabilities. As a result, his liabilities were reduced
to P970,691.46 plus the unreturned value of the vehicle.

In order to recover the Nissan Vanette, the bank filed a Complaint for replevin against Tuble.
Petitioner obtained a favorable judgment. Then, to collect the liabilities of respondent, it also filed a
Petition for Extra-judicial Foreclosure of real estate mortgage over his property. The Petition was
based only on his real estate loan, which at that time amounted to P421,800. His other liabilities to
the bank were excluded. The foreclosure proceedings terminated, with the bank emerging as the
purchaser of the secured property.

Thereafter, Tuble timely redeemed the property on 17 March 1997 for P1,318,401.91.8 Notably, the
redemption price increased to this figure, because the bank had unilaterally imposed additional
interest and other charges.

With the payment of P1,318,401.91, Tuble was deemed to have fully paid his accountabilities. Thus,
three years after his payment, the bank issued him a Clearance necessary for the release of his DIP
share. Subsequently, he received a Manager’s Check in the amount of P166,049.73 representing his
share in the DIP funds.
Despite his payment of the redemption price, Tuble questioned how the foreclosure basis of P421,800
ballooned to P1,318,401.91 in a matter of one year. Belatedly, the bank explained that this
redemption price included the Nissan Vanette’s book value, the salary loan, car insurance, 18%
annual interest on the bank’s redemption price of P421,800, penalty and interest charges on
Promissory Note No. 0142, and litigation expenses.9 By way of note, from these items, the amounts
that remained to be collected as stated in the Petition before us, are (1) the 18% annual interest on
the redemption price and (2) the interest charge on Promissory Note No. 0142.

Because Tuble disputed the redemption price, he filed a Complaint for recovery of a sum of money
and damages before the RTC. He specifically sought to collect P896,602.0210 representing the excess
charges on the redemption price. Additionally, he prayed for moral and exemplary damages.

The RTC ruled in favor of Tuble. The trial court characterized the redemption price as excessive and
arbitrary, because the correct redemption price should not have included the above-mentioned
charges. Moral and exemplary damages were also awarded to him.

According to the trial court,11 the value of the car should not have been included, considering that
the bank had already recovered the Nissan Vanette. The obligations arising from the salary loan and
car insurance should have also been excluded, for there was no proof that these debts existed. The
interest and penalty charges should have been deleted, too, because Promissory Note No. 0142 did
not indicate any interest or penalty charges. Neither should litigation expenses have been added,
since there was no proof that the bank incurred those expenses.

As for the 18% annual interest on the bid price of P421,800, the RTC agreed with Tuble that this
charge was unlawful. Act 313512 as amended, in relation to Section 28 of Rule 39 of the Rules of
Court,13 only allows the mortgagee to charge an interest of 1% per month if the foreclosed property is
redeemed. Ultimately, under the principle of solutio indebiti, the trial court required the refund of
these amounts charged in excess of the correct redemption price.

On appeal, the CA affirmed the findings of the RTC. 14 The appellate court only expounded the rule
that, at the time of redemption, the one who redeemed is liable to pay only 1% monthly interest plus
taxes. Thus, the CA also concluded that there was practically no basis to impose the additional
charges.

Before this Court, petitioner reiterates its claims regarding the inclusion in the redemption price of
the 18% annual interest on the bid price of P421,800 and the interest charges on Promissory Note
No. 0142. Petitioner emphasizes that an 18% interest rate allegedly referred to in the mortgage deed
is the proper basis of the interest. Pointing to the Real Estate Mortgage Contract, the bank
highlights the blanket security clause or "dragnet clause" that purports to cover all obligations owed
by Tuble:15

All obligations of the Borrower and/or Mortgagor, its renewal, extension, amendment or novation
irrespective of whether such obligations as renewed, extended, amended or novated are in the nature
of new, separate or additional obligations;

All other obligations of the Borrower and/or Mortgagor in favor of the Mortgagee, executed before or
after the execution of this document whether presently owing or hereinafter incurred and whether or
not arising from or connection with the aforesaid loan/Credit accommodation; x x x.

Tuble’s obligations are defined in Promissory Note Nos. 0142 and 0143. By way of recap, Promissory
Note No. 0142 refers to the real estate loan; it does not contain any stipulation on interest. On the
other hand, Promissory Note No. 0143 refers to the consumption loan; it charges an 18% annual
interest rate. Petitioner uses this latter rate to impose an interest over the bid price of P421,800.

Further, the bank sees the inclusion in the redemption price of an addition 12% annual interest on
Tuble’s real estate loan.

On top of these claims, the bank raises a new item – the car’s rental fee – to be included in the
redemption price. In dealing with this argument raised for the first time on certiorari, this Court
dismisses the contention based on the well-entrenched prohibition on raising new issues, especially
factual ones, on appeal.16

Thus, the pertinent issue in the instant appeal is whether or not the bank is entitled to include these
items in the redemption price: (1) the interest charges on Promissory Note No. 0142; and (2) the 18%
annual interest on the bid price of P421,800.

RULING OF THE COURT

The 18% Annual Interest on the Bid Price of P421,800

The Applicable Law

The bank argues that instead of referring to the Rules of Court to compute the redemption price, the
courts a quoshould have applied the General Banking Law,17 considering that petitioner is a banking
institution.

The statute referred to requires that in the event of judicial or extrajudicial foreclosure of any
mortgage on real estate that is used as security for an obligation to any bank, banking institution, or
credit institution, the mortgagor can redeem the property by paying the amount fixed by the court in
the order of execution, with interest thereon at the rate specified in the mortgage.18

Petitioner is correct. We have already established in Union Bank of the Philippines v. Court of
Appeals,19 citing Ponce de Leon v. Rehabilitation Finance Corporation 20 and Sy v. Court of
Appeals,21 that the General Banking Act – being a special and subsequent legislation – has the effect
of amending Section 6 of Act No. 3135, insofar as the redemption price is concerned, when the
mortgagee is a bank. Thus, the amount to be paid in redeeming the property is determined by the
General Banking Act, and not by the Rules of Court in Relation to Act 3135.

The Remedy of Foreclosure

In reviewing the bank’s additional charges on the redemption price as a result of the foreclosure, this
Court will first clarify certain vital points of fact and law that both parties and the courts a quo seem
to have missed.

Firstly, at the time respondent resigned, which was chronologically before the foreclosure
proceedings, he had several liabilities to the bank. Secondly, when the bank later on instituted the
foreclosure proceedings, it foreclosed only the mortgage secured by the real estate loan
of P421,800.22 It did not seek to include, in the foreclosure, the consumption loan under Promissory
Note No. 0143 or the other alleged obligations of respondent. Thirdly, on 28 February 1996, the bank
availed itself of the remedy of foreclosure and, in doing so, effectively gained the property.
As a result of these established facts, one evident conclusion surfaces: the Real Estate Mortgage
Contract on the secured property is already extinguished.

In foreclosures, the mortgaged property is subjected to the proceedings for the satisfaction of the
obligation.23 As a result, payment is effected by abnormal means whereby the debtor is forced by a
judicial proceeding to comply with the presentation or to pay indemnity. 24

Once the proceeds from the sale of the property are applied to the payment of the obligation, the
obligation is already extinguished.25 Thus, in Spouses Romero v. Court of Appeals,26 we held that the
mortgage indebtedness was extinguished with the foreclosure and sale of the mortgaged property,
and that what remained was the right of redemption granted by law.

Consequently, since the Real Estate Mortgage Contract is already extinguished, petitioner can no
longer rely on it or invoke its provisions, including the dragnet clause stipulated therein. It follows
that the bank cannot refer to the 18% annual interest charged in Promissory Note No. 0143, an
obligation allegedly covered by the terms of the Contract.

Neither can the bank use the consummated contract to collect on the rest of the obligations, which
were not included when it earlier instituted the foreclosure proceedings. It cannot be allowed to use
the same security to collect on the other loans. To do so would be akin to foreclosing an already
foreclosed property.

Rather than relying on an expired contract, the bank should have collected on the excluded loans by
instituting the proper actions for recovery of sums of money. Simply put, petitioner should have run
after Tuble separately, instead of hostaging the same property to cover all of his liabilities.

The Right of Redemption

Despite the extinguishment of the Real Estate Mortgage Contract, Tuble had the right to redeem the
security by paying the redemption price.

The right of redemption of foreclosed properties was a statutory privilege 27 he enjoyed. Redemption
is by force of law, and the purchaser at public auction is bound to accept it. 28 Thus, it is the law that
provides the terms of the right; the mortgagee cannot dictate them. The terms of this right, based on
Section 47 of the General Banking Law, are as follows:

1. The redemptioner shall have the right within one year after the sale of the real estate, to redeem
the property.

2. The redemptioner shall pay the amount due under the mortgage deed, with interest thereon at
rate specified in the mortgage, and all the costs and expenses incurred by the bank or institution
from the sale and custody of said property less the income derived therefrom.

3. In case of redemptioners who are considered by law as juridical persons, they shall have the right
to redeem not after the registration of the certificate of foreclosure sale with the applicable Register
of Deeds which in no case shall be more than three (3) months after foreclosure, whichever is earlier.

Consequently, the bank cannot alter that right by imposing additional charges and including other
loans. Verily, the freedom to stipulate the terms and conditions of an agreement is limited by law.29
Thus, we held in Rural Bank of San Mateo, Inc. v. Intermediate Appellate Court 30 that the power to
decide whether or not to foreclose is the prerogative of the mortgagee; however, once it has made the
decision by filing a petition with the sheriff, the acts of the latter shall thereafter be governed by the
provisions of the mortgage laws, and not by the instructions of the mortgagee. In direct
contravention of this ruling, though, the bank included numerous charges and loans in the
redemption price, which inexplicably ballooned to P1,318,401.91. On this error alone, the claims of
petitioner covering all the additional charges should be denied. Thus, considering the undue
inclusions of the additional charges, the bank cannot impose the 18% annual interest on the
redemption price.

The Dragnet Clause

In any event, assuming that the Real Estate Mortgage Contract subsists, we rule that the dragnet
clause therein does not justify the imposition of an 18% annual interest on the redemption price.

This Court has recognized that, through a dragnet clause, a real estate mortgage contract may
exceptionally secure future loans or advancements. 31 But an obligation is not secured by a mortgage,
unless, that mortgage comes fairly within the terms of the mortgage contract. 32

We have also emphasized that the mortgage agreement, being a contract of adhesion, is to be
carefully scrutinized and strictly construed against the bank, the party that prepared the
agreement.33

Here, after reviewing the entire deed, this Court finds that there is no specific mention of interest to
be added in case of either default or redemption. The Real Estate Mortgage Contract itself is silent
on the computation of the redemption price. Although it refers to the Promissory Notes as
constitutive of Tuble’s secured obligations, the said contract does not state that the interest to be
charged in case of redemption should be what is specified in the Promissory Notes.

In Philippine Banking Communications v. Court of Appeals, 34 we have construed such silence or

omission of additional charges strictly against the bank. In that case, we affirmed the findings of the
courts a quo that penalties and charges are not due for want of stipulation in the mortgage contract.

Worse, when petitioner invites us to look at the Promissory Notes in determining the interest, these
loan agreements offer different interest charges: Promissory Note No. 0142, which corresponds
exactly to the real estate loan, contains no stipulation on interest; while Promissory Note No. 0143,
which in turn corresponds to the consumption loan, provides a charge of 18% interest per annum.

Thus, an ambiguity results as to which interest shall be applied, for to apply an 18% interest per
annum based on Promissory Note No. 0143 will negate the existence of the 0% interest charged by
Promissory Note No. 0142. Notably, it is this latter Promissory Note that refers to the principal
agreement to which the security attaches.

In resolving this ambiguity, we refer to a basic principle in the law of contracts: "Any ambiguity is to
be taken contra proferentem, that is, construed against the party who caused the ambiguity which
could have avoided it by the exercise of a little more care."35 Therefore, the ambiguity in the
mortgage deed whose terms are susceptible of different interpretations must be read against the
bank that drafted it. Consequently, we cannot impute grave error on the part of the courts a quo for
not appreciating a charge of 18% interest per annum.
Furthermore, this Court refuses to be blindsided by the dragnet clause in the Real Estate Mortgage
Contract to automatically include the consumption loan, and its corresponding interest, in computing
the redemption price.

As we have held in Prudential Bank v. Alviar,36 in the absence of clear and supportive evidence of a
contrary intention, a mortgage containing a dragnet clause will not be extended to cover future
advances, unless the document evidencing the subsequent advance refers to the mortgage as
providing security therefor.

In this regard, this Court adopted the "reliance on the security test" used in the above-mentioned
cases, Prudential Bank37 and Philippine Bank of Communications.38 In these Decisions, we
elucidated the test as follows:

x x x A mortgage with a "dragnet clause" is an "offer" by the mortgagor to the bank to provide the
security of the mortgage for advances of and when they were made. Thus, it was concluded that the
"offer" was not accepted by the bank when a subsequent advance was made because (1) the second
note was secured by a chattel mortgage on certain vehicles, and the clause therein stated that the
note was secured by such chattel mortgage; (2) there was no reference in the second note or chattel
mortgage indicating a connection between the real estate mortgage and the advance; (3) the
mortgagor signed the real estate mortgage by her name alone, whereas the second note and chattel
mortgage were signed by the mortgagor doing business under an assumed name; and (4) there was
no allegation by the bank, and apparently no proof, that it relied on the security of the real estate
mortgage in making the advance.39 (Emphasis supplied)

Here, the second loan agreement, or Promissory Note No. 0143, referring to the consumption loan
makes no reference to the earlier loan with a real estate mortgage. Neither does the bank make any
allegation that it relied on the security of the real estate mortgage in issuing the consumption loan to
Tuble.

It must be remembered that Tuble was petitioner’s previous vice-president. Hence, as one of the
senior officers, the consumption loan was given to him not as an ordinary loan, but as a form of
accommodation or privilege.40The bank’s grant of the salary loan to Tuble was apparently not
motivated by the creation of a security in favor of the bank, but by the fact the he was a top executive
of petitioner.

Thus, the bank cannot claim that it relied on the previous security in granting the consumption loan
to Tuble. For this reason, the dragnet clause will not be extended to cover the consumption loan. It
follows, therefore, that its corresponding interest – 18% per annum – is inapplicable. Consequently,
the courts a quo did not gravely abuse their discretion in refusing to apply an annual interest of 18%
in computing the redemption price. A finding of grave abuse of discretion necessitates that the
judgment must have been exercised arbitrarily and without basis in fact and in law.41

The Interest Charges on Promissory Note No. 0142

In addition to the 18% annual interest, the bank also claims a 12% interest per annum on the
consumption loan. Notwithstanding that Promissory Note No. 0142 contains no stipulation on
interest payments, the bank still claims that Tuble is liable to pay the legal interest. This interest is
currently at 12% per annum, pursuant to Central Bank Circular No. 416 and Article 2209 of the
Civil Code, which provides:

If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the
indemnity for damages, there being no stipulation to the contrary, shall be the payment of the
interest agreed upon, and in the absence of stipulation, the legal interest, which is six per cent per
annum. (Emphasis supplied)

While Article 2209 allows the recovery of interest sans stipulation, this charge is provided not as a
form of monetary interest, but as one of compensatory interest. 42

Monetary interest refers to the compensation set by the parties for the use or forbearance of
money.43 On the other hand, compensatory interest refers to the penalty or indemnity for damages
imposed by law or by the courts.44 Compensatory interest, as a form of damages, is due only if the
obligor is proven to have defaulted in paying the loan. 45

Thus, a default must exist before the bank can collect the compensatory legal interest of 12% per
annum. In this regard, Tuble denies being in default since, by way of legal compensation, he
effectively paid his liabilities on time.

This argument is flawed. The bank correctly explains in its Petition that in order for legal
compensation to take effect, Article 1279 of the Civil Code requires that the debts be liquidated and
demandable. This provision reads:

(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 consist 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 be 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)

Liquidated debts are those whose exact amount has already been determined. 46 In this case, the
receivable of Tuble, including his DIP share, was not yet determined; it was the petitioner’s policy to
compute and issue the computation only after the retired employee had been cleared by the bank.
Thus, Tuble incorrectly invoked legal compensation in addressing this issue of default.

Nevertheless, based on the findings of the RTC and the CA, the obligation of Tuble as evidenced by
Promissory Note No. 0142, was set to mature on 1 January 1999. But then, he had already settled
his liabilities on 17 March 1997 by paying P1,318,401.91 as redemption price. Then, in 1999, the
bank issued his Clearance and share in the DIP in view of the full settlement of his obligations.
Thus, there being no substantial delay on his part, the CA did not grievously err in not declaring him
to be in default.

The Award of Moral and Exemplary Damages

The courts a quo awarded Tuble P200,000 as moral damages and P50,000 as exemplary
damages.1âwphi1 As appreciated by the RTC, which had the opportunity to examine the
parties,47 the bank treated Tuble unfairly and unreasonably by refusing to lend even a little charity
and human consideration when it immediately foreclosed the loans of its previous vice-president
instead of heeding his request to make a straightforward calculation of his receivables and offset
them against his liabilities.48

To the mind of the trial court, this was such a simple request within the control of the bank to grant;
and if petitioner had only acceded, the troubles of the lawsuit would have been avoided.1âwphi1

Moreover, the RTC found that the bank caused Tuble severe humiliation when the Nissan Vannette
was seized from his new office at Kuok Properties Philippines. The trial court also highlighted the
fact that respondent as the previous vice-president of petitioner was no ordinary employee – he was
a man of good professional standing, and one who actively participated in civic organizations. The
RTC then concluded that a man of his standing deserved fair treatment from his employer,
especially since they served common goals.

This Court affirms the dispositions of the RTC and the CA. They correctly ruled that the award of
moral damages also includes cases of besmirched reputation, moral shock, social humiliation and
similar injury. In this regard, the social and financial standings of the parties are additional
elements that should be taken into account in the determination of the amount of moral
damages.49 Based on their findings that Tuble suffered undue embarrassment, given his social
standing, the courts a quo had factual Basis50 to justify the award of moral damages and,
consequently, exemplary damages51 in his favor.

From all the foregoing, we rule that the appellate court correctly deleted the 18% annual interest
charges, albeit for different reasons. First, the interest cannot be imposed, because any reference to
it under the Real Estate Mortgage Contract is misplaced, as the contract is already extinguished.
Second, the said interest cannot be collected without any basis in terms of Tuble's redemption rights.
Third, assuming that the Real Estate Mortgage Contract subsists, the bank cannot collect the
interest because of the contract's ambiguity. Fourth, the dragnet clause referred to in the contract
cannot be presumed to include the 18% annual interest specified in the consumption loan. Fifth, with
respect to the compensatory interest claimed by the bank, we hold that neither is the interest due,
because Tuble cannot be deemed to be in default of his obligations.

IN VIEW THEREOF, the assailed 28 March 2008 Decision and 30 July 2008 Resolution of the
Court of Appeals in CA-G.R. CV No. 87410 are hereby AFFIRMED.

SO ORDERED.

I.A.4.d. Restrictions on Bank Exposure to Directors, Officers, Stockholders

and Other Related Interests

Go v. BSP

Through the present petition for review on certiorari, 1 petitioner Jose C. Go (Go) assails the October
26, 2006 decision2 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, 20034 and June 30,
20035 orders of the Regional Trial Court (RTC), Branch 26, Manila which granted Go’s motion to
quash the Information filed against him.

THE FACTS
On August 20, 1999, an Information6 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 Bank and 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 department of the said bank, as required by the General Banking Act.

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 bank’s loans to other persons. The use of the word "and/or"
meant that he was charged for being either a borrower or a guarantor, or for being both a borrower
and guarantor. Go claimed that the charge was not only vague, but also did not constitute an offense.
He posited that Section 83 of RA 337 penalized only directors and officers of banking institutions
who acted either as borrower or as guarantor, but not as both.

Go further pointed out that the Information failed to state that his alleged act of borrowing and/or
guarantying was not among the exceptions provided for in the law. According to Go, the second
paragraph of Section 83 allowed banks to extend credit accommodations to their directors, officers,
and stockholders, provided it is "limited to an amount equivalent to the respective outstanding
deposits and book value of the paid-in capital contribution in the bank." Extending credit
accommodations to bank directors, officers, and stockholders is not per se prohibited, unless the
amount exceeds the legal limit. Since the Information failed to state that the amount he purportedly
borrowed and/or guarantied was beyond the limit set by law, Go insisted that the acts so charged did
not constitute an offense.

Finding Go’s contentions persuasive, the RTC granted Go’s 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 prosecution’s petition for
certiorari.9The 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 prosecution’s 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 RTC’s orders and ordered the
reinstatement of the criminal charge against Go. After the CA’s 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 court’s
orders. He insists that the Information failed to allege the acts or omissions complained of with
sufficient particularity to enable him to know the offense being charged; to allow him to properly
prepare his defense; and likewise to allow the court to render proper judgment.

Repeating his arguments in his motion to quash, Go reads Section 83 of RA 337 as penalizing a
director or officer of a banking institution for either borrowing the deposits or funds of the bank, or
guaranteeing or indorsing loans to others, but not for assuming both capacities. He claimed that the
prosecution’s 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 prosecution’s 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 Go’s contentions. It insists on the
sufficiency of the allegations in the Information and prays for the denial of Go’s petition.

THE COURT’S RULING

The Court does not find the petition meritorious and accordingly denies it.

The Accused’s 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.
Romualdez15 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 Go’s contention that the law penalizes a bank
director or officer only either for borrowing the bank’s 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 bank’s 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 bank’s
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 legislature’s intent in enacting the statute. The objective of the law should allow for a
reasonable flexibility in its construction. Section 83 of RA 337, as well as other banking laws
adopting the same prohibition,17 was enacted to ensure that loans by banks and similar financial
institutions to their own directors, officers, and stockholders are above board. 18 Banks were not
created for the benefit of their directors and officers; they cannot use the assets of the bank for their
own benefit, except as may be permitted by law. Congress has thus deemed it essential to impose
restrictions on borrowings by bank directors and officers in order to protect the public, especially the
depositors.19 Hence, when the law prohibits directors and officers of banking institutions from
becoming in any manner an obligor of the bank (unless with the approval of the board), the terms of
the prohibition shall be the standards to be applied to directors’ transactions such as those involved
in the present case.

Credit accommodation limit is not an exception nor is it an element of the offense

Contrary to Go’s 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 bank’s 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 bank’s 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
prosecution’s failure to do so. The RTC’s failure to provide the prosecution this opportunity
twice21 constitutes an arbitrary exercise of power that was correctly addressed by the CA through the
certiorari petition. This defect in the RTC’s action on the case, while not central to the issue before
us, strengthens our conclusion that this criminal case should be resolved through full-blown trial on
the merits.

WHEREFORE, we DENY the petitioner’s petition for review on certiorari and AFFIRM the decision
of the Court of Appeals in CA-G.R. SP No. 79149, promulgated on October 26, 2006, as well as its
resolution of June 4, 2007. The Regional Trial Court, Branch 26, Manila is directed to PROCEED
with the hearing of Criminal Case No. 99-178551. Costs against the petitioner.

SO ORDERED.

I.A.4.e.3. Acquisition of Real Estate by Way of Satisfaction of Claims

Union Bank of the Phils. v. Sps. Tiu

This is a Petition for Review on Certiorari seeking to reverse the Joint Decision1 of the Court of
Appeals dated February 21, 2006 in CA-G.R. CV No. 00190 and CA-G.R. SP No. 00253, as well as the
Resolution2 dated June 1, 2006 denying the Motion for Reconsideration.

The factual and procedural antecedents of this case are as follows:

On November 21, 1995, petitioner Union Bank of the Philippines (Union Bank) and respondent
spouses Rodolfo T. Tiu and Victoria N. Tiu (the spouses Tiu) entered into a Credit Line Agreement
(CLA) whereby Union Bank agreed to make available to the spouses Tiu credit facilities in such
amounts as may be approved.3 From September 22, 1997 to March 26, 1998, the spouses Tiu took out
various loans pursuant to this CLA in the total amount of three million six hundred thirty-two
thousand dollars (US$3,632,000.00), as evidenced by promissory notes:

PN No. Amount in US$ Date Granted

87/98/111 72,000.00 02/16/98
87/98/108 84,000.00 02/13/98
87/98/152 320,000.00 03/02/98
87/98/075 150,000.00 01/30/98
87/98/211 32,000.00 03/26/98
87/98/071 110,000.00 01/29/98
87/98/107 135,000.00 02/13//98
87/98/100 75,000.00 02/12/98
 87/98/197 195,000.00 03/19/98
87/97/761 60,000.00 09/26/97
87/97/768 30,000.00 09/29/97
87/97/767 180,000.00 09/29/97
87/97/970 110,000.00 12/29/97
87/97/747 50,000.00 09/22/97
87/96/944 605,000.00 12/19/97
87/98/191 470,000.00 03/16/98
87/98/198 505,000.00 03/19/98
87/98/090 449,000.00 02/09/98
US$3,632,000.004

On June 23, 1998, Union Bank advised the spouses Tiu through a letter 5 that, in view of the existing
currency risks, the loans shall be redenominated to their equivalent Philippine peso amount on July
15, 1998. On July 3, 1998, the spouses Tiu wrote to Union Bank authorizing the latter to
redenominate the loans at the rate of US$1=P41.406 with interest of 19% for one year.7

On December 21, 1999, Union Bank and the spouses Tiu entered into a Restructuring
Agreement.8 The Restructuring Agreement contains a clause wherein the spouses Tiu confirmed
their debt and waived any action on account thereof. To quote said clause:

1. Confirmation of Debt – The BORROWER hereby confirms and accepts that as of December 8,
1999, its outstanding principal indebtedness to the BANK under the Agreement and the Notes
amount to ONE HUNDRED FIFTY[-]FIVE MILLION THREE HUNDRED SIXTY[-]FOUR
THOUSAND EIGHT HUNDRED PESOS (PHP 155,364,800.00) exclusive of interests, service and
penalty charges (the "Indebtedness") and further confirms the correctness, legality, collectability and
enforceability of the Indebtedness. The BORROWER unconditionally waives any action, demand or
claim that they may otherwise have to dispute the amount of the Indebtedness as of the date
specified in this Section, or the collectability and enforceability thereof. It is the understanding of the
parties that the BORROWER’s acknowledgment, affirmation, and waiver herein are material
considerations for the BANK’s agreeing to restructure the Indebtedness which would have already
become due and payable as of the above date under the terms of the Agreement and the Notes. 9

The restructured amount (P155,364,800.00) is the sum of the following figures: (1) P150,364,800.00,
which is the value of the US$3,632,000.00 loan as redenominated under the above-mentioned
exchange rate of US$1=P41.40; and (2) P5,000,000.00, an additional loan given to the spouses Tiu to
update their interest payments.10

Under the same Restructuring Agreement, the parties declared that the loan obligation to be
restructured (after deducting the dacion price of properties ceded by the Tiu spouses and adding: [1]
the taxes, registration fees and other expenses advanced by Union Bank in registering the Deeds of
Dation in Payment; and [2] other fees and charges incurred by the Indebtedness) is one hundred four
million six hundred sixty-eight thousand seven hundred forty-one pesos (P104,668,741.00) (total
restructured amount).11 The Deeds of Dation in Payment referred to are the following:
 1. Dation of the Labangon properties – Deed executed by Juanita Tiu, the mother of
respondent Rodolfo Tiu, involving ten parcels of land with improvements located in
Labangon, Cebu City and with a total land area of 3,344 square meters, for the amount
of P25,130,000.00. The Deed states that these properties shall be leased to the Tiu spouses at
a monthly rate of P98,000.00 for a period of two years.12

2. Dation of the Mandaue property – Deed executed by the spouses Tiu involving one parcel
of land with improvements located in A.S. Fortuna St., Mandaue City, covered by TCT No. T-
31604 and with a land area of 2,960 square meters, for the amount of P36,080,000.00. The
Deed states that said property shall be leased to the Tiu spouses at a monthly rate
of P150,000.00 for a period of two years.13

As likewise provided in the Restructuring Agreement, the spouses Tiu executed a Real Estate
Mortgage in favor of Union Bank over their "residential property inclusive of lot and improvements"
located at P. Burgos St., Mandaue City, covered by TCT No. T-11951 with an area of 3,096 square
meters.14

The spouses Tiu undertook to pay the total restructured amount (P104,668,741.00) via three loan
facilities (payment schemes).

The spouses Tiu claim to have made the following payments: (1) P15,000,000.00 on August 3, 1999;
and (2) another P13,197,546.79 as of May 8, 2001. Adding the amounts paid under the Deeds of
Dation in Payment, the spouses Tiu postulate that their payments added up to P89,407,546.79.15

Asserting that the spouses Tiu failed to comply with the payment schemes set up in the
Restructuring Agreement, Union Bank initiated extrajudicial foreclosure proceedings on the
residential property of the spouses Tiu, covered by TCT No. T-11951. The property was to be sold at
public auction on July 18, 2002.

The spouses Tiu, together with Juanita T. Tiu, Rosalinda T. King, Rufino T. Tiu, Rosalie T. Young
and Rosenda T. Tiu, filed with the Regional Trial Court (RTC) of Mandaue City a Complaint seeking
to have the Extrajudicial Foreclosure declared null and void. The case was docketed as Civil Case
No. MAN-4363.16 Named as defendants were Union Bank and Sheriff IV Veronico C. Ouano (Sheriff
Oano) of Branch 55, RTC, Mandaue City. Complainants therein prayed for the following: (1) that the
spouses Tiu be declared to have fully paid their obligation to Union Bank; (2) that defendants be
permanently enjoined from proceeding with the auction sale; (3) that Union Bank be ordered to
return to the spouses Tiu their properties as listed in the Complaint; (4) that Union Bank be ordered
to pay the plaintiffs the sum of P10,000,000.00 as moral damages, P2,000,000.00 as exemplary
damages, P3,000,000.00 as attorney’s fees and P500,000.00 as expenses of litigation; and (5) a writ of
preliminary injunction or temporary restraining order be issued enjoining the public auction sale to
be held on July 18, 2002.17

The spouses Tiu claim that from the beginning the loans were in pesos, not in dollars. Their office
clerk, Lilia Gutierrez, testified that the spouses Tiu merely received the peso equivalent of their
US$3,632,000.00 loan at the rate of US$1=P26.00. The spouses Tiu further claim that they were
merely forced to sign the Restructuring Agreement and take up an additional loan of P5,000,000.00,
the proceeds of which they never saw because this amount was immediately applied by Union Bank
to interest payments.18

The spouses Tiu allege that the foreclosure sale of the mortgaged properties was invalid, as the loans
have already been fully paid. They also allege that they are not the owners of the improvements
constructed on the lot because the real owners thereof are their co-petitioners, Juanita T. Tiu,
Rosalinda T. King, Rufino T. Tiu, Rosalie T. Young and Rosenda T. Tiu. 19

The spouses Tiu further claim that prior to the signing of the Restructuring Agreement, they entered
into a Memorandum of Agreement with Union Bank whereby the former deposited with the latter
several certificates of shares of stock of various companies and four certificates of title of various
parcels of land located in Cebu. The spouses Tiu claim that these properties have not been subjected
to any lien in favor of Union Bank, yet the latter continues to hold on to these properties and has not
returned the same to the former.20

On the other hand, Union Bank claims that the Restructuring Agreement was voluntarily and
validly entered into by both parties. Presenting as evidence the Warranties embodied in the Real
Estate Mortgage, Union Bank contends that the foreclosure of the mortgage on the residential
property of the spouses Tiu was valid and that the improvements thereon were absolutely owned by
them. Union Bank denies receiving certificates of shares of stock of various companies or the four
certificates of title of various parcels of land from the spouses Tiu. However, Union Bank also alleges
that even if said certificates were in its possession it is authorized under the Restructuring
Agreement to retain any and all properties of the debtor as security for the loan. 21

The RTC issued a Temporary Restraining Order 22 and, eventually, a Writ of Preliminary
Injunction23 preventing the sale of the residential property of the spouses Tiu. 24

On December 16, 2004, the RTC rendered its Decision 25 in Civil Case No. MAN-4363 in favor of
Union Bank. The dispositive portion of the Decision read:

WHEREFORE, premises considered, judgment is hereby rendered dismissing the Complaint and
lifting and setting aside the Writ of Preliminary Injunction. No pronouncement as to damages,
attorney’s fees and costs of suit.26

In upholding the validity of the Restructuring Agreement, the RTC held that the spouses Tiu failed
to present any evidence to prove either fraud or intimidation or any other act vitiating their consent
to the same. The exact obligation of the spouses Tiu to Union Bank is therefore P104,668,741.00, as
agreed upon by the parties in the Restructuring Agreement. As regards the contention of the spouses
Tiu that they have fully paid their indebtedness, the RTC noted that they could not present any
detailed accounting as to the total amount they have paid after the execution of the Restructuring
Agreement.27

On January 4, 2005, Union Bank filed a Motion for Partial Reconsideration, 28 protesting the finding
in the body of the December 16, 2004 Decision that the residential house on Lot No. 639 is not owned
by the spouses Tiu and therefore should be excluded from the real properties covered by the real
estate mortgage. On January 6, 2005, the spouses Tiu filed their own Motion for Partial
Reconsideration and/or New Trial.29 They alleged that the trial court failed to rule on their fourth
cause of action wherein they mentioned that they turned over the following titles to Union Bank:
TCT Nos. 30271, 116287 and 116288 and OCT No. 0-3538. They also prayed for a partial new trial
and for a declaration that they have fully paid their obligation to Union Bank. 30

On January 11, 2005, the spouses Tiu received from Sheriff Oano a Second Notice of Extra-judicial
Foreclosure Sale of Lot No. 639 to be held on February 3, 2005. To prevent the same, the Tiu spouses
filed with the Court of Appeals a Petition for Prohibition and Injunction with Application for
TRO/Writ of Preliminary Injunction.31 The petition was docketed as CA-G.R. SP No. 00253. The
Court of Appeals issued a Temporary Restraining Order on January 27, 2005. 32
On January 19, 2005, the RTC issued an Order denying Union Bank’s Motion for Partial
Reconsideration and the Tiu spouses’ Motion for Partial Reconsideration and/or New Trial. 33

Both the spouses Tiu and Union Bank appealed the case to the Court of Appeals. 34 The two appeals
were given a single docket number, CA-G.R. CEB-CV No. 00190. Acting on a motion filed by the
spouses Tiu, the Court of Appeals consolidated CA-G.R. SP No. 00253 with CA-G.R. CEB-CV No.
00190.35

On April 19, 2005, the Court of Appeals issued a Resolution finding that there was no need for the
issuance of a Writ of Preliminary Injunction as the judgment of the lower court has been stayed by
the perfection of the appeal therefrom.36

On May 9, 2005, Sheriff Oano proceeded to conduct the extrajudicial sale. Union Bank submitted the
lone bid of P18,576,000.00.37 On June 14, 2005, Union Bank filed a motion with the Court of Appeals
praying that Sheriff Oano be ordered to issue a definite and regular Certificate of Sale. 38 On July 21,
2005, the Court of Appeals issued a Resolution denying the Motion and suspending the auction sale
at whatever stage, pending resolution of the appeal and conditioned upon the filing of a bond in the
amount of P18,000,000.00 by the Tiu spouses.39 The Tiu spouses failed to file said bond.40

On February 21, 2006, the Court of Appeals rendered the assailed Joint Decision in CA-G.R. CV No.
00190 and CA-G.R. SP No. 00253. The Court of Appeals dismissed the Petition for Prohibition, CA-
G.R. SP No. 00253, on the ground that the proper venue for the same is with the RTC. 41

On the other hand, the Court of Appeals ruled in favor of the spouses Tiu in CA-G.R. CV No. 00190.
The Court of Appeals held that the loan transactions were in pesos, since there was supposedly no
stipulation the loans will be paid in dollars and since no dollars ever exchanged hands. Considering
that the loans were in pesos from the beginning, the Court of Appeals reasoned that there is no need
to convert the same. By making it appear that the loans were originally in dollars, Union Bank
overstepped its rights as creditor, and made unwarranted interpretations of the original loan
agreement. According to the Court of Appeals, the Restructuring Agreement, which purportedly
attempts to create a novation of the original loan, was not clearly authorized by the debtors and was
not supported by any cause or consideration. Since the Restructuring Agreement is void, the original
loan of P94,432,000.00 (representing the amount received by the spouses Tiu of US$3,632,000.00
using the US$1=P26.00 exchange rate) should subsist. The Court of Appeals likewise invalidated (1)
the P5,000,000.00 charge for interest in the Restructuring Agreement, for having been unilaterally
imposed by Union Bank; and (2) the lease of the properties conveyed in dacion en pago, for being
against public policy. 42

In sum, the Court of Appeals found Union Bank liable to the spouses Tiu in the amount
of P927,546.79. For convenient reference, we quote relevant portion of the Court of Appeal’s Decision
here:

To summarize the obligation of the Tiu spouses, they owe Union Bank P94,432,000.00. The Tiu
spouses had already paid Union Bank the amount of P89,407,546.79. On the other hand, Union
Bank must return to the Tiu spouses the illegally collected rentals in the amount of P5,952,000.00.
Given these findings, the obligation of the Tiu spouses has already been fully paid. In fact, it is the
Union Bank that must return to the Tiu spouses the amount of NINE HUNDRED TWENTY[-
]SEVEN THOUSAND FIVE HUNDRED FORTY[-]SIX PESOS AND SEVENTY[-]NINE CENTAVOS
(P927,546.79).43

With regard to the ownership of the improvements on the subject mortgaged property, the Court of
Appeals ruled that it belonged to respondent Rodolfo Tiu’s father, Jose Tiu, since 1981. According to
the Court of Appeals, Union Bank should not have relied on warranties made by debtors that they
are the owners of the property. The appellate court went on to permanently enjoin Union Bank from
foreclosing the mortgage not only of the property covered by TCT No. T-11951, but also any other
mortgage over any other property of the spouses Tiu. 44

The Court of Appeals likewise found Union Bank liable to return the certificates of stocks and titles
to real properties of the spouses Tiu in its possession. The appellate court held that Union Bank
made judicial admissions of such possession in its Reply to Plaintiff’s Request for Admission. 45 In the
event that Union Bank can no longer return these certificates and titles, it was mandated to
shoulder the cost for their replacement.46

Finally, the Court of Appeals took judicial notice that before or during the financial crisis, banks
actively convinced debtors to make dollar loans in the guise of benevolence, saddling borrowers with
loans that ballooned twice or thrice their original loans. The Court of Appeals, noting "the cavalier
way with which banks exploited and manipulated the situation,"47 held Union Bank liable to the
spouses Tiu for P100,000.00 in moral damages, P100,000.00 in exemplary damages, and P50,000.00
in attorney’s fees.48

The Court of Appeals disposed of the case as follows:

WHEREFORE, in view of the foregoing premises, judgment is hereby rendered by us permanently

enjoining Union Bank from foreclosing the mortgage of the residential property of the Tiu spouses
which is covered by Transfer Certificate of Title No. 11951 and from pursuing other foreclosure of
mortgages over any other properties of the Tiu spouses for the above-litigated debt that has already
been fully paid. If a foreclosure sale has already been made over such properties, this Court orders
the cancellation of such foreclosure sale and the Certificate of Sale thereof if any has been issued.
This Court orders Union Bank to return to the Tiu spouses the amount of NINE HUNDRED
TWENTY[-]SEVEN THOUSAND FIVE HUNDRED FORTY[-]SIX PESOS AND SEVENTY[-]NINE
CENTAVOS (P927,546.79) representing illegally collected rentals. This Court also orders Union
Bank to return to the Tiu spouses all the certificates of shares of stocks and titles to real properties
of the Tiu spouses that were deposited to it or, in lieu thereof, to pay the cost for the replacement and
issuance of new certificates and new titles over the said properties. This Court finally orders Union
Bank to pay the Tiu spouses ONE HUNDRED THOUSAND PESOS (P100,000.00) in moral
damages, ONE HUNDRED THOUSAND PESOS (P100,000.00) in exemplary damages, FIFTY
THOUSAND PESOS (P50,000.00) in attorney’s fees and cost, both in the lower court and in this
Court.49

On June 1, 2006, the Court of Appeals rendered the assailed Resolution denying Union Bank’s
Motion for Reconsideration.

Hence, this Petition for Review on Certiorari, wherein Union Bank submits the following issues for
the consideration of this Court:

1. WHETHER OR NOT THE COURT OF APPEALS COMMITTED GRAVE AND

REVERSIBLE ERROR WHEN IT CONCLUDED THAT THERE WERE NO DOLLAR
LOANS OBTAINED BY [THE] TIU SPOUSES FROM UNION BANK DESPITE [THE]
CLEAR ADMISSION OF INDEBTEDNESS BY THE BORROWER-MORTGAGOR TIU
SPOUSES.

2. WHETHER OR NOT THE COURT OF APPEALS COMMITTED GRAVE AND

REVERSIBLE ERROR WHEN IT NULLIFIED THE RESTRUCTURING AGREEMENT
BETWEEN TIU SPOUSES AND UNION BANK FOR LACK OF CAUSE OR
 CONSIDERATION DESPITE THE ADMISSION OF THE BORROWER-MORTGAGOR TIU
SPOUSES OF THE DUE AND VOLUNTARY EXECUTION OF SAID RESTRUCTURING
AGREEMENT.

3. WHETHER OR NOT THE COURT OF APPEALS COMMITTED GRAVE AND

REVERSIBLE ERROR WHEN IT PERMANENTLY ENJOINED UNION BANK FROM
FORECLOSING THE MORTGAGE ON THE RESIDENTIAL PROPERTY OF THE TIU
SPOUSES DESPITE THE ADMISSION OF NON-PAYMENT OF THEIR OUTSTANDING
LOAN TO THE BANK BY THE BORROWER-MORTGAGOR TIU SPOUSES;

4. WHETHER OR NOT THE COURT OF APPEALS COMMITTED GRAVE AND

REVERSIBLE ERROR WHEN IT FIXED THE AMOUNT OF THE OBLIGATION OF
RESPONDENT SPOUSES CONTRARY TO THE PROVISIONS OF THE PROMISSORY
NOTES, RESTRUCTURING AGREEMENT AND [THE] VOLUNTARY ADMISSIONS BY
BORROWER-MORTGAGOR TIU SPOUSES;

5. WHETHER OR NOT THE COURT OF APPEALS COMMITTED GRAVE AND

REVERSIBLE ERROR WHEN IT RULED ON THE ALLEGED RENTALS PAID BY
RESPONDENT SPOUSES WITHOUT ANY FACTUAL BASIS;

6. WHETHER OR NOT THE COURT OF APPEALS COMMITTED GRAVE AND

REVERSIBLE ERROR WHEN IT HELD WITHOUT ANY FACTUAL BASIS THAT THE
LOAN OBLIGATION OF TIU SPOUSES HAS BEEN FULLY PAID;

7. WHETHER OR NOT THE COURT OF APPEALS COMMITTED GRAVE AND

REVERSIBLE ERROR WHEN IT HELD WITHOUT ANY FACTUAL BASIS THAT THE
HOUSE INCLUDED IN THE REAL ESTATE MORTGAGE DID NOT BELONG TO THE
TIU SPOUSES.

8. WHETHER OR NOT THE COURT OF APPEALS COMMITTED GRAVE AND

REVERSIBLE ERROR IN ORDERING UNION BANK TO RETURN THE CERTIFICATES
OF SHARES OF STOCK AND TITLES TO REAL PROPERTIES OF TIU SPOUSES
ALLEGEDLY IN THE POSSESSION OF UNION BANK.

9. WHETHER OR NOT THE COURT OF APPEALS VIOLATED THE DOCTRINES AND

PRINCIPLES ON APPELLATE JURISDICTION.

10. WHETHER OR NOT THE COURT OF APPEALS COMMITTED GRAVE AND

REVERSIBLE ERROR IN AWARDING DAMAGES AGAINST UNION BANK. 50

Validity of the Restructuring Agreement

As previously discussed, the Court of Appeals declared that the Restructuring Agreement is void on
account of its being a failed novation of the original loan agreements. The Court of Appeals explained
that since there was no stipulation that the loans will be paid in dollars, and since no dollars ever
exchanged hands, the original loan transactions were in pesos. 51 Proceeding from this premise, the
Court of Appeals held that the Restructuring Agreement, which was meant to convert the loans into
pesos, was unwarranted. Thus, the Court of Appeals reasoned that:

Be that as it may, however, since the loans of the Tiu spouses from Union Bank were peso loans from
the very beginning, there is no need for conversion thereof. A Restructuring Agreement should
merely confirm the loans, not add thereto. By making it appear in the Restructuring Agreement that
the loans were originally dollar loans, Union Bank overstepped its rights as a creditor and made
unwarranted interpretations of the original loan agreement. This Court is not bound by such
interpretations made by Union Bank. When one party makes an interpretation of a contract, he
makes it at his own risk, subject to a subsequent challenge by the other party and a modification by
the courts. In this case, that party making the interpretation is not just any party, but a well
entrenched and highly respected bank. The matter that was being interpreted was also a financial
matter that is within the profound expertise of the bank. A normal person who does not possess the
same financial proficiency or acumen as that of a bank will most likely defer to the latter’s esteemed
opinion, representations and interpretations. It has been often stated in our jurisprudence that
banks have a fiduciary duty to their depositors. According to the case of Bank of the Philippine
Islands vs. IAC (G.R. No. 69162, February 21, 1992), "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."
Such fiduciary relationship should also extend to the bank’s borrowers who, more often than not, are
also depositors of the bank. Banks are in the business of lending while most borrowers hardly know
the basics of such business. When transacting with a bank, most borrowers concede to the expertise
of the bank and consider their procedures, pronouncements and representations as unassailable,
whether such be true or not. Therefore, when there is a doubtful banking transaction, this Court will
tip the scales in favor of the borrower.

Given the above ruling, the Restructuring Agreement, therefore, between the Tiu spouses and Union
Bank does not operate to supersede all previous loan documents, as claimed by Union Bank. But the
said Restructuring Agreement, as it was crafted by Union Bank, does not merely confirm the original
loan of the Tiu spouses but attempts to create a novation of the said original loan that is not clearly
authorized by the debtors and that is not supported by any cause or consideration. According to
Article 1292 of the New Civil Code, in order that an obligation may by extinguished by another
which substitutes the same, it is imperative that it be so declared in unequivocal terms, or that the
old and the new obligations be on every point incompatible with each other. Such is not the case in
this instance. No valid novation of the original obligation took place. Even granting arguendo that
there was a novation, the sudden change in the original amount of the loan to the new amount
declared in the Restructuring Agreement is not supported by any cause or consideration. Under
Article 1352 of the Civil Code, contracts without cause, or with unlawful cause, produce no effect
whatever. A contract whose cause did not exist at the time of the transaction is void. Accordingly,
Article 1297 of the New Civil Code mandates that, if the new obligation is void, the original one shall
subsist, unless the parties intended that the former relation should be extinguished at any event.
Since the Restructuring Agreement is void and since there was no intention to extinguish the
original loan, the original loan shall subsist.52

Union Bank does not dispute that the spouses Tiu received the loaned amount of US$3,632,000.00 in
Philippine pesos, not dollars, at the prevailing exchange rate of US$1=P26.53 However, Union Bank
claims that this does not change the true nature of the loan as a foreign currency loan, 54 and
proceeded to illustrate in its Memorandum that the spouses Tiu obtained favorable interest rates by
opting to borrow in dollars (but receiving the equivalent peso amount) as opposed to borrowing in
pesos.55

We agree with Union Bank on this point. Although indeed, the spouses Tiu received peso equivalents
of the borrowed amounts, the loan documents presented as evidence, i.e., the promissory
notes,56 expressed the amount of the loans in US dollars and not in any other currency. This clearly
indicates that the spouses Tiu were bound to pay Union Bank in dollars, the amount stipulated in
said loan documents. Thus, before the Restructuring Agreement, the spouses Tiu were bound to pay
Union Bank the amount of US$3,632,000.00 plus the interest stipulated in the promissory notes,
without converting the same to pesos. The spouses Tiu, who are in the construction business and
appear to be dealing primarily in Philippine currency, should therefore purchase the necessary
amount of dollars to pay Union Bank, who could have justly refused payment in any currency other
than that which was stipulated in the promissory notes.

We disagree with the finding of the Court of Appeals that the testimony of Lila Gutierrez, which
merely attests to the fact that the spouses Tiu received the peso equivalent of their dollar loan,
proves the intention of the parties that such loans should be paid in pesos. If such had been the
intention of the parties, the promissory notes could have easily indicated the same.

Such stipulation of payment in dollars is not prohibited by any prevailing law or jurisprudence at the
time the loans were taken. In this regard, Article 1249 of the Civil Code provides:

Art. 1249. The payment of debts in money shall be made in the currency stipulated, and if it is not
possible to deliver such currency, then in the currency which is legal tender in the Philippines.

Although the Civil Code took effect on August 30, 1950, jurisprudence had upheld 57 the continued
effectivity of Republic Act No. 529, which took effect earlier on June 16, 1950. Pursuant to Section
158 of Republic Act No. 529, any agreement to pay an obligation in a currency other than the
Philippine currency is void; the most that could be demanded is to pay said obligation in Philippine
currency to be measured in the prevailing rate of exchange at the time the obligation was
incurred.59 On June 19, 1964, Republic Act No. 4100 took effect, modifying Republic Act No. 529 by
providing for several exceptions to the nullity of agreements to pay in foreign currency. 60

On April 13, 1993, Central Bank Circular No. 1389 61 was issued, lifting foreign exchange restrictions
and liberalizing trade in foreign currency. In cases of foreign borrowings and foreign currency loans,
however, prior Bangko Sentral approval was required. On July 5, 1996, Republic Act No. 8183 took
effect,62 expressly repealing Republic Act No. 529 in Section 2 63 thereof. The same statute also
explicitly provided that parties may agree that the obligation or transaction shall be settled in a
currency other than Philippine currency at the time of payment. 64

Although the Credit Line Agreement between the spouses Tiu and Union Bank was entered into on
November 21, 1995,65 when the agreement to pay in foreign currency was still considered void under
Republic Act No. 529, the actual loans,66 as shown in the promissory notes, were taken out from
September 22, 1997 to March 26, 1998, during which time Republic Act No. 8183 was already in
effect. In United Coconut Planters Bank v. Beluso,67 we held that:

[O]pening a credit line does not create a credit transaction of loan or mutuum, since the former is
merely a preparatory contract to the contract of loan or mutuum. Under such credit line, the bank is
merely obliged, for the considerations specified therefor, to lend to the other party amounts not
exceeding the limit provided. The credit transaction thus occurred not when the credit line was
opened, but rather when the credit line was availed of. x x x. 68

Having established that Union Bank and the spouses Tiu validly entered into dollar loans, the
conclusion of the Court of Appeals that there were no dollar loans to novate into peso loans must
necessarily fail.

Similarly, the Court of Appeals’ pronouncement that the novation was not supported by any cause or
consideration is likewise incorrect. This conclusion suggests that when the parties signed the
Restructuring Agreement, Union Bank got something out of nothing or that the spouses Tiu received
no benefit from the restructuring of their existing loan and was merely taken advantage of by the
bank. It is important to note at this point that in the determination of the nullity of a contract based
on the lack of consideration, the debtor has the burden to prove the same. Article 1354 of the Civil
Code provides that "[a]though the cause is not stated in the contract, it is presumed that it exists
and is lawful, unless the debtor proves the contrary."

In the case at bar, the Restructuring Agreement was signed at the height of the financial crisis when
the Philippine peso was rapidly depreciating. Since the spouses Tiu were bound to pay their debt in
dollars, the cost of purchasing the required currency was likewise swiftly increasing. If the parties
did not enter into the Restructuring Agreement in December 1999 and the peso continued to
deteriorate, the ability of the spouses Tiu to pay and the ability of Union Bank to collect would both
have immensely suffered. As shown by the evidence presented by Union Bank, the peso indeed
continued to deteriorate, climbing to US$1=P50.01 on December 2000.69 Hence, in order to ensure
the stability of the loan agreement, Union Bank and the spouses Tiu agreed in the Restructuring
Agreement to peg the principal loan at P150,364,800.00 and the unpaid interest at P5,000,000.00.

Before this Court, the spouses Tiu belatedly argue that their consent to the Restructuring
Agreement was vitiated by fraud and mistake, alleging that (1) the Restructuring Agreement did not
take into consideration their substantial payment in the amount of P40,447,185.60 before its
execution; and (2) the dollar loans had already been redenominated in 1997 at the rate of
US$1=P26.34.70

We have painstakingly perused over the records of this case, but failed to find any documentary
evidence of the alleged payment of P40,447,185.60 before the execution of the Restructuring
Agreement. In paragraph 16 of their Amended Complaint, the spouses Tiu alleged payment
of P40,447,185.60 for interests before the conversion of the dollar loan. 71 This was specifically denied
by Union Bank in paragraph 5 of its Answer with Counterclaim. 72 Respondent Rodolfo Tiu testified
that they made "50 million plus" in cash payment plus "other monthly interest payments," 73 and
identified a computation of payments dated July 17, 2002 signed by himself.74Such computation,
however, was never formally offered in evidence and was in any event, wholly self-serving.

As regards the alleged redenomination of the same dollar loans in 1997 at the rate of US$1=P26.34,
the spouses Tiu merely relied on the following direct testimony of Herbert Hojas, one of the
witnesses of Union Bank:

Q: Could you please describe what kind of loan was the loan of the spouses Rodolfo Tiu, the
plaintiffs in this case?

A: It was originally an FCDU, meaning a dollar loan.

Q: What happened to this FCDU loan or dollar loan?

A: The dollar loan was re-denominated in view of the very unstable exchange of the dollar
and the peso at that time,

Q: Could you still remember what year this account was re-denominated from dollar to peso?

A: I think it was on the year 1997.

Q: Could [you] still remember what was then the prevailing exchange rate between the dollar
and the peso at that year 1997?

A: Yes. I have here the list of the dollar exchange rate from January 1987 (sic). It was P26.34
per dollar.75
Neither party presented any documentary evidence of the alleged redenomination in 1997.
Respondent Rodolfo Tiu did not even mention it in his testimony. Furthermore, Hojas was obviously
uncertain in his statement that said redenomination was made in 1997.

As pointed out by the trial court, the Restructuring Agreement, being notarized, is a public document
enjoying a prima facie presumption of authenticity and due execution. Clear and convincing evidence
must be presented to overcome such legal presumption. 76 The spouses Tiu, who attested before the
notary public that the Restructuring Agreement "is their own free and voluntary act and
deed,"77 failed to present sufficient evidence to prove otherwise. It is difficult to believe that the
spouses Tiu, veteran businessmen who operate a multi-million peso company, would sign a very
important document without fully understanding its contents and consequences.

This Court therefore rules that the Restructuring Agreement is valid and, as such, a valid and
binding novation of loans of the spouses Tiu entered into from September 22, 1997 to March 26, 1998
which had a total amount of US$3,632,000.00.

Validity of the Foreclosure of Mortgage

The spouses Tiu challenge the validity of the foreclosure of the mortgage on two grounds, claiming
that: (1) the debt had already been fully paid; and (2) they are not the owners of the improvements
on the mortgaged property.

(1) Allegation of full payment of the mortgage debt

In the preceding discussion, we have ruled that the Restructuring Agreement is a valid and binding
novation of loans of the spouses Tiu entered into from September 22, 1997 to March 26, 1998 in the
total amount of US$3,632,000.00. Thus, in order that the spouses Tiu can be held to have fully paid
their loan obligation, they should present evidence showing their payment of the total restructured
amount under the Restructuring Agreement which was P104,668,741.00. As we have discussed
above, however, while respondent Rodolfo Tiu appeared to have identified during his testimony a
computation dated July 17, 2002 of the alleged payments made to Union Bank, 78 the same was not
formally offered in evidence. Applying Section 34, Rule 132 79 of the Rules of Court, such computation
cannot be considered by this Court. We have held that a formal offer is necessary because judges are
mandated to rest their findings of facts and their judgment only and strictly upon the evidence
offered by the parties at the trial. It has several functions: (1) to enable the trial judge to know the
purpose or purposes for which the proponent is presenting the evidence; (2) to allow opposing parties
to examine the evidence and object to its admissibility; and (3) to facilitate review by the appellate
court, which will not be required to review documents not previously scrutinized by the trial
court.80 Moreover, even if such computation were admitted in evidence, the same is self-serving and
cannot be given probative weight. In the case at bar, the records do not contain even a single receipt
evidencing payment to Union Bank.

The Court of Appeals, however, held that several payments made by the spouses Tiu had been
admitted by Union Bank. Indeed, Section 11, Rule 8 of the Rules of Court provides that an allegation
not specifically denied is deemed admitted. In such a case, no further evidence would be required to
prove the antecedent facts. We should therefore examine which of the payments specified by the
spouses Tiu in their Amended Complaint81were not specifically denied by Union Bank.

The allegations of payment are made in paragraphs 16 to 21 of the Amended Complaint:

16. Before conversion of the dollar loan into a peso loan[,] the spouses Tiu had already paid
the defendant bank the amount of P40,447,185.60 for interests;
 17. On August 3, 1999 and August 12, 1999, plaintiffs made payments in the amount
of P15,000,000.00;

18. In order to lessen the obligation of plaintiffs, the mother of plaintiff Rodolfo T. Tiu,
plaintiff Juanita T. Tiu, executed a deed of dacion in payment in favor of defendant involving
her 10 parcels of land located in Labangon, Cebu City for the amount of P25,130,000.00.
Copy of the deed was attached to the original complaint as Annex "C";

19. For the same purpose, plaintiffs spouses Tiu also executed a deed of dacion in payment of
their property located at A.S. Fortuna St., Mandaue City for the amount of P36,080,000.00.
Copy of the deed was attached to the original complaint as Annex "D";

20. The total amount of the two dacions in payment made by the plaintiffs
was P61,210,000.00;

21. Plaintiffs spouses Tiu also made other payment of the amount of P13,197,546.79 as of
May 8, 2001;82

In paragraphs 4 and 5 of their Answer with Counterclaim,83 Union Bank specifically denied the
allegation in paragraph 9 of the Complaint, but admitted the allegations in paragraphs 17, 18, 19, 20
and 21 thereof. Paragraphs 18, 19 and 20 allege the two deeds of dacion. However, these instruments
were already incorporated in the computation of the outstanding debt (i.e., subtracted from the
confirmed debt of P155,364,800.00), as can be gleaned from the following provisions in the
Restructuring Agreement:

a.) The loan obligation to the BANK to be restructured herein after deducting from the Indebtedness
of the BORROWER the dacion price of the properties subject of the Deeds of Dacion and adding to
the Indebtedness all the taxes, registration fees and other expenses advanced by the bank in
registering the Deeds of Dacion, and also adding to the Indebtedness the interest, and other fees and
charges incurred by the Indebtedness, amounts to ONE HUNDRED FOUR MILLION SIX
HUNDRED SIXTY-EIGHT THOUSAND SEVEN HUNDRED FORTY-ONE PESOS
(PHP104,668,741.00) (the "TOTAL RESTRUCTURED AMOUNT").84

As regards the allegations of cash payments in paragraphs 17 and 21 of the Amended Complaint, the
date of the alleged payment is critical as to whether they were included in the Restructuring
Agreement. The payment of P15,000,000.00 alleged in paragraph 17 of the Amended Complaint was
supposedly made on August 3 and 12, 1999. This payment was before the date of execution of the
Restructuring Agreement on December 21, 1999, and is therefore already factored into the
restructured obligation of the spouses.85 On the other hand, the payment of P13,197,546.79 alleged
in paragraph 21 of the Amended Complaint was dated May, 8, 2001. Said payment cannot be deemed
included in the computation of the spouses Tiu’s debt in the Restructuring Agreement, which was
assented to more than a year earlier. This amount (P13,197,546.79) is even absent86 in the
computation of Union Bank of the outstanding debt, in contrast with the P15,000,000.00 payment
which is included87 therein. Union Bank did not explain this discrepancy and merely relied on the
spouses Tiu’s failure to formally offer supporting evidence. Since this payment of P13,197,546.79 on
May 8, 2001 was admitted by Union Bank in their Answer with Counterclaim, there was no need on
the part of the spouses Tiu to present evidence on the same. Nonetheless, if we subtract this figure
from the total restructured amount (P104,668,741.00) in the Restructuring Agreement, the result is
that the spouses Tiu still owe Union Bank P91,471,194.21.

(2) Allegation of third party ownership of the improvements on the mortgaged lot
The Court of Appeals, taking into consideration its earlier ruling that the loan was already fully
paid, permanently enjoined Union Bank from foreclosing the mortgage on the property covered by
Transfer Certificate of Title No. 11951 (Lot No. 639) and from pursuing other foreclosure of
mortgages over any other properties of the spouses Tiu. The Court of Appeals ruled:

The prayer, therefore, of the Tiu spouses to enjoin the foreclosure of the real estate mortgage over
their residential property has merit. The loan has already been fully paid. It should also be noted
that the house constructed on the residential property of the Tiu spouses is not registered in the
name of the Tiu spouses, but in the name of Jose Tiu (Records, pp. 127-132), the father of appellant
and petitioner Rodolfo Tiu, since 1981. It had been alleged by the Tiu spouses that Jose Tiu died on
December 18, 1983, and, that consequently upon his death, Juanita T. Tiu, Rosalinda T. King,
Rufino T. Tiu, Rosalie T. Young and Rosenda T. Tiu became owners of the house (Records, p. 116).
This allegation has not been substantially denied by Union Bank. All that the Union Bank presented
to refute this allegation are a Transfer Certificate of Title and a couple of Tax Declarations which do
not indicate that a residential house is titled in the name of the Tiu spouses. In fact, in one of the
Tax Declarations, the market value of the improvements is worth only P3,630.00. Certainly, Union
Bank should have been aware that this Tax Declaration did not cover the residential house. Union
Bank should also not rely on warranties made by debtors that they are the owners of the property.
They should investigate such representations. The courts have made consistent rulings that a bank,
being in the business of lending, is obligated to verify the true ownership of the properties mortgaged
to them. Consequently, this Court permanently enjoins Union Bank from foreclosing the mortgage of
the residential property of the Tiu spouses which is covered by Transfer Certificate of Title No.
11951 and from pursuing other foreclosure of mortgages over any other properties of the Tiu spouses.
If a foreclosure sale has already been made over such properties, this Court orders the cancellation of
such foreclosure sale and the Certificate of Sale thereof if any has been issued, and the return of the
title to the Tiu spouses.88

We disagree. Contrary to the ruling of the Court of Appeals, the burden to prove the spouses Tiu’s
allegation – that they do not own the improvements on Lot No. 639, despite having such
improvements included in the mortgage – is on the spouses Tiu themselves. The fundamental rule is
that he who alleges must prove.89 The allegations of the spouses Tiu on this matter, which are found
in paragraphs 35 to 3990 of their Amended Complaint, were specifically denied in paragraph 9 of
Union Bank’s Answer with Counterclaim.91

Upon careful examination of the evidence, we find that the spouses Tiu failed to prove that the
improvements on Lot No. 639 were owned by third persons. In fact, the evidence presented by the
spouses Tiu merely attempt to prove that the improvements on Lot No. 639 were declared for taxes
in the name of respondent Rodolfo Tiu’s father, Jose Tiu, who allegedly died on December 18, 1983.
There was no effort to show how their co-plaintiffs in the original complaint, namely Juanita T. Tiu,
Rosalinda T. King, Rufino T. Tiu, Rosalie T. Young and Rosenda T. Tiu, became co-owners of the
house. The spouses Tiu did not present evidence as to (1) who the heirs of Jose Tiu are; (2) if Juanita
T. Tiu, Rosalinda T. King, Rufino T. Tiu, Rosalie T. Young and Rosenda T. Tiu are indeed included
as heirs; and (3) why petitioner Rodolfo Tiu is not included as an heir despite being the son of Jose
Tiu. No birth certificate of the alleged heirs, will of the deceased, or any other piece of evidence
showing judicial or extrajudicial settlement of the estate of Jose Tiu was presented.

In light of the foregoing, this Court therefore sets aside the ruling of the Court of Appeals
permanently enjoining Union Bank from foreclosing the mortgage on Lot No. 639, including the
improvements thereon.

Validity of Alleged Rental Payments on the Properties Conveyed to the Bank via Dacion en Pago
The Court of Appeals found the lease contracts over the properties conveyed to Union Bank via
dacion en pago to be void for being against public policy. The appellate court held that since the
General Banking Law of 200092mandates banks to immediately dispose of real estate properties that
are not necessary for its own use in the conduct of its business, banks should not enter into two-year
contracts of lease over properties paid to them through dacion. 93 The Court of Appeals thus ordered
Union Bank to return the rentals it collected. To determine the amount of rentals paid by the
spouses Tiu to Union Bank, the Court of Appeals simply multiplied the monthly rental stipulated in
the Restructuring Agreement by the stipulated period of the lease agreement:

For the Labangon property, the Tiu spouses paid rentals in the amount of P98,000.00 per month for
two years, or a total amount of P2,352,000.00. For the A.S. Fortuna property, the Tiu spouses paid
rentals in the amount of P150,000.00 per month for two years, or a total amount of P3,600,000.00.
The total amount in rentals paid by the Tiu spouses to Union Bank is FIVE MILLION NINE
HUNDRED FIFTY- TWO THOUSAND PESOS (P5,952,000.00). This Court finds that the return of
this amount to the Tiu spouses is called for since it will better serve public policy. These properties
that were given by the Tiu spouses to Union Bank as payment should not be used by the latter to
extract more money from the former. This situation is analogous to having a debtor pay interest for a
debt already paid. Instead of leasing the properties, Union Bank should have instructed the Tiu
spouses to vacate the said properties so that it could dispose of them. 94

The Court of Appeals committed a serious error in this regard. As pointed out by petitioner Union
Bank, the spouses Tiu did not present any proof of the alleged rental payments. Not a single receipt
was formally offered in evidence. The mere stipulation in a contract of the monthly rent to be paid by
the lessee is certainly not evidence that the same has been paid. Since the spouses Tiu failed to prove
their payment to Union Bank of the amount of P5,952,000.00, we are constrained to reverse the
ruling of the Court of Appeals ordering its return.

Even assuming arguendo that the spouses Tiu had duly proven that it had paid rent to Union Bank,
we nevertheless disagree with the finding of the Court of Appeals that it is against public policy for
banks to enter into two-year contracts of lease of properties ceded to them through dacion en pago.
The provisions of law cited by the Court of Appeals, namely Sections 51 and 52 of the General
Banking Law of 2000, merely provide:

SECTION 51. Ceiling on Investments in Certain Assets. — Any bank may acquire real estate as
shall be necessary for its own use in the conduct of its business: Provided, however, That the total
investment in such real estate and improvements thereof, including bank equipment, shall not
exceed fifty percent (50%) of combined capital accounts: Provided, further, That the equity
investment of a bank in another corporation engaged primarily in real estate shall be considered as
part of the bank's total investment in real estate, unless otherwise provided by the Monetary Board.

SECTION 52. Acquisition of Real Estate by Way of Satisfaction of Claims. — Notwithstanding the
limitations of the preceding Section, a bank may acquire, hold or convey real property under the
following circumstances:

52.1. Such as shall be mortgaged to it in good faith by way of security for debts;

52.2. Such as shall be conveyed to it in satisfaction of debts previously contracted in the course of its
dealings; or

52.3. Such as it shall purchase at sales under judgments, decrees, mortgages, or trust deeds held by
it and such as it shall purchase to secure debts due it.
Any real property acquired or held under the circumstances enumerated in the above paragraph
shall be disposed of by the bank within a period of five (5) years or as may be prescribed by the
Monetary Board: Provided, however, That the bank may, after said period, continue to hold the
property for its own use, subject to the limitations of the preceding Section.

Section 52.2 contemplates a dacion en pago. Thus, Section 52 undeniably gives banks five years to
dispose of properties conveyed to them in satisfaction of debts previously contracted in the course of
its dealings, unless another period is prescribed by the Monetary Board. Furthermore, there appears
to be no legal impediment for a bank to lease the real properties it has received in satisfaction of
debts, within the five-year period that such bank is allowed to hold the acquired realty.

We do not dispute the interpretation of the Court of Appeals that the purpose of the law is to prevent
the concentration of land holdings in a few hands, and that banks should not be allowed to hold on to
the properties contemplated in Section 52 beyond the five-year period unless such bank has exerted
its best efforts to dispose of the property in good faith but failed. However, inquiries as to whether
the banks exerted best efforts to dispose of the property can only be done if said banks fail to dispose
of the same within the period provided. Such inquiry is furthermore irrelevant to the issues in the
case at bar.

Order to Return Certificates Allegedly in Union Bank’s Possession

In the Amended Complaint, the spouses Tiu alleged 95 that they delivered several certificates and
titles to Union Bank pursuant to a Memorandum of Agreement. These certificates and titles were
not subjected to any lien in favor of Union Bank, but the latter allegedly continued to hold on to said
properties.

The RTC failed to rule on this issue. The Court of Appeals, tackling this issue for the first time, ruled
in favor of the Tiu spouses and ordered the return of these certificates and titles. The appellate court
added that if Union Bank can no longer return these certificates or titles, it should shoulder the cost
for their replacement.96

Union Bank, asserting that the Memorandum of Agreement did not, in fact, push through, denies
having received the subject certificates and titles. Union Bank added that even assuming arguendo
that it is in possession of said documents, the Restructuring Agreement itself allows such
possession.97

The evidence on hand lends credibility to the allegation of Union Bank that the Memorandum of
Agreement did not push through. The copy of the Memorandum of Agreement attached by the
spouses Tiu themselves to their original complaint did not bear the signature of any representative
from Union Bank and was not notarized.98

We, however, agree with the finding of the Court of Appeals that despite the failure of the
Memorandum of Agreement to push through, the certificates and titles mentioned therein do appear
to be in the possession of Union Bank. As held by the Court of Appeals:

Lastly, this Court will order, as it hereby orders, Union Bank to return to the Tiu spouses all the
certificates of shares of stocks and titles to real properties of the Tiu spouses in its possession. Union
Bank cannot deny possession of these items since it had made judicial admissions of such possession
in their document entitled "Reply to Plaintiffs’ request for Admission" (records, pp. 216-217). While
in that document, Union Bank only admitted to the possession of four real estate titles, this Court is
convinced that all the certificates and titles mentioned in the unconsummated Memorandum of
Agreement (Records, pp. 211-213) were given by the Tiu spouses to Union Bank for appraisal. This
finding is further bolstered by the admission of the Union Bank that it kept the titles for safekeeping
after it rejected the Memorandum of Agreement. Since Union Bank rejected these certificates and
titles of property, it should return the said items to the Tiu spouses. If Union Bank can no longer
return these certificates and titles or if it has misplaced them, it shall shoulder the cost for the
replacement and issuance of new certificates and new titles over the said properties. 99

As regards Union Bank’s argument that it has the right to retain said documents pursuant to the
Restructuring Agreement, it is referring to paragraph 11(b), which provides that:

11. Effects of Default – When the BORROWER is in default, such default shall have the following
effects, alternative, concurrent and cumulative with each other:

xxxx

(b) The BANK shall be entitled to all the remedies provided for and further shall have the right to
effect or apply against the partial or full payment of any and all obligations of the BORROWER
under this Restructuring Agreement any and all moneys or other properties of the BORROWER
which, for any reason, are or may hereafter come into the possession of the Bank or the Bank’s
agent. All such moneys or properties shall be deemed in the BANK’s possession as soon as put in
transit to the BANK by mail or carrier.100

In the first place, notwithstanding the foregoing provision, there is no clear intention on the part of
the spouses Tiu to deliver the certificates over certain shares of stock and real properties as security
for their debt. From the terms of the Memorandum of Agreement, these certificates were
surrendered to Union Bank in order that the said properties described therein be given their
corresponding loan values required for the restructuring of the spouses Tiu’s outstanding obligations.
However, in the event the parties fail to agree on the valuation of the subject properties, Union Bank
agrees to release the same.101 As Union Bank itself vehemently alleges, the Memorandum of
Agreement was not consummated. Moreover, despite the fact that the Bank was aware, or in
possession, of these certificates,102 at the time of execution of the Restructuring Agreement, only the
mortgage over the real property covered by TCT No. T-11951 was expressly mentioned as a security
in the Restructuring Agreement. In fact, in its Reply to Request for Admission, 103 Union Bank
admitted that (1) the titles to the real properties were submitted to it for appraisal but were
subsequently rejected, and (2) no real estate mortgages were executed over the said properties. There
being no agreement that these properties shall secure respondents’ obligation, Union Bank has no
right to retain said certificates.1avvphi1

Assuming arguendo that paragraph 11(b) of the Restructuring Agreement indeed allows the
retention of the certificates (submitted to the Bank ostensibly for safekeeping and appraisal) as
security for spouses Tiu’s debt, Union Bank’s position still cannot be upheld. Insofar as said
provision permits Union Bank to apply properties of the spouses Tiu in its possession to the full or
partial payment of the latter’s obligations, the same appears to impliedly allow Union Bank to
appropriate these properties for such purpose. However, said provision cannot be validly applied to
the subject certificates and titles without violating the prohibition against pactum commissorium
contained in Article 2088 of the Civil Code, to the effect that "[t]he creditor cannot appropriate the
things given by way of pledge or mortgage, or dispose of them[;] [a]ny stipulation to the contrary is
null and void." Applicable by analogy to the present case is our ruling in Nakpil v. Intermediate
Appellate Court,104 wherein property held in trust was ceded to the trustee upon failure of the
beneficiary to answer for the amounts owed to the former, to wit:

For, there was to be automatic appropriation of the property by Valdes in the event of failure of
petitioner to pay the value of the advances. Thus, contrary to respondent's manifestations, all the
elements of a pactum commissorium were present: there was a creditor-debtor relationship between
the parties; the property was used as security for the loan; and, there was automatic appropriation
by respondent of Pulong Maulap in case of default of petitioner.105 (Emphases supplied.)

This Court therefore affirms the order of the Court of Appeals for Union Bank to return to the
spouses Tiu all the certificates of shares of stock and titles to real properties that were submitted to
it or, in lieu thereof, to pay the cost for the replacement and issuance of new certificates and new
titles over the said properties.

Validity of the Award of Damages

The Court of Appeals awarded damages in favor of the spouses Tiu based on its taking judicial notice
of the alleged exploitation by many banks of the Asian financial crisis, as well as the foreclosure of
the mortgage of the home of the spouses Tiu despite the alleged full payment by the latter. As
regards the alleged manipulation of the financial crisis, the Court of Appeals held:

As a final note, this Court observes the irregularity in the circumstances [surrounding] dollar loans
granted by banks right before or during the Asian financial crisis. It is of common knowledge that
many banks, around that time, actively pursued and convinced debtors to make dollar loans or to
convert their peso loans to dollar loans allegedly because of the lower interest rate of dollar loans.
This is a highly suspect behavior on the part of the banks because it is irrational for the banks to
voluntarily and actively proffer a conversion that would give them substantially less income. In the
guise of benevolence, many banks were able to convince borrowers to make dollar loans or to convert
their peso loans to dollar loans. Soon thereafter, the Asian financial crisis hit, and many borrowers
were saddled with loans that ballooned to twice or thrice the amount of their original loans. This
court takes judicial notice of these events or matters which are of public knowledge. It is
inconceivable that the banks were unaware of the looming Asian financial crisis. Being in the
forefront of the financial world and having access to financial data that were not available to the
average borrower, the banks were in such a position that they had a higher vantage point with
respect to the financial landscape over their average clients. The cavalier way with which banks
exploited and manipulated the situation is almost too palpable that they openly and unabashedly
struck heavy blows on the Philippine economy, industries and businesses. The banks have a
fiduciary duty to their clients and to the Filipino people to be transparent in their dealings and to
make sure that the latter’s interest are not prejudiced by the former’s interest. Article 1339 of the
New Civil Code provides that the failure to disclose facts, when there is a duty to reveal them, as
when the parties are bound by confidential relations, constitutes fraud. Undoubtedly, the banks and
their clients are bound by confidential relations. The almost perfect timing of the banks in
convincing their clients to shift to dollar loans just when the Asian financial crisis struck indicates
that the banks not only failed to disclose facts to their clients of the looming crisis, but also suggests
of the insidious design to take advantage of these undisclosed facts. 106

We have already held that the foreclosure of the mortgage was warranted under the circumstances.
As regards the alleged exploitation by many banks of the Asian financial crisis, this Court rules that
the generalization made by the appellate court is unfounded and cannot be the subject of judicial
notice. "It is axiomatic that good faith is always presumed unless convincing evidence to the contrary
is adduced. It is incumbent upon the party alleging bad faith to sufficiently prove such allegation.
Absent enough proof thereof, the presumption of good faith prevails." 107 The alleged insidious design
of many banks to betray their clients during the Asian financial crisis is certainly not of public
knowledge. The deletion of the award of moral and exemplary damages in favor of the spouses Tiu is
therefore in order.
WHEREFORE, the Petition is PARTIALLY GRANTED. The Joint Decision of the Court of Appeals
in CA-G.R. CV No. 00190 and CA-G.R. SP No. 00253 dated February 21, 2006 is hereby AFFIRMED
insofar as it ordered petitioner Union Bank of the Philippines to return to the respondent spouses
Rodolfo T. Tiu and Victoria N. Tiu all the certificates of shares of stock and titles to real properties
that were submitted to it or, in lieu thereof, to pay the cost for the replacement and issuance of new
certificates and new titles over the said properties. The foregoing Joint Decision is hereby SET
ASIDE: (1) insofar as it permanently enjoined Union Bank of the Philippines from foreclosing the
mortgage of the residential property of respondent spouses Rodolfo T. Tiu and Victoria N. Tiu which
is covered by Transfer Certificate of Title No. 11951; (2) insofar as it ordered Union Bank of the
Philippines to return to the respondent spouses Rodolfo T. Tiu and Victoria N. Tiu the amount
of P927,546.79 representing illegally collected rentals; and (3) insofar as it ordered Union Bank of
the Philippines to pay the respondent spouses Rodolfo T. Tiu and Victoria N. Tiu P100,000.00 in
moral damages, P100,000.00 in exemplary damages, P50,000.00 in attorney’s fees and cost, both in
the lower court and in this Court.

No further pronouncement as to costs.

SO ORDERED.

I.A.4.f.2. Prohibited Transactions

BPI Employees Union v. BPI

Before the Court is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil
Procedure, assailing the April 5, 2006 Decision 1 and August 17, 2006 Resolution2 of the Court of
Appeals (CA) in CA-G.R. SP No. 74595 affirming the December 21, 20013 and August 23,
20024 Resolutions of the National Labor Relations Commission (NLRC) in declaring as valid and
legal the action of respondent Bank of the Philippine Islands-Davao City (BPI-Davao) in contracting
out certain functions to BPI Operations Management Corporation (BOMC).

The Factual Antecedents

BOMC, which was created pursuant to Central Bank5 Circular No. 1388, Series of 1993 (CBP
Circular No. 1388, 1993), and primarily engaged in providing and/or handling support services for
banks and other financial institutions, is a subsidiary of the Bank of Philippine Islands (BPI)
operating and functioning as an entirely separate and distinct entity.

A service agreement between BPI and BOMC was initially implemented in BPI’s Metro Manila
branches. In this agreement, BOMC undertook to provide services such as check clearing, delivery of
bank statements, fund transfers, card production, operations accounting and control, and cash
servicing, conformably with BSP Circular No. 1388. Not a single BPI employee was displaced and
those performing the functions, which were transferred to BOMC, were given other assignments.

The Manila chapter of BPI Employees Union (BPIEU-Metro ManilaFUBU) then filed a complaint for
unfair labor practice (ULP). The Labor Arbiter (LA) decided the case in favor of the union. The
decision was, however, reversed on appeal by the NLRC. BPIEU-Metro Manila-FUBU filed a petition
for certiorari before the CA which denied it, holding that BPI transferred the employees in the
affected departments in the pursuit of its legitimate business. The employees were neither demoted
nor were their salaries, benefits and other privileges diminished. 6
On January 1, 1996, the service agreement was likewise implemented in Davao City. Later, a
merger between BPI and Far East Bank and Trust Company (FEBTC) took effect on April 10, 2000
with BPI as the surviving corporation. Thereafter, BPI’s cashiering function and FEBTC’s
cashiering, distribution and bookkeeping functions were handled by BOMC. Consequently, twelve
(12) former FEBTC employees were transferred to BOMC to complete the latter’s service
complement.

BPI Davao’s rank and file collective bargaining agent, BPI Employees Union-Davao City-FUBU
(Union), objected to the transfer of the functions and the twelve (12) personnel to BOMC contending
that the functions rightfully belonged to the BPI employees and that the Union was deprived of
membership of former FEBTC personnel who, by virtue of the merger, would have formed part of the
bargaining unit represented by the Union pursuant to its union shop provision in the CBA. 7

The Union then filed a formal protest on June 14, 2000 addressed to BPI Vice Presidents Claro M.
Reyes and Cecil Conanan reiterating its objection. It requested the BPI management to submit the
BOMC issue to the grievance procedure under the CBA, but BPI did not consider it as "grievable."
Instead, BPI proposed a Labor Management Conference (LMC) between the parties. 8

During the LMC, BPI invoked management prerogative stating that the creation of the BOMC was
to preserve more jobs and to designate it as an agency to place employees where they were most
needed. On the other hand, the Union charged that BOMC undermined the existence of the union
since it reduced or divided the bargaining unit. While BOMC employees perform BPI functions, they
were beyond the bargaining unit’s coverage. In contracting out FEBTC functions to BOMC, BPI
effectively deprived the union of the membership of employees handling said functions as well as
curtailed the right of those employees to join the union.

Thereafter, the Union demanded that the matter be submitted to the grievance machinery as the
resort to the LMC was unsuccessful. As BPI allegedly ignored the demand, the Union filed a notice of
strike before the National Conciliation and Mediation Board (NCMB) on the following grounds:

a) Contracting out services/functions performed by union members that interfered with,

restrained and/or coerced the employees in the exercise of their right to self-organization;

b) Violation of duty to bargain; and

c) Union busting.9

BPI then filed a petition for assumption of jurisdiction/certification with the Secretary of the
Department of Labor and Employment (DOLE), who subsequently issued an order certifying the
labor dispute to the NLRC for compulsory arbitration. The DOLE Secretary directed the parties to
cease and desist from committing any act that might exacerbate the situation.

On October 27, 2000, a hearing was conducted. Thereafter, the parties were required to submit their
respective position papers. On November 29, 2000, the Union filed its Urgent Omnibus Motion to
Cease and Desist with a prayer that BPI-Davao and/or Mr. Claro M. Reyes and Mr. Cecil Conanan
be held in contempt for the following alleged acts of BPI:

1. The Bank created a Task Force Committee on November 20, 2000 composed of six (6)
former FEBTC employees to handle the Cashiering, Distributing, Clearing, Tellering and
Accounting functions of the former FEBTC branches but the "task force" conducts its
business at the office of the BOMC using the latter’s equipment and facilities.
 2. On November 27, 2000, the bank integrated the clearing operations of the BPI and the
FEBTC. The clearing function of BPI, then solely handled by the BPI Processing Center prior
to the labor dispute, is now encroached upon by the BOMC because with the merger,
differences between BPI and FEBTC operations were diminished or deleted. What the bank
did was simply to get the total of all clearing transactions under BPI but the BOMC
employees process the clearing of checks at the Clearing House as to checks coming from
former FEBTC branches. Prior to the labor dispute, the run-up and distribution of the checks
of BPI were returned to the BPI processing center, now all checks whether of BPI or of
FEBTC were brought to the BOMC. Since the clearing operations were previously done by
the BPI processing center with BPI employees, said function should be performed by BPI
employees and not by BOMC.10

On December 21, 2001, the NLRC came out with a resolution upholding the validity of the service
agreement between BPI and BOMC and dismissing the charge of ULP. It ruled that the engagement
by BPI of BOMC to undertake some of its activities was clearly a valid exercise of its management
prerogative.11 It further stated that the spinning off by BPI to BOMC of certain services and
functions did not interfere with, restrain or coerce employees in the exercise of their right to self-
organization.12 The Union did not present even an iota of evidence showing that BPI had terminated
employees, who were its members. In fact, BPI exerted utmost diligence, care and effort to see to it
that no union member was terminated.13 The NLRC also stressed that Department Order (D.O.) No.
10 series of 1997, strongly relied upon by the Union, did not apply in this case as BSP Circular No.
1388, series of 1993, was the applicable rule.

After the denial of its motion for reconsideration, the Union elevated its grievance to the CA via a
petition for certiorari under Rule 65. The CA, however, affirmed the NLRC’s December 21, 2001
Resolution with modification that the enumeration of functions listed under BSP Circular No. 1388
in the said resolution be deleted. The CA noted at the outset that the petition must be dismissed as it
merely touched on factual matters which were beyond the ambit of the remedy availed of. 14 Be that
as it may, the CA found that the factual findings of the NLRC were supported by substantial
evidence and, thus, entitled to great respect and finality. To the CA, the NLRC did not act with
grave abuse of discretion as to merit the reversal of the resolution. 15

Furthermore, the CA ratiocinated that, considering the ramifications of the corporate merger, it was
well within BPI’s prerogatives "to determine what additional tasks should be performed, who should
best perform it and what should be done to meet the exigencies of business." 16 It pointed out that the
Union did not, by the mere fact of the merger, become the bargaining agent of the merged
employees17 as the Union’s right to represent said employees did not arise until it was chosen by
them.18

As to the applicability of D.O. No. 10, the CA agreed with the NLRC that the said order did not apply
as BPI, being a commercial bank, its transactions were subject to the rules and regulations of the
BSP.

Not satisfied, the Union filed a motion for reconsideration which was, however, denied by the
CA.1âwphi1

Hence, the present petition with the following

ASSIGNMENT OF ERRORS:

A. THE PETITION BEFORE THE COURT OF APPEALS INVOLVED QUESTIONS OF

LAW AND ITS DECISION DID NOT ADDRESS THE ISSUE OF WHETHER BPI’S ACT OF
 OUTSOURCING FUNCTIONS FORMERLY PERFORMED BY UNION MEMBERS
VIOLATES THE CBA.

B. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT DOLE

DEPARTMENT ORDER NO. 10 DOES NOT APPLY IN THIS CASE.

The Union is of the position that the outsourcing of jobs included in the existing bargaining unit to
BOMC is a breach of the union-shop agreement in the CBA. In transferring the former employees of
FEBTC to BOMC instead of absorbing them in BPI as the surviving corporation in the merger, the
number of positions covered by the bargaining unit was decreased, resulting in the reduction of the
Union’s membership. For the Union, BPI’s act of arbitrarily outsourcing functions formerly
performed by the Union members and, in fact, transferring a number of its members beyond the
ambit of the Union, is a violation of the CBA and interfered with the employees’ right to self
organization. The Union insists that the CBA covers the agreement with respect, not only to wages
and hours of work, but to all other terms and conditions of work. The union shop clause, being part of
these conditions, states that the regular employees belonging to the bargaining unit, including those
absorbed by way of the corporate merger, were required to join the bargaining union "as a condition
for employment." Simply put, the transfer of former FEBTC employees to BOMC removed them from
the coverage of unionized establishment. While the Union admitted that BPI has the prerogative to
determine what should be done to meet the exigencies of business in accordance with the case of
Sime Darby Pilipinas, Inc. v. NLRC,19 it insisted that the exercise of management prerogative is not
absolute, thus, requiring good faith and adherence to the law and the CBA. Citing the case of Shell
Oil Workers’ Union v. Shell Company of the Philippines, Ltd., 20 the Union claims that it is unfair
labor practice for an employer to outsource the positions in the existing bargaining unit.

Position of BPI-Davao

For its part, BPI defended the validity of its service agreement with BOMC on three (3) grounds: 1]
that it was pursuant to the prevailing law at that time, CBP Circular No. 1388; 2] that the creation
of BOMC was within management prerogatives intended to streamline the operations and provide
focus for BPI’s core activities; and 3] that the Union recognized, in its CBA, the exclusive right and
prerogative of BPI to conduct the management and operation of its business. 21

BPI argues that the case of Shell Oil Workers’ Union v. Shell Company of the Philippines,
Ltd.,22 cited by the Union, is not on all fours with the present case. In said case, the company
dissolved its security guard section and replaced it with an outside agency, claiming that such act
was a valid exercise of management prerogative. The Court, however, ruled against the said
outsourcing because there was an express assurance in the CBA that the security guard section
would continue to exist. Having failed to reserve its right to effect a dissolution, the company’s act of
outsourcing and transferring security guards was invalidated by the Court, ruling that the unfair
labor practice strike called by the Union did have the impression of validity. In contrast, there is no
provision in the CBA between BPI and the Union expressly stipulating the continued existence of
any position within the bargaining unit. For BPI, the absence of this peculiar fact is enough reason
to prevent the application of Shell to this case.

BPI likewise invokes settled jurisprudence,23 where the Court upheld the acts of management to
contract out certain functions held by employees, and even notably those held by union members. In
these cases, the decision to outsource certain functions was a justifiable business judgment which
deserved no judicial interference. The only requisite of this act is good faith on the part of the
employer and the absence of malicious and arbitrary action in the outsourcing of functions to BOMC.
On the issue of the alleged curtailment of the right of the employees to self-organization, BPI refutes
the Union’s allegation that ULP was committed when the number of positions in the bargaining was
reduced. It cites as correct the CA ruling that the representation of the Union’s prospective members
is contingent on the choice of the employee, that is, whether or not to join the Union. Hence, it was
premature for the Union to claim that the rights of its prospective members to self-organize were
restrained by the transfer of the former FEBTC employees to BOMC.

The Court’s Ruling

In essence, the primordial issue in this case is whether or not the act of BPI to outsource the
cashiering, distribution and bookkeeping functions to BOMC is in conformity with the law and the
existing CBA. Particularly in dispute is the validity of the transfer of twelve (12) former FEBTC
employees to BOMC, instead of being absorbed in BPI after the corporate merger. The Union claims
that a union shop agreement is stipulated in the existing CBA. It is unfair labor practice for
employer to outsource the positions in the existing bargaining unit, citing the case of Shell Oil

Workers’ Union v. Shell Company of the Philippines, Ltd.24

The Union’s reliance on the Shell Case is misplaced. The rule now is covered by Article 261 of the
Labor Code, which took effect on November 1, 1974. 25 Article 261 provides:

ART. 261. Jurisdiction of Voluntary Arbitrators or panel of Voluntary Arbitrators. – x x x

Accordingly, violations of a Collective Bargaining Agreement, except those which are gross in
character, shall no longer be treated as unfair labor practice and shall be resolved as grievances
under the Collective Bargaining Agreement. For purposes of this article, gross violations of
Collective Bargaining Agreement shall mean flagrant and/or malicious refusal to comply with the
economic provisions of such agreement. [Emphases supplied]

Clearly, only gross violations of the economic provisions of the CBA are treated as ULP. Otherwise,
they are mere grievances.

In the present case, the alleged violation of the union shop agreement in the CBA, even assuming it
was malicious and flagrant, is not a violation of an economic provision in the agreement. The
provisions relied upon by the Union were those articles referring to the recognition of the union as
the sole and exclusive bargaining representative of all rank-and-file employees, as well as the
articles on union security, specifically, the maintenance of membership in good standing as a
condition for continued employment and the union shop clause. 26 It failed to take into consideration
its recognition of the bank’s exclusive rights and prerogatives, likewise provided in the CBA, which
included the hiring of employees, promotion, transfers, and dismissals for just cause and the
maintenance of order, discipline and efficiency in its operations.27

The Union, however, insists that jobs being outsourced to BOMC were included in the existing
bargaining unit, thus, resulting in a reduction of a number of positions in such unit. The reduction
interfered with the employees’ right to self-organization because the power of a union primarily
depends on its strength in number.28

It is incomprehensible how the "reduction of positions in the collective bargaining unit" interferes
with the employees’ right to self-organization because the employees themselves were neither
transferred nor dismissed from the service. As the NLRC clearly stated:

In the case at hand, the union has not presented even an iota of evidence that petitioner bank has
started to terminate certain employees, members of the union. In fact, what appears is that the Bank
has exerted utmost diligence, care and effort to see to it that no union member has been terminated.
In the process of the consolidation or merger of the two banks which resulted in increased
diversification of functions, some of these non-banking functions were merely transferred to the
BOMC without affecting the union membership.29

BPI stresses that not a single employee or union member was or would be dislocated or terminated
from their employment as a result of the Service Agreement. 30 Neither had it resulted in any
diminution of salaries and benefits nor led to any reduction of union membership.31

As far as the twelve (12) former FEBTC employees are concerned, the Union failed to substantially
prove that their transfer, made to complete BOMC’s service complement, was motivated by ill will,
anti-unionism or bad faith so as to affect or interfere with the employees’ right to self-organization.

It is to be emphasized that contracting out of services is not illegal perse.1âwphi1 It is an exercise of

business judgment or management prerogative. Absent proof that the management acted in a
malicious or arbitrary manner, the Court will not interfere with the exercise of judgment by an
employer.32 In this case, bad faith cannot be attributed to BPI because its actions were authorized by
CBP Circular No. 1388, Series of 199333 issued by the Monetary Board of the then Central Bank of
the Philippines (now Bangko Sentral ng Pilipinas). The circular covered amendments in Book I of
the Manual of Regulations for Banks and Other Financial Intermediaries, particularly on the matter
of bank service contracts. A finding of ULP necessarily requires the alleging party to prove it with
substantial evidence. Unfortunately, the Union failed to discharge this burden.

Much has been said about the applicability of D.O. No. 10. Both the NLRC and the CA agreed with
BPI that the said order does not apply. With BPI, as a commercial bank, its transactions are subject
to the rules and regulations of the governing agency which is the Bangko Sentral ng Pilipinas.34 The
Union insists that D.O. No. 10 should prevail.

The Court is of the view, however, that there is no conflict between D.O. No. 10 and CBP Circular
No. 1388. In fact, they complement each other.

Consistent with the maxim, interpretare et concordare leges legibus est optimus interpretandi
modus, a statute should be construed not only to be consistent with itself but also to harmonize with
other laws on the same subject matter, as to form a complete, coherent and intelligible system of
jurisprudence.35 The seemingly conflicting provisions of a law or of two laws must be harmonized to
render each effective.36 It is only when harmonization is impossible that resort must be made to
choosing which law to apply.37

In the case at bench, the Union submits that while the Central Bank regulates banking, the Labor
Code and its implementing rules regulate the employment relationship. To this, the Court agrees.
The fact that banks are of a specialized industry must, however, be taken into account. The
competence in determining which banking functions may or may not be outsourced lies with the
BSP. This does not mean that banks can simply outsource banking functions allowed by the BSP
through its circulars, without giving regard to the guidelines set forth under D.O. No. 10 issued by
the DOLE.

While D.O. No. 10, Series of 1997, enumerates the permissible contracting or subcontracting
activities, it is to be observed that, particularly in Sec. 6(d) invoked by the Union, the provision is
general in character – "x x x Works or services not directly related or not integral to the main
business or operation of the principal… x x x." This does not limit or prohibit the appropriate
government agency, such as the BSP, to issue rules, regulations or circulars to further and
specifically determine the permissible services to be contracted out. CBP Circular No.
138838enumerated functions which are ancillary to the business of banks, hence, allowed to be
outsourced. Thus, sanctioned by said circular, BPI outsourced the cashiering (i.e., cash-delivery and
deposit pick-up) and accounting requirements of its Davao City branches. 39 The Union even
described the extent of BPI’s actual and intended contracting out to BOMC as follows:

"As an initiatory move, the functions of the Cashiering Unit of the Processing Center of BPI, handled
by its regular rank and file employees who are members of the Union, xxx [were] transferred to
BOMC with the Accounting Department as next in line. The Distributing, Clearing and Bookkeeping
functions of the Processing Center of the former FEBTC were likewise contracted out to BOMC." 40

Thus, the subject functions appear to be not in any way directly related to the core activities of
banks. They are functions in a processing center of BPI which does not handle or manage deposit
transactions. Clearly, the functions outsourced are not inherent banking functions, and, thus, are
well within the permissible services under the circular.

The Court agrees with BPI that D.O. No. 10 is but a guide to determine what functions may be
contracted out, subject to the rules and established jurisprudence on legitimate job contracting and
prohibited labor-only contracting.41 Even if the Court considers D.O. No. 10 only, BPI would still be
within the bounds of D.O. No. 10 when it contracted out the subject functions. This is because the
subject functions were not related or not integral to the main business or operation of the principal
which is the lending of funds obtained in the form of deposits. 42From the very definition of "banks" as
provided under the General Banking Law, it can easily be discerned that banks perform only two (2)
main or basic functions – deposit and loan functions. Thus, cashiering, distribution and bookkeeping
are but ancillary functions whose outsourcing is sanctioned under CBP Circular No. 1388 as well as
D.O. No. 10. Even BPI itself recognizes that deposit and loan functions cannot be legally contracted
out as they are directly related or integral to the main business or operation of banks. The CBP's
Manual of Regulations has even categorically stated and emphasized on the prohibition against
outsourcing inherent banking functions, which refer to any contract between the bank and a service
provider for the latter to supply, or any act whereby the latter supplies, the manpower to service the
deposit transactions of the former.43

In one case, the Court held that it is management prerogative to farm out any of its activities,
regardless of whether such activity is peripheral or core in nature. 44 What is of primordial
importance is that the service agreement does not violate the employee's right to security of tenure
and payment of benefits to which he is entitled under the law. Furthermore, the outsourcing must
not squarely fall under labor-only contracting where the contractor or sub-contractor merely recruits,
supplies or places workers to perform a job, work or service for a principal or if any of the following
elements are present:

i) The contractor or subcontractor does not have substantial capital or investment which
relates to the job, work or service to be performed and the employees recruited, supplied or
placed by such contractor or subcontractor are performing activities which are directly
related to the main business of the principal; or

ii) The contractor does not exercise the right to control over the performance of the work of
the contractual employee.45

WHEREFORE, the petition is DENIED.

SO ORDERED.
I.A.8.b. Republic Act No. 10641

Citibank v. Sabeniano

On 16 October 2006, this Court promulgated its Decision 1 in the above-entitled case, the dispositive
portion of which reads –

IN VIEW OF THE FOREGOING, the instant Petition is PARTLY GRANTED. The assailed
Decision of the Court of Appeals in CA-G.R. No. 51930, dated 26 March 2002, as already modified by
its Resolution, dated 20 November 2002, is hereby AFFIRMED WITH MODIFICATION, as
follows –

1. PNs No. 23356 and 23357 are DECLARED subsisting and outstanding. Petitioner
Citibank is ORDEREDto return to respondent the principal amounts of the said PNs,
amounting to Three Hundred Eighteen Thousand Eight Hundred Ninety-Seven Pesos and
Thirty-Four Centavos (P318,897.34) and Two Hundred Three Thousand One Hundred Fifty
Pesos (P203,150.00), respectively, plus the stipulated interest of Fourteen and a half percent
(14.5%) per annum, beginning 17 March 1977;

2. The remittance of One Hundred Forty-Nine Thousand Six Hundred Thirty Two US Dollars
and Ninety-Nine Cents (US$149,632.99) from respondent’s Citibank-Geneva accounts to
petitioner Citibank in Manila, and the application of the same against respondent’s
outstanding loans with the latter, is DECLAREDillegal, null and void. Petitioner Citibank
is ORDERED to refund to respondent the said amount, or its equivalent in Philippine
currency using the exchange rate at the time of payment, plus the stipulated interest for
each of the fiduciary placements and current accounts involved, beginning 26 October 1979;

3. Petitioner Citibank is ORDERED to pay respondent moral damages in the amount of

Three Hundred Thousand Pesos (P300,000.00); exemplary damages in the amount of Two
Hundred Fifty Thousand Pesos (P250,000.00); and attorney’s fees in the amount of Two
Hundred Thousand Pesos (P200,000.00); and

4. Respondent is ORDERED to pay petitioner Citibank the balance of her outstanding loans,
which, from the respective dates of their maturity to 5 September 1979, was computed to be
in the sum of One Million Sixty-Nine Thousand Eight Hundred Forty-Seven Pesos and Forty
Centavos (P1,069,847.40), inclusive of interest. These outstanding loans shall continue to
earn interest, at the rates stipulated in the corresponding PNs, from 5 September 1979 until
payment thereof.

Subsequent thereto, respondent Modesta R. Sabeniano filed an Urgent Motion to Clarify and/or
Confirm Decision with Notice of Judgment on 20 October 2006; while, petitioners Citibank, N.A. and
FNCB Finance2 filed their Motion for Partial Reconsideration of the foregoing Decision on 6
November 2006.

The facts of the case, as determined by this Court in its Decision, may be summarized as follows.

Respondent was a client of petitioners. She had several deposits and market placements with
petitioners, among which were her savings account with the local branch of petitioner Citibank
(Citibank-Manila3 ); money market placements with petitioner FNCB Finance; and dollar accounts
with the Geneva branch of petitioner Citibank (Citibank-Geneva). At the same time, respondent had
outstanding loans with petitioner Citibank, incurred at Citibank-Manila, the principal amounts
aggregating to P1,920,000.00, all of which had become due and demandable by May 1979. Despite
repeated demands by petitioner Citibank, respondent failed to pay her outstanding loans. Thus,
petitioner Citibank used respondent’s deposits and money market placements to off-set and liquidate
her outstanding obligations, as follows –

Respondent’s outstanding obligation (principal and interest as of 26

October 1979) P 2,156,940.58
Less: Proceeds from respondent’s money market placements with
petitioner FNCB Finance (principal and interest as of 5
September 1979) (1,022,916.66)
Deposits in respondent’s bank accounts with petitioner Citibank (31,079.14)
Proceeds of respondent’s money market placements and dollar
accounts with Citibank-Geneva (peso equivalent as of 26
October 1979) (1,102,944.78)
Balance of respondent’s obligation P 0.00

Respondent, however, denied having any outstanding loans with petitioner Citibank. She likewise
denied that she was duly informed of the off-setting or compensation thereof made by petitioner
Citibank using her deposits and money market placements with petitioners. Hence, respondent
sought to recover her deposits and money market placements.

Respondent instituted a complaint for "Accounting, Sum of Money and Damages" against petitioners,
docketed as Civil Case No. 11336, before the Regional Trial Court (RTC) of Makati City. After trial
proper, which lasted for a decade, the RTC rendered a Decision 4 on 24 August 1995, the dispositive
portion of which reads –

WHEREFORE, in view of all the foregoing, decision is hereby rendered as follows:

(1) Declaring as illegal, null and void the setoff effected by the defendant Bank [petitioner
Citibank] of plaintiff’s [respondent Sabeniano] dollar deposit with Citibank, Switzerland, in
the amount of US$149,632.99, and ordering the said defendant [petitioner Citibank] to
refund the said amount to the plaintiff with legal interest at the rate of twelve percent (12%)
per annum, compounded yearly, from 31 October 1979 until fully paid, or its peso equivalent
at the time of payment;

(2) Declaring the plaintiff [respondent Sabeniano] indebted to the defendant Bank [petitioner
Citibank] in the amount of P1,069,847.40 as of 5 September 1979 and ordering the plaintiff
[respondent Sabeniano] to pay said amount, however, there shall be no interest and penalty
charges from the time the illegal setoff was effected on 31 October 1979;

(3) Dismissing all other claims and counterclaims interposed by the parties against each
other.

Costs against the defendant Bank.

All the parties appealed the afore-mentioned RTC Decision to the Court of Appeals, docketed as CA-
G.R. CV No. 51930. On 26 March 2002, the appellate court promulgated its Decision, 5 ruling entirely
in favor of respondent, to wit –
Wherefore, premises considered, the assailed 24 August 1995 Decision of the court a quo is
hereby AFFIRMED with MODIFICATION, as follows:

1. Declaring as illegal, null and void the set-off effected by the defendant-appellant Bank of
the plaintiff-appellant’s dollar deposit with Citibank, Switzerland, in the amount of
US$149,632.99, and ordering defendant-appellant Citibank to refund the said amount to the
plaintiff-appellant with legal interest at the rate of twelve percent (12%) per annum,
compounded yearly, from 31 October 1979 until fully paid, or its peso equivalent at the time
of payment;

2. As defendant-appellant Citibank failed to establish by competent evidence the alleged

indebtedness of plaintiff-appellant, the set-off of P1,069,847.40 in the account of Ms.
Sabeniano is hereby declared as without legal and factual basis;

3. As defendants-appellants failed to account the following plaintiff-appellant’s money

market placements, savings account and current accounts, the former is hereby ordered to
return the same, in accordance with the terms and conditions agreed upon by the contending
parties as evidenced by the certificates of investments, to wit:

(i) Citibank NNPN Serial No. 023356 (Cancels and Supersedes NNPN No. 22526)
issued on 17 March 1977, P318,897.34 with 14.50% interest p.a.;

(ii) Citibank NNPN Serial No. 23357 (Cancels and Supersedes NNPN No. 22528)
issued on 17 March 1977, P203,150.00 with 14.50 interest p.a.;

(iii) FNCB NNPN Serial No. 05757 (Cancels and Supersedes NNPN No. 04952),
issued on 02 June 1977, P500,000.00 with 17% interest p.a.;

(iv) FNCB NNPN Serial No. 05758 (Cancels and Supersedes NNPN No. 04962),
issued on 02 June 1977, P500,000.00 with 17% interest per annum;

(v) The Two Million (P2,000,000.00) money market placements of Ms. Sabeniano with
the Ayala Investment & Development Corporation (AIDC) with legal interest at the
rate of twelve percent (12%) per annum compounded yearly, from 30 September 1976
until fully paid;

4. Ordering defendants-appellants to jointly and severally pay the plaintiff-appellant the

sum of FIVE HUNDRED THOUSAND PESOS (P500,000.00) by way of moral damages,
FIVE HUNDRED THOUSAND PESOS (P500,000.00) as exemplary damages, and ONE
HUNDRED THOUSAND PESOS (P100,000.00) as attorney’s fees.

Acting on petitioners’ Motion for Partial Reconsideration, the Court of Appeals issued a
Resolution,6 dated 20 November 2002, modifying its earlier Decision, thus –

WHEREFORE, premises considered, the instant Motion for Reconsideration is PARTIALLY

GRANTED as Sub-paragraph (V) paragraph 3 of the assailed Decision’s dispositive portion is hereby
ordered DELETED.

The challenged 26 March 2002 Decision of the Court is AFFIRMED with MODIFICATION.
Since the Court of Appeals Decision, dated 26 March 2002, as modified by the Resolution of the same
court, dated 20 November 2002, was still principally in favor of respondent, petitioners filed the
instant Petition for Review on Certiorari under Rule 45 of the Revised Rules of Court. After giving
due course to the instant Petition, this Court promulgated on 16 October 2006 its Decision, now
subject of petitioners’ Motion for Partial Reconsideration.1awphi1.net

Among the numerous grounds raised by petitioners in their Motion for Partial Reconsideration, this
Court shall address and discuss herein only particular points that had not been considered or
discussed in its Decision. Even in consideration of these points though, this Court remains
unconvinced that it should modify or reverse in any way its disposition of the case in its earlier
Decision.

As to the off-setting or compensation of respondent’s outstanding loan balance with her dollar deposits
in Citibank-Geneva

Petitioners’ take exception to the following findings made by this Court in its Decision, dated 16
October 2006, disallowing the off-setting or compensation of the balance of respondent’s outstanding
loans using her dollar deposits in Citibank-Geneva –

Without the Declaration of Pledge, petitioner Citibank had no authority to demand the remittance of
respondent’s dollar accounts with Citibank-Geneva and to apply them to her outstanding loans. It
cannot effect legal compensation under Article 1278 of the Civil Code since, petitioner Citibank itself
admitted that Citibank-Geneva is a distinct and separate entity. As for the dollar accounts,
respondent was the creditor and Citibank-Geneva is the debtor; and as for the outstanding loans,
petitioner Citibank was the creditor and respondent was the debtor. The parties in these
transactions were evidently not the principal creditor of each other.

Petitioners maintain that respondent’s Declaration of Pledge, by virtue of which she supposedly
assigned her dollar accounts with Citibank-Geneva as security for her loans with petitioner
Citibank, is authentic and, thus, valid and binding upon respondent. Alternatively, petitioners aver
that even without said Declaration of Pledge, the off-setting or compensation made by petitioner
Citibank using respondent’s dollar accounts with Citibank-Geneva to liquidate the balance of her
outstanding loans with Citibank-Manila was expressly authorized by respondent herself in the
promissory notes (PNs) she signed for her loans, as well as sanctioned by Articles 1278 to 1290 of the
Civil Code. This alternative argument is anchored on the premise that all branches of petitioner
Citibank in the Philippines and abroad are part of a single worldwide corporate entity and share the
same juridical personality. In connection therewith, petitioners deny that they ever admitted that
Citibank-Manila and Citibank-Geneva are distinct and separate entities.

Petitioners call the attention of this Court to the following provision found in all of the PNs7 executed
by respondent for her loans –

At or after the maturity of this note, or when same becomes due under any of the provisions hereof,
any money, stocks, bonds, or other property of any kind whatsoever, on deposit or otherwise, to the
credit of the undersigned on the books of CITIBANK, N.A. in transit or in their possession, may
without notice be applied at the discretion of the said bank to the full or partial payment of this note.

It is the petitioners’ contention that the term "Citibank, N.A." used therein should be deemed to refer
to all branches of petitioner Citibank in the Philippines and abroad; thus, giving petitioner Citibank
the authority to apply as payment for the PNs even respondent’s dollar accounts with Citibank-
Geneva. Still proceeding from the premise that all branches of petitioner Citibank should be
considered as a single entity, then it should not matter that the respondent obtained the loans from
Citibank-Manila and her deposits were with Citibank-Geneva. Respondent should be considered the
debtor (for the loans) and creditor (for her deposits) of the same entity, petitioner Citibank. Since
petitioner Citibank and respondent were principal creditors of each other, in compliance with the
requirements under Article 1279 of the Civil Code,8 then the former could have very well used off-
setting or compensation to extinguish the parties’ obligations to one another. And even without the
PNs, off-setting or compensation was still authorized because according to Article 1286 of the Civil
Code, "Compensation takes place by operation of law, even though the debts may be payable at
different places, but there shall be an indemnity for expenses of exchange or transportation to the
place of payment."

Pertinent provisions of Republic Act No. 8791, otherwise known as the General Banking Law of
2000, governing bank branches are reproduced below –

SEC. 20. Bank Branches. – Universal or commercial banks may open branches or other offices within
or outside the Philippines upon prior approval of the Bangko Sentral.

Branching by all other banks shall be governed by pertinent laws.

A bank may, subject to prior approval of the Monetary Board, use any or all of its branches as outlets
for the presentation and/or sale of the financial products of its allied undertaking or its investment
house units.

A bank authorized to establish branches or other offices shall be responsible for all business
conducted in such branches and offices to the same extent and in the same manner as though such
business had all been conducted in the head office. A bank and its branches and offices shall be
treated as one unit.

xxxx

SEC. 72. Transacting Business in the Philippines. – The entry of foreign banks in the Philippines
through the establishment of branches shall be governed by the provisions of the Foreign Banks
Liberalization Act.

The conduct of offshore banking business in the Philippines shall be governed by the provisions of
Presidential Decree No. 1034, otherwise known as the "Offshore Banking System Decree."

xxxx

SEC. 74. Local Branches of Foreign Banks. – In case of a foreign bank which has more than one (1)
branch in the Philippines, all such branches shall be treated as one (1) unit for the purpose of this
Act, and all references to the Philippine branches of foreign banks shall be held to refer to such
units.

SEC. 75. Head Office Guarantee. – In order to provide effective protection of the interests of the
depositors and other creditors of Philippine branches of a foreign bank, the head office of such
branches shall fully guarantee the prompt payment of all liabilities of its Philippine branch.

Residents and citizens of the Philippines who are creditors of a branch in the Philippines of a foreign
bank shall have preferential rights to the assets of such branch in accordance with existing laws.
Republic Act No. 7721, otherwise known as the Foreign Banks Liberalization Law, lays down the
policies and regulations specifically concerning the establishment and operation of local branches of
foreign banks. Relevant provisions of the said statute read –

Sec. 2. Modes of Entry. - The Monetary Board may authorize foreign banks to operate in the
Philippine banking system through any of the following modes of entry: (i) by acquiring, purchasing
or owning up to sixty percent (60%) of the voting stock of an existing bank; (ii) by investing in up to
sixty percent (60%) of the voting stock of a new banking subsidiary incorporated under the laws of
the Philippines; or (iii) by establishing branches with full banking authority: Provided, That a
foreign bank may avail itself of only one (1) mode of entry: Provided, further, That a foreign bank or
a Philippine corporation may own up to a sixty percent (60%) of the voting stock of only one (1)
domestic bank or new banking subsidiary.

Sec. 5. Head Office Guarantee. - The head office of foreign bank branches shall guarantee prompt
payment of all liabilities of its Philippine branches.

It is true that the afore-quoted Section 20 of the General Banking Law of 2000 expressly states that
the bank and its branches shall be treated as one unit. It should be pointed out, however, that the
said provision applies to a universal9 or commercial bank,10 duly established and organized as a
Philippine corporation in accordance with Section 8 of the same statute, 11 and authorized to
establish branches within or outside the Philippines.

The General Banking Law of 2000, however, does not make the same categorical statement as
regards to foreign banks and their branches in the Philippines. What Section 74 of the said law
provides is that in case of a foreign bank with several branches in the country, all such branches
shall be treated as one unit. As to the relations between the local branches of a foreign bank and its
head office, Section 75 of the General Banking Law of 2000 and Section 5 of the Foreign Banks
Liberalization Law provide for a "Home Office Guarantee," in which the head office of the foreign
bank shall guarantee prompt payment of all liabilities of its Philippine branches. While the Home
Office Guarantee is in accord with the principle that these local branches, together with its head
office, constitute but one legal entity, it does not necessarily support the view that said principle is
true and applicable in all circumstances.

The Home Office Guarantee is included in Philippine statutes clearly for the protection of the
interests of the depositors and other creditors of the local branches of a foreign bank. 12 Since the
head office of the bank is located in another country or state, such a guarantee is necessary so as to
bring the head office within Philippine jurisdiction, and to hold the same answerable for the
liabilities of its Philippine branches. Hence, the principle of the singular identity of that the local
branches and the head office of a foreign bank are more often invoked by the clients in order to
establish the accountability of the head office for the liabilities of its local branches. It is under such
attendant circumstances in which the American authorities and jurisprudence presented by
petitioners in their Motion for Partial Reconsideration were rendered.

Now the question that remains to be answered is whether the foreign bank can use the principle for
a reverse purpose, in order to extend the liability of a client to the foreign bank’s Philippine branch
to its head office, as well as to its branches in other countries. Thus, if a client obtains a loan from
the foreign bank’s Philippine branch, does it absolutely and automatically make the client a debtor,
not just of the Philippine branch, but also of the head office and all other branches of the foreign
bank around the world? This Court rules in the negative.

There being a dearth of Philippine authorities and jurisprudence on the matter, this Court, just as
what petitioners have done, turns to American authorities and jurisprudence. American authorities
and jurisprudence are significant herein considering that the head office of petitioner Citibank is
located in New York, United States of America (U.S.A.).

Unlike Philippine statutes, the American legislation explicitly defines the relations among foreign
branches of an American bank. Section 25 of the United States Federal Reserve Act 13 states that –

Every national banking association operating foreign branches shall conduct the accounts of each
foreign branch independently of the accounts of other foreign branches established by it and of its
home office, and shall at the end of each fiscal period transfer to its general ledger the profit or loss
accrued at each branch as a separate item.

Contrary to petitioners’ assertion that the accounts of Citibank-Manila and Citibank-Geneva should
be deemed as a single account under its head office, the foregoing provision mandates that the
accounts of foreign branches of an American bank shall be conducted independently of each other.
Since the head office of petitioner Citibank is in the U.S.A., then it is bound to treat its foreign
branches in accordance with the said provision. It is only at the end of its fiscal period that the bank
is required to transfer to its general ledger the profit or loss accrued at each branch, but still
reporting it as a separate item. It is by virtue of this provision that the Circuit Court of Appeals of
New York declared in Pan-American Bank and Trust Co. v. National City Bank of New York 14 that a
branch is not merely a teller’s window; it is a separate business entity.

The circumstances in the case of McGrath v. Agency of Chartered Bank of India, Australia &
China15 are closest to the one at bar. In said case, the Chartered Bank had branches in several
countries, including one in Hamburg, Germany and another in New York, U.S.A., and yet another in
London, United Kingdom. The New York branch entered in its books credit in favor of four German
firms. Said credit represents collections made from bills of exchange delivered by the four German
firms. The same four German firms subsequently became indebted to the Hamburg branch. The
London branch then requested for the transfer of the credit in the name of the German firms from
the New York branch so as to be applied or setoff against the indebtedness of the same firms to the
Hamburg branch. One of the question brought before the U.S. District Court of New York was
"whether or not the debts and the alleged setoffs thereto are mutual," which could be answered by
determining first whether the New York and Hamburg branches of Chartered Bank are individual
business entities or are one and the same entity. In denying the right of the Hamburg branch to
setoff, the U.S. District Court ratiocinated that –

The structure of international banking houses such as Chartered bank defies one rigorous
description. Suffice it to say for present analysis, branches or agencies of an international bank
have been held to be independent entities for a variety of purposes (a) deposits payable only at
branch where made; Mutaugh v. Yokohama Specie Bank, Ltd., 1933, 149 Misc. 693, 269 N.Y.S. 65;
Bluebird Undergarment Corp. v. Gomez, 1931, 139 Misc. 742, 249 N.Y.S. 319; (b) checks need be
honored only when drawn on branch where deposited; Chrzanowska v. Corn Exchange Bank, 1916,
173 App. Div. 285, 159 N.Y.S. 385, affirmed 1919, 225 N.Y. 728, 122 N.E. 877; subpoena duces tecum
on foreign bank’s record barred; In re Harris, D.C.S.D.N.Y. 1939, 27 F. Supp. 480; (d) a foreign
branch separate for collection of forwarded paper; Pan-American Bank and Trust Company v.
National City Bank of New York, 2 Cir., 1925, 6 F. 2d 762, certiorari denied 1925, 269 U.S. 554, 46 S.
Ct. 18, 70 L. Ed. 408. Thus in law there is nothing innately unitary about the organization of
international banking institutions.

Defendant, upon its oral argument and in its brief, relies heavily on Sokoloff v. National City Bank of
New York,1928, 250 N.Y. 69, 164 N.E. 745, as authority for the proposition that Chartered Bank, not
the Hamburg or New York Agency, is ultimately responsible for the amounts owing its German
customers and, conversely, it is to Chartered Bank that the German firms owe their obligations.
The Sokoloff case, aside from its violently different fact situation, is centered on the legal problem of
default of payment and consequent breach of contract by a branch bank. It does not stand for the
principle that in every instance an international bank with branches is but one legal
entity for all purposes. The defendant concedes in its brief (p. 15) that there are purposes for
which the various agencies and branches of Chartered Bank may be treated in law as separate
entities. I fail to see the applicability of Sokoloff either as a guide to or authority for the resolution of
this problem. The facts before me and the cases catalogued supra lend weight to the view that we are
dealing here with Agencies independent of one another.

xxxx

I hold that for instant purposes the Hamburg Agency and defendant were independent business
entities, and the attempted setoff may not be utilized by defendant against its debt to the German
firms obligated to the Hamburg Agency.

Going back to the instant Petition, although this Court concedes that all the Philippine branches of
petitioner Citibank should be treated as one unit with its head office, it cannot be persuaded to
declare that these Philippine branches are likewise a single unit with the Geneva branch. It would
be stretching the principle way beyond its intended purpose.

Therefore, this Court maintains its original position in the Decision that the off-setting or
compensation of respondent’s loans with Citibank-Manila using her dollar accounts with Citibank-
Geneva cannot be effected. The parties cannot be considered principal creditor of the other. As for
the dollar accounts, respondent was the creditor and Citibank-Geneva was the debtor; and as for the
outstanding loans, petitioner Citibank, particularly Citibank-Manila, was the creditor and
respondent was the debtor. Since legal compensation was not possible, petitioner Citibank could only
use respondent’s dollar accounts with Citibank-Geneva to liquidate her loans if she had expressly
authorized it to do so by contract.

Respondent cannot be deemed to have authorized the use of her dollar deposits with Citibank-
Geneva to liquidate her loans with petitioner Citibank when she signed the PNs16 for her loans
which all contained the provision that –

At or after the maturity of this note, or when same becomes due under any of the provisions hereof,
any money, stocks, bonds, or other property of any kind whatsoever, on deposit or otherwise, to the
credit of the undersigned on the books of CITIBANK, N.A. in transit or in their possession, may
without notice be applied at the discretion of the said bank to the full or partial payment of this note.

As has been established in the preceding discussion, "Citibank, N.A." can only refer to the local
branches of petitioner Citibank together with its head office. Unless there is any showing that
respondent understood and expressly agreed to a more far-reaching interpretation, the reference to
Citibank, N.A. cannot be extended to all other branches of petitioner Citibank all over the world.
Although theoretically, books of the branches form part of the books of the head office, operationally
and practically, each branch maintains its own books which shall only be later integrated and
balanced with the books of the head office. Thus, it is very possible to identify and segregate the
books of the Philippine branches of petitioner Citibank from those of Citibank-Geneva, and to limit
the authority granted for application as payment of the PNs to respondent’s deposits in the books of
the former.

Moreover, the PNs can be considered a contract of adhesion, the PNs being in standard printed form
prepared by petitioner Citibank. Generally, stipulations in a contract come about after deliberate
drafting by the parties thereto, there are certain contracts almost all the provisions of which have
been drafted only by one party, usually a corporation. Such contracts are called contracts of
adhesion, because the only participation of the party is the affixing of his signature or his "adhesion"
thereto. This being the case, the terms of such contract are to be construed strictly against the party
which prepared it.17

As for the supposed Declaration of Pledge of respondent’s dollar accounts with Citibank-Geneva as
security for the loans, this Court stands firm on its ruling that the non-production thereof is fatal to
petitioners’ cause in light of respondent’s claim that her signature on such document was a forgery.
It bears to note that the original of the Declaration of Pledge is with Citibank-Geneva, a branch of
petitioner Citibank. As between respondent and petitioner Citibank, the latter has better access to
the document. The constant excuse forwarded by petitioner Citibank that Citibank-Geneva refused
to return possession of the original Declaration of Pledge to Citibank-Manila only supports this
Court’s finding in the preceding paragraphs that the two branches are actually operating separately
and independently of each other.

Further, petitioners keep playing up the fact that respondent, at the beginning of the trial, refused to
give her specimen signatures to help establish whether her signature on the Declaration of Pledge
was indeed forged. Petitioners seem to forget that subsequently, respondent, on advice of her new
counsel, already offered to cooperate in whatever manner so as to bring the original Declaration of
Pledge before the RTC for inspection. The exchange of the counsels for the opposing sides during the
hearing on 24 July 1991 before the RTC reveals the apparent willingness of respondent’s counsel to
undertake whatever course of action necessary for the production of the contested document, and the
evasive, non-committal, and uncooperative attitude of petitioners’ counsel. 18

Lastly, this Court’s ruling striking down the Declaration of Pledge is not entirely based on
respondent’s allegation of forgery. In its Decision, this Court already extensively discussed why it
found the said Declaration of Pledge highly suspicious and irregular, to wit –

First of all, it escapes this Court why petitioner Citibank took care to have the Deeds of Assignment
of the PNs notarized, yet left the Declaration of Pledge unnotarized. This Court would think that
petitioner Citibank would take greater cautionary measures with the preparation and execution of
the Declaration of Pledge because it involved respondent’s "all present and future fiduciary
placements" with a Citibank branch in another country, specifically, in Geneva, Switzerland. While
there is no express legal requirement that the Declaration of Pledge had to be notarized to be
effective, even so, it could not enjoy the same prima facie presumption of due execution that is
extended to notarized documents, and petitioner Citibank must discharge the burden of proving due
execution and authenticity of the Declaration of Pledge.

Second, petitioner Citibank was unable to establish the date when the Declaration of Pledge was
actually executed. The photocopy of the Declaration of Pledge submitted by petitioner Citibank
before the RTC was undated. It presented only a photocopy of the pledge because it already
forwarded the original copy thereof to Citibank-Geneva when it requested for the remittance of
respondent’s dollar accounts pursuant thereto. Respondent, on the other hand, was able to secure a
copy of the Declaration of Pledge, certified by an officer of Citibank-Geneva, which bore the date 24
September 1979. Respondent, however, presented her passport and plane tickets to prove that she
was out of the country on the said date and could not have signed the pledge. Petitioner Citibank
insisted that the pledge was signed before 24 September 1979, but could not provide an explanation
as to how and why the said date was written on the pledge. Although Mr. Tan testified that the
Declaration of Pledge was signed by respondent personally before him, he could not give the exact
date when the said signing took place. It is important to note that the copy of the Declaration of
Pledge submitted by the respondent to the RTC was certified by an officer of Citibank-Geneva, which
had possession of the original copy of the pledge. It is dated 24 September 1979, and this Court shall
abide by the presumption that the written document is truly dated. Since it is undeniable that
respondent was out of the country on 24 September 1979, then she could not have executed the
pledge on the said date.

Third, the Declaration of Pledge was irregularly filled-out. The pledge was in a standard printed
form. It was constituted in favor of Citibank, N.A., otherwise referred to therein as the Bank. It
should be noted, however, that in the space which should have named the pledgor, the name of
petitioner Citibank was typewritten, to wit –

The pledge right herewith constituted shall secure all claims which the Bank now has or in the
future acquires against Citibank, N.A., Manila (full name and address of the Debtor), regardless of
the legal cause or the transaction (for example current account, securities transactions, collections,
credits, payments, documentary credits and collections) which gives rise thereto, and including
principal, all contractual and penalty interest, commissions, charges, and costs.

The pledge, therefore, made no sense, the pledgor and pledgee being the same entity. Was a mistake
made by whoever filled-out the form? Yes, it could be a possibility. Nonetheless, considering the
value of such a document, the mistake as to a significant detail in the pledge could only be
committed with gross carelessness on the part of petitioner Citibank, and raised serious doubts as to
the authenticity and due execution of the same. The Declaration of Pledge had passed through the
hands of several bank officers in the country and abroad, yet, surprisingly and implausibly, no one
noticed such a glaring mistake.

Lastly, respondent denied that it was her signature on the Declaration of Pledge. She claimed that
the signature was a forgery. When a document is assailed on the basis of forgery, the best evidence
rule applies –

Basic is the rule of evidence that when the subject of inquiry is the contents of a document, no
evidence is admissible other than the original document itself except in the instances mentioned in
Section 3, Rule 130 of the Revised Rules of Court. Mere photocopies of documents are inadmissible
pursuant to the best evidence rule. This is especially true when the issue is that of forgery.

As a rule, forgery cannot be presumed and must be proved by clear, positive and convincing evidence
and the burden of proof lies on the party alleging forgery. The best evidence of a forged signature in
an instrument is the instrument itself reflecting the alleged forged signature. The fact of forgery can
only be established by a comparison between the alleged forged signature and the authentic and
genuine signature of the person whose signature is theorized upon to have been forged. Without the
original document containing the alleged forged signature, one cannot make a definitive comparison
which would establish forgery. A comparison based on a mere xerox copy or reproduction of the
document under controversy cannot produce reliable results.

Respondent made several attempts to have the original copy of the pledge produced before the RTC
so as to have it examined by experts. Yet, despite several Orders by the RTC, petitioner Citibank
failed to comply with the production of the original Declaration of Pledge. It is admitted that
Citibank-Geneva had possession of the original copy of the pledge. While petitioner Citibank in
Manila and its branch in Geneva may be separate and distinct entities, they are still incontestably
related, and between petitioner Citibank and respondent, the former had more influence and
resources to convince Citibank-Geneva to return, albeit temporarily, the original Declaration of
Pledge. Petitioner Citibank did not present any evidence to convince this Court that it had exerted
diligent efforts to secure the original copy of the pledge, nor did it proffer the reason why Citibank-
Geneva obstinately refused to give it back, when such document would have been very vital to the
case of petitioner Citibank. There is thus no justification to allow the presentation of a mere
photocopy of the Declaration of Pledge in lieu of the original, and the photocopy of the pledge
presented by petitioner Citibank has nil probative value. In addition, even if this Court cannot make
a categorical finding that respondent’s signature on the original copy of the pledge was forged, it is
persuaded that petitioner Citibank willfully suppressed the presentation of the original document,
and takes into consideration the presumption that the evidence willfully suppressed would be
adverse to petitioner Citibank if produced.

As far as the Declaration of Pledge is concerned, petitioners failed to submit any new evidence or
argument that was not already considered by this Court when it rendered its Decision.

As to the value of the dollar deposits in Citibank-Geneva ordered refunded to respondent

In case petitioners are still ordered to refund to respondent the amount of her dollar accounts with
Citibank-Geneva, petitioners beseech this Court to adjust the nominal values of respondent’s dollar
accounts and/or her overdue peso loans by using the values of the currencies stipulated at the time
the obligations were established in 1979, to address the alleged inequitable consequences resulting
from the extreme and extraordinary devaluation of the Philippine currency that occurred in the
course of the Asian crisis of 1997. Petitioners base their request on Article 1250 of the Civil Code
which reads, "In case an extraordinary inflation or deflation of the currency stipulated should
supervene, the value of the currency at the time of the establishment of the obligation shall be the
basis of payment, unless there is an agreement to the contrary."

It is well-settled that Article 1250 of the Civil Code becomes applicable only when there is
extraordinary inflation or deflation of the currency. Inflation has been defined as the sharp increase
of money or credit or both without a corresponding increase in business transaction. There is
inflation when there is an increase in the volume of money and credit relative to available goods
resulting in a substantial and continuing rise in the general price level. 19 In Singson v. Caltex
(Philippines), Inc.,20 this Court already provided a discourse as to what constitutes as extraordinary
inflation or deflation of currency, thus –

We have held extraordinary inflation to exist when there is a decrease or increase in the purchasing
power of the Philippine currency which is unusual or beyond the common fluctuation in the value of
said currency, and such increase or decrease could not have been reasonably foreseen or was
manifestly beyond the contemplation of the parties at the time of the establishment of the obligation.

An example of extraordinary inflation, as cited by the Court in Filipino Pipe and Foundry
Corporation vs. NAWASA, supra, is that which happened to the deutschmark in 1920. Thus:

"More recently, in the 1920s, Germany experienced a case of hyperinflation. In early 1921, the value
of the German mark was 4.2 to the U.S. dollar. By May of the same year, it had stumbled to 62 to the
U.S. dollar. And as prices went up rapidly, so that by October 1923, it had reached 4.2 trillion to the
U.S. dollar!" (Bernardo M. Villegas & Victor R. Abola, Economics, An Introduction [Third Edition]).

As reported, "prices were going up every week, then every day, then every hour. Women were paid
several times a day so that they could rush out and exchange their money for something of value
before what little purchasing power was left dissolved in their hands. Some workers tried to beat the
constantly rising prices by throwing their money out of the windows to their waiting wives, who
would rush to unload the nearly worthless paper. A postage stamp cost millions of marks and a loaf
of bread, billions." (Sidney Rutberg, "The Money Balloon", New York: Simon and Schuster, 1975, p.
19, cited in "Economics, An Introduction" by Villegas & Abola, 3rd ed.)

The supervening of extraordinary inflation is never assumed. The party alleging it must lay down
the factual basis for the application of Article 1250.
Thus, in the Filipino Pipe case, the Court acknowledged that the voluminous records and statistics
submitted by plaintiff-appellant proved that there has been a decline in the purchasing power of the
Philippine peso, but this downward fall cannot be considered "extraordinary" but was simply a
universal trend that has not spared our country. Similarly, in Huibonhoa vs. Court of Appeals, the
Court dismissed plaintiff-appellant's unsubstantiated allegation that the Aquino assassination in
1983 caused building and construction costs to double during the period July 1983 to February 1984.
In Serra vs. Court of Appeals, the Court again did not consider the decline in the peso's purchasing
power from 1983 to 1985 to be so great as to result in an extraordinary inflation.

Like the Serra and Huibonhoa cases, the instant case also raises as basis for the application of
Article 1250 the Philippine economic crisis in the early 1980s --- when, based on petitioner's
evidence, the inflation rate rose to 50.34% in 1984. We hold that there is no legal or factual basis to
support petitioner's allegation of the existence of extraordinary inflation during this period, or, for
that matter, the entire time frame of 1968 to 1983, to merit the adjustment of the rentals in the lease
contract dated July 16, 1968. Although by petitioner's evidence there was a decided decline in the
purchasing power of the Philippine peso throughout this period, we are hard put to treat this as an
"extraordinary inflation" within the meaning and intent of Article 1250.

Rather, we adopt with approval the following observations of the Court of Appeals on petitioner's
evidence, especially the NEDA certification of inflation rates based on consumer price index:

xxx (a) from the period 1966 to 1986, the official inflation rate never exceeded 100% in any single
year; (b) the highest official inflation rate recorded was in 1984 which reached only 50.34%; (c) over a
twenty one (21) year period, the Philippines experienced a single-digit inflation in ten (10) years (i.e.,
1966, 1967, 1968, 1969, 1975, 1976, 1977, 1978, 1983 and 1986); (d) in other years (i.e., 1970, 1971,
1972, 1973, 1974, 1979, 1980, 1981, 1982, 1984 and 1989) when the Philippines experienced double-
digit inflation rates, the average of those rates was only 20.88%; (e) while there was a decline in the
purchasing power of the Philippine currency from the period 1966 to 1986, such cannot be considered
as extraordinary; rather, it is a normal erosion of the value of the Philippine peso which is a
characteristic of most currencies.

"Erosion" is indeed an accurate description of the trend of decline in the value of the peso in the past
three to four decades. Unfortunate as this trend may be, it is certainly distinct from the phenomenon
contemplated by Article 1250.

Moreover, this Court has held that the effects of extraordinary inflation are not to be applied without
an official declaration thereof by competent authorities.

The burden of proving that there had been extraordinary inflation or deflation of the currency is
upon the party that alleges it. Such circumstance must be proven by competent evidence, and it
cannot be merely assumed. In this case, petitioners presented no proof as to how much, for instance,
the price index of goods and services had risen during the intervening period. 21 All the information
petitioners provided was the drop of the U.S. dollar-Philippine peso exchange rate by 17 points from
June 1997 to January 1998. While the said figure was based on the statistics of the Bangko Sentral
ng Pilipinas (BSP), it is also significant to note that the BSP did not categorically declare that the
same constitute as an extraordinary inflation. The existence of extraordinary inflation must be
officially proclaimed by competent authorities, and the only competent authority so far recognized by
this Court to make such an official proclamation is the BSP.22

Neither can this Court, by merely taking judicial notice of the Asian currency crisis in 1997, already
declare that there had been extraordinary inflation. It should be recalled that the Philippines
likewise experienced economic crisis in the 1980s, yet this Court did not find that extraordinary
inflation took place during the said period so as to warrant the application of Article 1250 of the Civil
Code.

Furthermore, it is incontrovertible that Article 1250 of the Civil Code is based on equitable
considerations. Among the maxims of equity are (1) he who seeks equity must do equity, and (2) he
who comes into equity must come with clean hands. The latter is a frequently stated maxim which is
also expressed in the principle that he who has done inequity shall not have equity.23 Petitioner
Citibank, hence, cannot invoke Article 1250 of the Civil Code because it does not come to court with
clean hands. The delay in the recovery24 by respondent of her dollar accounts with Citibank-Geneva
was due to the unlawful act of petitioner Citibank in using the same to liquidate respondent’s loans.
Petitioner Citibank even attempted to justify the off-setting or compensation of respondent’s loans
using her dollar accounts with Citibank-Geneva by the presentation of a highly suspicious and
irregular, and even possibly forged, Declaration of Pledge.

The damage caused to respondent of the deprivation of her dollar accounts for more than two
decades is unquestionably relatively more extensive and devastating, as compared to whatever
damage petitioner Citibank, an international banking corporation with undoubtedly substantial
capital, may have suffered for respondent’s non-payment of her loans. It must also be remembered
that petitioner Citibank had already considered respondent’s loans paid or liquidated by 26 October
1979 after it had fully effected compensation thereof using respondents deposits and money market
placements. All this time, respondent’s dollar accounts are unlawfully in the possession of and are
being used by petitioner Citibank for its business transactions. In the meantime, respondent’s
businesses failed and her properties were foreclosed because she was denied access to her funds
when she needed them most. Taking these into consideration, respondent’s dollar accounts with
Citibank-Geneva must be deemed to be subsisting and continuously deposited with petitioner
Citibank all this while, and will only be presently withdrawn by respondent. Therefore, petitioner
Citibank should refund to respondent the U.S. $149,632.99 taken from her Citibank-Geneva
accounts, or its equivalent in Philippine currency using the exchange rate at the time of payment,
plus the stipulated interest for each of the fiduciary placements and current accounts involved,
beginning 26 October 1979.

As to respondent’s Motion to Clarify and/or Confirm Decision with Notice of Judgment

Respondent, in her Motion, is of the mistaken notion that the Court of Appeals Decision, dated 26
March 2002, as modified by the Resolution of the same court, dated 20 November 2002, would be
implemented or executed together with this Court’s Decision.

This Court clarifies that its affirmation of the Decision of the Court of Appeals, as modified, is only to
the extent that it recognizes that petitioners had liabilities to the respondent. However, this Court’s
Decision modified that of the appellate court’s by making its own determination of the specific
liabilities of the petitioners to respondent and the amounts thereof; as well as by recognizing that
respondent also had liabilities to petitioner Citibank and the amount thereof.

Thus, for purposes of execution, the parties need only refer to the dispositive portion of this Court’s
Decision, dated 16 October 2006, should it already become final and executory, without any further
modifications.

As the last point, there is no merit in respondent’s Motion for this Court to already declare its
Decision, dated 16 October 2006, final and executory. A judgment becomes final and executory by
operation of law and, accordingly, the finality of the judgment becomes a fact upon the lapse of the
reglementary period without an appeal or a motion for new trial or reconsideration being filed. 25 This
Court cannot arbitrarily disregard the reglementary period and declare a judgment final and
executory upon the mere motion of one party, for to do so will be a culpable violation of the right of
the other parties to due process.

IN VIEW OF THE FOREGOING, petitioners’ Motion for Partial Reconsideration of this Court’s
Decision, dated 16 October 2006, and respondent’s Motion for this Court to declare the same Decision
already final and executory, are both DENIED for lack of merit.

SO ORDERED.

I.B.1. Conservatorship

First Phil. International Bank v. CA

In the absence of a formal deed of sale, may commitments given by bank officers in an exchange of
letters and/or in a meeting with the buyers constitute a perfected and enforceable contract of sale
over 101 hectares of land in Sta. Rosa, Laguna? Does the doctrine of "apparent authority" apply in
this case? If so, may the Central Bank-appointed conservator of Producers Bank (now First
Philippine International Bank) repudiate such "apparent authority" after said contract has been
deemed perfected? During the pendency of a suit for specific performance, does the filing of a
"derivative suit" by the majority shareholders and directors of the distressed bank to prevent the
enforcement or implementation of the sale violate the ban against forum-shopping?

Simply stated, these are the major questions brought before this Court in the instant Petition for
review on certiorari under Rule 45 of the Rules of Court, to set aside the Decision promulgated
January 14, 1994 of the respondent Court of Appeals 1 in CA-G.R CV No. 35756 and the Resolution
promulgated June 14, 1994 denying the motion for reconsideration. The dispositive portion of the
said Decision reads:

WHEREFORE, the decision of the lower court is MODIFIED by the elimination of the
damages awarded under paragraphs 3, 4 and 6 of its dispositive portion and the reduction of
the award in paragraph 5 thereof to P75,000.00, to be assessed against defendant bank. In
all other aspects, said decision is hereby AFFIRMED.

All references to the original plaintiffs in the decision and its dispositive portion are deemed,
herein and hereafter, to legally refer to the plaintiff-appellee Carlos C. Ejercito.

Costs against appellant bank.

The dispositive portion of the trial court's2 decision dated July 10, 1991, on the other hand, is as
follows:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiffs

and against the defendants as follows:

1. Declaring the existence of a perfected contract to buy and sell over the six (6) parcels of
land situated at Don Jose, Sta. Rosa, Laguna with an area of 101 hectares, more or less,
covered by and embraced in Transfer Certificates of Title Nos. T-106932 to T-106937,
inclusive, of the Land Records of Laguna, between the plaintiffs as buyers and the defendant
Producers Bank for an agreed price of Five and One Half Million (P5,500,000.00) Pesos;
 2. Ordering defendant Producers Bank of the Philippines, upon finality of this decision and
receipt from the plaintiffs the amount of P5.5 Million, to execute in favor of said plaintiffs a
deed of absolute sale over the aforementioned six (6) parcels of land, and to immediately
deliver to the plaintiffs the owner's copies of T.C.T. Nos. T-106932 to T- 106937, inclusive, for
purposes of registration of the same deed and transfer of the six (6) titles in the names of the
plaintiffs;

3. Ordering the defendants, jointly and severally, to pay plaintiffs Jose A. Janolo and
Demetrio Demetria the sums of P200,000.00 each in moral damages;

4. Ordering the defendants, jointly and severally, to pay plaintiffs the sum of P100,000.00 as
exemplary damages ;

5. Ordering the defendants, jointly and severally, to pay the plaintiffs the amount of
P400,000.00 for and by way of attorney's fees;

6. Ordering the defendants to pay the plaintiffs, jointly and severally, actual and moderate
damages in the amount of P20,000.00;

With costs against the defendants.

After the parties filed their comment, reply, rejoinder, sur-rejoinder and reply to sur-rejoinder, the
petition was given due course in a Resolution dated January 18, 1995. Thence, the parties filed their
respective memoranda and reply memoranda. The First Division transferred this case to the Third
Division per resolution dated October 23, 1995. After carefully deliberating on the aforesaid
submissions, the Court assigned the case to the undersigned ponente for the writing of this Decision.

The Parties

Petitioner First Philippine International Bank (formerly Producers Bank of the Philippines;
petitioner Bank, for brevity) is a banking institution organized and existing under the laws of the
Republic of the Philippines. Petitioner Mercurio Rivera (petitioner Rivera, for brevity) is of legal age
and was, at all times material to this case, Head-Manager of the Property Management Department
of the petitioner Bank.

Respondent Carlos Ejercito (respondent Ejercito, for brevity) is of legal age and is the assignee of
original plaintiffs-appellees Demetrio Demetria and Jose Janolo.

Respondent Court of Appeals is the court which issued the Decision and Resolution sought to be set
aside through this petition.

The Facts

The facts of this case are summarized in the respondent Court's Decision 3 as follows:

(1) In the course of its banking operations, the defendant Producer Bank of the Philippines
acquired six parcels of land with a total area of 101 hectares located at Don Jose, Sta. Rose,
Laguna, and covered by Transfer Certificates of Title Nos. T-106932 to T-106937. The
property used to be owned by BYME Investment and Development Corporation which had
them mortgaged with the bank as collateral for a loan. The original plaintiffs, Demetrio
Demetria and Jose O. Janolo, wanted to purchase the property and thus initiated
negotiations for that purpose.

(2) In the early part of August 1987 said plaintiffs, upon the suggestion of BYME
investment's legal counsel, Jose Fajardo, met with defendant Mercurio Rivera, Manager of
the Property Management Department of the defendant bank. The meeting was held
pursuant to plaintiffs' plan to buy the property (TSN of Jan. 16, 1990, pp. 7-10). After the
meeting, plaintiff Janolo, following the advice of defendant Rivera, made a formal purchase
offer to the bank through a letter dated August 30, 1987 (Exh. "B"), as follows:

August 30, 1987

The Producers Bank of the Philippines

Makati, Metro Manila

Attn. Mr. Mercurio Q. Rivera

Manager, Property Management Dept.

Gentleman:

I have the honor to submit my formal offer to purchase your properties covered by titles
listed hereunder located at Sta. Rosa, Laguna, with a total area of 101 hectares, more or less.

TCT NO. AREA

T-106932 113,580 sq. m.
T-106933 70,899 sq. m.
T-106934 52,246 sq. m.
T-106935 96,768 sq. m.
T-106936 187,114 sq. m.
T-106937 481,481 sq. m.

My offer is for PESOS: THREE MILLION FIVE HUNDRED THOUSAND (P3,500,000.00)

PESOS, in cash.

Kindly contact me at Telephone Number 921-1344.

(3) On September 1, 1987, defendant Rivera made on behalf of the bank a formal reply by
letter which is hereunder quoted (Exh. "C"):

September 1, 1987

JP M-P GUTIERREZ ENTERPRISES

142 Charisma St., Doña Andres II
Rosario, Pasig, Metro Manila

Attention: JOSE O. JANOLO

Dear Sir:
Thank you for your letter-offer to buy our six (6) parcels of acquired lots at Sta. Rosa, Laguna
(formerly owned by Byme Industrial Corp.). Please be informed however that the bank's
counter-offer is at P5.5 million for more than 101 hectares on lot basis.

We shall be very glad to hear your position on the on the matter.

Best regards.

(4) On September 17, 1987, plaintiff Janolo, responding to Rivera's aforequoted reply, wrote
(Exh. "D"):

September 17, 1987

Producers Bank
Paseo de Roxas
Makati, Metro Manila

Attention: Mr. Mercurio Rivera

Gentlemen:

In reply to your letter regarding my proposal to purchase your 101-hectare lot located at Sta.
Rosa, Laguna, I would like to amend my previous offer and I now propose to buy the said lot
at P4.250 million in CASH..

Hoping that this proposal meets your satisfaction.

(5) There was no reply to Janolo's foregoing letter of September 17, 1987. What took place
was a meeting on September 28, 1987 between the plaintiffs and Luis Co, the Senior Vice-
President of defendant bank. Rivera as well as Fajardo, the BYME lawyer, attended the
meeting. Two days later, or on September 30, 1987, plaintiff Janolo sent to the bank, through
Rivera, the following letter (Exh. "E"):

The Producers Bank of the Philippines

Paseo de Roxas, Makati
Metro Manila

Attention: Mr. Mercurio Rivera

Re: 101 Hectares of Land

in Sta. Rosa, Laguna

Gentlemen:

Pursuant to our discussion last 28 September 1987, we are pleased to inform you that we are
accepting your offer for us to purchase the property at Sta. Rosa, Laguna, formerly owned by
Byme Investment, for a total price of PESOS: FIVE MILLION FIVE HUNDRED
THOUSAND (P5,500,000.00).

Thank you.
(6) On October 12, 1987, the conservator of the bank (which has been placed under
conservatorship by the Central Bank since 1984) was replaced by an Acting Conservator in
the person of defendant Leonida T. Encarnacion. On November 4, 1987, defendant Rivera
wrote plaintiff Demetria the following letter (Exh. "F"):

Attention: Atty. Demetrio Demetria

Dear Sir:

Your proposal to buy the properties the bank foreclosed from Byme investment Corp. located
at Sta. Rosa, Laguna is under study yet as of this time by the newly created committee for
submission to the newly designated Acting Conservator of the bank.

For your information.

(7) What thereafter transpired was a series of demands by the plaintiffs for compliance by
the bank with what plaintiff considered as a perfected contract of sale, which demands were
in one form or another refused by the bank. As detailed by the trial court in its decision, on
November 17, 1987, plaintiffs through a letter to defendant Rivera (Exhibit "G") tendered
payment of the amount of P5.5 million "pursuant to (our) perfected sale agreement."
Defendants refused to receive both the payment and the letter. Instead, the parcels of land
involved in the transaction were advertised by the bank for sale to any interested buyer
(Exh, "H" and "H-1"). Plaintiffs demanded the execution by the bank of the documents on
what was considered as a "perfected agreement." Thus:

Mr. Mercurio Rivera

Manager, Producers Bank
Paseo de Roxas, Makati
Metro Manila

Dear Mr. Rivera:

This is in connection with the offer of our client, Mr. Jose O. Janolo, to purchase your 101-
hectare lot located in Sta. Rosa, Laguna, and which are covered by TCT No. T-106932 to
106937.

From the documents at hand, it appears that your counter-offer dated September 1, 1987 of
this same lot in the amount of P5.5 million was accepted by our client thru a letter dated
September 30, 1987 and was received by you on October 5, 1987.

In view of the above circumstances, we believe that an agreement has been perfected. We
were also informed that despite repeated follow-up to consummate the purchase, you now
refuse to honor your commitment. Instead, you have advertised for sale the same lot to
others.

In behalf of our client, therefore, we are making this formal demand upon you to
consummate and execute the necessary actions/documentation within three (3) days from
your receipt hereof. We are ready to remit the agreed amount of P5.5 million at your advice.
Otherwise, we shall be constrained to file the necessary court action to protect the interest of
our client.
We trust that you will be guided accordingly.

(8) Defendant bank, through defendant Rivera, acknowledged receipt of the foregoing letter
and stated, in its communication of December 2, 1987 (Exh. "I"), that said letter has been
"referred . . . to the office of our Conservator for proper disposition" However, no response
came from the Acting Conservator. On December 14, 1987, the plaintiffs made a second
tender of payment (Exh. "L" and "L-1"), this time through the Acting Conservator, defendant
Encarnacion. Plaintiffs' letter reads:

PRODUCERS BANK OF
THE PHILIPPINES
Paseo de Roxas,
Makati, Metro Manila

Attn.: Atty. NIDA ENCARNACION

Central Bank Conservator

We are sending you herewith, in - behalf of our client, Mr. JOSE O. JANOLO, MBTC Check
No. 258387 in the amount of P5.5 million as our agreed purchase price of the 101-hectare lot
covered by TCT Nos. 106932, 106933, 106934, 106935, 106936 and 106937 and registered
under Producers Bank.

This is in connection with the perfected agreement consequent from your offer of P5.5 Million
as the purchase price of the said lots. Please inform us of the date of documentation of the
sale immediately.

Kindly acknowledge receipt of our payment.

(9) The foregoing letter drew no response for more than four months. Then, on May 3, 1988,
plaintiff, through counsel, made a final demand for compliance by the bank with its
obligations under the considered perfected contract of sale (Exhibit "N"). As recounted by the
trial court (Original Record, p. 656), in a reply letter dated May 12, 1988 (Annex "4" of
defendant's answer to amended complaint), the defendants through Acting Conservator
Encarnacion repudiated the authority of defendant Rivera and claimed that his dealings
with the plaintiffs, particularly his counter-offer of P5.5 Million are unauthorized or illegal.
On that basis, the defendants justified the refusal of the tenders of payment and the non-
compliance with the obligations under what the plaintiffs considered to be a perfected
contract of sale.

(10) On May 16, 1988, plaintiffs filed a suit for specific performance with damages against
the bank, its Manager Rivers and Acting Conservator Encarnacion. The basis of the suit was
that the transaction had with the bank resulted in a perfected contract of sale, The
defendants took the position that there was no such perfected sale because the defendant
Rivera is not authorized to sell the property, and that there was no meeting of the minds as
to the price.

On March 14, 1991, Henry L. Co (the brother of Luis Co), through counsel Sycip Salazar
Hernandez and Gatmaitan, filed a motion to intervene in the trial court, alleging that as
owner of 80% of the Bank's outstanding shares of stock, he had a substantial interest in
resisting the complaint. On July 8, 1991, the trial court issued an order denying the motion
to intervene on the ground that it was filed after trial had already been concluded. It also
denied a motion for reconsideration filed thereafter. From the trial court's decision, the
 Bank, petitioner Rivera and conservator Encarnacion appealed to the Court of Appeals which
subsequently affirmed with modification the said judgment. Henry Co did not appeal the
denial of his motion for intervention.

In the course of the proceedings in the respondent Court, Carlos Ejercito was substituted in place of
Demetria and Janolo, in view of the assignment of the latters' rights in the matter in litigation to
said private respondent.

On July 11, 1992, during the pendency of the proceedings in the Court of Appeals, Henry Co and
several other stockholders of the Bank, through counsel Angara Abello Concepcion Regala and Cruz,
filed an action (hereafter, the "Second Case") — purportedly a "derivative suit" — with the Regional
Trial Court of Makati, Branch 134, docketed as Civil Case No. 92-1606, against Encarnacion,
Demetria and Janolo "to declare any perfected sale of the property as unenforceable and to stop
Ejercito from enforcing or implementing the sale" 4 In his answer, Janolo argued that the Second
Case was barred by litis pendentia by virtue of the case then pending in the Court of Appeals. During
the pre-trial conference in the Second Case, plaintiffs filed a Motion for Leave of Court to Dismiss
the Case Without Prejudice. "Private respondent opposed this motion on the ground, among others,
that plaintiff's act of forum shopping justifies the dismissal of both cases, with prejudice." 5 Private
respondent, in his memorandum, averred that this motion is still pending in the Makati RTC.

In their Petition6 and Memorandum7, petitioners summarized their position as follows:

I.

The Court of Appeals erred in declaring that a contract of sale was perfected between
Ejercito (in substitution of Demetria and Janolo) and the bank.

II.

The Court of Appeals erred in declaring the existence of an enforceable contract of sale
between the parties.

III.

The Court of Appeals erred in declaring that the conservator does not have the power to
overrule or revoke acts of previous management.

IV.

The findings and conclusions of the Court of Appeals do not conform to the evidence on
record.

On the other hand, petitioners prayed for dismissal of the instant suit on the ground 8 that:

I.

Petitioners have engaged in forum shopping.

II.
 The factual findings and conclusions of the Court of Appeals are supported by the evidence
on record and may no longer be questioned in this case.

III.

The Court of Appeals correctly held that there was a perfected contract between Demetria
and Janolo (substituted by; respondent Ejercito) and the bank.

IV.

The Court of Appeals has correctly held that the conservator, apart from being estopped from
repudiating the agency and the contract, has no authority to revoke the contract of sale.

The Issues

From the foregoing positions of the parties, the issues in this case may be summed up as follows:

1) Was there forum-shopping on the part of petitioner Bank?

2) Was there a perfected contract of sale between the parties?

3) Assuming there was, was the said contract enforceable under the statute of frauds?

4) Did the bank conservator have the unilateral power to repudiate the authority of the bank
officers and/or to revoke the said contract?

5) Did the respondent Court commit any reversible error in its findings of facts?

The First Issue: Was There Forum-Shopping?

In order to prevent the vexations of multiple petitions and actions, the Supreme Court promulgated
Revised Circular No. 28-91 requiring that a party "must certify under oath . . . [that] (a) he has not
(t)heretofore commenced any other action or proceeding involving the same issues in the Supreme
Court, the Court of Appeals, or any other tribunal or agency; (b) to the best of his knowledge, no such
action or proceeding is pending" in said courts or agencies. A violation of the said circular entails
sanctions that include the summary dismissal of the multiple petitions or complaints. To be sure,
petitioners have included a VERIFICATION/CERTIFICATION in their Petition stating "for the
record(,) the pendency of Civil Case No. 92-1606 before the Regional Trial Court of Makati, Branch
134, involving a derivative suit filed by stockholders of petitioner Bank against the conservator and
other defendants but which is the subject of a pending Motion to Dismiss Without Prejudice. 9

Private respondent Ejercito vigorously argues that in spite of this verification, petitioners are guilty
of actual forum shopping because the instant petition pending before this Court involves "identical
parties or interests represented, rights asserted and reliefs sought (as that) currently pending before
the Regional Trial Court, Makati Branch 134 in the Second Case. In fact, the issues in the two cases
are so interwined that a judgement or resolution in either case will constitute res judicata in the
other." 10

On the other hand, petitioners explain 11 that there is no forum-shopping because:

 1) In the earlier or "First Case" from which this proceeding arose, the Bank was impleaded
as a defendant, whereas in the "Second Case" (assuming the Bank is the real party in
interest in a derivative suit), it wasplaintiff;

2) "The derivative suit is not properly a suit for and in behalf of the corporation under the
circumstances";

3) Although the CERTIFICATION/VERIFICATION (supra) signed by the Bank president

and attached to the Petition identifies the action as a "derivative suit," it "does not mean that
it is one" and "(t)hat is a legal question for the courts to decide";

4) Petitioners did not hide the Second Case at they mentioned it in the said
VERIFICATION/CERTIFICATION.

We rule for private respondent.

To begin with, forum-shopping originated as a concept in private international law. 12, where non-
resident litigants are given the option to choose the forum or place wherein to bring their suit for
various reasons or excuses, including to secure procedural advantages, to annoy and harass the
defendant, to avoid overcrowded dockets, or to select a more friendly venue. To combat these less
than honorable excuses, the principle of forum non conveniens was developed whereby a court, in
conflicts of law cases, may refuse impositions on its jurisdiction where it is not the most "convenient"
or available forum and the parties are not precluded from seeking remedies elsewhere.

In this light, Black's Law Dictionary 13 says that forum shopping "occurs when a party attempts to
have his action tried in a particular court or jurisdiction where he feels he will receive the most
favorable judgment or verdict." Hence, according to Words and Phrases14, "a litigant is open to the
charge of "forum shopping" whenever he chooses a forum with slight connection to factual
circumstances surrounding his suit, and litigants should be encouraged to attempt to settle their
differences without imposing undue expenses and vexatious situations on the courts".

In the Philippines, forum shopping has acquired a connotation encompassing not only a choice of
venues, as it was originally understood in conflicts of laws, but also to a choice of remedies. As to the
first (choice of venues), the Rules of Court, for example, allow a plaintiff to commence personal
actions "where the defendant or any of the defendants resides or may be found, or where the plaintiff
or any of the plaintiffs resides, at the election of the plaintiff" (Rule 4, Sec, 2 [b]). As to remedies,
aggrieved parties, for example, are given a choice of pursuing civil liabilities independently of the
criminal, arising from the same set of facts. A passenger of a public utility vehicle involved in a
vehicular accident may sue on culpa contractual, culpa aquiliana or culpa criminal — each remedy
being available independently of the others — although he cannot recover more than once.

In either of these situations (choice of venue or choice of remedy), the litigant actually shops
for a forum of his action, This was the original concept of the term forum shopping.

Eventually, however, instead of actually making a choice of the forum of their actions,
litigants, through the encouragement of their lawyers, file their actions in all available
courts, or invoke all relevant remedies simultaneously. This practice had not only resulted to
(sic) conflicting adjudications among different courts and consequent confusion enimical (sic)
to an orderly administration of justice. It had created extreme inconvenience to some of the
parties to the action.
 Thus, "forum shopping" had acquired a different concept — which is unethical professional
legal practice. And this necessitated or had given rise to the formulation of rules and canons
discouraging or altogether prohibiting the practice. 15

What therefore originally started both in conflicts of laws and in our domestic law as a legitimate
device for solving problems has been abused and mis-used to assure scheming litigants of dubious
reliefs.

To avoid or minimize this unethical practice of subverting justice, the Supreme Court, as already
mentioned, promulgated Circular 28-91. And even before that, the Court had prescribed it in the
Interim Rules and Guidelines issued on January 11, 1983 and had struck down in several
cases 16 the inveterate use of this insidious malpractice. Forum shopping as "the filing of repetitious
suits in different courts" has been condemned by Justice Andres R. Narvasa (now Chief Justice)
in Minister of Natural Resources, et al., vs. Heirs of Orval Hughes, et al.,"as a reprehensible
manipulation of court processes and proceedings . . ." 17 when does forum shopping take place?

There is forum-shopping whenever, as a result of an adverse opinion in one forum, a party

seeks a favorable opinion (other than by appeal or certiorari) in another. The principle
applies not only with respect to suits filed in the courts but also in connection with litigations
commenced in the courts while an administrative proceeding is pending, as in this case, in
order to defeat administrative processes and in anticipation of an unfavorable administrative
ruling and a favorable court ruling. This is specially so, as in this case, where the court in
which the second suit was brought, has no jurisdiction. 18

The test for determining whether a party violated the rule against forum shopping has been laid
dawn in the 1986 case of Buan vs. Lopez 19, also by Chief Justice Narvasa, and that is, forum
shopping exists where the elements of litis pendentia are present or where a final judgment in one
case will amount to res judicata in the other, as follows:

There thus exists between the action before this Court and RTC Case No. 86-36563 identity
of parties, or at least such parties as represent the same interests in both actions, as well as
identity of rights asserted and relief prayed for, the relief being founded on the same facts,
and the identity on the two preceding particulars is such that any judgment rendered in the
other action, will, regardless of which party is successful, amount to res adjudicata in the
action under consideration: all the requisites, in fine, of auter action pendant.

xxx xxx xxx

As already observed, there is between the action at bar and RTC Case No. 86-36563, an
identity as regards parties, or interests represented, rights asserted and relief sought, as
well as basis thereof, to a degree sufficient to give rise to the ground for dismissal known
as auter action pendant or lis pendens. That same identity puts into operation the sanction of
twin dismissals just mentioned. The application of this sanction will prevent any further
delay in the settlement of the controversy which might ensue from attempts to seek
reconsideration of or to appeal from the Order of the Regional Trial Court in Civil Case No.
86-36563 promulgated on July 15, 1986, which dismissed the petition upon grounds which
appear persuasive.

Consequently, where a litigant (or one representing the same interest or person) sues the same party
against whom another action or actions for the alleged violation of the same right and the
enforcement of the same relief is/are still pending, the defense of litis pendencia in one case is bar to
the others; and, a final judgment in one would constitute res judicata and thus would cause the
dismissal of the rest. In either case, forum shopping could be cited by the other party as a ground to
ask for summary dismissal of the two 20 (or more) complaints or petitions, and for imposition of the
other sanctions, which are direct contempt of court, criminal prosecution, and disciplinary action
against the erring lawyer.

Applying the foregoing principles in the case before us and comparing it with the Second Case, it is
obvious that there exist identity of parties or interests represented, identity of rights or causes and
identity of reliefs sought.

Very simply stated, the original complaint in the court a quo which gave rise to the instant petition
was filed by the buyer (herein private respondent and his predecessors-in-interest) against the seller
(herein petitioners) to enforce the alleged perfected sale of real estate. On the other hand, the
complaint 21 in the Second Case seeks to declare such purported sale involving the same real
property "as unenforceable as against the Bank", which is the petitioner herein. In other words, in
the Second Case, the majority stockholders, in representation of the Bank, are seeking to accomplish
what the Bank itself failed to do in the original case in the trial court. In brief, the objective or the
relief being sought, though worded differently, is the same, namely, to enable the petitioner Bank to
escape from the obligation to sell the property to respondent. In Danville Maritime, Inc. vs.
Commission on Audit. 22, this Court ruled that the filing by a party of two apparently different
actions, but with the same objective,constituted forum shopping:

In the attempt to make the two actions appear to be different, petitioner impleaded different
respondents therein — PNOC in the case before the lower court and the COA in the case
before this Court and sought what seems to be different reliefs. Petitioner asks this Court to
set aside the questioned letter-directive of the COA dated October 10, 1988 and to direct said
body to approve the Memorandum of Agreement entered into by and between the PNOC and
petitioner, while in the complaint before the lower court petitioner seeks to enjoin the PNOC
from conducting a rebidding and from selling to other parties the vessel "T/T Andres
Bonifacio", and for an extension of time for it to comply with the paragraph 1 of the
memorandum of agreement and damages. One can see that although the relief prayed for in
the two (2) actions are ostensibly different, the ultimate objective in both actions is the same,
that is, approval of the sale of vessel in favor of petitioner and to overturn the letter-directive
of the COA of October 10, 1988 disapproving the sale. (emphasis supplied).

In an earlier case 23 but with the same logic and vigor, we held:

In other words, the filing by the petitioners of the instant special civil action
for certiorari and prohibition in this Court despite the pendency of their action in the Makati
Regional Trial Court, is a species of forum-shopping. Both actions unquestionably involve the
same transactions, the same essential facts and circumstances. The petitioners' claim of
absence of identity simply because the PCGG had not been impleaded in the RTC suit, and
the suit did not involve certain acts which transpired after its commencement, is specious. In
the RTC action, as in the action before this Court, the validity of the contract to purchase
and sell of September 1, 1986, i.e., whether or not it had been efficaciously rescinded, and the
propriety of implementing the same (by paying the pledgee banks the amount of their loans,
obtaining the release of the pledged shares, etc.) were the basic issues. So, too, the relief was
the same: the prevention of such implementation and/or the restoration of the status quo
ante. When the acts sought to be restrained took place anyway despite the issuance by the
Trial Court of a temporary restraining order, the RTC suit did not become functus oficio. It
remained an effective vehicle for obtention of relief; and petitioners' remedy in the premises
was plain and patent: the filing of an amended and supplemental pleading in the RTC suit,
so as to include the PCGG as defendant and seek nullification of the acts sought to be
enjoined but nonetheless done. The remedy was certainly not the institution of another
 action in another forum based on essentially the same facts, The adoption of this latter
recourse renders the petitioners amenable to disciplinary action and both their actions, in
this Court as well as in the Court a quo, dismissible.

In the instant case before us, there is also identity of parties, or at least, of interests represented.
Although the plaintiffs in the Second Case (Henry L. Co. et al.) are not name parties in the First
Case, they represent the same interest and entity, namely, petitioner Bank, because:

Firstly, they are not suing in their personal capacities, for they have no direct personal interest in
the matter in controversy. They are not principally or even subsidiarily liable; much less are they
direct parties in the assailed contract of sale; and

Secondly, the allegations of the complaint in the Second Case show that the stockholders are
bringing a "derivative suit". In the caption itself, petitioners claim to have brought suit "for and in
behalf of the Producers Bank of the Philippines" 24. Indeed, this is the very essence of a derivative
suit:

An individual stockholder is permitted to institute a derivative suit on behalf of the

corporation wherein he holdsstock in order to protect or vindicate corporate rights, whenever
the officials of the corporation refuse to sue, or are the ones to be sued or hold the control of
the corporation. In such actions, the suing stockholder is regarded as a nominal party, with
the corporation as the real party in interest. (Gamboa v. Victoriano, 90 SCRA 40, 47 [1979];
emphasis supplied).

In the face of the damaging admissions taken from the complaint in the Second Case, petitioners,
quite strangely, sought to deny that the Second Case was a derivative suit, reasoning that it was
brought, not by the minority shareholders, but by Henry Co et al., who not only own, hold or control
over 80% of the outstanding capital stock, but also constitute the majority in the Board of Directors
of petitioner Bank. That being so, then they really represent the Bank. So, whether they sued
"derivatively" or directly, there is undeniably an identity of interests/entity represented.

Petitioner also tried to seek refuge in the corporate fiction that the personality Of the Bank is
separate and distinct from its shareholders. But the rulings of this Court are consistent: "When the
fiction is urged as a means of perpetrating a fraud or an illegal act or as a vehicle for the evasion of
an existing obligation, the circumvention of statutes, the achievement or perfection of a monopoly or
generally the perpetration of knavery or crime, the veil with which the law covers and isolates the
corporation from the members or stockholders who compose it will be lifted to allow for its
consideration merely as an aggregation of individuals." 25

In addition to the many cases 26 where the corporate fiction has been disregarded, we now add the
instant case, and declare herewith that the corporate veil cannot be used to shield an otherwise
blatant violation of the prohibition against forum-shopping. Shareholders, whether suing as the
majority in direct actions or as the minority in a derivative suit, cannot be allowed to trifle with
court processes, particularly where, as in this case, the corporation itself has not been remiss in
vigorously prosecuting or defending corporate causes and in using and applying remedies available
to it. To rule otherwise would be to encourage corporate litigants to use their shareholders as fronts
to circumvent the stringent rules against forum shopping.

Finally, petitioner Bank argued that there cannot be any forum shopping, even
assuming arguendo that there is identity of parties, causes of action and reliefs sought, "because it
(the Bank) was the defendant in the (first) case while it was the plaintiff in the other (Second
Case)",citing as authority Victronics Computers, Inc., vs. Regional Trial Court, Branch 63, Makati,
etc. et al., 27 where Court held:

The rule has not been extended to a defendant who, for reasons known only to him,
commences a new action against the plaintiff — instead of filing a responsive pleading in the
other case — setting forth therein, as causes of action, specific denials, special and
affirmative defenses or even counterclaims, Thus, Velhagen's and King's motion to dismiss
Civil Case No. 91-2069 by no means negates the charge of forum-shopping as such did not
exist in the first place. (emphasis supplied)

Petitioner pointed out that since it was merely the defendant in the original case, it could not have
chosen the forum in said case.

Respondent, on the other hand, replied that there is a difference in factual setting
between Victronics and the present suit. In the former, as underscored in the above-quoted Court
ruling, the defendants did not file any responsive pleading in the first case. In other words, they did
not make any denial or raise any defense or counter-claim therein In the case before us however,
petitioners filed a responsive pleading to the complaint — as a result of which, the issues were
joined.

Indeed, by praying for affirmative reliefs and interposing counter–claims in their responsive
pleadings, the petitioners became plaintiffs themselves in the original case, giving unto themselves
the very remedies they repeated in the Second Case.

Ultimately, what is truly important to consider in determining whether forum-shopping exists or not
is the vexation caused the courts and parties-litigant by a party who asks different courts and/or
administrative agencies to rule on the same or related causes and/or to grant the same or
substantially the same reliefs, in the process creating the possibility of conflicting decisions being
rendered by the different fora upon the same issue. In this case, this is exactly the problem: a
decision recognizing the perfection and directing the enforcement of the contract of sale will directly
conflict with a possible decision in the Second Case barring the parties front enforcing or
implementing the said sale. Indeed, a final decision in one would constitute res judicata in the
other 28.

The foregoing conclusion finding the existence of forum-shopping notwithstanding, the only sanction
possible now is the dismissal of both cases with prejudice, as the other sanctions cannot be imposed
because petitioners' present counsel entered their appearance only during the proceedings in this
Court, and the Petition's VERIFICATION/CERTIFICATION contained sufficient allegations as to
the pendency of the Second Case to show good faith in observing Circular 28-91. The Lawyers who
filed the Second Case are not before us; thus the rudiments of due process prevent us from motu
propio imposing disciplinary measures against them in this Decision. However, petitioners
themselves (and particularly Henry Co, et al.) as litigants are admonished to strictly follow the rules
against forum-shopping and not to trifle with court proceedings and processes They are warned that
a repetition of the same will be dealt with more severely.

Having said that, let it be emphasized that this petition should be dismissed not merely because of
forum-shopping but also because of the substantive issues raised, as will be discussed shortly.

The Second Issue: Was The Contract Perfected?

The respondent Court correctly treated the question of whether or not there was, on the basis of the
facts established, a perfected contract of sale as the ultimate issue. Holding that a valid contract has
been established, respondent Court stated:

There is no dispute that the object of the transaction is that property owned by the defendant
bank as acquired assets consisting of six (6) parcels of land specifically identified under
Transfer Certificates of Title Nos. T-106932 to T-106937. It is likewise beyond cavil that the
bank intended to sell the property. As testified to by the Bank's Deputy Conservator, Jose
Entereso, the bank was looking for buyers of the property. It is definite that the plaintiffs
wanted to purchase the property and it was precisely for this purpose that they met with
defendant Rivera, Manager of the Property Management Department of the defendant bank,
in early August 1987. The procedure in the sale of acquired assets as well as the nature and
scope of the authority of Rivera on the matter is clearly delineated in the testimony of Rivera
himself, which testimony was relied upon by both the bank and by Rivera in their appeal
briefs. Thus (TSN of July 30, 1990. pp. 19-20):

A: The procedure runs this way: Acquired assets was turned over to me and then I
published it in the form of an inter-office memorandum distributed to all branches
that these are acquired assets for sale. I was instructed to advertise acquired assets
for sale so on that basis, I have to entertain offer; to accept offer, formal offer and
upon having been offered, I present it to the Committee. I provide the Committee
with necessary information about the property such as original loan of the borrower,
bid price during the foreclosure, total claim of the bank, the appraised value at the
time the property is being offered for sale and then the information which are
relative to the evaluation of the bank to buy which the Committee considers and it is
the Committee that evaluate as against the exposure of the bank and it is also the
Committee that submit to the Conservator for final approval and once approved, we
have to execute the deed of sale and it is the Conservator that sign the deed of sale,
sir.

The plaintiffs, therefore, at that meeting of August 1987 regarding their purpose of buying
the property, dealt with and talked to the right person. Necessarily, the agenda was the price
of the property, and plaintiffs were dealing with the bank official authorized to entertain
offers, to accept offers and to present the offer to the Committee before which the said official
is authorized to discuss information relative to price determination. Necessarily, too, it being
inherent in his authority, Rivera is the officer from whom official information regarding the
price, as determined by the Committee and approved by the Conservator, can be had. And
Rivera confirmed his authority when he talked with the plaintiff in August 1987. The
testimony of plaintiff Demetria is clear on this point (TSN of May 31,1990, pp. 27-28):

Q: When you went to the Producers Bank and talked with Mr. Mercurio Rivera, did
you ask him point-blank his authority to sell any property?

A: No, sir. Not point blank although it came from him, (W)hen I asked him how long
it would take because he was saying that the matter of pricing will be passed upon by
the committee. And when I asked him how long it will take for the committee to
decide and he said the committee meets every week. If I am not mistaken Wednesday
and in about two week's (sic) time, in effect what he was saying he was not the one
who was to decide. But he would refer it to the committee and he would relay the
decision of the committee to me.

Q — Please answer the question.

 A — He did not say that he had the authority (.) But he said he would refer the
matter to the committee and he would relay the decision to me and he did just like
that.

"Parenthetically, the Committee referred to was the Past Due Committee of which Luis Co
was the Head, with Jose Entereso as one of the members.

What transpired after the meeting of early August 1987 are consistent with the authority
and the duties of Rivera and the bank's internal procedure in the matter of the sale of bank's
assets. As advised by Rivera, the plaintiffs made a formal offer by a letter dated August 20,
1987 stating that they would buy at the price of P3.5 Million in cash. The letter was for the
attention of Mercurio Rivera who was tasked to convey and accept such offers. Considering
an aspect of the official duty of Rivera as some sort of intermediary between the plaintiffs-
buyers with their proposed buying price on one hand, and the bank Committee, the
Conservator and ultimately the bank itself with the set price on the other, and considering
further the discussion of price at the meeting of August resulting in a formal offer of P3.5
Million in cash, there can be no other logical conclusion than that when, on September 1,
1987, Rivera informed plaintiffs by letter that "the bank's counter-offer is at P5.5 Million for
more than 101 hectares on lot basis," such counter-offer price had been determined by the
Past Due Committee and approved by the Conservator after Rivera had duly presented
plaintiffs' offer for discussion by the Committee of such matters as original loan of borrower,
bid price during foreclosure, total claim of the bank, and market value. Tersely put, under
the established facts, the price of P5.5 Million was, as clearly worded in Rivera's letter (Exh.
"E"), the official and definitive price at which the bank was selling the property.

There were averments by defendants below, as well as before this Court, that the P5.5
Million price was not discussed by the Committee and that price. As correctly characterized
by the trial court, this is not credible. The testimonies of Luis Co and Jose Entereso on this
point are at best equivocal and considering the gratuitous and self-serving character of these
declarations, the bank's submission on this point does not inspire belief. Both Co ad
Entereso, as members of the Past Due Committee of the bank, claim that the offer of the
plaintiff was never discussed by the Committee. In the same vein, both Co and Entereso
openly admit that they seldom attend the meetings of the Committee. It is important to note
that negotiations on the price had started in early August and the plaintiffs had already
offered an amount as purchase price, having been made to understand by Rivera, the official
in charge of the negotiation, that the price will be submitted for approval by the bank and
that the bank's decision will be relayed to plaintiffs. From the facts, the official bank price.
At any rate, the bank placed its official, Rivera, in a position of authority to accept offers to
buy and negotiate the sale by having the offer officially acted upon by the bank. The bank
cannot turn around and later say, as it now does, that what Rivera states as the bank's
action on the matter is not in fact so. It is a familiar doctrine, the doctrine of ostensible
authority, that if a corporation knowingly permits one of its officers, or any other agent, to do
acts within the scope of an apparent authority, and thus holds him out to the public as
possessing power to do those acts, the corporation will, as against any one who has in good
faith dealt with the corporation through such agent, he estopped from denying his authority
(Francisco v. GSIS, 7 SCRA 577, 583-584; PNB v. Court of Appeals, 94 SCRA 357, 369-370;
Prudential Bank v. Court of Appeals, G.R. No. 103957, June 14, 1993). 29

Article 1318 of the Civil Code enumerates the requisites of a valid and perfected contract as follows:
"(1) Consent of the contracting parties; (2) Object certain which is the subject matter of the contract;
(3) Cause of the obligation which is established."
There is no dispute on requisite no. 2. The object of the questioned contract consists of the six (6)
parcels of land in Sta. Rosa, Laguna with an aggregate area of about 101 hectares, more or less, and
covered by Transfer Certificates of Title Nos. T-106932 to T-106937. There is, however, a dispute on
the first and third requisites.

Petitioners allege that "there is no counter-offer made by the Bank, and any supposed counter-offer
which Rivera (or Co) may have made is unauthorized. Since there was no counter-offer by the Bank,
there was nothing for Ejercito (in substitution of Demetria and Janolo) to accept." 30 They disputed
the factual basis of the respondent Court's findings that there was an offer made by Janolo for P3.5
million, to which the Bank counter-offered P5.5 million. We have perused the evidence but cannot
find fault with the said Court's findings of fact. Verily, in a petition under Rule 45 such as this,
errors of fact — if there be any - are, as a rule, not reviewable. The mere fact that respondent Court
(and the trial court as well) chose to believe the evidence presented by respondent more than that
presented by petitioners is not by itself a reversible error. In fact, such findings merit serious
consideration by this Court, particularly where, as in this case, said courts carefully and
meticulously discussed their findings. This is basic.

Be that as it may, and in addition to the foregoing disquisitions by the Court of Appeals, let us
review the question of Rivera's authority to act and petitioner's allegations that the P5.5 million
counter-offer was extinguished by the P4.25 million revised offer of Janolo. Here, there are questions
of law which could be drawn from the factual findings of the respondent Court. They also delve into
the contractual elements of consent and cause.

The authority of a corporate officer in dealing with third persons may be actual or apparent. The
doctrine of "apparent authority", with special reference to banks, was laid out in Prudential Bank vs.
Court of Appeals31, where it was held that:

Conformably, we have declared in countless decisions that the principal is liable for
obligations contracted by the agent. The agent's apparent representation yields to the
principal's true representation and the contract is considered as entered into between the
principal and the third person (citing National Food Authority vs. Intermediate Appellate
Court, 184 SCRA 166).

A bank is liable for wrongful acts of its officers done in the interests of the bank or in
the course of dealings of the officers in their representative capacity but not for acts
outside the scape of their authority (9 C.J.S., p. 417). A bank holding out its officers
and agents as worthy of confidence will not be permitted to profit by the frauds they
may thus be enabled to perpetrate in the apparent scope of their employment; nor
will it be permitted to shirk its responsibility for such frauds even though no benefit
may accrue to the bank therefrom (10 Am Jur 2d, p. 114). Accordingly, a banking
corporation is liable to innocent third persons where the representation is made in
the course of its business by an agent acting within the general scope of his authority
even though, in the particular case, the agent is secretly abusing his authority and
attempting to perpetrate a fraud upon his principal or some other person, for his own
ultimate benefit (McIntosh v. Dakota Trust Co., 52 ND 752, 204 NW 818, 40 ALR
1021).

Application of these principles is especially necessary because banks have a fiduciary

relationship with the public and their stability depends on the confidence of the people in
their honesty and efficiency. Such faith will be eroded where banks do not exercise strict care
in the selection and supervision of its employees, resulting in prejudice to their depositors.
From the evidence found by respondent Court, it is obvious that petitioner Rivera has apparent or
implied authority to act for the Bank in the matter of selling its acquired assets. This evidence
includes the following:

(a) The petition itself in par. II-i (p. 3) states that Rivera was "at all times material to this
case, Manager of the Property Management Department of the Bank". By his own admission,
Rivera was already the person in charge of the Bank's acquired assets (TSN, August 6, 1990,
pp. 8-9);

(b) As observed by respondent Court, the land was definitely being sold by the Bank. And
during the initial meeting between the buyers and Rivera, the latter suggested that the
buyers' offer should be no less than P3.3 million (TSN, April 26, 1990, pp. 16-17);

(c) Rivera received the buyers' letter dated August 30, 1987 offering P3.5 million (TSN, 30
July 1990, p.11);

(d) Rivera signed the letter dated September 1, 1987 offering to sell the property for P5.5
million (TSN, July 30, p. 11);

(e) Rivera received the letter dated September 17, 1987 containing the buyers' proposal to
buy the property for P4.25 million (TSN, July 30, 1990, p. 12);

(f) Rivera, in a telephone conversation, confirmed that the P5.5 million was the final price of
the Bank (TSN, January 16, 1990, p. 18);

(g) Rivera arranged the meeting between the buyers and Luis Co on September 28, 1994,
during which the Bank's offer of P5.5 million was confirmed by Rivera (TSN, April 26, 1990,
pp. 34-35). At said meeting, Co, a major shareholder and officer of the Bank, confirmed
Rivera's statement as to the finality of the Bank's counter-offer of P5.5 million (TSN,
January 16, 1990, p. 21; TSN, April 26, 1990, p. 35);

(h) In its newspaper advertisements and announcements, the Bank referred to Rivera as the
officer acting for the Bank in relation to parties interested in buying assets owned/acquired
by the Bank. In fact, Rivera was the officer mentioned in the Bank's advertisements offering
for sale the property in question (cf. Exhs. "S" and "S-1").

In the very recent case of Limketkai Sons Milling, Inc. vs. Court of Appeals, et. al.32, the Court,
through Justice Jose A. R. Melo, affirmed the doctrine of apparent authority as it held that the
apparent authority of the officer of the Bank of P.I. in charge of acquired assets is borne out by
similar circumstances surrounding his dealings with buyers.

To be sure, petitioners attempted to repudiate Rivera's apparent authority through documents and
testimony which seek to establish Rivera's actual authority. These pieces of evidence, however, are
inherently weak as they consist of Rivera's self-serving testimony and various inter-office
memoranda that purport to show his limited actual authority, of which private respondent cannot be
charged with knowledge. In any event, since the issue is apparent authority, the existence of which
is borne out by the respondent Court's findings, the evidence of actual authority is immaterial
insofar as the liability of a corporation is concerned 33.

Petitioners also argued that since Demetria and Janolo were experienced lawyers and their "law
firm" had once acted for the Bank in three criminal cases, they should be charged with actual
knowledge of Rivera's limited authority. But the Court of Appeals in its Decision (p. 12) had already
made a factual finding that the buyers had no notice of Rivera's actual authority prior to the sale. In
fact, the Bank has not shown that they acted as its counsel in respect to any acquired assets; on the
other hand, respondent has proven that Demetria and Janolo merely associated with a loose
aggrupation of lawyers (not a professional partnership), one of whose members (Atty. Susana
Parker) acted in said criminal cases.

Petitioners also alleged that Demetria's and Janolo's P4.25 million counter-offer in the letter dated
September 17, 1987 extinguished the Bank's offer of P5.5 million 34 .They disputed the respondent
Court's finding that "there was a meeting of minds when on 30 September 1987 Demetria and Janolo
through Annex "L" (letter dated September 30, 1987) "accepted" Rivera's counter offer of P5.5 million
under Annex "J" (letter dated September 17, 1987)", citing the late Justice Paras35, Art. 1319 of the
Civil Code 36 and related Supreme Court rulings starting with Beaumont vs. Prieto 37.

However, the above-cited authorities and precedents cannot apply in the instant case because, as
found by the respondent Court which reviewed the testimonies on this point, what was "accepted" by
Janolo in his letter dated September 30, 1987 was the Bank's offer of P5.5 million as confirmed and
reiterated to Demetria and Atty. Jose Fajardo by Rivera and Co during their meeting on September
28, 1987. Note that the said letter of September 30, 1987 begins with"(p)ursuant to our discussion
last 28 September 1987 . . .

Petitioners insist that the respondent Court should have believed the testimonies of Rivera and Co
that the September 28, 1987 meeting "was meant to have the offerors improve on their position of
P5.5. million."38However, both the trial court and the Court of Appeals found petitioners' testimonial
evidence "not credible", and we find no basis for changing this finding of fact.

Indeed, we see no reason to disturb the lower courts' (both the RTC and the CA) common finding that
private respondents' evidence is more in keeping with truth and logic — that during the meeting on
September 28, 1987, Luis Co and Rivera "confirmed that the P5.5 million price has been passed upon
by the Committee and could no longer be lowered (TSN of April 27, 1990, pp. 34-35)"39. Hence,
assuming arguendo that the counter-offer of P4.25 million extinguished the offer of P5.5 million,
Luis Co's reiteration of the said P5.5 million price during the September 28, 1987
meeting revived the said offer. And by virtue of the September 30, 1987 letter accepting
this revived offer, there was a meeting of the minds, as the acceptance in said letter was absolute
and unqualified.

We note that the Bank's repudiation, through Conservator Encarnacion, of Rivera's authority and
action, particularly the latter's counter-offer of P5.5 million, as being "unauthorized and illegal"
came only on May 12, 1988 or more than seven (7) months after Janolo' acceptance. Such delay, and
the absence of any circumstance which might have justifiably prevented the Bank from acting
earlier, clearly characterizes the repudiation as nothing more than a last-minute attempt on the
Bank's part to get out of a binding contractual obligation.

Taken together, the factual findings of the respondent Court point to an implied admission on the
part of the petitioners that the written offer made on September 1, 1987 was carried through during
the meeting of September 28, 1987. This is the conclusion consistent with human experience, truth
and good faith.

It also bears noting that this issue of extinguishment of the Bank's offer of P5.5 million was raised
for the first time on appeal and should thus be disregarded.

This Court in several decisions has repeatedly adhered to the principle that points of law,
theories, issues of fact and arguments not adequately brought to the attention of the trial
 court need not be, and ordinarily will not be, considered by a reviewing court, as they cannot
be raised for the first time on appeal (Santos vs. IAC, No. 74243, November 14, 1986, 145
SCRA 592).40

. . . It is settled jurisprudence that an issue which was neither averred in the complaint nor
raised during the trial in the court below cannot be raised for the first time on appeal as it
would be offensive to the basic rules of fair play, justice and due process (Dihiansan vs. CA,
153 SCRA 713 [1987]; Anchuelo vs. IAC, 147 SCRA 434 [1987]; Dulos Realty & Development
Corp. vs. CA, 157 SCRA 425 [1988]; Ramos vs. IAC, 175 SCRA 70 [1989]; Gevero vs. IAC,
G.R. 77029, August 30, 1990).41

Since the issue was not raised in the pleadings as an affirmative defense, private respondent was not
given an opportunity in the trial court to controvert the same through opposing evidence. Indeed,
this is a matter of due process. But we passed upon the issue anyway, if only to avoid deciding the
case on purely procedural grounds, and we repeat that, on the basis of the evidence already in the
record and as appreciated by the lower courts, the inevitable conclusion is simply that there was a
perfected contract of sale.

The Third Issue: Is the Contract Enforceable?

The petition alleged42:

Even assuming that Luis Co or Rivera did relay a verbal offer to sell at P5.5 million during
the meeting of 28 September 1987, and it was this verbal offer that Demetria and Janolo
accepted with their letter of 30 September 1987, the contract produced thereby would be
unenforceable by action — there being no note, memorandum or writing subscribed by the
Bank to evidence such contract. (Please see article 1403[2], Civil Code.)

Upon the other hand, the respondent Court in its Decision (p, 14) stated:

. . . Of course, the bank's letter of September 1, 1987 on the official price and the plaintiffs'
acceptance of the price on September 30, 1987, are not, in themselves, formal contracts of
sale. They are however clear embodiments of the fact that a contract of sale was perfected
between the parties, such contract being binding in whatever form it may have been entered
into (case citations omitted). Stated simply, the banks' letter of September 1, 1987, taken
together with plaintiffs' letter dated September 30, 1987, constitute in law a sufficient
memorandum of a perfected contract of sale.

The respondent Court could have added that the written communications commenced not only from
September 1, 1987 but from Janolo's August 20, 1987 letter. We agree that, taken together, these
letters constitute sufficient memoranda — since they include the names of the parties, the terms and
conditions of the contract, the price and a description of the property as the object of the contract.

But let it be assumed arguendo that the counter-offer during the meeting on September 28, 1987 did
constitute a "new" offer which was accepted by Janolo on September 30, 1987. Still, the statute of
frauds will not apply by reason of the failure of petitioners to object to oral testimony proving
petitioner Bank's counter-offer of P5.5 million. Hence, petitioners — by such utter failure to object —
are deemed to have waived any defects of the contract under the statute of frauds, pursuant to
Article 1405 of the Civil Code:
 Art. 1405. Contracts infringing the Statute of Frauds, referred to in No. 2 of article 1403, are
ratified by the failure to object to the presentation of oral evidence to prove the same, or by
the acceptance of benefits under them.

As private respondent pointed out in his Memorandum, oral testimony on the reaffirmation of the
counter-offer of P5.5 million is a plenty — and the silence of petitioners all throughout the
presentation makes the evidence binding on them thus;

A Yes, sir, I think it was September 28, 1987 and I was again present because Atty.
Demetria told me to accompany him we were able to meet Luis Co at the Bank.

xxx xxx xxx

Q Now, what transpired during this meeting with Luis Co of the Producers Bank?

A Atty. Demetria asked Mr. Luis Co whether the price could be reduced, sir.

Q What price?

A The 5.5 million pesos and Mr. Luis Co said that the amount cited by Mr. Mercurio Rivera
is the final price and that is the price they intends (sic) to have, sir.

Q What do you mean?.

A That is the amount they want, sir.

Q What is the reaction of the plaintiff Demetria to Luis Co's statement (sic) that the
defendant Rivera's counter-offer of 5.5 million was the defendant's bank (sic) final offer?

A He said in a day or two, he will make final acceptance, sir.

Q What is the response of Mr. Luis Co?.

A He said he will wait for the position of Atty. Demetria, sir.

[Direct testimony of Atty. Jose Fajardo, TSN, January 16, 1990, at pp. 18-21.]

Q What transpired during that meeting between you and Mr. Luis Co of the defendant
Bank?

A We went straight to the point because he being a busy person, I told him if the amount of
P5.5 million could still be reduced and he said that was already passed upon by the
committee. What the bank expects which was contrary to what Mr. Rivera stated. And he
told me that is the final offer of the bank P5.5 million and we should indicate our position as
soon as possible.

Q What was your response to the answer of Mr. Luis Co?

A I said that we are going to give him our answer in a few days and he said that was it. Atty.
Fajardo and I and Mr. Mercurio [Rivera] was with us at the time at his office.
 Q For the record, your Honor please, will you tell this Court who was with Mr. Co in his
Office in Producers Bank Building during this meeting?

A Mr. Co himself, Mr. Rivera, Atty. Fajardo and I.

Q By Mr. Co you are referring to?

A Mr. Luis Co.

Q After this meeting with Mr. Luis Co, did you and your partner accede on (sic) the counter
offer by the bank?

A Yes, sir, we did.? Two days thereafter we sent our acceptance to the bank which offer we
accepted, the offer of the bank which is P5.5 million.

[Direct testimony of Atty. Demetria, TSN, 26 April 1990, at pp. 34-36.]

Q According to Atty. Demetrio Demetria, the amount of P5.5 million was reached by the
Committee and it is not within his power to reduce this amount. What can you say to that
statement that the amount of P5.5 million was reached by the Committee?

A It was not discussed by the Committee but it was discussed initially by Luis Co and the
group of Atty. Demetrio Demetria and Atty. Pajardo (sic) in that September 28, 1987
meeting, sir.

[Direct testimony of Mercurio Rivera, TSN, 30 July 1990, pp. 14-15.]

The Fourth Issue: May the Conservator Revoke

the Perfected and Enforceable Contract.

It is not disputed that the petitioner Bank was under a conservator placed by the Central Bank of
the Philippines during the time that the negotiation and perfection of the contract of sale took place.
Petitioners energetically contended that the conservator has the power to revoke or overrule actions
of the management or the board of directors of a bank, under Section 28-A of Republic Act No. 265
(otherwise known as the Central Bank Act) as follows:

Whenever, on the basis of a report submitted by the appropriate supervising or examining

department, the Monetary Board finds that a bank or a non-bank financial intermediary
performing quasi-banking functions is in a state of continuing inability or unwillingness to
maintain a state of liquidity deemed adequate to protect the interest of depositors and
creditors, the Monetary Board may appoint a conservator to take charge of the assets,
liabilities, and the management of that institution, collect all monies and debts due said
institution and exercise all powers necessary to preserve the assets of the institution,
reorganize the management thereof, and restore its viability. He shall have the power to
overrule or revoke the actions of the previous management and board of directors of the bank
or non-bank financial intermediary performing quasi-banking functions, any provision of law
to the contrary notwithstanding, and such other powers as the Monetary Board shall deem
necessary.

In the first place, this issue of the Conservator's alleged authority to revoke or repudiate the
perfected contract of sale was raised for the first time in this Petition — as this was not litigated in
the trial court or Court of Appeals. As already stated earlier, issues not raised and/or ventilated in
the trial court, let alone in the Court of Appeals, "cannot be raised for the first time on appeal as it
would be offensive to the basic rules of fair play, justice and due process." 43

In the second place, there is absolutely no evidence that the Conservator, at the time the contract
was perfected, actually repudiated or overruled said contract of sale. The Bank's acting conservator
at the time, Rodolfo Romey, never objected to the sale of the property to Demetria and Janolo. What
petitioners are really referring to is the letter of Conservator Encarnacion, who took over from
Romey after the sale was perfected on September 30, 1987 (Annex V, petition) which unilaterally
repudiated — not the contract — but the authority of Rivera to make a binding offer — and which
unarguably came months after the perfection of the contract. Said letter dated May 12, 1988 is
reproduced hereunder:

May 12, 1988

Atty. Noe C. Zarate

Zarate Carandang Perlas & Ass.
Suite 323 Rufino Building
Ayala Avenue, Makati, Metro-Manila

Dear Atty. Zarate:

This pertains to your letter dated May 5, 1988 on behalf of Attys. Janolo and Demetria
regarding the six (6) parcels of land located at Sta. Rosa, Laguna.

We deny that Producers Bank has ever made a legal counter-offer to any of your clients nor
perfected a "contract to sell and buy" with any of them for the following reasons.

In the "Inter-Office Memorandum" dated April 25, 1986 addressed to and approved by former
Acting Conservator Mr. Andres I. Rustia, Producers Bank Senior Manager Perfecto M.
Pascua detailed the functions of Property Management Department (PMD) staff and officers
(Annex A.), you will immediately read that Manager Mr. Mercurio Rivera or any of his
subordinates has no authority, power or right to make any alleged counter-offer. In short,
your lawyer-clients did not deal with the authorized officers of the bank.

Moreover, under Sec. 23 and 36 of the Corporation Code of the Philippines (Bates Pambansa
Blg. 68.) and Sec. 28-A of the Central Bank Act (Rep. Act No. 265, as amended), only the
Board of Directors/Conservator may authorize the sale of any property of the
corportion/bank..

Our records do not show that Mr. Rivera was authorized by the old board or by any of the
bank conservators (starting January, 1984) to sell the aforesaid property to any of your
clients. Apparently, what took place were just preliminary discussions/consultations between
him and your clients, which everyone knows cannot bind the Bank's Board or Conservator.

We are, therefore, constrained to refuse any tender of payment by your clients, as the same is
patently violative of corporate and banking laws. We believe that this is more than sufficient
legal justification for refusing said alleged tender.
 Rest assured that we have nothing personal against your clients. All our acts are official,
legal and in accordance with law. We also have no personal interest in any of the properties
of the Bank.

Please be advised accordingly.

Very truly yours,

(Sgd.) Leonida T. Encarnacion

LEONIDA T. EDCARNACION
Acting Conservator

In the third place, while admittedly, the Central Bank law gives vast and far-reaching powers to the
conservator of a bank, it must be pointed out that such powers must be related to the "(preservation
of) the assets of the bank, (the reorganization of) the management thereof and (the restoration of) its
viability." Such powers, enormous and extensive as they are, cannot extend to the post-
facto repudiation of perfected transactions, otherwise they would infringe against the non-
impairment clause of the Constitution 44. If the legislature itself cannot revoke an existing valid
contract, how can it delegate such non-existent powers to the conservator under Section 28-A of said
law?

Obviously, therefore, Section 28-A merely gives the conservator power to revoke contracts that are,
under existing law, deemed to be defective — i.e., void, voidable, unenforceable or rescissible. Hence,
the conservator merely takes the place of a bank's board of directors. What the said board cannot do
— such as repudiating a contract validly entered into under the doctrine of implied authority — the
conservator cannot do either. Ineluctably, his power is not unilateral and he cannot simply repudiate
valid obligations of the Bank. His authority would be only to bring court actions to assail such
contracts — as he has already done so in the instant case. A contrary understanding of the law
would simply not be permitted by the Constitution. Neither by common sense. To rule otherwise
would be to enable a failing bank to become solvent, at the expense of third parties, by simply getting
the conservator to unilaterally revoke all previous dealings which had one way or another or come to
be considered unfavorable to the Bank, yielding nothing to perfected contractual rights nor vested
interests of the third parties who had dealt with the Bank.

The Fifth Issue: Were There Reversible Errors of Facts?

Basic is the doctrine that in petitions for review under Rule 45 of the Rules of Court, findings of fact
by the Court of Appeals are not reviewable by the Supreme Court. In Andres vs. Manufacturers
Hanover & Trust Corporation, 45, we held:

. . . The rule regarding questions of fact being raised with this Court in a petition
for certiorari under Rule 45 of the Revised Rules of Court has been stated in Remalante vs.
Tibe, G.R. No. 59514, February 25, 1988, 158 SCRA 138, thus:

The rule in this jurisdiction is that only questions of law may be raised in a petition
for certiorari under Rule 45 of the Revised Rules of Court. "The jurisdiction of the Supreme
Court in cases brought to it from the Court of Appeals is limited to reviewing and revising
the errors of law imputed to it, its findings of the fact being conclusive " [Chan vs. Court of
Appeals, G.R. No. L-27488, June 30, 1970, 33 SCRA 737, reiterating a long line of decisions].
This Court has emphatically declared that "it is not the function of the Supreme Court to
analyze or weigh such evidence all over again, its jurisdiction being limited to reviewing
errors of law that might have been committed by the lower court" (Tiongco v. De la Merced,
 G. R. No. L-24426, July 25, 1974, 58 SCRA 89; Corona vs. Court of Appeals, G.R. No. L-
62482, April 28, 1983, 121 SCRA 865; Baniqued vs. Court of Appeals, G. R. No. L-47531,
February 20, 1984, 127 SCRA 596). "Barring, therefore, a showing that the findings
complained of are totally devoid of support in the record, or that they are so glaringly
erroneous as to constitute serious abuse of discretion, such findings must stand, for this
Court is not expected or required to examine or contrast the oral and documentary evidence
submitted by the parties" [Santa Ana, Jr. vs. Hernandez, G. R. No. L-16394, December 17,
1966, 18 SCRA 973] [at pp. 144-145.]

Likewise, in Bernardo vs. Court of Appeals 46, we held:

The resolution of this petition invites us to closely scrutinize the facts of the case, relating to
the sufficiency of evidence and the credibility of witnesses presented. This Court so held that
it is not the function of the Supreme Court to analyze or weigh such evidence all over again.
The Supreme Court's jurisdiction is limited to reviewing errors of law that may have been
committed by the lower court. The Supreme Court is not a trier of facts. . . .

As held in the recent case of Chua Tiong Tay vs. Court of Appeals and Goldrock Construction and
Development Corp. 47:

The Court has consistently held that the factual findings of the trial court, as well as the
Court of Appeals, are final and conclusive and may not be reviewed on appeal. Among the
exceptional circumstances where a reassessment of facts found by the lower courts is allowed
are when the conclusion is a finding grounded entirely on speculation, surmises or
conjectures; when the inference made is manifestly absurd, mistaken or impossible; when
there is grave abuse of discretion in the appreciation of facts; when the judgment is premised
on a misapprehension of facts; when the findings went beyond the issues of the case and the
same are contrary to the admissions of both appellant and appellee. After a careful study of
the case at bench, we find none of the above grounds present to justify the re-evaluation of
the findings of fact made by the courts below.

In the same vein, the ruling of this Court in the recent case of South Sea Surety and Insurance
Company Inc. vs. Hon. Court of Appeals, et al. 48 is equally applicable to the present case:

We see no valid reason to discard the factual conclusions of the appellate court, . . . (I)t is not
the function of this Court to assess and evaluate all over again the evidence, testimonial and
documentary, adduced by the parties, particularly where, such as here, the findings of both
the trial court and the appellate court on the matter coincide. (emphasis supplied)

Petitioners, however, assailed the respondent Court's Decision as "fraught with findings and
conclusions which were not only contrary to the evidence on record but have no bases at all,"
specifically the findings that (1) the "Bank's counter-offer price of P5.5 million had been determined
by the past due committee and approved by conservator Romey, after Rivera presented the same for
discussion" and (2) "the meeting with Co was not to scale down the price and start negotiations
anew, but a meeting on the already determined price of P5.5 million" Hence, citing Philippine
National Bank vs. Court of Appeals 49, petitioners are asking us to review and reverse such factual
findings.

The first point was clearly passed upon by the Court of Appeals 50, thus:

There can be no other logical conclusion than that when, on September 1, 1987, Rivera
informed plaintiffs by letter that "the bank's counter-offer is at P5.5 Million for more than
 101 hectares on lot basis, "such counter-offer price had been determined by the Past Due
Committee and approved by the Conservator after Rivera had duly presented plaintiffs' offer
for discussion by the Committee . . . Tersely put, under the established fact, the price of P5.5
Million was, as clearly worded in Rivera's letter (Exh. "E"), the official and definitive price at
which the bank was selling the property. (p. 11, CA Decision)

xxx xxx xxx

. . . The argument deserves scant consideration. As pointed out by plaintiff, during the
meeting of September 28, 1987 between the plaintiffs, Rivera and Luis Co, the senior vice-
president of the bank, where the topic was the possible lowering of the price, the bank official
refused it and confirmed that the P5.5 Million price had been passed upon by the Committee
and could no longer be lowered (TSN of April 27, 1990, pp. 34-35) (p. 15, CA Decision).

The respondent Court did not believe the evidence of the petitioners on this point, characterizing it
as "not credible" and "at best equivocal and considering the gratuitous and self-serving character of
these declarations, the bank's submissions on this point do not inspire belief."

To become credible and unequivocal, petitioners should have presented then Conservator Rodolfo
Romey to testify on their behalf, as he would have been in the best position to establish their thesis.
Under the rules on evidence 51, such suppression gives rise to the presumption that his testimony
would have been adverse, if produced.

The second point was squarely raised in the Court of Appeals, but petitioners' evidence was deemed
insufficient by both the trial court and the respondent Court, and instead, it was respondent's
submissions that were believed and became bases of the conclusions arrived at.

In fine, it is quite evident that the legal conclusions arrived at from the findings of fact by the lower
courts are valid and correct. But the petitioners are now asking this Court to disturb these findings
to fit the conclusion they are espousing, This we cannot do.

To be sure, there are settled exceptions where the Supreme Court may disregard findings of fact by
the Court of Appeals 52. We have studied both the records and the CA Decision and we find no such
exceptions in this case. On the contrary, the findings of the said Court are supported by a
preponderance of competent and credible evidence. The inferences and conclusions are seasonably
based on evidence duly identified in the Decision. Indeed, the appellate court patiently traversed and
dissected the issues presented before it, lending credibility and dependability to its findings. The
best that can be said in favor of petitioners on this point is that the factual findings of respondent
Court did not correspond to petitioners' claims, but were closer to the evidence as presented in the
trial court by private respondent. But this alone is no reason to reverse or ignore such factual
findings, particularly where, as in this case, the trial court and the appellate court were in common
agreement thereon. Indeed, conclusions of fact of a trial judge — as affirmed by the Court of Appeals
— are conclusive upon this Court, absent any serious abuse or evident lack of basis or capriciousness
of any kind, because the trial court is in a better position to observe the demeanor of the witnesses
and their courtroom manner as well as to examine the real evidence presented.

Epilogue.

In summary, there are two procedural issues involved forum-shopping and the raising of issues for
the first time on appeal [viz., the extinguishment of the Bank's offer of P5.5 million and the
conservator's powers to repudiate contracts entered into by the Bank's officers] — which per se could
justify the dismissal of the present case. We did not limit ourselves thereto, but delved as well into
the substantive issues — the perfection of the contract of sale and its enforceability, which required
the determination of questions of fact. While the Supreme Court is not a trier of facts and as a rule
we are not required to look into the factual bases of respondent Court's decisions and resolutions, we
did so just the same, if only to find out whether there is reason to disturb any of its factual findings,
for we are only too aware of the depth, magnitude and vigor by which the parties through their
respective eloquent counsel, argued their positions before this Court.

We are not unmindful of the tenacious plea that the petitioner Bank is operating abnormally under a
government-appointed conservator and "there is need to rehabilitate the Bank in order to get it back
on its feet . . . as many people depend on (it) for investments, deposits and well as employment. As of
June 1987, the Bank's overdraft with the Central Bank had already reached P1.023 billion . . . and
there were (other) offers to buy the subject properties for a substantial amount of money." 53

While we do not deny our sympathy for this distressed bank, at the same time, the Court cannot
emotionally close its eyes to overriding considerations of substantive and procedural law, like respect
for perfected contracts, non-impairment of obligations and sanctions against forum-shopping, which
must be upheld under the rule of law and blind justice.

This Court cannot just gloss over private respondent's submission that, while the subject properties
may currently command a much higher price, it is equally true that at the time of the transaction in
1987, the price agreed upon of P5.5 million was reasonable, considering that the Bank acquired these
properties at a foreclosure sale for no more than P3.5 million 54. That the Bank procrastinated and
refused to honor its commitment to sell cannot now be used by it to promote its own advantage, to
enable it to escape its binding obligation and to reap the benefits of the increase in land values. To
rule in favor of the Bank simply because the property in question has algebraically accelerated in
price during the long period of litigation is to reward lawlessness and delays in the fulfillment of
binding contracts. Certainly, the Court cannot stamp its imprimatur on such outrageous proposition.

WHEREFORE, finding no reversible error in the questioned Decision and Resolution, the Court
hereby DENIES the petition. The assailed Decision is AFFIRMED. Moreover, petitioner Bank is
REPRIMANDED for engaging in forum-shopping and WARNED that a repetition of the same or
similar acts will be dealt with more severely. Costs against petitioners.

SO ORDERED.

I.B.2. Cessation of Banking Business

RBSM v. MB

This is a petition for review on certiorari 1 of a decision2 and resolution3 of the Court of Appeals (CA)
dated March 28, 2000 and November 13, 2001, respectively, in CA-G.R. SP No. 57112.

Petitioner Rural Bank of San Miguel, Inc. (RBSM) was a domestic corporation engaged in banking. It
started operations in 1962 and by year 2000 had 15 branches in Bulacan. 4 Petitioner Hilario P.
Soriano claims to be the majority stockholder of its outstanding shares of stock.5

On January 21, 2000, respondent Monetary Board (MB), the governing board of respondent Bangko
Sentral ng Pilipinas (BSP), issued Resolution No. 105 prohibiting RBSM from doing business in the
Philippines, placing it under receivership and designating respondent Philippine Deposit Insurance
Corporation (PDIC) as receiver:
On the basis of the comptrollership/monitoring report as of October 31, 1999 as reported by Mr.
Wilfredo B. Domo-ong, Director, Department of Rural Banks, in his memorandum dated January 20,
2000, which report showed that [RBSM] (a) is unable to pay its liabilities as they become due in the
ordinary course of business; (b) cannot continue in business without involving probable losses to its
depositors and creditors; that the management of the bank had been accordingly informed of the
need to infuse additional capital to place the bank in a solvent financial condition and was given
adequate time within which to make the required infusion and that no infusion of adequate fresh
capital was made, the Board decided as follows:

1. To prohibit the bank from doing business in the Philippines and to place its assets and
affairs under receivership in accordance with Section 30 of [RA 7653];

2. To designate the [PDIC] as receiver of the bank;

xxx xxx xxx6

On January 31, 2000, petitioners filed a petition for certiorari and prohibition in the Regional Trial
Court (RTC) of Malolos, Branch 22 to nullify and set aside Resolution No. 105. 7 However, on
February 7, 2000, petitioners filed a notice of withdrawal in the RTC and, on the same day, filed a
special civil action for certiorari and prohibition in the CA. On February 8, 2000, the RTC dismissed
the case pursuant to Section 1, Rule 17 of the Rules of Court.8

The CA’s findings of facts were as follows.

To assist its impaired liquidity and operations, the RBSM was granted emergency loans on different
occasions in the aggregate amount of P375 [million].

As early as November 18, 1998, Land Bank of the Philippines (LBP) advised RBSM that it will
terminate the clearing of RBSM’s checks in view of the latter’s frequent clearing losses and
continuing failure to replenish its Special Clearing Demand Deposit with LBP. The BSP interceded
with LBP not to terminate the clearing arrangement of RBSM to protect the interests of RBSM’s
depositors and creditors.

After a year, or on November 29, 1999, the LBP informed the BSP of the termination of the clearing
facility of RBSM to take effect on December 29, 1999, in view of the clearing problems of RBSM.

On December 28, 1999, the MB approved the release of P26.189 [million] which is the last tranche of
the P375 million emergency loan for the sole purpose of servicing and meeting the withdrawals of its
depositors. Of the P26.180 million, xxx P12.6 million xxx was not used to service withdrawals [and]
remains unaccounted for as admitted by [RBSM’s Treasury Officer and Officer-in-Charge of
Treasury]. Instead of servicing withdrawals of depositors, RBSM paid Forcecollect Professional
Solution, Inc. and Surecollect Professional, Inc., entities which are owned and controlled by Hilario
P. Soriano and other RBSM officers.

On January 4, 2000, RBSM declared a bank holiday. RBSM and all of its 15 branches were closed
from doing business.

Alarmed and disturbed by the unilateral declaration of bank holiday, [BSP] wanted to examine the
books and records of RBSM but encountered problems.
Meanwhile, on November 10, 1999, RBSM’s designated comptroller, Ms. Zenaida Cabais of the BSP,
submitted to the Department of Rural Banks, BSP, a Comptrollership Report on her findings on the
financial condition and operations of the bank as of October 31, 1999. Another set of findings was
submitted by said comptroller [and] this second report reflected the financial status of RBSM as of
December 31, 1999.

The findings of the comptroller on the financial state of RBSM as of October 31, 1999 in comparison
with the financial condition as of December 31, 1999 is summed up pertinently as follows:

FINANCIAL CONDITION OF RBSM

As of Oct. 31, 1999 As of Dec. 31, 1999

Total obligations/ P1,076,863,000.00 1,009,898,000.00

Liabilities

Realizable Assets 898,588,000.00 796,930,000.00

Deficit 178,275,000.00 212,968,000.00

Cash on Hand 101,441.547.00 8,266,450.00

Required Capital Infusion P252,120,000.00

Capital Infusion P5,000,000.00

(On Dec. 20, 1999)

Actual Breakdown of Total Obligations:

1) Deposits of 20,000 depositors – P578,201,000.00

2) Borrowings from BSP – P320,907,000.00

3) Unremitted withholding and gross receipt taxes – P57,403,000.00.9

Based on these comptrollership reports, the director of the Department of Rural Banks Supervision
and Examination Sector, Wilfredo B. Domo-ong, made a report to the MB dated January 20,
2000.10 The MB, after evaluating and deliberating on the findings and recommendation of the
Department of Rural Banks Supervision and Examination Sector, issued Resolution No. 105 on
January 21, 2000.11 Thereafter, PDIC implemented the closure order and took over the management
of RBSM’s assets and affairs.

In their petition12 before the CA, petitioners claimed that respondents MB and BSP committed grave
abuse of discretion in issuing Resolution No. 105. The petition was dismissed by the CA on March 28,
2000. It held, among others, that the decision of the MB to issue Resolution No. 105 was based on the
findings and recommendations of the Department of Rural Banks Supervision and Examination
Sector, the comptroller reports as of October 31, 1999 and December 31, 1999 and the declaration of
a bank holiday. Such could be considered as substantial evidence.13

Pertinently, on June 9, 2000, on the basis of reports prepared by PDIC stating that RBSM could not
resume business with sufficient assurance of protecting the interest of its depositors, creditors and
the general public, the MB passed Resolution No. 966 directing PDIC to proceed with the liquidation
of RBSM under Section 30 of RA 7653.14

Hence this petition.

It is well-settled that the closure of a bank may be considered as an exercise of police power. 15 The
action of the MB on this matter is final and executory. 16 Such exercise may nonetheless be subject to
judicial inquiry and can be set aside if found to be in excess of jurisdiction or with such grave abuse
of discretion as to amount to lack or excess of jurisdiction. 17

Petitioners argue that Resolution No. 105 was bereft of any basis considering that no complete
examination had been conducted before it was issued. This case essentially boils down to one core
issue: whether Section 30 of RA 7653 (also known as the New Central Bank Act) and applicable
jurisprudence require a current and complete examination of the bank before it can be closed and
placed under receivership.

Section 30 of RA 7653 provides:

SECTION 30. Proceedings in Receivership and Liquidation. — Whenever, upon report of the head
of the supervising or examining department, the Monetary Board finds that a bank or quasi-
bank:

(a) is unable to pay its liabilities as they become due in the ordinary course of business:
Provided, That this shall not include inability to pay caused by extraordinary demands
induced by financial panic in the banking community;

(b) has insufficient realizable assets, as determined by the [BSP] to meet its liabilities; or

(c) cannot continue in business without involving probable losses to its depositors or
creditors; or

(d) has willfully violated a cease and desist order under Section 37 that has become final,
involving acts or transactions which amount to fraud or a dissipation of the assets of the
institution; in which cases, the Monetary Board may summarily and without need for
prior hearing forbid the institution from doing business in the Philippines and
designate the Philippine Deposit Insurance Corporation as receiver of the banking
institution.

xxx xxx xxx

The actions of the Monetary Board taken under this section or under Section 29 of this Act shall be
final and executory, and may not be restrained or set aside by the court except on petition for
certiorari on the ground that the action taken was in excess of jurisdiction or with such grave abuse
of discretion as to amount to lack or excess of jurisdiction. The petition for certiorari may only be
filed by the stockholders of record representing the majority of the capital stock within ten (10) days
from receipt by the board of directors of the institution of the order directing receivership, liquidation
or conservatorship. (Emphasis supplied)

xxx xxx xxx

Petitioners contend that there must be a current, thorough and complete examination before a bank
can be closed under Section 30 of RA 7653. They argue that this section should be harmonized with
Sections 25 and 28 of the same law:

SECTION 25. Supervision and Examination. — The [BSP] shall have supervision over, and conduct
periodic or special examinations of, banking institutions and quasi-banks, including their
subsidiaries and affiliates engaged in allied activities.

xxx xxx xxx

SECTION 28. Examination and Fees. — The supervising and examining department head,
personally or by deputy, shall examine the books of every banking institution once in every twelve
(12) months, and at such other time as the Monetary Board by an affirmative vote of five (5)
members may deem expedient and to make a report on the same to the Monetary Board:
Provided that there shall be an interval of at least twelve (12) months between annual examinations.
(Emphasis supplied)

xxx xxx xxx

According to the petitioners, it is clear from these provisions that the "report of the supervising or
examining department" required under Section 30 refers to the report on the examination of the
bank which, under Section 28, must be made to the MB after the supervising or examining head
conducts an examination mandated by Sections 25 and 28.18 They cite Banco Filipino Savings &
Mortgage Bank v. Monetary Board, Central Bank of the Philippines 19 wherein the Court ruled:

There is no question that under Section 29 of the Central Bank Act, the following are
the mandatory requirements to be complied with before a bank found to be insolvent is ordered
closed and forbidden to do business in the Philippines: Firstly, an examination shall be
conducted by the head of the appropriate supervising or examining department or his
examiners or agents into the condition of the bank; secondly, it shall be disclosed in the
examination that the condition of the bank is one of insolvency, or that its continuance in business
would involve probable loss to its depositors or creditors; thirdly, the department head concerned
shall inform the Monetary Board in writing, of the facts; and lastly, the Monetary Board shall find
the statements of the department head to be true.20 (Emphasis supplied)

Petitioners assert that an examination is necessary and not a mere report, otherwise the decision to
close a bank would be arbitrary.

Respondents counter that RA 7653 merely requires a report of the head of the supervising or
examining department. They maintain that the term "report" under Section 30 and the word
"examination" used in Section 29 of the old law are not synonymous. "Examination" connotes in-
depth analysis, evaluation, inquiry or investigation while "report" connotes a simple disclosure or
narration of facts for informative purposes.21

Petitioners’ contention has no merit. Banco Filipino and other cases petitioners cited22 were decided
using Section 29 of the old law (RA 265):

SECTION 29. Proceedings upon insolvency. — Whenever, upon examination by the head of the
appropriate supervising or examining department or his examiners or agents into the
condition of any bank or non-bank financial intermediary performing quasi-banking functions, it
shall be disclosed that the condition of the same is one of insolvency, or that its continuance in
business would involve probable loss to its depositors or creditors, it shall be the duty of the
department head concerned forthwith, in writing, to inform the Monetary Board of the facts. The
Board may, upon finding the statements of the department head to be true, forbid the institution to
do business in the Philippines and designate an official of the Central Bank or a person of recognized
competence in banking or finance, as receiver to immediately take charge of its assets and liabilities,
as expeditiously as possible collect and gather all the assets and administer the same for the benefits
of its creditors, and represent the bank personally or through counsel as he may retain in all actions
or proceedings for or against the institution, exercising all the powers necessary for these purposes
including, but not limited to, bringing and foreclosing mortgages in the name of the bank or non-
bank financial intermediary performing quasi-banking functions. (Emphasis supplied)

xxx xxx xxx

Thus in Banco Filipino, we ruled that an "examination [conducted] by the head of the appropriate
supervising or examining department or his examiners or agents into the condition of the bank" 23 is
necessary before the MB can order its closure.

However, RA 265, including Section 29 thereof, was expressly repealed by RA 7653 which took effect
in 1993. Resolution No. 105 was issued on January 21, 2000. Hence, petitioners’ reliance on Banco
Filipino which was decided under RA 265 was misplaced.

In RA 7653, only a "report of the head of the supervising or examining department" is necessary. It
is an established rule in statutory construction that where the words of a statute are clear, plain and
free from ambiguity, it must be given its literal meaning and applied without attempted
interpretation:24

This plain meaning rule or verba legis derived from the maxim index animi sermo est (speech is the
index of intention) rests on the valid presumption that the words employed by the legislature in a
statute correctly express its intention or will and preclude the court from construing it differently.
The legislature is presumed to know the meaning of the words, to have used words advisedly, and to
have expressed its intent by use of such words as are found in the statute. Verba legis non est
recedendum, or from the words of a statute there should be no departure. 25

The word "report" has a definite and unambiguous meaning which is clearly different from
"examination." A report, as a noun, may be defined as "something that gives information" or "a
usually detailed account or statement."26On the other hand, an examination is "a search,
investigation or scrutiny."27

This Court cannot look for or impose another meaning on the term "report" or to construe it as
synonymous with "examination." From the words used in Section 30, it is clear that RA 7653 no
longer requires that an examination be made before the MB can issue a closure order. We cannot
make it a requirement in the absence of legal basis.

Indeed, the court may consider the spirit and reason of the statute, where a literal meaning would
lead to absurdity, contradiction, injustice, or would defeat the clear purpose of the
lawmakers.28 However, these problems are not present here. Using the literal meaning of "report"
does not lead to absurdity, contradiction or injustice. Neither does it defeat the intent of the
legislators. The purpose of the law is to make the closure of a bank summary and expeditious in
order to protect public interest. This is also why prior notice and hearing are no longer required
before a bank can be closed.29

Laying down the requisites for the closure of a bank under the law is the prerogative of the
legislature and what its wisdom dictates. The lawmakers could have easily retained the word
"examination" (and in the process also preserved the jurisprudence attached to it) but they did not
and instead opted to use the word "report." The insistence on an examination is not sanctioned by RA
7653 and we would be guilty of judicial legislation were we to make it a requirement when such is
not supported by the language of the law.

What is being raised here as grave abuse of discretion on the part of the respondents was the lack of
an examination and not the supposed arbitrariness with which the conclusions of the director of the
Department of Rural Banks Supervision and Examination Sector had been reached in the report
which became the basis of Resolution No. 105.1awphi1.net

The absence of an examination before the closure of RBSM did not mean that there was no basis for
the closure order. Needless to say, the decision of the MB and BSP, like any other administrative
body, must have something to support itself and its findings of fact must be supported by substantial
evidence. But it is clear under RA 7653 that the basis need not arise from an examination as
required in the old law.

We thus rule that the MB had sufficient basis to arrive at a sound conclusion that there were
grounds that would justify RBSM’s closure. It relied on the report of Mr. Domo-ong, the head of the
supervising or examining department, with the findings that: (1) RBSM was unable to pay its
liabilities as they became due in the ordinary course of business and (2) that it could not continue in
business without incurring probable losses to its depositors and creditors. 30 The report was a 50-page
memorandum detailing the facts supporting those grounds, an extensive chronology of events
revealing the multitude of problems which faced RBSM and the recommendations based on those
findings.

In short, MB and BSP complied with all the requirements of RA 7653. By relying on a report before
placing a bank under receivership, the MB and BSP did not only follow the letter of the law, they
were also faithful to its spirit, which was to act expeditiously. Accordingly, the issuance of Resolution
No. 105 was untainted with arbitrariness.

Having dispensed with the issue decisive of this case, it becomes unnecessary to resolve the other
minor issues raised.31

WHEREFORE, the petition is hereby DENIED. The March 28, 2000 decision and November 13,
2001 resolution of the Court of Appeals in CA-G.R. SP No. 57112 are AFFIRMED.

Costs against petitioners.

SO ORDERED.

Banco Filipino Savings and Mortgage Bank v. MB

This refers to nine (9) consolidated cases concerning the legality of the closure and receivership of
petitioner Banco Filipino Savings and Mortgage Bank (Banco Filipino for brevity) pursuant to the
order of respondent Monetary Board. Six (6) of these cases, namely, G.R. Nos. 68878, 77255-68,
78766, 81303, 81304 and 90473 involve the common issue of whether or not the liquidator appointed
by the respondent Central Bank (CB for brevity) has the authority to prosecute as well as to defend
suits, and to foreclose mortgages for and in behalf of the bank while the issue on the validity of the
receivership and liquidation of the latter is pending resolution in G.R. No. 7004. Corollary to this
issue is whether the CB can be sued to fulfill financial commitments of a closed bank pursuant to
Section 29 of the Central Bank Act. On the other hand, the other three (3) cases, namely, G.R. Nos.
70054, which is the main case, 78767 and 78894 all seek to annul and set aside M.B. Resolution No.
75 issued by respondents Monetary Board and Central Bank on January 25, 1985.

The antecedent facts of each of the nine (9) cases are as follows:

G.R No. 68878

This is a motion for reconsideration, filed by respondent Celestina Pahimuntung, of the decision
promulgated by thisCourt on April 8, 1986, granting the petition for review on certiorari and
reversing the questioned decision of respondent appellate court, which annulled the writ of
possession issued by the trial court in favor of petitioner.

The respondent-movant contends that the petitioner has no more personality to continue prosecuting
the instant case considering that petitioner bank was placed under receivership since January 25,
1985 by the Central Bank pursuant to the resolution of the Monetary Board.

G.R. Nos. 77255-58

Petitioners Top Management Programs Corporation (Top Management for brevity) and Pilar
Development Corporation (Pilar Development for brevity) are corporations engaged in the business
of developing residential subdivisions.

Top Management obtained a loan of P4,836,000 from Banco Filipino as evidenced by a promissory
note dated January 7, 1982 payable in three years from date. The loan was secured by real estate
mortgage in its various properties in Cavite. Likewise, Pilar Development obtained loans from Banco
Filipino between 1982 and 1983 in the principal amounts of P6,000,000, P7,370,000 and P5,300,000
with maturity dates on December 28, 1984, January 5, 1985 and February 16, 1984, respectively. To
secure the loan, Pilar Development mortgaged to Banco Filipino various properties in Dasmariñas,
Cavite.

On January 25, 1985, the Monetary Board issued a resolution finding Banco Filipino insolvent and
unable to do business without loss to its creditors and depositors. It placed Banco Filipino under
receivership of Carlota Valenzuela, Deputy Governor of the Central Bank.

On March 22, 1985, the Monetary Board issued another resolution placing the bank under
liquidation and designating Valenzuela as liquidator. By virtue of her authority as liquidator,
Valenzuela appointed the law firm of Sycip, Salazar, et al. to represent Banco Filipino in all
litigations.

On March 26, 1985, Banco Filipino filed the petition for certiorari in G.R. No. 70054 questioning the
validity of the resolutions issued by the Monetary Board authorizing the receivership and liquidation
of Banco Filipino.

In a resolution dated August 29, 1985, this Court in G.R. No. 70054 resolved to issue a temporary
restraining order, effective during the same period of 30 days, enjoining the respondents from
executing further acts of liquidation of the bank; that acts such as receiving collectibles and
receivables or paying off creditors' claims and other transactions pertaining to normal operations of a
bank are not enjoined. The Central Bank is ordered to designate a comptroller for Banco Filipino.
Subsequently, Top Management failed to pay its loan on the due date. Hence, the law firm of Sycip,
Salazar, et al. acting as counsel for Banco Filipino under authority of Valenzuela as liquidator,
applied for extra-judicial foreclosure of the mortgage over Top Management's properties. Thus, the
Ex-Officio Sheriff of the Regional Trial Court of Cavite issued a notice of extra-judicial foreclosure
sale of the properties on December 16, 1985.

On December 9, 1985, Top Management filed a petition for injunction and prohibition with the
respondent appellate court docketed as CA-G.R. SP No. 07892 seeking to enjoin the Regional Trial
Court of Cavite, the ex-officio sheriff of said court and Sycip, Salazar, et al. from proceeding with
foreclosure sale.

Similarly, Pilar Development defaulted in the payment of its loans. The law firm of Sycip, Salazar, et
al. filed separate applications with the ex-officio sheriff of the Regional Trial Court of Cavite for the
extra-judicial foreclosure of mortgage over its properties.

Hence, Pilar Development filed with the respondent appellate court a petition for prohibition with
prayer for the issuance of a writ of preliminary injunction docketed as CA-G.R SP Nos. 08962-64
seeking to enjoin the same respondents from enforcing the foreclosure sale of its properties. CA-G.R.
SP Nos. 07892 and 08962-64 were consolidated and jointly decided.

On October 30, 1986, the respondent appellate court rendered a decision dismissing the
aforementioned petitions.

Hence, this petition was filed by the petitioners Top Management and Pilar Development alleging
that Carlota Valenzuela, who was appointed by the Monetary Board as liquidator of Banco Filipino,
has no authority to proceed with the foreclosure sale of petitioners' properties on the ground that the
resolution of the issue on the validity of the closure and liquidation of Banco Filipino is still pending
with this Court in G.R. 70054.

G.R. No. 78766

Petitioner El Grande Development Corporation (El Grande for brevity) is engaged in the business of
developing residential subdivisions. It was extended by respondent Banco Filipino a credit
accommodation to finance its housing program. Hence, petitioner was granted a loan in the amount
of P8,034,130.00 secured by real estate mortgages on its various estates located in Cavite.

On January 15, 1985, the Monetary Board forbade Banco Filipino to do business, placed it under
receivership and designated Deputy Governor Carlota Valenzuela as receiver. On March 22, 1985,
the Monetary Board confirmed Banco Filipino's insolvency and designated the receiver Carlota
Valenzuela as liquidator.

When petitioner El Grande failed to pay its indebtedness to Banco Filipino, the latter thru its
liquidator, Carlota Valenzuela, initiated the foreclosure with the Clerk of Court and Ex-officio sheriff
of RTC Cavite. Subsequently, on March 31, 1986, the ex-officio sheriff issued the notice of extra-
judicial sale of the mortgaged properties of El Grande scheduled on April 30, 1986.

In order to stop the public auction sale, petitioner El Grande filed a petition for prohibition with the
Court of Appeals alleging that respondent Carlota Valenzuela could not proceed with the foreclosure
of its mortgaged properties on the ground that this Court in G.R. No. 70054 issued a resolution dated
August 29, 1985, which restrained Carlota Valenzuela from acting as liquidator and allowed Banco
Filipino to resume banking operations only under a Central Bank comptroller.
On March 2, 1987, the Court of Appeals rendered a decision dismissing the petition.

Hence this petition for review on certiorari was filed alleging that the respondent court erred when it
held in its decision that although Carlota P. Valenzuela was restrained by this Honorable Court from
exercising acts in liquidation of Banco Filipino Savings & Mortgage Bank, she was not legally
precluded from foreclosing the mortgage over the properties of the petitioner through counsel
retained by her for the purpose.

G.R. No. 81303

On November 8, 1985, petitioner Pilar Development Corporation (Pilar Development for brevity)
filed an action against Banco Filipino, the Central Bank and Carlota Valenzuela for specific
performance, docketed as Civil Case No. 12191. It appears that the former management of Banco
Filipino appointed Quisumbing & Associates as counsel for Banco Filipino. On June 12, 1986 the
said law firm filed an answer for Banco Filipino which confessed judgment against Banco Filipino.

On June 17, 1986, petitioner filed a second amended complaint. The Central Bank and Carlota
Valenzuela, thru the law firm Sycip, Salazar, Hernandez and Gatmaitan filed an answer to the
complaint.

On June 23, 1986, Sycip, et al., acting for all the defendants including Banco Filipino moved that the
answer filed by Quisumbing & Associates for defendant Banco Filipino be expunged from the
records. Despite opposition from Quisumbing & Associates, the trial court granted the motion to
expunge in an order dated March 17, 1987. Petitioner Pilar Development moved to reconsider the
order but the motion was denied.

Petitioner Pilar Development filed with the respondent appellate court a petition for certiorari and
mandamus to annul the order of the trial court. The Court of Appeals rendered a decision dismissing
the petition. A petition was filed with this Court but was denied in a resolution dated March 22,
1988. Hence, this instant motion for reconsideration.

G.R. No. 81304

On July 9, 1985, petitioner BF Homes Incorporated (BF Homes for brevity) filed an action with the
trial court to compel the Central Bank to restore petitioner's; financing facility with Banco Filipino.

The Central Bank filed a motion to dismiss the action. Petitioner BF Homes in a supplemental
complaint impleaded as defendant Carlota Valenzuela as receiver of Banco Filipino Savings and
Mortgage Bank.

On April 8, 1985, petitioner filed a second supplemental complaint to which respondents filed a
motion to dismiss.

On July 9, 1985, the trial court granted the motion to dismiss the supplemental complaint on the
grounds (1) that plaintiff has no contractual relation with the defendants, and (2) that the
Intermediate Appellate Court in a previous decision in AC-G.R. SP. No. 04609 had stated that Banco
Filipino has been ordered closed and placed under receivership pending liquidation, and thus, the
continuation of the facility sued for by the plaintiff has become legally impossible and the suit has
become moot.
The order of dismissal was appealed by the petitioner to the Court of Appeals. On November 4, 1987,
the respondent appellate court dismissed the appeal and affirmed the order of the trial court.

Hence, this petition for review on certiorari was filed, alleging that the respondent court erred when
it found that the private respondents should not be the ones to respond to the cause of action
asserted by the petitioner and the petitioner did not have any cause of action against the
respondents Central Bank and Carlota Valenzuela.

G.R. No. 90473

Petitioner El Grande Development Corporation (El Grande for brevity) obtained a loan from Banco
Filipino in the amount of P8,034,130.00, secured by a mortgage over its five parcels of land located in
Cavite which were covered by Transfer Certificate of Title Nos. T-82187, T-109027, T-132897, T-
148377, and T-79371 of the Registry of Deeds of Cavite.

When Banco Filipino was ordered closed and placed under receivership in 1985, the appointed
liquidator of BF, thru its counsel Sycip, Salazar, et al. applied with the ex-officio sheriff of the
Regional Trial Court of Cavite for the extrajudicial foreclosure of the mortgage constituted over
petitioner's properties. On March 24, 1986, the ex-officio sheriff issued a notice of extrajudicial
foreclosure sale of the properties of petitioner.

Thus, petitioner filed with the Court of Appeals a petition for prohibition with prayer for writ of
preliminary injunction to enjoin the respondents from foreclosing the mortgage and to nullify the
notice of foreclosure.

On June 16, 1989, respondent Court of Appeals rendered a decision dismissing the petition.

Not satisfied with the decision, petitioner filed the instant petition for review on certiorari.

G.R. No. 70054

Banco Filipino Savings and Mortgage Bank was authorized to operate as such under M.B. Resolution
No. 223 dated February 14, 1963. It commenced operations on July 9, 1964. It has eighty-nine (89)
operating branches, forty-six (46) of which are in Manila, with more than three (3) million depositors.

As of July 31, 1984, the list of stockholders showed the major stockholders to be: Metropolis
Development Corporation, Apex Mortgage and Loans Corporation, Filipino Business Consultants,
Tiu Family Group, LBH Inc. and Anthony Aguirre.

Petitioner Bank had an approved emergency advance of P119.7 million under M.B. Resolution No.
839 dated June 29, 1984. This was augmented with a P3 billion credit line under M.B. Resolution
No. 934 dated July 27, 1984.

On the same date, respondent Board issued M.B. Resolution No. 955 placing petitioner bank under
conservatorship of Basilio Estanislao. He was later replaced by Gilberto Teodoro as conservator on
August 10, 1984. The latter submitted a report dated January 8, 1985 to respondent Board on the
conservatorship of petitioner bank, which report shall hereinafter be referred to as the Teodoro
report.

Subsequently, another report dated January 23, 1985 was submitted to the Monetary Board by
Ramon Tiaoqui, Special Assistant to the Governor and Head, SES Department II of the Central
Bank, regarding the major findings of examination on the financial condition of petitioner BF as of
July 31, 1984. The report, which shall be referred to herein as the Tiaoqui Report contained the
following conclusion and recommendation:

The examination findings as of July 31, 1984, as shown earlier, indicate one of
insolvency and illiquidity and further confirms the above conclusion of the
Conservator.

All the foregoing provides sufficient justification for forbidding the bank from
engaging in banking.

Foregoing considered, the following are recommended:

1. Forbid the Banco Filipino Savings & Mortgage Bank to do business

in the Philippines effective the beginning of office January 1985,
pursuant to Sec. 29 of R.A No. 265, as amended;

2. Designate the Head of the Conservator Team at the bank, as

Receiver of Banco Filipino Savings & Mortgage Bank, to immediately
take charge of the assets and liabilities, as expeditiously as possible
collect and gather all the assets and administer the same for the
benefit of all the creditors, and exercise all the powers necessary for
these purposes including but not limited to bringing suits and
foreclosing mortgages in the name of the bank.

3. The Board of Directors and the principal officers from Senior Vice
Presidents, as listed in the attached Annex "A" be included in the
watchlist of the Supervision and Examination Sector until such time
that they shall have cleared themselves.

4. Refer to the Central Bank's Legal Department and Office of Special

Investigation the report on the findings on Banco Filipino for
investigation and possible prosecution of directors, officers, and
employees for activities which led to its insolvent position. (pp- 61-62,
Rollo)

On January 25, 1985, the Monetary Board issued the assailed MB Resolution No. 75 which ordered
the closure of BF and which further provides:

After considering the report dated January 8, 1985 of the Conservator for Banco
Filipino Savings and Mortgage Bank that the continuance in business of the bank
would involve probable loss to its depositors and creditors, and after discussing and
finding to be true the statements of the Special Assistant to the Governor and Head,
Supervision and Examination Sector (SES) Department II as recited in his
memorandum dated January 23, 1985, that the Banco Filipino Savings & Mortgage
Bank is insolvent and that its continuance in business would involve probable loss to
its depositors and creditors, and in pursuance of Sec. 29 of RA 265, as amended, the
Board decided:

1. To forbid Banco Filipino Savings and Mortgage Bank and all its
branches to do business in the Philippines;
 2. To designate Mrs. Carlota P. Valenzuela, Deputy Governor as
Receiver who is hereby directly vested with jurisdiction and authority
to immediately take charge of the bank's assets and liabilities, and as
expeditiously as possible collect and gather all the assets and
administer the same for the benefit of its creditors, exercising all the
powers necessary for these purposes including but not limited to,
bringing suits and foreclosing mortgages in the name of the bank;

3. To designate Mr. Arnulfo B. Aurellano, Special Assistant to the

Governor, and Mr. Ramon V. Tiaoqui, Special Assistant to the
Governor and Head, Supervision and Examination Sector
Department II, as Deputy Receivers who are likewise hereby directly
vested with jurisdiction and authority to do all things necessary or
proper to carry out the functions entrusted to them by the Receiver
and otherwise to assist the Receiver in carrying out the functions
vested in the Receiver by law or Monetary Board Resolutions;

4. To direct and authorize Management to do all other things and

carry out all other measures necessary or proper to implement this
Resolution and to safeguard the interests of depositors, creditors and
the general public; and

5. In consequence of the foregoing, to terminate the conservatorship

over Banco Filipino Savings and Mortgage Bank. (pp. 10-11, Rollo,
Vol. I)

On February 2, 1985, petitioner BF filed a complaint docketed as Civil Case No. 9675 with the
Regional Trial Court of Makati to set aside the action of the Monetary Board placing BF under
receivership.

On February 28, 1985, petitioner filed with this Court the instant petition for certiorari and
mandamus under Rule 65 of the Rules of Court seeking to annul the resolution of January 25, 1985
as made without or in excess of jurisdiction or with grave abuse of discretion, to order respondents to
furnish petitioner with the reports of examination which led to its closure and to afford petitioner BF
a hearing prior to any resolution that may be issued under Section 29 of R.A. 265, also known as
Central Bank Act.

On March 19, 1985, Carlota Valenzuela, as Receiver and Arnulfo Aurellano and Ramon Tiaoqui as
Deputy Receivers of Banco Filipino submitted their report on the receivership of BF to the Monetary
Board, in compliance with the mandate of Sec. 29 of R.A. 265 which provides that the Monetary
Board shall determine within sixty (60) days from date of receivership of a bank whether such bank
may be reorganized/permitted to resume business or ordered to be liquidated. The report contained
the following recommendation:

In view of the foregoing and considering that the condition of the banking institution
continues to be one of insolvency, i.e., its realizable assets are insufficient to meet all
its liabilities and that the bank cannot resume business with safety to its depositors,
other creditors and the general public, it is recommended that:

1. Banco Filipino Savings & Mortgage Bank be liquidated pursuant to paragraph 3, Sec. 29 of RA No.
265, as amended;
2. The Legal Department, through the Solicitor General, be authorized to file in the proper court a
petition for assistance in th liquidation of the Bank;

3. The Statutory Receiver be designated as the Liquidator of said bank; and

4. Management be instructed to inform the stockholders of Banco Filipino Savings & Mortgage Bank
of the Monetary Board's decision liquidate the Bank. (p. 167, Rollo, Vol. I)

On July 23, 1985, petitioner filed a motion before this Court praying that a restraining order or a
writ of preliminary injunction be issued to enjoin respondents from causing the dismantling of BF
signs in its main office and 89 branches. This Court issued a resolution on August 8, 1985 ordering
the issuance of the aforesaid temporary restraining order.

On August 20, 1985, the case was submitted for resolution.

In a resolution dated August 29, 1985, this Court Resolved direct the respondents Monetary Board
and Central Bank hold hearings at which the petitioner should be heard, and terminate such
hearings and submit its resolution within thirty (30) days. This Court further resolved to issue a
temporary restraining order enjoining the respondents from executing further acts of liquidation of a
bank. Acts such as receiving collectibles and receivables or paying off creditors' claims and other
transactions pertaining to normal operations of a bank were no enjoined. The Central Bank was also
ordered to designate comptroller for the petitioner BF. This Court also ordered th consolidation of
Civil Cases Nos. 8108, 9676 and 10183 in Branch 136 of the Regional Trial Court of Makati.

However, on September 12, 1985, this Court in the meantime suspended the hearing it ordered in its
resolution of August 29, 1985.

On October 8, 1985, this Court submitted a resolution order ing Branch 136 of the Regional Trial
Court of Makati the presided over by Judge Ricardo Francisco to conduct the hear ing contemplated
in the resolution of August 29, 1985 in the most expeditious manner and to submit its resolution to
this Court.

In the Court's resolution of February 19, 1987, the Court stated that the hearing contemplated in the
resolution of August 29, 1985, which is to ascertain whether substantial administrative due process
had been observed by the respondent Monetary Board, may be expedited by Judge Manuel Cosico
who now presides the court vacated by Judge Ricardo Francisco, who was elevated to the Court of
Appeals, there being no legal impediment or justifiable reason to bar the former from conducting
such hearing. Hence, this Court directed Judge Manuel Cosico to expedite the hearing and submit
his report to this Court.

On February 20, 1988, Judge Manuel Cosico submitted his report to this Court with the
recommendation that the resolutions of respondents Monetary Board and Central Bank authorizing
the closure and liquidation of petitioner BP be upheld.

On October 21, 1988, petitioner BF filed an urgent motion to reopen hearing to which respondents
filed their comment on December 16, 1988. Petitioner filed their reply to respondent's comment of
January 11, 1989. After having deliberated on the grounds raised in the pleadings, this Court in its
resolution dated August 3, 1989 declared that its intention as expressed in its resolution of August
29, 1985 had not been faithfully adhered to by the herein petitioner and respondents. The
aforementioned resolution had ordered a healing on the reports that led respondents to order
petitioner's closure and its alleged pre-planned liquidation. This Court noted that during the referral
hearing however, a different scheme was followed. Respondents merely submitted to the
commissioner their findings on the examinations conducted on petitioner, affidavits of the private
respondents relative to the findings, their reports to the Monetary Board and several other
documents in support of their position while petitioner had merely submitted objections to the
findings of respondents, counter-affidavits of its officers and also documents to prove its claims.
Although the records disclose that both parties had not waived cross-examination of their deponents,
no such cross-examination has been conducted. The reception of evidence in the form of affidavits
was followed throughout, until the commissioner submitted his report and recommendations to the
Court. This Court also held that the documents pertinent to the resolution of the instant petition are
the Teodoro Report, Tiaoqui Report, Valenzuela, Aurellano and Tiaoqui Report and the supporting
documents which were made as the bases by the reporters of their conclusions contained in their
respective reports. This Court also Resolved in its resolution to re-open the referral hearing that was
terminated after Judge Cosico had submitted his report and recommendation with the end in view of
allowing petitioner to complete its presentation of evidence and also for respondents to adduce
additional evidence, if so minded, and for both parties to conduct the required cross-examination of
witnesses/deponents, to be done within a period of three months. To obviate all doubts on Judge
Cosico's impartiality, this Court designated a new hearing commissioner in the person of former
Judge Consuelo Santiago of the Regional Trial Court, Makati, Branch 149 (now Associate Justice of
the Court of Appeals).

Three motions for intervention were filed in this case as follows: First, in G.R. No. 70054 filed by
Eduardo Rodriguez and Fortunate M. Dizon, stockholders of petitioner bank for and on behalf of
other stockholders of petitioner; second, in G.R. No. 78894, filed by the same stockholders, and, third,
again in G.R. No. 70054 by BF Depositors' Association and others similarly situated. This Court, on
March 1, 1990, denied the aforesaid motions for intervention.

On January 28, 1991, the hearing commissioner, Justice Consuelo Santiago of the Court of Appeals
submitted her report and recommendation (to be hereinafter called, "Santiago Report") on the
following issues stated therein as follows:

l) Had the Monetary Board observed the procedural requirements

laid down in Sec. 29 of R.A. 265, as amended to justify th closure of
the Banco Filipino Savings and Mortgage Bank?

2) On the date of BF's closure (January 25, 1985) was its condition
one of insolvency or would its continuance in business involve
probable loss to its depositors or creditors?

The commissioner after evaluation of the evidence presented found and recommended the following:

1. That the TEODORO and TIAOQUI reports did not establish in

accordance with See. 29 of the R.A. 265, as amended, BF's insolvency
as of July 31, 1984 or that its continuance in business thereafter
would involve probable loss to its depositors or creditors. On the
contrary, the evidence indicates that BF was solvent on July 31, 1984
and that on January 25, 1985, the day it was closed, its insolvency
was not clearly established;

2. That consequently, BF's closure on January 25, 1985, not having

satisfied the requirements prescribed under Sec. 29 of RA 265, as
amended, was null and void.
 3. That accordingly, by way of correction, BF should be allowed to re-
open subject to such laws, rules and regulations that apply to its
situation.

Respondents thereafter filed a motion for leave to file objections to the Santiago Report. In the same
motion, respondents requested that the report and recommendation be set for oral argument before
the Court. On February 7, 1991, this Court denied the request for oral argument of the parties.

On February 25, 1991, respondents filed their objections to the Santiago Report. On March 5, 1991,
respondents submitted a motion for oral argument alleging that this Court is confronted with two
conflicting reports on the same subject, one upholding on all points the Monetary Board's closure of
petitioner, (Cosico Report dated February 19, 1988) and the other (Santiago Report dated January
25, 1991) holding that petitioner's closure was null and void because petitioner's insolvency was not
clearly established before its closure; and that such a hearing on oral argrument will therefore allow
the parties to directly confront the issues before this Court.

On March 12, 1991 petitioner filed its opposition to the motion for oral argument. On March 20,
1991, it filed its reply to respondents' objections to the Santiago Report.

On June 18, 1991, a hearing was held where both parties were heard on oral argument before this
Court. The parties, having submitted their respective memoranda, the case is now submitted for
decision.

G.R. No. 78767

On February 2, 1985, Banco Filipino filed a complaint with the trial court docketed as Civil Case No.
9675 to annul the resolution of the Monetary Board dated January 25, 1985, which ordered the
closure of the bank and placed it under receivership.

On February 14, 1985, the Central Bank and the receivers filed a motion to dismiss the complaint on
the ground that the receivers had not authorized anyone to file the action. In a supplemental motion
to dismiss, the Central Bank cited the resolution of this Court dated October 15, 1985 in G.R. No.
65723 entitled, "Central Bank et al. v. Intermediate Appellate Court" whereby We held that a
complaint questioning the validity of the receivership established by the Central Bank becomes moot
and academic upon the initiation of liquidation proceedings.

While the motion to dismiss was pending resolution, petitioner herein Metropolis Development
Corporation (Metropolis for brevity) filed a motion to intervene in the aforestated civil case on the
ground that as a stockholder and creditor of Banco Filipino, it has an interest in the subject of the
action.

On July 19, 1985, the trial court denied the motion to dismiss and also denied the motion for
reconsideration of the order later filed by Central Bank. On June 5, 1985, the trial court allowed the
motion for intervention.

Hence, the Central Bank and the receivers of Banco Filipino filed a petition for certiorari with the
respondent appellate court alleging that the trial court committed grave abuse of discretion in not
dismissing Civil Case No. 9675.

On March 17, 1986, the respondent appellate court rendered a decision annulling and setting aside
the questioned orders of the trial court, and ordering the dismissal of the complaint filed by Banco
Filipino with the trial court as well as the complaint in intervention of petitioner Metropolis
Development Corporation.

Hence this petition was filed by Metropolis Development Corporation questioning the decision of the
respondent appellate court.

G.R. No. 78894

On February 2, 1985, a complaint was filed with the trial court in the name of Banco Filipino to
annul the resolution o the Monetary Board dated January 25, 1985 which ordered the closure of
Banco Filipino and placed it under receivership. The receivers appointed by the Monetary Board
were Carlota Valenzuela, Arnulfo Aurellano and Ramon Tiaoqui.

On February 14, 1985, the Central Bank and the receiver filed a motion to dismiss the complaint on
the ground that the receiver had not authorized anyone to file the action.

On March 22, 1985, the Monetary Board placed the bank under liquidation and designated
Valenzuela as liquidator and Aurellano and Tiaoqui as deputy liquidators.

The Central Bank filed a supplemental motion to dismiss which was denied. Hence, the latter filed a
petition for certiorari with the respondent appellate court to set aside the order of the trial court
denying the motion to dismiss. On March 17, 1986, the respondent appellate court granted the
petition and dismissed the complaint of Banco Filipino with the trial court.

Thus, this petition for certiorari was filed with the petitioner contending that a bank which has been
closed and placed under receivership by the Central Bank under Section 29 of RA 265 could file suit
in court in its name to contest such acts of the Central Bank, without the authorization of the CB-
appointed receiver.

After deliberating on the pleadings in the following cases:

1. In G.R. No. 68878, the respondent's motion for reconsideration;

2. In G.R. Nos. 77255-58, the petition, comment, reply, rejoinder and

sur-rejoinder;

2. In G.R. No. 78766, the petition, comment, reply and rejoinder;

3. In G.R. No. 81303, the petitioner's motion for reconsideration;

4. In G.R.No. 81304, the petition, comment and reply;

5. Finally, in G.R. No. 90473, the petition comment and reply.

We find the motions for reconsideration in G.R. Nos. 68878 and 81303 and the petitions in G.R. Nos.
77255-58, 78766, 81304 and 90473 devoid of merit.

Section 29 of the Republic Act No. 265, as amended known as the Central Bank Act, provides that
when a bank is forbidden to do business in the Philippines and placed under receivership, the person
designated as receiver shall immediately take charge of the bank's assets and liabilities, as
expeditiously as possible, collect and gather all the assets and administer the same for the benefit of
its creditors, and represent the bank personally or through counsel as he may retain in all actions or
proceedings for or against the institution, exercising all the powers necessary for these purposes
including, but not limited to, bringing and foreclosing mortgages in the name of the bank. If the
Monetary Board shall later determine and confirm that banking institution is insolvent or cannot
resume business safety to depositors, creditors and the general public, it shall, public interest
requires, order its liquidation and appoint a liquidator who shall take over and continue the functions
of receiver previously appointed by Monetary Board. The liquid for may, in the name of the bank and
with the assistance counsel as he may retain, institute such actions as may necessary in the
appropriate court to collect and recover a counts and assets of such institution or defend any action ft
against the institution.

When the issue on the validity of the closure and receivership of Banco Filipino bank was raised in
G.R. No. 70054, pendency of the case did not diminish the powers and authority of the designated
liquidator to effectuate and carry on the a ministration of the bank. In fact when We adopted a
resolute on August 25, 1985 and issued a restraining order to respondents Monetary Board and
Central Bank, We enjoined me further acts of liquidation. Such acts of liquidation, as explained in
Sec. 29 of the Central Bank Act are those which constitute the conversion of the assets of the
banking institution to money or the sale, assignment or disposition of the s to creditors and other
parties for the purpose of paying debts of such institution. We did not prohibit however acts a as
receiving collectibles and receivables or paying off credits claims and other transactions pertaining to
normal operate of a bank. There is no doubt that the prosecution of suits collection and the
foreclosure of mortgages against debtors the bank by the liquidator are among the usual and
ordinary transactions pertaining to the administration of a bank. their did Our order in the same
resolution dated August 25, 1985 for the designation by the Central Bank of a comptroller Banco
Filipino alter the powers and functions; of the liquid insofar as the management of the assets of the
bank is concerned. The mere duty of the comptroller is to supervise counts and finances undertaken
by the liquidator and to d mine the propriety of the latter's expenditures incurred behalf of the bank.
Notwithstanding this, the liquidator is empowered under the law to continue the functions of
receiver is preserving and keeping intact the assets of the bank in substitution of its former
management, and to prevent the dissipation of its assets to the detriment of the creditors of the
bank. These powers and functions of the liquidator in directing the operations of the bank in place of
the former management or former officials of the bank include the retaining of counsel of his choice
in actions and proceedings for purposes of administration.

Clearly, in G.R. Nos. 68878, 77255-58, 78766 and 90473, the liquidator by himself or through counsel
has the authority to bring actions for foreclosure of mortgages executed by debtors in favor of the
bank. In G.R. No. 81303, the liquidator is likewise authorized to resist or defend suits instituted
against the bank by debtors and creditors of the bank and by other private persons. Similarly, in
G.R. No. 81304, due to the aforestated reasons, the Central Bank cannot be compelled to fulfill
financial transactions entered into by Banco Filipino when the operations of the latter were
suspended by reason of its closure. The Central Bank possesses those powers and functions only as
provided for in Sec. 29 of the Central Bank Act.

While We recognize the actual closure of Banco Filipino and the consequent legal effects thereof on
its operations, We cannot uphold the legality of its closure and thus, find the petitions in G.R. Nos.
70054, 78767 and 78894 impressed with merit. We hold that the closure and receivership of
petitioner bank, which was ordered by respondent Monetary Board on January 25, 1985, is null and
void.

It is a well-recognized principle that administrative and discretionary functions may not be

interfered with by the courts. In general, courts have no supervising power over the proceedings and
actions of the administrative departments of the government. This is generally true with respect to
acts involving the exercise of judgment or discretion, and findings of fact. But when there is a grave
abuse of discretion which is equivalent to a capricious and whimsical exercise of judgment or where
the power is exercised in an arbitrary or despotic manner, then there is a justification for the courts
to set aside the administrative determination reached (Lim, Sr. v. Secretary of Agriculture and
Natural Resources, L-26990, August 31, 1970, 34 SCRA 751)

The jurisdiction of this Court is called upon, once again, through these petitions, to undertake the
delicate task of ascertaining whether or not an administrative agency of the government, like the
Central Bank of the Philippines and the Monetary Board, has committed grave abuse of discretion or
has acted without or in excess of jurisdiction in issuing the assailed order. Coupled with this task is
the duty of this Court not only to strike down acts which violate constitutional protections or to
nullify administrative decisions contrary to legal mandates but also to prevent acts in excess of
authority or jurisdiction, as well as to correct manifest abuses of discretion committed by the officer
or tribunal involved.

The law applicable in the determination of these issues is Section 29 of Republic Act No. 265, as
amended, also known as the Central Bank Act, which provides:

SEC. 29. Proceedings upon insolvency. — Whenever, upon examination by the head of
the appropriate supervising or examining department or his examiners or agents into
the condition of any bank or non-bank financial intermediary performing quasi-
banking functions, it shall be disclosed that the condition of the same is one of
insolvency, or that its continuance in business would involve probable loss to its
depositors or creditors, it shall be the duty of the department head concerned
forthwith, in writing, to inform the Monetary Board of the facts. The Board may,
upon finding the statements of the department head to be true, forbid the institution
to do business in the Philippines and designate an official of the Central Bank or a
person of recognized competence in banking or finance, as receiver to immediately
take charge of its assets and liabilities, as expeditiously as possible collect and gather
all the assets and administer the same for the benefit's of its creditors, and represent
the bank personally or through counsel as he may retain in all actions or proceedings
for or against the institution, exercising all the powers necessary for these purposes
including, but not limited to, bringing and foreclosing mortgages in the name of the
bank or non-bank financial intermediary performing quasi-banking functions.

The Monetary Board shall thereupon determine within sixty days whether the
institution may be reorganized or otherwise placed in such a condition so that it may
be permitted to resume business with safety to its depositors and creditors and the
general public and shall prescribe the conditions under which such resumption of
business shall take place as well as the time for fulfillment of such conditions. In
such case, the expenses and fees in the collection and administration of the assets of
the institution shall be determined by the Board and shall be paid to the Central
Bank out of the assets of such institution.

If the Monetary Board shall determine and confirm within the said period that the
bank or non-bank financial intermediary performing quasi-banking functions is
insolvent or cannot resume business with safety to its depositors, creditors, and the
general public, it shall, if the public interest requires, order its liquidation, indicate
the manner of its liquidation and approve a liquidation plan which may, when
warranted, involve disposition of any or all assets in consideration for the assumption
of equivalent liabilities. The liquidator designated as hereunder provided shall, by
the Solicitor General, file a petition in the regional trial court reciting the
proceedings which have been taken and praying the assistance of the court in the
liquidation of such institutions. The court shall have jurisdiction in the same
proceedings to assist in the adjudication of the disputed claims against the bank or
non-bank financial intermediary performing quasi-banking functions and in the
enforcement of individual liabilities of the stockholders and do all that is necessary to
preserve the assets of such institutions and to implement the liquidation plan
approved by the Monetary Board. The Monetary Board shall designate an official of
the Central bank or a person of recognized competence in banking or finance, as
liquidator who shall take over and continue the functions of the receiver previously
appointed by the Monetary Board under this Section. The liquidator shall, with all
convenient speed, convert the assets of the banking institutions or non-bank financial
intermediary performing quasi-banking function to money or sell, assign or otherwise
dispose of the same to creditors and other parties for the purpose of paying the debts
of such institution and he may, in the name of the bank or non-bank financial
intermediary performing quasi-banking functions and with the assistance of counsel
as he may retain, institute such actions as may be necessary in the appropriate court
to collect and recover accounts and assets of such institution or defend any action
filed against the institution: Provided, However, That after having reasonably
established all claims against the institution, the liquidator may, with the approval
of the court, effect partial payments of such claims for assets of the institution in
accordance with their legal priority.

The assets of an institution under receivership or liquidation shall be deemed

in custodia legis in the hands of the receiver or liquidator and shall from the moment
of such receivership or liquidation, be exempt from any order of garnishment, levy,
attachment, orexecution.

The provisions of any law to the contrary notwithstanding, the actions of the
Monetary Board under this Section, Section 28-A, an the second paragraph of Section
34 of this Act shall be final an executory, and can be set aside by a court only if there
is convince proof, after hearing, that the action is plainly arbitrary and made in bad
faith: Provided, That the same is raised in an appropriate pleading filed by the
stockholders of record representing the majority of th capital stock within ten (10)
days from the date the receiver take charge of the assets and liabilities of the bank or
non-bank financial intermediary performing quasi-banking functions or, in case of
conservatorship or liquidation, within ten (10) days from receipt of notice by the said
majority stockholders of said bank or non-bank financial intermediary of the order of
its placement under conservatorship o liquidation. No restraining order or injunction
shall be issued by an court enjoining the Central Bank from implementing its actions
under this Section and the second paragraph of Section 34 of this Act in th absence of
any convincing proof that the action of the Monetary Board is plainly arbitrary and
made in bad faith and the petitioner or plaintiff files a bond, executed in favor of the
Central Bank, in an amount be fixed by the court. The restraining order or injunction
shall be refused or, if granted, shall be dissolved upon filing by the Central Bank of a
bond, which shall be in the form of cash or Central Bank cashier's check, in an
amount twice the amount of the bond of th petitioner or plaintiff conditioned that it
will pay the damages which the petitioner or plaintiff may suffer by the refusal or the
dissolution of the injunction. The provisions of Rule 58 of the New Rules of Court
insofar as they are applicable and not inconsistent with the provision of this Section
shall govern the issuance and dissolution of the re straining order or injunction
contemplated in this Section.

xxx xxx xxx

Based on the aforequoted provision, the Monetary Board may order the cessation of operations of a
bank in the Philippine and place it under receivership upon a finding of insolvency or when its
continuance in business would involve probable loss its depositors or creditors. If the Monetary
Board shall determine and confirm within sixty (60) days that the bank is insolvent or can no longer
resume business with safety to its depositors, creditors and the general public, it shall, if public
interest will be served, order its liquidation.

Specifically, the basic question to be resolved in G.R. Nos. 70054, 78767 and 78894 is whether or not
the Central Bank and the Monetary Board acted arbitrarily and in bad faith in finding and
thereafter concluding that petitioner bank is insolvent, and in ordering its closure on January 25,
1985.

As We have stated in Our resolution dated August 3, 1989, the documents pertinent to the resolution
of these petitions are the Teodoro Report, Tiaoqui Report, and the Valenzuela, Aurellano and Tiaoqui
Report and the supporting documents made as bases by the supporters of their conclusions contained
in their respective reports. We will focus Our study and discussion however on the Tiaoqui Report
and the Valenzuela, Aurellano and Tiaoqui Report. The former recommended the closure and
receivership of petitioner bank while the latter report made the recommendation to eventually place
the petitioner bank under liquidation. This Court shall likewise take into consideration the findings
contained in the reports of the two commissioners who were appointed by this Court to hold the
referral hearings, namely the report by Judge Manuel Cosico submitted February 20, 1988 and the
report submitted by Justice Consuelo Santiago on January 28, 1991.

There is no question that under Section 29 of the Central Bank Act, the following are the mandatory
requirements to be complied with before a bank found to be insolvent is ordered closed and forbidden
to do business in the Philippines: Firstly, an examination shall be conducted by the head of the
appropriate supervising or examining department or his examiners or agents into the condition of
the bank; secondly, it shall be disclosed in the examination that the condition of the bank is one of
insolvency, or that its continuance in business would involve probable loss to its depositors or
creditors; thirdly, the department head concerned shall inform the Monetary Board in writing, of the
facts; and lastly, the Monetary Board shall find the statements of the department head to be true.

Anent the first requirement, the Tiaoqui report, submitted on January 23, 1985, revealed that the
finding of insolvency of petitioner was based on the partial list of exceptions and findings on the
regular examination of the bank as of July 31, 1984 conducted by the Supervision and Examination
Sector II of the Central Bank of the PhilippinesCentral Bank (p. 1, Tiaoqui Report).

On December 17, 1984, this list of exceptions and finding was submitted to the petitioner bank (p. 6,
Tiaoqui Report) This was attached to the letter dated December 17, 1984, of examiner-in-charge
Dionisio Domingo of SES Department II of the Central Bank to Teodoro Arcenas, president of
petitione bank, which disclosed that the examination of the petitioner bank as to its financial
condition as of July 31, 1984 was not yet completed or finished on December 17, 1984 when the
Central Bank submitted the partial list of findings of examination to th petitioner bank. The letter
reads:

In connection with the regular examination of your institution a of July 31, 1984, we
are submitting herewith a partial list of our exceptions/findings for your comments.

Please be informed that we have not yet officially terminated our examination
(tentatively scheduled last December 7, 1984) and that we are still awaiting for the
unsubmitted replies to our previous letters requests. Moreover, other findings/
observations are still being summarized including the classification of loans and other
 risk assets. These shall be submitted to you in due time (p. 810, Rollo, Vol. III;
emphasis ours).

It is worthy to note that a conference was held on January 21, 1985 at the Central Bank between the
officials of the latter an of petitioner bank. What transpired and what was agreed upon during the
conference was explained in the Tiaoqui report.

... The discussion centered on the substantial exposure of the bank to the various
entities which would have a relationship with the bank; the manner by which some
bank funds were made indirectly available to several entities within the group; and
the unhealth financial status of these firms in which the bank was additionally
exposed through new funds or refinancing accommodation including accrued interest.

Queried in the impact of these clean loans, on the bank solvency Mr. Dizon (BF
Executive Vice President) intimated that, collectively these corporations have large
undeveloped real estate properties in the suburbs which can be made answerable for
the unsecured loans a well as the Central Bank's credit accommodations. A formal
reply of the bank would still be forthcoming. (pp. 58-59, Rollo, Vol. I; emphasis ours)

Clearly, Tiaoqui based his report on an incomplete examination of petitioner bank and outrightly
concluded therein that the latter's financial status was one of insolvency or illiquidity. He arrived at
the said conclusion from the following facts: that as of July 31, 1984, total capital accounts consisting
of paid-in capital and other capital accounts such as surplus, surplus reserves and undivided profits
aggregated P351.8 million; that capital adjustments, however, wiped out the capital accounts and
placed the bank with a capital deficiency amounting to P334.956 million; that the biggest adjustment
which contributed to the deficit is the provision for estimated losses on accounts classified as
doubtful and loss which was computed at P600.4 million pursuant to the examination. This provision
is also known as valuation reserves which was set up or deducted against the capital accounts of the
bank in arriving at the latter's financial condition.

Tiaoqui however admits the insufficiency and unreliability of the findings of the examiner as to the
setting up of recommended valuation reserves from the assets of petitioner bank. He stated:

The recommended valuation reserves as bases for determining the financial status of
the bank would need to be discussed with the bank, consistent with standard
examination procedure, for which the bank would in turn reply. Also, the examination
has not been officially terminated. (p. 7. Tiaoqui report; p. 59, Rollo, Vol. I)

In his testimony in the second referral hearing before Justice Santiago, Tiaoqui testified that on
January 21, 1985, he met with officers of petitioner bank to discuss the advanced findings and
exceptions made by Mr. Dionisio Domingo which covered 70%-80% of the bank's loan portfolio; that
at that meeting, Fortunato Dizon (BF's Executive Vice President) said that as regards the unsecured
loans granted to various corporations, said corporations had large undeveloped real estate properties
which could be answerable for the said unsecured loans and that a reply from BF was forthcoming,
that he (Tiaoqui) however prepared his report despite the absence of such reply; that he believed, as
in fact it is stated in his report, that despite the meeting on January 21, 1985, there was still a need
to discuss the recommended valuation reserves of petitioner bank and; that he however, did not wait
anymore for a discussion of the recommended valuation reserves and instead prepared his report two
days after January 21, 1985 (pp. 3313-3314, Rollo).
Records further show that the examination of petitioner bank was officially terminated only when
Central Bank Examination-charge Dionisio Domingo submitted his final report of examination on
March 4,1985.

It is evident from the foregoing circumstances that the examination contemplated in Sec. 29 of the
CB Act as a mandatory requirement was not completely and fully complied with. Despite the
existence of the partial list of findings in the examination of the bank, there were still highly
significant items to be weighed and determined such as the matter of valuation reserves, before
these can be considered in the financial condition of the bank. It would be a drastic move to conclude
prematurely that a bank is insolvent if the basis for such conclusion is lacking and insufficient,
especially if doubt exists as to whether such bases or findings faithfully represent the real financial
status of the bank.

The actuation of the Monetary Board in closing petitioner bank on January 25, 1985 barely four days
after a conference with the latter on the examiners' partial findings on its financial position is also
violative of what was provided in the CB Manual of Examination Procedures. Said manual provides
that only after the examination is concluded, should a pre-closing conference led by the examiner-in-
charge be held with the officers/representatives of the institution on the findings/exception, and a
copy of the summary of the findings/violations should be furnished the institution examined so that
corrective action may be taken by them as soon as possible (Manual of Examination Procedures,
General Instruction, p. 14). It is hard to understand how a period of four days after the conference
could be a reasonable opportunity for a bank to undertake a responsive and corrective action on the
partial list of findings of the examiner-in-charge.

We recognize the fact that it is the responsibility of the Central Bank of the Philippines to
administer the monetary, banking and credit system of the country and that its powers and
functions shall be exercised by the Monetary Board pursuant to Rep. Act No. 265, known as the
Central Bank Act. Consequently, the power and authority of the Monetary Board to close banks and
liquidate them thereafter when public interest so requires is an exercise of the police power of the
state. Police power, however, may not be done arbitratrily or unreasonably and could be set aside if
it is either capricious, discriminatory, whimsical, arbitrary, unjust or is tantamount to a denial of
due process and equal protection clauses of the Constitution (Central Bank v. Court of Appeals, Nos.
L-50031-32, July 27, 1981, 106 SCRA 143).

In the instant case, the basic standards of substantial due process were not observed. Time and
again, We have held in several cases, that the procedure of administrative tribunals must satisfy the
fundamentals of fair play and that their judgment should express a well-supported conclusion.

In the celebrated case of Ang Tibay v. Court of Industrial Relations, 69 Phil. 635, this Court laid
down several cardinal primary rights which must be respected in a proceeding before an
administrative body.

However, as to the requirement of notice and hearing, Sec. 29 of RA 265 does not require a previous
hearing before the Monetary Board implements the closure of a bank, since its action is subject to
judicial scrutiny as provided for under the same law (Rural Bank of Bato v. IAC, G.R. No. 65642,
October 15, 1984, Rural Bank v. Court of Appeals, G.R. 61689, June 20, 1988,162 SCRA 288).

Notwithstanding the foregoing, administrative due process does not mean that the other important
principles may be dispensed with, namely: the decision of the administrative body must have
something to support itself and the evidence must be substantial. Substantial evidence is more than
a mere scintilla. It means such relevant evidence as a reasonable mind might accept as adequate to
support a conclusion (Ang Tibay vs. CIR, supra). Hence, where the decision is merely based upon
pieces of documentary evidence that are not sufficiently substantial and probative for the purpose
and conclusion they are presented, the standard of fairness mandated in the due process clause is
not met. In the case at bar, the conclusion arrived at by the respondent Board that the petitioner
bank is in an illiquid financial position on January 23, 1985, as to justify its closure on January 25,
1985 cannot be given weight and finality as the report itself admits the inadequacy of its basis to
support its conclusion.

The second requirement provided in Section 29, R.A. 265 before a bank may be closed is that the
examination should disclose that the condition of the bank is one of insolvency.

As to the concept of whether the bank is solvent or not, the respondents contend that under the
Central Bank Manual of Examination Procedures, Central Bank examiners must recommend
valuation reserves, when warranted, to be set up or deducted against the corresponding asset
account to determine the bank's true condition or net worth. In the case of loan accounts, to which
practically all the questioned valuation reserves refer, the manual provides that:

1. For doubtful loans, or loans the ultimate collection of which is doubtful and in which a substantial
loss is probable but not yet definitely ascertainable as to extent, valuation reserves of fifty per cent
(50%) of the accounts should be recommended to be set up.

2. For loans classified as loss, or loans regarded by the examiner as absolutely uncollectible or
worthless, valuation reserves of one hundred percent (100%) of the accounts should be recommended
to be set up (p. 8, Objections to Santiago report).

The foregoing criteria used by respondents in determining the financial condition of the bank is
based on Section 5 of RA 337, known as the General Banking Act which states:

Sec. 5. The following terms shall be held to be synonymous and interchangeable:

... f. Unimpaired Capital and Surplus, "Combined capital accounts," and "Net worth,"
which terms shall mean for the purposes of this Act, the total of the "unimpaired
paid-in capital, surplus, and undivided profits net of such valuation reserves as may
be required by the Central Bank."

There is no doubt that the Central Bank Act vests authority upon the Central Bank and Monetary
Board to take charge and administer the monetary and banking system of the country and this
authority includes the power to examine and determine the financial condition of banks for purposes
provided for by law, such as for the purpose of closure on the ground of insolvency stated in Section
29 of the Central Bank Act. But express grants of power to public officers should be subjected to a
strict interpretation, and will be construed as conferring those powers which are expressly imposed
or necessarily implied (Floyd Mechem, Treatise on the Law of Public Offices and Officers, p. 335).

In this case, there can be no clearer explanation of the concept of insolvency than what the law itself
states. Sec. 29 of the Central Bank Act provides that insolvency under the Act, shall be understood to
mean that "the realizable assets of a bank or a non-bank financial intermediary performing quasi-
banking functions as determined by the Central Bank are insufficient to meet its liabilities."

Hence, the contention of the Central Bank that a bank's true financial condition is synonymous with
the terms "unimpaired capital and surplus," "combined capital accounts" and net worth after
deducting valuation reserves from the capital, surplus and unretained earnings, citing Sec. 5 of RA
337 is misplaced.
Firstly, it is clear from the law that a solvent bank is one in which its assets exceed its liabilities. It
is a basic accounting principle that assets are composed of liabilities and capital. The term "assets"
includes capital and surplus" (Exley v. Harris, 267 p. 970, 973, 126 Kan., 302). On the other hand,
the term "capital" includes common and preferred stock, surplus reserves, surplus and undivided
profits. (Manual of Examination Procedures, Report of Examination on Department of Commercial
and Savings Banks, p. 3-C). If valuation reserves would be deducted from these items, the result
would merely be the networth or the unimpaired capital and surplus of the bank applying Sec. 5 of
RA 337 but not the total financial condition of the bank.

Secondly, the statement of assets and liabilities is used in balance sheets. Banks use statements of
condition to reflect the amounts, nature and changes in the assets and liabilities. The Central Bank
Manual of Examination Procedures provides a format or checklist of a statement of condition to be
used by examiners as guide in the examination of banks. The format enumerates the items which
will compose the assets and liabilities of a bank. Assets include cash and those due from banks,
loans, discounts and advances, fixed assets and other property owned or acquired and other
miscellaneous assets. The amount of loans, discounts and advances to be stated in the statement of
condition as provided for in the manual is computed after deducting valuation reserves when deemed
necessary. On the other hand, liabilities are composed of demand deposits, time and savings
deposits, cashier's, manager's and certified checks, borrowings, due to head office, branches; and
agencies, other liabilities and deferred credits (Manual of Examination Procedure, p. 9). The
amounts stated in the balance sheets or statements of condition including the computation of
valuation reserves when justified, are based however, on the assumption that the bank or company
will continue in business indefinitely, and therefore, the networth shown in the statement is in no
sense an indication of the amount that might be realized if the bank or company were to be
liquidated immediately (Prentice Hall Encyclopedic Dictionary of Business Finance, p. 48). Further,
based on respondents' submissions, the allowance for probable losses on loans and discounts
represents the amount set up against current operations to provide for possible losses arising from
non-collection of loans and advances, and this account is also referred to as valuation reserve (p. 9,
Objections to Santiago report). Clearly, the statement of condition which contains a provision for
recommended valuation reserves should not be used as the ultimate basis to determine the solvency
of an institution for the purpose of termination of its operations.

Respondents acknowledge that under the said CB manual, CB examiners must recommend
valuation reserves, when warranted, to be set up against the corresponding asset account (p. 8,
Objections to Santiago report). Tiaoqui himself, as author of the report recommending the closure of
petitioner bank admits that the valuation reserves should still be discussed with the petitioner bank
in compliance with standard examination procedure. Hence, for the Monetary Board to unilaterally
deduct an uncertain amount as valuation reserves from the assets of a bank and to conclude
therefrom without sufficient basis that the bank is insolvent, would be totally unjust and unfair.

The test of insolvency laid down in Section 29 of the Central Bank Act is measured by determining
whether the realizable assets of a bank are leas than its liabilities. Hence, a bank is solvent if the
fair cash value of all its assets, realizable within a reasonable time by a reasonable prudent person,
would equal or exceed its total liabilities exclusive of stock liability; but if such fair cash value so
realizable is not sufficient to pay such liabilities within a reasonable time, the bank is insolvent.
(Gillian v. State, 194 N.E. 360, 363, 207 Ind. 661). Stated in other words, the insolvency of a bank
occurs when the actual cash market value of its assets is insufficient to pay its liabilities, not
considering capital stock and surplus which are not liabilities for such purpose (Exley v. Harris, 267
p. 970, 973,126 Kan. 302; Alexander v. Llewellyn, Mo. App., 70 S.W. 2n 115,117).

In arriving at the computation of realizable assets of petitioner bank, respondents used its books
which undoubtedly are not reflective of the actual cash or fair market value of its assets. This is not
the proper procedure contemplated in Sec. 29 of the Central Bank Act. Even the CB Manual of
Examination Procedures does not confine examination of a bank solely with the determination of the
books of the bank. The latter is part of auditing which should not be confused with examination.
Examination appraises the soundness of the institution's assets, the quality and character of
management and determines the institution's compliance with laws, rules and regulations. Audit is a
detailed inspection of the institution's books, accounts, vouchers, ledgers, etc. to determine the
recording of all assets and liabilities. Hence, examination concerns itself with review and appraisal,
while audit concerns itself with verification (CB Manual of Examination Procedures, General
Instructions, p. 5). This Court however, is not in the position to determine how much cash or market
value shall be assigned to each of the assets and liabilities of the bank to determine their total
realizable value. The proper determination of these matters by using the actual cash value criteria
belongs to the field of fact-finding expertise of the Central Bank and the Monetary Board.
Notwithstanding the fact that the figures arrived at by the respondent Board as to assets and
liabilities do not truly indicate their realizable value as they were merely based on book value, We
will however, take a look at the figures presented by the Tiaoqui Report in concluding insolvency as
of July 31, 1984 and at the figures presented by the CB authorized deputy receiver and by the
Valenzuela, Aurellano and Tiaoqui Report which recommended the liquidation of the bank by reason
of insolvency as o January 25,1985.

The Tiaoqui report dated January 23, 1985, which was based on partial examination findings on the
bank's condition as of July 31, 1984, states that total liabilities of P5,282.1 million exceeds total
assets of P4,947.2 million after deducting from the assets valuation reserves of P612.2 million. Since,
as We have explained in our previous discussion that valuation reserves can not be legally deducted
as there was no truthful and complete evaluation thereof as admitted by the Tiaoqui report itself,
then an adjustment of the figures win show that the liabilities of P5,282.1 million will not exceed the
total assets which will amount to P5,559.4 if the 612.2 million allotted to valuation reserves will not
be deducted from the assets. There can be no basis therefore for both the conclusion of insolvency
and for the decision of the respondent Board to close petitioner bank and place it under receivership.

Concerning the financial position of the bank as of January 25, 1985, the date of the closure of the
bank, the consolidated statement of condition thereof as of the aforesaid date shown in the
Valenzuela, Aurellano and Tiaoqui report on the receivership of petitioner bank, dated March 19,
1985, indicates that total liabilities of 4,540.84 million does not exceed the total assets of 4,981.53
million. Likewise, the consolidated statement of condition of petitioner bank as of January 25, 1985
prepared by the Central Bank Authorized Deputy Receiver Artemio Cruz shows that total assets
amounting to P4,981,522,996.22 even exceeds total liabilities amounting to P4,540,836,834.15. Based
on the foregoing, there was no valid reason for the Valenzuela, Aurellano and Tiaoqui report to
finally recommend the liquidation of petitioner bank instead of its rehabilitation.

We take note of the exhaustive study and findings of the Cosico report on the petitioner bank's
having engaged in unsafe, unsound and fraudulent banking practices by the granting of huge
unsecured loans to several subsidiaries and related companies. We do not see, however, that this has
any material bearing on the validity of the closure. Section 34 of the RA 265, Central Bank Act
empowers the Monetary Board to take action under Section 29 of the Central Bank Act when a bank
"persists in carrying on its business in an unlawful or unsafe manner." There was no showing
whatsoever that the bank had persisted in committing unlawful banking practices and that the
respondent Board had attempted to take effective action on the bank's alleged activities. During the
period from July 27, 1984 up to January 25, 1985, when petitioner bank was under conservatorship
no official of the bank was ever prosecuted, suspended or removed for any participation in unsafe
and unsound banking practices, and neither was the entire management of the bank replaced or
substituted. In fact, in her testimony during the second referral hearing, Carlota Valenzuela, CB
Deputy Governor, testified that the reason for petitioner bank's closure was not unsound, unsafe and
fraudulent banking practices but the alleged insolvency position of the bank (TSN, August 3, 1990, p.
3316, Rollo, Vol. VIII).
Finally, another circumstance which point to the solvency of petitioner bank is the granting by the
Monetary Board in favor of the former a credit line in the amount of P3 billion along with the placing
of petitioner bank under conservatorship by virtue of M.B. Resolution No. 955 dated July 27, 1984.
This paved the way for the reopening of the bank on August 1, 1984 after a self-imposed bank
holiday on July 23, 1984.

On emergency loans and advances, Section 90 of RA 265 provides two types of emergency loans that
can be granted by the Central Bank to a financially distressed bank:

Sec. 90. ... In periods of emergency or of imminent financial panic which directly
threaten monetary and banking stability, the Central Bank may grant banking
institutions extraordinary advances secured by any assets which are defined as
acceptable by by a concurrent vote of at least five members of the Monetary Board.
While such advances are outstanding, the debtor institution may not expand the
total volume of its loans or investments without the prior authorization of the
Monetary Board.

The Central Bank may, at its discretion, likewise grant advances to banking
institutions, even during normal periods, for the purpose of assisting a bank in a
precarious financial condition or under serious financial pressures brought about by
unforeseen events, or events which, though foreseeable, could not be prevented by the
bank concerned. Provided, however, That the Monetary Board has ascertained that
the bank is not insolvent and has clearly realizable assets to secure the advances.
Provided, further, That a concurrent vote of at least five members of the Monetary
Board is obtained. (Emphasis ours)

The first paragraph of the aforequoted provision contemplates a situation where the whole banking
community is confronted with financial and economic crisis giving rise to serious and widespread
confusion among the public, which may eventually threaten and gravely prejudice the stability of the
banking system. Here, the emergency or financial confusion involves the whole banking community
and not one bank or institution only. The second situation on the other hand, provides for a situation
where the Central Bank grants a loan to a bank with uncertain financial condition but not insolvent.

As alleged by the respondents, the following are the reasons of the Central Bank in approving the
resolution granting the P3 billion loan to petitioner bank and the latter's reopening after a brief self-
imposed banking holiday:

WHEREAS, the closure by Banco Filipino Savings and Mortgage Bank of its Banking
offices on its own initiative has worked serious hardships on its depositors and has
affected confidence levels in the banking system resulting in a feeling of
apprehension among depositors and unnecessary deposit withdrawals;

WHEREAS, the Central Bank is charged with the function of administering the
banking system;

WHEREAS, the reopening of Banco Filipino would require additional credit

resources from the Central Bank as well as an independent management acceptable
to the Central Bank;

WHEREAS, it is the desire of the Central Bank to rapidly diffuse the uncertainty
that presently exists;
 ... (M.B. Min. No. 35 dated July 27, 1984 cited in Respondents' Objections to Santiago
Report, p. 26; p. 3387, Rollo, Vol. IX; Emphasis ours).

A perusal of the foregoing "Whereas" clauses unmistakably show that the clear reason for the
decision to grant the emergency loan to petitioner bank was that the latter was suffering from
financial distress and severe bank "run" as a result of which it closed on July 23, 1984 and that the
release of the said amount is in accordance with the Central Bank's full support to meet Banco
Filipino's depositors' withdrawal requirements (Excerpts of minutes of meeting on MB Min. No. 35,
p. 25, Rollo, Vol. IX). Nothing therein shows that an extraordinary emergency situation exists
affecting most banks, not only as regards petitioner bank. This Court thereby finds that the grant of
the said emergency loan was intended from the beginning to fall under the second paragraph of
Section 90 of the Central Bank Act, which could not have occurred if the petitioner bank was not
solvent. Where notwithstanding knowledge of the irregularities and unsafe banking practices
allegedly committed by the petitioner bank, the Central Bank even granted financial support to the
latter and placed it under conservatorship, such actuation means that petitioner bank could still be
saved from its financial distress by adequate aid and management reform, which was required by
Central Bank's duty to maintain the stability of the banking system and the preservation of public
confidence in it (Ramos v. Central Bank, No. L-29352, October 4, 1971, 41 SCRA 565).

In view of the foregoing premises, We believe that the closure of the petitioner bank was arbitrary
and committed with grave abuse of discretion. Granting in gratia argumenti that the closure was
based on justified grounds to protect the public, the fact that petitioner bank was suffering from
serious financial problems should not automatically lead to its liquidation. Section 29 of the Central
Bank provides that a closed bank may be reorganized or otherwise placed in such a condition that it
may be permitted to resume business with safety to its depositors, creditors and the general public.

We are aware of the Central Bank's concern for the safety of Banco Filipino's depositors as well as its
creditors including itself which had granted substantial financial assistance up to the time of the
latter's closure. But there are alternatives to permanent closure and liquidation to safeguard those
interests as well as those of the general public for the failure of Banco Filipino or any bank for that
matter may be viewed as an irreversible decline of the country's entire banking system and
ultimately, it may reflect on the Central Bank's own viability. For one thing, the Central Bank and
the Monetary Board should exercise strict supervision over Banco Filipino. They should take all the
necessary steps not violative of the laws that will fully secure the repayment of the total financial
assistance that the Central Bank had already granted or would grant in the future.

ACCORDINGLY, decision is hereby rendered as follows:

1. The motion for reconsideration in G.R. Nos. 68878 and 81303, and the petitions in G.R. Nos.
77255-58, 78766, 81304 and 90473 are DENIED;

2. The petitions in G.R. No. 70054, 78767 and 78894 are GRANTED and the assailed order of the
Central Bank and the Monetary Board dated January 25, 1985 is hereby ANNULLED AND SET
ASIDE. The Central Bank and the Monetary Board are ordered to reorganize petitioner Banco
Filipino Savings and Mortgage Bank and allow the latter to resume business in the Philippines
under the comptrollership of both the Central Bank and the Monetary Board and under such
conditions as may be prescribed by the latter in connection with its reorganization until such time
that petitioner bank can continue in business with safety to its creditors, depositors and the general
public.

SO ORDERED.
Rural Bank of Buhi v. CA

This is a petition for review on certiorari with preliminary mandatory injunction seeking the
reversal of the orders of the Court of Appeals dated March 19, 1982 and March 24, 1982 and its
decision * (HATOL) promulgated on June 17,1982 in CA-G.R. No. 13944 entitled "Banko Central ng
Pilipinas at Consolacion Odra Laban Kina Rural Bank of Buhi (Camarines Sur), Inc." and praying
for a restraining order or a preliminary mandatory injunction to restrain respondents from enforcing
aforesaid orders and decision of the respondent Court, and to give due course to the petitioners'
complaint in IR-428, pending before Hon. Judge Carlos R. Buenviaje of Branch VII, CFI, Camarines
Sur.

The decretal portion of the appealed decision reads:

DAHIL DITO, ang utos ng pinasasagot sa Hukom noong ika-9 ng Marso, 1982, ay
isinasang-tabi. Kapalit nito, isang utos and ipinalabas na nag-uutos sa pinasasagot
sa Hukom na itigil ang anumang pagpapatuloy o pagdidinig kaugnay sa usaping IR-
428 na pinawawalang saysay din ng Hukumang ito.

SIYANG IPINAG-UUTOS.

The antecedent facts of the case are as follows:

The petitioner Rural Bank of Buhi, Inc. (hereinafter referred to as Buhi) is a juridical entity existing
under the laws of the Philippines. Buhi is a rural bank that started its operations only on December
26,1975 (Rollo, p. 86).

In 1980, an examination of the books and affairs of Buhi was ordered conducted by the Rural Banks
and Savings and Loan Association (DRBSLA), Central Bank of the Philippines, which by law, has
charge of the supervision and examination of rural banks and savings and loan associations in the
Philippines. However, said petitioner refused to be examined and as a result thereof, financial
assistance was suspended.

On January 10, 1980, a general examination of the bank's affairs and operations was conducted and
there were found by DRBSLA represented by herein respondent, Consolacion V. Odra, Director of
DRBSLA, among others, massive irregularities in its operations consisting of loans to unknown and
fictitious borrowers, where the sum of P 1,704,782.00 was past due and another sum
of P1,130,000.00 was also past due in favor of the Central Bank (Rollo, p. 86). The promissory notes
evidencing these loans were rediscounted with the Central Bank for cash. As a result thereof, the
bank became insolvent and prejudiced its depositors and creditors.

Respondent, Consolacion V. Odra, submitted a report recommending to the Monetary Board of the
Central Bank the placing of Buhi under receivership in accordance with Section 29 of Republic Act
No. 265, as amended, the designation of the Director, DRBSLA, as receiver thereof. On March 28,
1980, the Monetary Board, finding the report to be true, adopted Resolution No. 583
placing Buhi, petitioner herein, under receivership and designated respondent, Consolacion V. Odra,
as Receiver, pursuant to the provisions of Section 29 of Republic Act No. 265 as amended (Rollo, p.
111).

In a letter dated April 8, 1980, respondent Consolacion V. Odra, as receiver, implemented and
carried out said Monetary Board Resolution No. 583 by authorizing deputies of the receiver to take
control, possession and charge of Buhi, its assets and liabilities (Rollo, p. 109).
Imelda del Rosario, Manager of herein petitioner Buhi, filed a petition for injunction with
Restraining Order dated April 23, 1980, docketed as Special Proceedings IR-428 against respondent
Consolacion V. Odra and DRBSLA deputies in the Court of First Instance of Camarines Sur, Branch
VII, Iriga City, entitled Rural Bank of Buhi vs. Central Bank, which assailed the action of herein
respondent Odra in recommending the receivership over Buhias a violation of the provisions of
Sections 28 and 29 of Republic Act No. 265 as amended, and Section 10 of Republic Act No. 720 (The
Rural Banks Act) and as being ultra vires and done with grave abuse of discretion and in excess of
jurisdiction (Rollo, p. 120).

Respondents filed their motion to dismiss dated May 27, 1980 alleging that the petition did not
allege a cause of action and is not sufficient in form and substance and that it was filed in violation
of Section 29, Republic Act No. 265 as amended by Presidential Decree No. 1007 (Rollo, p. 36).

Petitioners, through their counsel, filed an opposition to the motion to dismiss dated June 17, 1980
averring that the petition alleged a valid cause of action and that respondents have violated the due
process clause of the Constitution (Rollo, p. 49).

Later, respondents filed a reply to the opposition dated July 1, 1980, claiming that the petition is not
proper; that Imelda del Rosario is not the proper representative of the bank; that the petition failed
to state a cause of action; and, that the provisions of Section 29 of Republic Act No. 265 had been
faithfully observed (Rollo, p. 57).

On August 22, 1980, the Central Bank Monetary Board issued a Resolution No. 1514 ordering the
liquidation of the Rural Bank of Buhi (Rollo, p. 108).

On September 1, 1981, the Office of the Solicitor General, in accordance with Republic Act No. 265,
Section 29, filed in the same Court of First Instance of Camarines Sur, Branch VII, a petition for
Assistance in the Liquidation of Buhi, which petition was docketed as SP-IR-553, pursuant to the
Monetary Board Resolution No. 1514 (Rollo, pp. 89; 264).

Meanwhile, respondent Central Bank filed on September 15, 1981, in Civil Case No. IR-428 a
Supplemental Motion To Dismiss on the ground that the receivership of Buhi, in view of the issuance
of the Monetary Board Resolution No. 1514 had completely become moot and academic (Rollo, p. 68)
and the fact that Case SP-IR-553 for the liquidation of Buhi was already pending with the same
Court (Rollo, p. 69).

On October 16, 1981, petitioners herein filed their amended complaint in Civil Case No. IR-428
alleging that the issuance of Monetary Board Resolution No. 583 was plainly arbitrary and in bad
faith under aforequoted Section 29 of Republic Act No. 265 as amended, among others (Rollo, p. 28).
On the same day, petitioner herein filed a rejoinder to its opposition to the motion to dismiss (Rollo,
p. 145).

On March 9,1982, herein petitioner Judge Buenviaje, issued an order denying the respondents'
motion to dismiss, supplemental motion to dismiss and granting a temporary restraining order
enjoining respondents from further managing and administering the Rural Bank of Buhi and to
deliver the possession and control thereof to the petitioner Bank under the same conditions and with
the same financial status as when the same was taken over by herein respondents (defendants) on
April 16, 1980 and further enjoining petitioner to post a bond in the amount of three hundred
thousand pesos (P300,000.00) (Rollo, p. 72).

The dispositive portion of said decision reads:

 WHEREFORE, premises considered, the motion to dismiss and supplemental motion
to dismiss, in the light of petitioners' opposition, for want of sufficient merit is
denied. Respondents are hereby directed to file their answer within ten (10) days
from receipt of a copy of this order. (Rollo, p. 4).

On March 11, 1982, petitioner Buhi through counsel, conformably with the above-mentioned order,
filed a Motion to Admit Bond in the amount of P300,220.00 (Rollo, pp. 78-80).

On March 15,1982, herein petitioner Judge issued the order admitting the bond of P300,220.00 filed
by the petitioner, and directing the respondents to surrender the possession of the Rural Bank of
Buhi, together with all its equipments, accessories, etc. to the petitioners (Rollo, p. 6).

Consequently, on March 16, 1982, herein petitioner Judge issued the writ of execution directing the
Acting Provincial Sheriff of Camarines Sur to implement the Court's order of March 9, 1982 (Rollo, p.
268). Complying with the said order of the Court, the Deputy Provincial Sheriff went to the Buhi
premises to implement the writ of execution but the vault of the petitioner bank was locked and no
inventory was made, as evidenced by the Sheriffs Report (Rollo, pp. 83-84). Thus, the petitioner
herein filed with the Court an "Urgent Ex-Parte Motion to Allow Sheriff Calope to Force Open Bank
Vault" on the same day (Rollo, p. 268). Accordingly, on March 17, 1982, herein petitioner Judge
granted the aforesaid Ex-Parte Motion to Force Open the Bank Vault (Rollo, p. 269).

On March 18, 1982, counsel for petitioner filed another "Urgent Ex-Parte Motion to Order Manager
of City Trust to Allow Petitioner to Withdraw Rural Bank Deposits" while a separate "Urgent Ex-
Parte Motion to Order Manager of Metrobank to Release Deposits of Petitioners" was filed on the
same date. The motion was granted by the Court in an order directing the Manager of Metro Bank-
Naga City (Rollo, p. 269) to comply as prayed for.

In view thereof, herein respondents filed in the Court of Appeals a petition for certiorari and
prohibition with preliminary injunction docketed as CA-G.R. No. 13944 against herein petitioners,
seeking to set aside the restraining order and reiterating therein that petitioner Buhi's complaint in
the lower court be dismissed (Rollo, p. 270).

On March 19, 1982, the Court of Appeals issued a Resolution (KAPASIYAHAN) in tagalog,
restraining the Hon. Judge Carlos R. Buenviaje, from enforcing his order of March 9,1982 and
suspending further proceedings in Sp. Proc. No. IR-428 pending before him while giving the Central
Bank counsel, Atty. Ricardo Quintos, authority to carry out personally said orders and directing the
"Punong Kawani" of the Court of Appeals to send telegrams to the Office of the President and the
Supreme Court (Rollo, p. 168).

Herein petitioners did not comply with the Court of Appeals' order of March 19, 1982, but filed
instead on March 21, 1982 a motion for reconsideration of said order of the Court of Appeals,
claiming that the lower court's order of March 9, 1982 referred only to the denial of therein
respondents' motion to dismiss and supplemental motion to dismiss and that the return of Buhi to
the petitioners was already an accomplished fact. The motion was denied by the respondent court in
a resolution dated June 1, 1982 (Rollo, p. 301).

In view of petitioners' refusal to obey the Court of Appeals' Order of March 19, 1982, herein
respondents filed with the Court of Appeals a Motion to Cite Petitioners in Contempt, dated April 22,
1982 (Rollo, p. 174).

The Court of Appeals issued on May 24, 1982 an order requiring herein petitioner Rural Bank of
Buhi, Inc., through its then Acting Manager, Imelda del Rosario and herein petitioner Judge Carlos
Buenviaje, as well as Manuel Genova and Rodolfo Sosa, to show cause within ten (10) days from
notice why they should not be held in contempt of court and further directing the Ministry of
National Defense or its representative to cause the return of possession and management of the
Rural Bank to the respondents Central Bank and Consolacion Odra (Rollo, p. 180).

On June 9, 1982, petitioners filed their objection to respondents' motion for contempt dated June 5,
1982 claiming that the properties, subject of the order, had already been returned to the herein
petitioners who are the lawful owners thereof and that the returning could no longer be undone
(Rollo, p. 181).

Later, petitioners filed another motion dated June 17, 1982 for the reconsideration of the resolution
of June 1, 1982 of the Court of Appeals alleging that the same contravened and departed from the
rulings of the Supreme Court that consummated acts or acts already done could no longer be the
subject of mandatory injunction and that the respondent Court of Appeals had no jurisdiction to
issue the order unless it was in aid of its appellate jurisdiction, claiming that the case (CA-G.R. No.
13944) did not come to it on appeal (Rollo, p. 302).

As aforestated, on June 17, 1982, respondent Court of Appeals rendered its decision (HATOL) setting
aside the lower court's restraining order dated March 9,1982 and ordering the dismissal of herein
petitioners' amended complaint in Civil Case No. IR-428 (Rollo, p. 186).

On July 9, 1982, petitioners (respondents in CA-G.R. No. 13944) filed a Motion for Reconsideration of
the Decision dated June 17, 1982 insofar as the complaint with the lower court (Civil Case No. IR-
428 was ordered dismissed (Rollo, p. 305).

On August 23, 1982, the respondent Court of Appeals issued its Resolution denying for lack of merit,
herein petitioners' motion for reconsideration of the resolution issued by the respondent Court of
Appeals on June 1, 1982 and set on August 31, 1982 the hearing of the motion to cite the
respondents in CA-G.R. No. SP-13944 (herein petitioner) for contempt (Rollo, p. 193).

At said hearing, counsel for Rural Bank of Buhi agreed and promised in open court to restore and
return to the Central Bank the possession and control of the Bank within three (3) days from August
31, 1982.

However on September 3,1982, Rosalia Guevara, Manager thereof, vigorously and adamantly
refused to surrender the premises unless she received a written order from the Court.

In a subsequent hearing of the contempt incident, the Court of Appeals issued its Order dated
October 13,1982, but Rosalia Guevara still refused to obey, whereupon she was placed under arrest
and the Court of Appeals ordered her to be detained until she decided to obey the Court's Order
(Rollo, pp. 273-274).

Earlier, on September 14, 1982 petitioners had filed this petition even while a motion for
reconsideration of the decision of June 17,1982 was still pending consideration in the Court of
Appeals.

In the resolution of October 20, 1982, the Second Division of this Court without giving due course to
the petition required respondents to COMMENT (Rollo, p. 225).

Counsel for respondents manifested (Rollo, p. 226) that they could not file the required comment
because they were not given a copy of the petition. Meanwhile, they filed an urgent motion dated
October 28, 1982 with the Court of Appeals to place the bank through its representatives in
possession of the Rural Bank of Buhi (Camarines Sur), Inc. (Rollo, p. 237).

On December 9, 1982, petitioners filed a Supplemental Petition with urgent motion for the issuance
of a restraining order dated December 2, 1982 praying that the restraining order be issued against
respondent court (Rollo, p. 229).

In the resolution of December 15,1982, the Court resolved to require petitioners to furnish the
respondents with a copy of the petition and to require the respondents to comment on both the
original and the supplemental petitions (Rollo, p. 243).

In a resolution of February 21, 1983, the Court NOTED Rosalia V. Guevara's letter dated February
4, 1983 (Rollo, p. 252) addressed to Hon. Chief Justice Enrique M. Fernando, requesting that she be
allowed to file a petition for the issuance of a writ of habeas corpus (Rollo, p. 256).

At the hearing of the said petition on February 23, 1983 where the counsel of both parties appeared,
this Court noted the Return of the Writ of Habeas Corpus as well as the release of petitioner Rosalia
V. Guevara from detention by the National Bureau of Investigation. After hearing aforesaid counsel
and petitioner herself, and it appearing that the latter had resigned since January 18,1983 as
Manager of the Rural Bank of Buhi, Inc. and that the Central Bank might avail of more than
adequate legal measures to take over the management, possession and control of the said bank (and
not through contempt proceedings and detention and confinement of petitioner), with Assistant
Solicitor General Andin manifesting that respondents were not insisting on the continued detention
of petitioner, the Court Resolved to SET the petitioner at liberty and to consider the contempt
incident closed (Rollo, p. 339).

On April 11, 1983, respondents filed their comment on the original and supplemental petitions.

Meanwhile, the Court of Appeals, acting on respondents' urgent motion filed on October 28, 1982
ordered on April 13, 1983 the return to the petitioners (herein respondents) or their duly authorized
representatives of the possession, management and control of subject Rural Bank (Rollo, p. 319),
together with its properties.

On April 28, 1983, petitioner filed an urgent motion: (1) to give due course to the petition and (2) for
immediate issuance of a Restraining Order against the respondent court to prevent it from enforcing
its aforesaid resolution dated April 13, 1983 and from further proceeding in AC-G.R. No. 13944-SP
(Rollo, p. 315).

On May 16, 1983, this Court resolved to deny the petition for lack of merit (Rollo, p. 321). On July
25, 1983, petitioners filed their verified Motion for Reconsideration (Rollo, p. 337) praying that the
HATOL dated June 17, 1982 of the Court of Appeals be set aside as null and void and that Special
Proceedings No. IR-428 of CFI-Camarines Sur, Iriga City, Branch VII, be ordered remanded to the
RTC of Camarines Sur, Iriga City, for further proceedings.

A Motion for Early Resolution was filed by herein petitioners on March 12,1984 (Rollo, p. 348).

Petitioners raised the following legal issues in their motion for reconsideration:

I. UNDER SEC. 29, R.A. 265, AS AMENDED, MAY THE MONETARY BOARD (MB) OF THE
CENTRAL BANK (CB) PLACE A RURAL BANK UNDER RECEIVERSHIP WITHOUT PRIOR
NOTICE TO SAID RURAL BANK TO ENABLE IT TO BE HEARD ON THE GROUND RELIED
UPON FOR SUCH RECEIVERSHIP?
II. UNDER THE SAME SECTION OF SAID LAW, WHERE THE MONETARY BOARD (MB) OF
THE CENTRAL BANK (CB) HAS PLACED A RURAL BANK UNDER RECEIVERSHIP, IS SUCH
ACTION OF THE MONETARY BOARD (MB) SUBJECT TO JUDICIAL REVIEW? IF SO, WHICH
COURT MAY EXERCISE SUCH POWER AND WHEN MAY IT EXERCISE THE SAME?

III. UNDER THE SAID SECTION OF THE LAW, SUPPOSE A CIVIL CASE IS INSTITUTED
SEEKING ANNULMENT OF THE RECEIVERSHIP ON THE GROUND OF ARBITRARINESS
AND BAD FAITH ON THE PART OF THE MONETARY BOARD (MB), MAY SUCH CASE BE
DISMISSED BY THE IAC (THEN CA) ON THE GROUND OF INSUFFICIENCY OF EVIDENCE
EVEN IF THE TRIAL COURT HAS NOT HAD A CHANCE YET TO RECEIVE EVIDENCE AND
THE PARTIES HAVE NOT YET PRESENTED EVIDENCE EITHER IN THE TRIAL COURT OR
IN SAID APPELLATE COURT? (Rollo, pp. 330-331).

I. Petitioner Rural Bank's position is to the effect that due process was not observed by the Monetary
Board before said bank was placed under receivership. Said Rural Bank claimed that it was not
given the chance to deny and disprove such claim of insolvency and/or any other ground which the
Monetary Board used in justification of its action.

Relative thereto, the provision of Republic Act No. 265 on the proceedings upon insolvency reads:

SEC. 29. Proceedings upon insolvency.— Whenever, upon examination by the head of
the appropriate supervising and examining department or his examiners or agents
into the condition of any banking institution, it shall be disclosed that the condition
of the same is one of insolvency, or that its continuance in business would involve
probable loss to its depositors or creditors, it shall be the duty of the department
head concerned forthwith, in writing, to inform the Monetary Board of the facts, and
the Board may, upon finding the statements of the department head to be true, forbid
the institution to do business in the Philippines and shall designate an official of the
Central Bank, or a person of recognized competence in banking, as receiver to
immediately take charge of its assets and liabilities, as expeditiously as possible
collect and gather all the assets and administer the same for the benefit of its
creditors, exercising all the powers necessary for these purposes including, but not
limited to, bringing suits and foreclosing mortgages in the name of the banking
institution.

The Monetary Board shall thereupon determine within sixty days whether the
institution may be recognized or otherwise placed in such a condition so that it may
be permitted to resume business with safety to its depositors and creditors and the
general public and shall prescribe the conditions under which such redemption of
business shall take place as the time for fulfillment of such conditions. In such case,
the expenses and fees in the collection and administration of the assets of the
institution shall be determined by the Board and shall be paid to the Central Bank
out of the assets of such banking institution.

If the Monetary Board shall determine and confirm within the said period that the
banking institution is insolvent or cannot resume business with safety to its
depositors, creditors and the general public, it shall, if the public interest requires,
order its liquidation, indicate the manner of its liquidation and approve a liquidation
plan. The Central Bank shall, by the Solicitor General, file a petition in the Court of
First Instance reciting the proceedings which have been taken and praying the
assistance of the court in the liquidation of the banking institution. The Court shall
have jurisdiction in the same proceedings to adjudicate disputed claims against the
 bank and enforce individual liabilities of the stockholders and do all that is necessary
to preserve the assets of the banking institution and to implement the liquidation
plan approved by the Monetary Board. The Monetary Board shall designate an
official of the Central Bank or a person of recognized competence in banking, as
liquidator who shall take over the functions of the receiver previously appointed by
the Monetary Board under this Section. The liquidator shall, with all convenient
speed, convert the assets of the banking institution to money or sell, assign or
otherwise dispose of the same to creditors and other parties for the purpose of paying
the debts of such bank and he may, in the name of the banking institution, institute
such actions as may be necessary in the appropriate court to collect and recover
accounts and assets of the banking institution.

The provisions of any law to the contrary notwithstanding the actions of the
Monetary Board under this Section and the second paragraph of Section 34 of this
Act shall be final and executory, and can be set aside by the court only if there is
convincing proof that the action is plainly arbitrary and made in bad faith. No
restraining order or injunction shall be issued by the court enjoining the Central
Bank from implementing its actions under this Section and the second paragraph of
Section 34 of this Act, unless there is convincing proof that the action of the
Monetary Board is plainly arbitrary and made in bad faith and the petitioner or
plaintiff files with the clerk or judge of the court in which the action is pending a
bond executed in favor of the Central Bank, in an amount to be fixed by the court.
The restraining order or injunction shall be refused or, if granted, shall be dissolved
upon filing by the Central Bank of a bond, which shall be in the form of cash or
Central Bank cashier's check, in an amount twice the amount of the bond of the
petitioner, or plaintiff conditioned that it will pay the damages which the petitioner
or plaintiff may suffer by the refusal or the dissolution of the injunction. The
provisions of Rule 58 of the New Rules of Court insofar as they are applicable and not
inconsistent with the provisions of this Section shall govern the issuance and
dissolution of the restraining order or injunction contemplated in this Section.

Insolvency, under this Act, shall be understood to mean the inability of a banking
institution to pay its liabilities as they fall due in the usual and ordinary course of
business: Provided, however, that this shall not include the inability to pay of an
otherwise non-insolvent bank caused by extraordinary demands induced by financial
panic commonly evidenced by a run on the banks in the banking community.

The appointment of a conservator under Section 28-A of this Act or the appointment
of receiver under this Section shall be vested exclusively with the Monetary Board,
the provision of any law, general or special, to the contrary not withstanding.

It will be observed from the foregoing provision of law, that there is no requirement whether express
or implied, that a hearing be first conducted before a banking institution may be placed under
receivership. On the contrary, the law is explicit as to the conditions prerequisite to the action of the
Monetary Board to forbid the institution to do business in the Philippines and to appoint a receiver
to immediately take charge of the bank's assets and liabilities. They are: (a) an examination made by
the examining department of the Central Bank; (b) report by said department to the Monetary
Board; and (c) prima facie showing that the bank is in a condition of insolvency or so situated that its
continuance in business would involve probable loss to its depositors or creditors.

Supportive of this theory is the ruling of this Court, which established the authority of the Central
Bank under the foregoing circumstances, which reads:
 As will be noted, whenever it shall appear prima facie that a banking institution is in
"a condition of insolvency" or so situated "that its continuance in business would
involved probable loss to its depositors or creditors," the Monetary Board has
authority:

First, to forbid the institution to do business and appoint a receiver therefor; and

Second, to determine, within 60 days, whether or not:

1) the institution may be reorganized and rehabilitated to such an

extent as to be permitted to resume business with safety to
depositors, creditors and the general public; or

2) it is indeed insolvent or cannot resume business with safety to

depositors, creditors and the general public, and public interest
requires that it be liquidated.

In this latter case (i.e., the bank can no longer resume business with safety to depositors, creditors
and the public, etc.) its liquidation will be ordered and a liquidator appointed by the Monetary
Board. The Central Bank shall thereafter file a petition in the Regional Trial Court praying for the
Court's assistance in the liquidation of the bank." ... (Salud vs. Central Bank, 143 SCRA 590 [1986]).

Petitioner further argues, that there is also that constitutional guarantee that no property shall be
taken without due process of law, so that Section 29, R.A. 265, as amended, could not have intended
to disregard and do away with such constitutional requirement when it conferred upon the Monetary
Board the power to place Rural Banks under receivership (Rollo, p. 333).

The contention is without merit. It has long been established and recognized in this jurisdiction that
the closure and liquidation of a bank may be considered as an exercise of police power. Such exercise
may, however, be subject to judicial inquiry and could be set aside if found to be capricious,
discriminatory, whimsical, arbitrary, unjust or a denial of the due process and equal protection
clauses of the Constitution (Central Bank vs. Court of Appeals, 106 SCRA 155 [1981]).

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

In Mendiola vs. Court of Appeals, (106 SCRA 130), the Supreme Court held:

The pivotal issue raised by petitioner is whether or not the appointment of a receiver
by the Court of First Instance on January 14, 1969 was in order.

Respondent Court correctly stated that the appointment of a receiver pendente lite is
a matter principally addressed to and resting largely on the sound discretion of the
court to which the application is made. This Tribunal has so held in a number of
cases. However, receivership being admittedly a harsh remedy, it should be granted
with extreme caution. Sound reasons for receivership must appear of record, and
there should be a clear showing of a necessity therefor. Before granting the remedy,
 the court is advised to consider the consequence or effects thereof in order to avoid
irreparable injustice or injury to others who are entitled to as much consideration as
those seeking it.

xxx xxx xxx

This is not to say that a hearing is an indispensable requirement for the appointment
of a receiver. As petitioner correctly contends in his first assignment of error, courts
may appoint receivers without prior presentation of evidence and solely on the basis
of the averments of the pleadings. Rule 59 of the Revised Rules of Court allows the
appointment of a receiver upon an ex parte application.

There is no question that the action of the Monetary Board in this regard may be subject to judicial
review. Thus, it has been held that the courts may interfere with the Central Bank's exercise of
discretion in determining whether or not a distressed bank shall be supported or liquidated.
Discretion has its limits and has never been held to include arbitrariness, discrimination or bad faith
(Ramos vs. Central Bank of the Philippines, 41 SCRA 567 [1971]).

It has likewise been held that resolutions of the Monetary Board under Section 29 of the Central
Bank Act, such as: forbidding bank institutions to do business on account of a "condition of
insolvency" or because its continuance in business would involve probable loss to depositors or
creditors; or appointing a receiver to take charge of the bank's assets and liabilities, or determining
whether the bank may be rehabilitated or should be liquidated and appointing a liquidator for that
purpose, are under the law "final and executory" and may be set aside only on one ground, that is "if
there is convincing proof that the action is plainly arbitrary and made in bad faith" (Salud vs.
Central Bank, supra).

There is no dispute that under the above-quoted Section 29 of the Central Bank Act, the Regional
Trial Court has jurisdiction to adjudicate the question of whether or not the action of the Monetary
Board directing the dissolution of the subject Rural Bank is attended by arbitrariness and bad faith.
Such position has been sustained by this Court in Salud vs. Central Bank of the Philippines (supra).

In the same case, the Court ruled further that a banking institution's claim that a resolution of the
Monetary Board under Section 29 of the Central Bank Act should be set aside as plainly arbitrary
and made in bad faith, may be asserted as an affirmative defense (Sections 1 and 4[b], Rule 6, Rules
of Court) or a counterclaim (Section 6, Rule 6; Section 2, Rule 72 of the Rules of Court) in the
proceedings for assistance in liquidation or as a cause of action in a separate and distinct action
where the latter was filed ahead of the petition for assistance in liquidation (ibid; Central Bank vs.
Court of Appeals, 106 SCRA 143 [1981]).

III. It will be noted that in the issuance of the Order of the Court of First Instance of Camarines Sur,
Branch VII, Iriga City, dated March 9, 1982 (Rollo, pp. 72-77), there was no trial on the merits.
Based on the pleadings filed, the Court merely acted on the Central Bank's Motion to Dismiss and
Supplemental Motion to Dismiss, denying both for lack of sufficient merit. Evidently, the trial court
merely acted on an incident and has not as yet inquired, as mandated by Section 29 of the Central
Bank Act, into the merits of the claim that the Monetary Board's action is plainly arbitrary and
made in bad faith. It has not appreciated certain facts which would render the remedy of liquidation
proper and rehabilitation improper, involving as it does an examination of the probative value of the
evidence presented by the parties properly belonging to the trial court and not properly cognizable on
appeal (Central Bank vs. Court of Appeals, supra, p. 156).
Still further, without a hearing held for both parties to substantiate their allegations in their
respective pleadings, there is lacking that "convincing proof" prerequisite to justify the temporary
restraining order (mandatory injunction) issued by the trial court in its Order of March 9, 1982.

PREMISES CONSIDERED, the decision of the Court of Appeals is MODIFIED; We hereby order the
remand of this case to the Regional Trial Court for further proceedings, but We LIFT the temporary
restraining order issued by the trial court in its Order dated March 9, 1982.

SO ORDERED.

CB v. CA

May a Monetary Board resolution placing a private bank under receivership be annulled on the
ground of lack of prior notice and hearing?

This petition seeks review of the decision of the Court of Appeals in CA G.R. S.P. No. 07867 entitled
"The Central Bank of the Philippines and Ramon V. Tiaoqui vs. Hon. Jose C. de Guzman and
Triumph Savings Bank," promulgated 26 September 1986, which affirmed the twin orders of the
Regional Trial Court of Quezon City issued 11 November 1985 1 denying herein petitioners' motion to
dismiss Civil Case No. Q-45139, and directing petitioner Ramon V. Tiaoqui to restore the private
management of Triumph Savings Bank (TSB) to its elected board of directors and officers, subject to
Central Bank comptrollership. 2

The antecedent facts: Based on examination reports submitted by the Supervision and Examination
Sector (SES), Department II, of the Central Bank (CB) "that the financial condition of TSB is one of
insolvency and its continuance in business would involve probable loss to its depositors and
creditors," 3 the Monetary Board (MB) issued on 31 May 1985 Resolution No. 596 ordering the
closure of TSB, forbidding it from doing business in the Philippines, placing it under receivership,
and appointing Ramon V. Tiaoqui as receiver. Tiaoqui assumed office on 3 June 1985. 4

On 11 June 1985, TSB filed a complaint with the Regional Trial Court of Quezon City, docketed as
Civil Case No. Q-45139, against Central Bank and Ramon V. Tiaoqui to annul MB Resolution No.
596, with prayer for injunction, challenging in the process the constitutionality of Sec. 29 of R.A. 269,
otherwise known as "The Central Bank Act," as amended, insofar as it authorizes the Central Bank
to take over a banking institution even if it is not charged with violation of any law or regulation,
much less found guilty thereof. 5

On 1 July 1985, the trial court temporarily restrained petitioners from implementing MB Resolution
No. 596 "until further orders", thus prompting them to move for the quashal of the restraining order
(TRO) on the ground that it did not comply with said Sec. 29, i.e., that TSB failed to show convincing
proof of arbitrariness and bad faith on the part of petitioners;' and, that TSB failed to post the
requisite bond in favor of Central Bank.

On 19 July 1985, acting on the motion to quash the restraining order, the trial court granted the
relief sought and denied the application of TSB for injunction. Thereafter, Triumph Savings Bank
filed with Us a petition for certiorariunder Rule 65 of the Rules of Court 6 dated 25 July 1985 seeking
to enjoin the continued implementation of the questioned MB resolution.

Meanwhile, on 9 August 1985; Central Bank and Ramon Tiaoqui filed a motion to dismiss the
complaint before the RTC for failure to state a cause of action, i.e., it did not allege ultimate facts
showing that the action was plainly arbitrary and made in bad faith, which are the only grounds for
the annulment of Monetary Board resolutions placing a bank under conservatorship, and that TSB
was without legal capacity to sue except through its receiver. 7

On 9 September 1985, TSB filed an urgent motion in the RTC to direct receiver Ramon V. Tiaoqui to
restore TSB to its private management. On 11 November 1985, the RTC in separate orders denied
petitioners' motion to dismiss and ordered receiver Tiaoqui to restore the management of TSB to its
elected board of directors and officers, subject to CB comptrollership.

Since the orders of the trial court rendered moot the petition for certiorari then pending before this
Court, Central Bank and Tiaoqui moved on 2 December 1985 for the dismissal of G.R. No. 71465
which We granted on 18 December 1985. 8

Instead of proceeding to trial, petitioners elevated the twin orders of the RTC to the Court of Appeals
on a petition for certiorari and prohibition under Rule 65. 9 On 26 September 1986, the appellate
court, upheld the orders of the trial court thus —

Petitioners' motion to dismiss was premised on two grounds, namely, that the
complaint failed to state a cause of action and that the Triumph Savings Bank was
without capacity to sue except through its appointed receiver.

Concerning the first ground, petitioners themselves admit that the Monetary Board
resolution placing the Triumph Savings Bank under the receivership of the officials
of the Central Bank was done without prior hearing, that is, without first hearing the
side of the bank. They further admit that said resolution can be the subject of judicial
review and may be set aside should it be found that the same was issued with
arbitrariness and in bad faith.

The charge of lack of due process in the complaint may be taken as constitutive of
allegations of arbitrariness and bad faith. This is not of course to be taken as
meaning that there must be previous hearing before the Monetary Board may
exercise its powers under Section 29 of its Charter. Rather, judicial review of such
action not being foreclosed, it would be best should private respondent be given the
chance to show and prove arbitrariness and bad faith in the issuance of the
questioned resolution, especially so in the light of the statement of private
respondent that neither the bank itself nor its officials were even informed of any
charge of violating banking laws.

In regard to lack of capacity to sue on the part of Triumph Savings Bank, we view
such argument as being specious, for if we get the drift of petitioners' argument, they
mean to convey the impression that only the CB appointed receiver himself may
question the CB resolution appointing him as such. This may be asking for the
impossible, for it cannot be expected that the master, the CB, will allow the receiver
it has appointed to question that very appointment. Should the argument of
petitioners be given circulation, then judicial review of actions of the CB would be
effectively checked and foreclosed to the very bank officials who may feel, as in the
case at bar, that the CB action ousting them from the bank deserves to be set aside.

xxx xxx xxx

On the questioned restoration order, this Court must say that it finds nothing
whimsical, despotic, capricious, or arbitrary in its issuance, said action only being in
line and congruent to the action of the Supreme Court in the Banco Filipino Case
 (G.R. No. 70054) where management of the bank was restored to its duly elected
directors and officers, but subject to the Central Bank comptrollership. 10

On 15 October 1986, Central Bank and its appointed receiver, Ramon V. Tiaoqui, filed this petition
under Rule 45 of the Rules of Court praying that the decision of the Court of Appeals in CA-G.R. SP
No. 07867 be set aside, and that the civil case pending before the RTC of Quezon City, Civil Case No.
Q-45139, be dismissed. Petitioners allege that the Court of Appeals erred —

(1) in affirming that an insolvent bank that had been summarily closed by the
Monetary Board should be restored to its private management supposedly because
such summary closure was "arbitrary and in bad faith" and a denial of "due process";

(2) in holding that the "charge of lack of due process" for "want of prior hearing" in a
complaint to annul a Monetary Board receivership resolution under Sec. 29 of R.A.
265 "may be taken as . . allegations of arbitrariness and bad faith"; and

(3) in holding that the owners and former officers of an insolvent bank may still act
or sue in the name and corporate capacity of such bank, even after it had been
ordered closed and placed under receivership. 11

The respondents, on the other hand, allege inter alia that in the Banco Filipino case, 12 We held that
CB violated the rule on administrative due process laid down in Ang Tibay vs. CIR (69 Phil. 635)
and Eastern Telecom Corp. vs. Dans, Jr. (137 SCRA 628) which requires that prior notice and
hearing be afforded to all parties in administrative proceedings. Since MB Resolution No. 596 was
adopted without TSB being previously notified and heard, according to respondents, the same is void
for want of due process; consequently, the bank's management should be restored to its board of
directors and officers. 13

Petitioners claim that it is the essence of Sec. 29 of R.A. 265 that prior notice and hearing in cases
involving bank closures should not be required since in all probability a hearing would not only cause
unnecessary delay but also provide bank "insiders" and stockholders the opportunity to further
dissipate the bank's resources, create liabilities for the bank up to the insured amount of P40,000.00,
and even destroy evidence of fraud or irregularity in the bank's operations to the prejudice of its
depositors and creditors. 14 Petitioners further argue that the legislative intent of Sec. 29 is to repose
in the Monetary Board exclusive power to determine the existence of statutory grounds for the
closure and liquidation of banks, having the required expertise and specialized competence to do so.

The first issue raised before Us is whether absence of prior notice and hearing may be considered
acts of arbitrariness and bad faith sufficient to annul a Monetary Board resolution enjoining a bank
from doing business and placing it under receivership. Otherwise stated, is absence of prior notice
and hearing constitutive of acts of arbitrariness and bad faith?

Under Sec. 29 of R.A. 265, 15 the Central Bank, through the Monetary Board, is vested with exclusive
authority to assess, evaluate and determine the condition of any bank, and finding such condition to
be one of insolvency, or that its continuance in business would involve probable loss to its depositors
or creditors, forbid the bank or non-bank financial institution to do business in the Philippines; and
shall designate an official of the CB or other competent person as receiver to immediately take
charge of its assets and liabilities. The fourth paragraph, 16 which was then in effect at the time the
action was commenced, allows the filing of a case to set aside the actions of the Monetary Board
which are tainted with arbitrariness and bad faith.
Contrary to the notion of private respondent, Sec. 29 does not contemplate prior notice and hearing
before a bank may be directed to stop operations and placed under receivership. When par. 4 (now
par. 5, as amended by E.O. 289) provides for the filing of a case within ten (10) days after the
receiver takes charge of the assets of the bank, it is unmistakable that the assailed actions should
precede the filing of the case. Plainly, the legislature could not have intended to authorize "no prior
notice and hearing" in the closure of the bank and at the same time allow a suit to annul it on the
basis of absence thereof.

In the early case of Rural Bank of Lucena, Inc. v. Arca [1965], 17 We held that a previous hearing is
nowhere required in Sec. 29 nor does the constitutional requirement of due process demand that the
correctness of the Monetary Board's resolution to stop operation and proceed to liquidation be first
adjudged before making the resolution effective. It is enough that a subsequent judicial review be
provided.

Even in Banco Filipino, 18 We reiterated that Sec. 29 of R.A. 265 does not require a previous hearing
before the Monetary Board can implement its resolution closing a bank, since its action is subject to
judicial scrutiny as provided by law.

It may be emphasized that Sec. 29 does not altogether divest a bank or a non-bank financial
institution placed under receivership of the opportunity to be heard and present evidence on
arbitrariness and bad faith because within ten (10) days from the date the receiver takes charge of
the assets of the bank, resort to judicial review may be had by filing an appropriate pleading with
the court. Respondent TSB did in fact avail of this remedy by filing a complaint with the RTC of
Quezon City on the 8th day following the takeover by the receiver of the bank's assets on 3 June
1985.

This "close now and hear later" scheme is grounded on practical and legal considerations to prevent
unwarranted dissipation of the bank's assets and as a valid exercise of police power to protect the
depositors, creditors, stockholders and the general public.

In Rural Bank of Buhi, Inc. v. Court of Appeals, 19 We stated that —

. . . due process does not necessarily require a prior hearing; a hearing or an

opportunity to be heard may be subsequent to the closure. One can just imagine the
dire consequences of a prior hearing: bank runs would be the order of the day,
resulting in panic and hysteria. In the process, fortunes may be wiped out and
disillusionment will run the gamut of the entire banking community.

We stressed in Central Bank of the Philippines v. Court of Appeals 20 that —

. . . the banking business is properly subject to reasonable regulation under the police
power of the state because of its nature and relation to the fiscal affairs of the people
and the revenues of the state (9 CJS 32). Banks are affected with public interest
because they receive funds from the general public in the form of deposits. Due to the
nature of their transactions and functions, a fiduciary relationship is created between
the banking institutions and their depositors. Therefore, banks are under the
obligation to treat with meticulous care and utmost fidelity the accounts of those who
have reposed their trust and confidence in them (Simex International [Manila], Inc.,
v. Court of Appeals, 183 SCRA 360 [1990]).

It is then the Government's responsibility to see to it that the financial interests of

those who deal with the banks and banking institutions, as depositors or otherwise,
 are protected. In this country, that task is delegated to the Central Bank which,
pursuant to its Charter (R.A. 265, as amended), is authorized to administer the
monetary, banking and credit system of the Philippines. Under both the 1973 and
1987 Constitutions, the Central Bank is tasked with providing policy direction in the
areas of money, banking and credit; corollarily, it shall have supervision over the
operations of banks (Sec. 14, Art. XV, 1973 Constitution, and Sec. 20, Art. XII, 1987
Constitution). Under its charter, the CB is further authorized to take the necessary
steps against any banking institution if its continued operation would cause
prejudice to its depositors, creditors and the general public as well. This power has
been expressly recognized by this Court. In Philippine Veterans Bank Employees
Union-NUBE v. Philippine Veterans Banks (189 SCRA 14 [1990], this Court held
that:

. . . [u]nless adequate and determined efforts are taken by the

government against distressed and mismanaged banks, public faith
in the banking system is certain to deteriorate to the prejudice of the
national economy itself, not to mention the losses suffered by the
bank depositors, creditors, and stockholders, who all deserve the
protection of the government. The government cannot simply cross its
arms while the assets of a bank are being depleted through
mismanagement or irregularities. It is the duty of the Central Bank
in such an event to step in and salvage the remaining resources of the
bank so that they may not continue to be dissipated or plundered by
those entrusted with their management.

Section 29 of R.A. 265 should be viewed in this light; otherwise, We would be subscribing to a
situation where the procedural rights invoked by private respondent would take precedence over the
substantive interests of depositors, creditors and stockholders over the assets of the bank.

Admittedly, the mere filing of a case for receivership by the Central Bank can trigger a bank run and
drain its assets in days or even hours leading to insolvency even if the bank be actually solvent. The
procedure prescribed in Sec. 29 is truly designed to protect the interest of all concerned, i.e., the
depositors, creditors and stockholders, the bank itself, and the general public, and the summary
closure pales in comparison to the protection afforded public interest. At any rate, the bank is given
full opportunity to prove arbitrariness and bad faith in placing the bank under receivership, in which
event, the resolution may be properly nullified and the receivership lifted as the trial court may
determine.

The heavy reliance of respondents on the Banco Filipino case is misplaced in view of factual
circumstances therein which are not attendant in the present case. We ruled in Banco Filipino that
the closure of the bank was arbitrary and attendant with grave abuse of discretion, not because of
the absence of prior notice and hearing, but that the Monetary Board had no sufficient basis to arrive
at a sound conclusion of insolvency to justify the closure. In other words, the arbitrariness, bad faith
and abuse of discretion were determined only after the bank was placed under conservatorship and
evidence thereon was received by the trial court. As this Court found in that case, the Valenzuela,
Aurellano and Tiaoqui Reports contained unfounded assumptions and deductions which did not
reflect the true financial condition of the bank. For instance, the subtraction of an uncertain amount
as valuation reserve from the assets of the bank would merely result in its net worth or the
unimpaired capital and surplus; it did not reflect the total financial condition of Banco Filipino.

Furthermore, the same reports showed that the total assets of Banco Filipino far exceeded its total
liabilities. Consequently, on the basis thereof, the Monetary Board had no valid reason to liquidate
the bank; perhaps it could have merely ordered its reorganization or rehabilitation, if need be.
Clearly, there was in that case a manifest arbitrariness, abuse of discretion and bad faith in the
closure of Banco Filipino by the Monetary Board. But, this is not the case before Us. For here, what
is being raised as arbitrary by private respondent is the denial of prior notice and hearing by the
Monetary Board, a matter long settled in this jurisdiction, and not the arbitrariness which the
conclusions of the Supervision and Examination Sector (SES), Department II, of the Central Bank
were reached.

Once again We refer to Rural Bank of Buhi, Inc. v. Court of Appeals, 21 and reiterate Our
pronouncement therein that —

. . . the law is explicit as to the conditions prerequisite to the action of the Monetary
Board to forbid the institution to do business in the Philippines and to appoint a
receiver to immediately take charge of the bank's assets and liabilities. They are: (a)
an examination made by the examining department of the Central Bank; (b) report
by said department to the Monetary Board; and (c) prima facieshowing that its
continuance in business would involve probable loss to its depositors or creditors.

In sum, appeal to procedural due process cannot just outweigh the evil sought to be prevented;
hence, We rule that Sec. 29 of R.A. 265 is a sound legislation promulgated in accordance with the
Constitution in the exercise of police power of the state. Consequently, the absence of notice and
hearing is not a valid ground to annul a Monetary Board resolution placing a bank under
receivership. The absence of prior notice and hearing cannot be deemed acts of arbitrariness and bad
faith. Thus, an MB resolution placing a bank under receivership, or conservatorship for that matter,
may only be annulled after a determination has been made by the trial court that its issuance was
tainted with arbitrariness and bad faith. Until such determination is made, the status quo shall be
maintained, i.e., the bank shall continue to be under receivership.

As regards the second ground, to rule that only the receiver may bring suit in behalf of the bank is,
to echo the respondent appellate court, "asking for the impossible, for it cannot be expected that the
master, the CB, will allow the receiver it has appointed to question that very appointment."
Consequently, only stockholders of a bank could file an action for annulment of a Monetary Board
resolution placing the bank under receivership and prohibiting it from continuing
operations. 22 In Central Bank v. Court of Appeals, 23 We explained the purpose of the law —

. . . in requiring that only the stockholders of record representing the majority of the
capital stock may bring the action to set aside a resolution to place a bank under
conservatorship is to ensure that it be not frustrated or defeated by the incumbent
Board of Directors or officers who may immediately resort to court action to prevent
its implementation or enforcement. It is presumed that such a resolution is directed
principally against acts of said Directors and officers which place the bank in a state
of continuing inability to maintain a condition of liquidity adequate to protect the
interest of depositors and creditors. Indirectly, it is likewise intended to protect and
safeguard the rights and interests of the stockholders. Common sense and public
policy dictate then that the authority to decide on whether to contest the resolution
should be lodged with the stockholders owning a majority of the shares for they are
expected to be more objective in determining whether the resolution is plainly
arbitrary and issued in bad faith.

It is observed that the complaint in this case was filed on 11 June 1985 or two (2) years prior to 25
July 1987 when E.O. 289 was issued, to be effective sixty (60) days after its approval (Sec. 5). The
implication is that before E.O
. 289, any party in interest could institute court proceedings to question a Monetary Board resolution
placing a bank under receivership. Consequently, since the instant complaint was filed by parties
representing themselves to be officers of respondent Bank (Officer-in-Charge and Vice President),
the case before the trial court should now take its natural course. However, after the effectivity of
E.O. 289, the procedure stated therein should be followed and observed.

PREMISES considered, the Decision of the Court of Appeals in CA-G.R. SP No. 07867
is AFFIRMED, except insofar as it upholds the Order of the trial court of 11 November 1985
directing petitioner RAMON V. TIAOQUI to restore the management of TRIUMPH SAVINGS
BANK to its elected Board of Directors and Officers, which is hereby SET ASIDE.

Let this case be remanded to the Regional Trial Court of Quezon City for further proceedings to
determine whether the issuance of Resolution No. 596 of the Monetary Board was tainted with
arbitrariness and bad faith and to decide the case accordingly.

SO ORDERED.

Abacus v. Manila Banking Corp.

Thru this appeal by way of a petition for review on certiorari under Rule 45 of the Rules of Court,
petitioner Abacus Real Estate Development Center, Inc. seeks to set aside the following
issuances of the Court of Appeals in CA-G.R. CV No. 64877, to wit:

1. Decision dated May 26, 2003,1 reversing an earlier decision of the Regional Trial Court at
Makati City, Branch 59, in an action for specific performance and damages thereat commenced by
the petitioner against the herein respondent Manila Banking Corporation; and

2. Resolution of February 17, 2004,2 denying petitioner’s motion for reconsideration.

The petition is casts against the following factual backdrop:

Respondent Manila Banking Corporation (Manila Bank, for brevity), owns a 1,435-square meter
parcel of land located along Gil Puyat Avenue Extension, Makati City and covered by Transfer
Certificate of Title (TCT) No. 132935 of the Registry of Deeds of Makati. Prior to 1984, the bank
began constructing on said land a 14-storey building. Not long after, however, the bank encountered
financial difficulties that rendered it unable to finish construction of the building.

On May 22, 1987, the Central Bank of the Philippines, now Bangko Sentral ng Pilipinas, ordered the
closure of Manila Bank and placed it under receivership, with Feliciano Miranda, Jr. being initially
appointed as Receiver. The legality of the closure was contested by the bank before the proper court.

On November 11, 1988, the Central Bank, by virtue of Monetary Board (MB) Resolution No. 505,
ordered the liquidation of Manila Bank and designated Atty. Renan V. Santos as Liquidator. The
liquidation, however, was held in abeyance pending the outcome of the earlier suit filed by Manila
Bank regarding the legality of its closure. Consequently, the designation of Atty. Renan V. Santos as
Liquidator was amended by the Central Bank on December 22, 1988 to that of Statutory Receiver.

In the interim, Manila Bank’s then acting president, the late Vicente G. Puyat, in a bid to save the
bank’s investment, started scouting for possible investors who could finance the completion of the
building earlier mentioned. On August 18, 1989, a group of investors, represented by Calixto Y.
Laureano (hereafter referred to as Laureano group), wrote Vicente G. Puyat offering to lease the
building for ten (10) years and to advance the cost to complete the same, with the advanced cost to be
amortized and offset against rental payments during the term of the lease. Likewise, the letter-offer
stated that in consideration of advancing the construction cost, the group wanted to be given the
"exclusive option to purchase" the building and the lot on which it was constructed.

Since no disposition of assets could be made due to the litigation concerning Manila Bank’s closure,
an arrangement was thought of whereby the property would first be leased to Manila Equities
Corporation (MEQCO, for brevity), a wholly-owned subsidiary of Manila Bank, with MEQCO
thereafter subleasing the property to the Laureano group.

In a letter dated August 30, 1989, Vicente G. Puyat accepted the Laureano group’s offer and granted
it an "exclusive option to purchase" the lot and building for One Hundred Fifty Million Pesos
(P150,000,000.00). Later, or on October 31, 1989, the building was leased to MEQCO for a period of
ten (10) years pursuant to a contract of lease bearing that date. On March 1, 1990, MEQCO
subleased the property to petitioner Abacus Real Estate Development Center, Inc. (Abacus, for
short), a corporation formed by the Laureano group for the purpose, under identical provisions as
that of the October 31, 1989 lease contract between Manila Bank and MEQCO.

The Laureano group was, however, unable to finish the building due to the economic crisis brought
about by the failed December 1989 coup attempt. On account thereof, the Laureano group offered its
rights in Abacus and its "exclusive option to purchase" to Benjamin Bitanga (Bitanga hereinafter),
for Twenty Million Five Hundred Thousand Pesos (P20,500,000.00). Bitanga would later allege that
because of the substantial amount involved, he first had to talk with Atty. Renan Santos, the
Receiver appointed by the Central Bank, to discuss Abacus’ offer. Bitanga further alleged that, over
lunch, Atty. Santos then verbally approved his entry into Abacus and his take-over of the sublease
and option to purchase.

On March 30, 1990, the Laureano group transferred and assigned to Bitanga all of its rights in
Abacus and the "exclusive option to purchase" the subject land and building.

On September 16, 1994, Abacus sent a letter to Manila Bank informing the latter of its desire to
exercise its "exclusive option to purchase". However, Manila Bank refused to honor the same.

Such was the state of things when, on November 10, 1995, in the Regional Trial Court (RTC) at
Makati, Abacus Real Estate Development Center, Inc. filed a complaint 3 for specific performance and
damages against Manila Bank and/or the Estate of Vicente G. Puyat. In its complaint, docketed as
Civil Case No. 96-1638 and raffled to Branch 59 of the court, plaintiff Abacus prayed for a judgment
ordering Manila Bank, inter alia, to sell, transfer and convey unto it for P150,000,000.00 the land
and building in dispute "free from all liens and encumbrances", plus payment of damages and
attorney’s fees.

Subsequently, defendant Manila Bank, followed a month later by its co-defendant Estate of Vicente
G. Puyat, filed separate motions to dismiss the complaint.

In an Order dated April 15, 1996, the trial court granted the motion to dismiss filed by the Estate of
Vicente G. Puyat, but denied that of Manila Bank and directed the latter to file its answer.

Before plaintiff Abacus could adduce evidence but after pre-trial, defendant Manila Bank filed
a Motion for Partial Summary Judgment, followed by a Supplement to Motion for Partial Summary
Judgment. While initially opposed, Abacus would later join Manila Bank in submitting the case for
summary judgment.
Eventually, in a decision dated May 27, 1999,4 the trial court rendered judgment for Abacus in
accordance with the latter’s prayer in its complaint, thus:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff as follows:

1. Ordering the defendant [Manila Bank] to immediately sell to plaintiff the parcel of land and
building, with an area of 1,435 square meters and covered by TCT No. 132935 of the Makati Registry
of Deeds, situated along Sen. Gil J. Puyat Ave. in Makati City, at the price of One Hundred Fifty
Million (P150,000.000.00) Pesos in accordance with the said exclusive option to purchase, and to
execute the appropriate deed of sale therefor in favor of plaintiff;

2. Ordering the defendant [Manila Bank] to pay plaintiff the amount of Two Million (P2,000,000.00)
Pesos representing reasonable attorney’s fees;

3. Ordering the DISMISSAL of defendant’s counterclaim, for lack of merit; and

4. With costs against the defendant.

SO ORDERED.

Its motion for reconsideration of the aforementioned decision having been denied by the trial court in
its Order of August 17, 1999,5 Manila Bank then went on to the Court of Appeals whereat its
appellate recourse was docketed as CA-G.R. CV No. 64877.

As stated at the threshold hereof, the Court of Appeals, in a decision dated May 26,
2003,6 reversed and set aside the appealed decision of the trial court, thus:

WHEREFORE, finding serious reversible error, the appeal is GRANTED.

The Decision dated May 27, 1999 of the Regional Trial Court of Makati City, Branch 59
is REVERSED and SET ASIDE.

Cost of the appeal to be paid by the appellee.

SO ORDERED.

On June 25, 2003, Abacus filed a Motion for Reconsideration, followed, with leave of court, by an
Amended Motion for Reconsideration. Pending resolution of its motion for reconsideration, as
amended, Abacus filed a Motion to Dismiss Appeal,7 therein praying for the dismissal of Manila
Bank’s appeal from the RTC decision of May 27, 1999, contending that said appeal was filed out of
time.

In its Resolution of February 17, 2004,8 the appellate court denied Abacus’ aforementioned
motion for reconsideration.

Hence, this recourse by petitioner Abacus Real Estate Development Center, Inc.

As we see it, two (2) issues commend themselves for the resolution of the Court, namely:

WHETHER OR NOT RESPONDENT BANK’S APPEAL TO THE COURT OF APPEALS WAS

FILED ON TIME; and
WHETHER OR NOT PETITIONER ABACUS HAS ACQUIRED THE RIGHT TO PURCHASE THE
LOT AND BUILDING IN QUESTION.

We rule for respondent Manila Bank on both issues.

Addressing the first issue, petitioner submits that respondent bank’s appeal to the Court of Appeals
from the adverse decision of the trial court was belatedly filed. Elaborating thereon, petitioner
alleges that respondent bank received a copy of the May 27, 1999 RTC decision on June 22, 1999,
hence, petitioner had 15 days, or only up to July 7, 1999 within which to take an appeal from the
same decision or move for a reconsideration thereof. Petitioner alleges that respondent furnished the
trial court with a copy of its Motion for Reconsideration only on July 7, 1999, the last day for filing
an appeal. Under Section 3, Rule 41 of the 1997 Rules of Civil Procedure, "the period of appeal shall
be interrupted by a timely motion for new trial or reconsideration". Since, according to petitioner,
respondent filed its Motion for Reconsideration on the last day of the period to appeal, it only had
one (1) more day within which to file an appeal, so much so that when it received on August 23, 1999
a copy of the trial court’s order denying its Motion for Reconsideration, respondent bank had only up
to August 24, 1999 within which to file the corresponding appeal. As respondent bank appealed the
decision of the trial court only on August 25, 1999, petitioner thus argues that respondent’s appeal
was filed out of time.

As a counterpoint, respondent alleges that it sent the trial court a copy of its Motion for
Reconsideration on July 6, 1999, through registered mail. Having sent a copy of its Motion for
Reconsideration to the trial court with still two (2) days left to appeal, respondent then claims that
its filing of an appeal on August 25, 1999, two (2) days after receiving the Order of the trial court
denying its Motion for Reconsideration, was within the reglementary period.

Agreeing with respondent, the appellate court declared that respondent’s appeal was filed on time.
Explained that court in its Resolution of February 17, 2004, denying petitioner’s motion for
reconsideration:

Firstly, the file copy of the motion for reconsideration contains the written annotations "Registry
Receipt No. 1633 Makati P.O. 7-6-99" in its page 13. The presence of the annotations proves that
the motion for reconsiderationwas truly filed by registered mail on July 6, 1999 through registry
receipt no. 1633.

Secondly, the appellant’s manifestation filed in the RTC personally on July 7, 1999 contains the
following self-explanatory statements, to wit:

2. Defendant [Manila Bank] also filed with this Honorable Court a Motion for Reconsideration of the
Decision dated 27 May 1999 promulgated by this Honorable Court in this case, and served a copy
thereof to the plaintiff, by registered mail yesterday, 6 July 1999, due to lack of material time and
messenger to effect personal service and filing.

3. In order for this Honorable Court to be able to review defendant [Manila Bank’s] Motion for
Reconsideration without awaiting the mailed copy, defendant [Manila Bank] is now furnishing this
Honorable Court with a copy of said motion, as well as the entry of appearance, by personal service.

The aforecited reference in the manifestation to the mailing of the motion for reconsideration on July
6, 1999, in light of the handwritten annotations adverted to herein, renders beyond doubt the
appellant’s insistence of filing through registered mail on July 6, 1999.
Thirdly, the registry return cards attached to the envelopes separately addressed and mailed to the
RTC and the appellee’s counsel, found in pages 728 and 729 of the rollo, indicate that the contents
were the motion for reconsideration and the formal entry of appearance. Although the appellee
argues that the handwritten annotations of what were contained by the envelopes at the time of
mailing was easily self-serving, the fact remains that the envelope addressed to the appellee’s
counsel appears thereon to have been received on July 6, 1999 ("7/6/99"), which enhances the
probability of the motion for reconsideration being mailed, hence filed, on July 6, 1999, as claimed by
the appellant.

Fourthly, the certification issued on October 2, 2003 by Atty. Jayme M. Luy, Branch Clerk of Court,
Branch 59, RTC in Makati City, has no consequence because Atty. Luy based his data only on page 3
of the 1995 Civil Case Docket Book without reference to the original records which were already with
the Court of Appeals.

Fifthly, since the appellant received the denial of the motion for reconsideration on August 23, 1999,
it had until August 25, 1999 within which to perfect its appeal from the decision of the RTC because
2 days remained in its reglementary period to appeal. It is not disputed that the appellant filed
its notice of appeal and paid the appellate court docket fees on August 25, 1999.

These circumstances preponderantly demonstrate that the appellant’s appeal was not late by one
day. (Emphasis in the original)

Petitioner would, however, contest the above findings of the appellate court, stating, among other
things, that if it were true that respondent filed its Motion for Reconsideration by registered mail
and then furnished the trial court with a copy of said Motion the very next day, then the rollo should
have had two copies of the Motion for Reconsideration in question. Respondent, on the other hand,
insists that it indeed filed a Motion for Reconsideration on July 6, 1999 through registered mail.

It is evident that the issue raised by petitioner relates to the correctness of the factual finding of the
Court of Appeals as to the precise date when respondent filed its motion for reconsideration before
the trial court. Such issue, however, is beyond the province of this Court to review. It is not the
function of the Court to analyze or weigh all over again the evidence or premises supportive of such
factual determination.9 The Court has consistently held that the findings of the Court of Appeals and
other lower courts are, as a rule, accorded great weight, if not binding upon it,10 save for the most
compelling and cogent reasons.11 As nothing in the record indicates any of such exceptions, the
factual conclusion of the appellate court that respondent filed its appeal on time, supported as it is
by substantial evidence, must be affirmed.

Going to the second issue, petitioner insists that the option to purchase the lot and building in
question granted to it by the late Vicente G. Puyat, then acting president of Manila Bank, was
binding upon the latter. On the other hand, respondent has consistently maintained that the late
Vicente G. Puyat had no authority to act for and represent Manila Bank, the latter having been
placed under receivership by the Central Bank at the time of the granting of the "exclusive option to
purchase."

There can be no quibbling that respondent Manila Bank was under receivership, pursuant to Central
Bank’s MB Resolution No. 505 dated May 22, 1987, at the time the late Vicente G. Puyat granted the
"exclusive option to purchase" to the Laureano group of investors. Owing to this defining reality, the
appellate court was correct in declaring that Vicente G. Puyat was without authority to grant the
exclusive option to purchase the lot and building in question. The invocation by the appellate court of
the following pronouncement in Villanueva vs. Court of Appeals12 was apropos, to say the least:
… the assets of the bank pass beyond its control into the possession and control of the receiver whose
duty it is to administer the assets for the benefit of the creditors of the bank. Thus, the appointment
of a receiver operates to suspend the authority of the bank and of its directors and officers over its
property and effects, such authority being reposed in the receiver, and in this respect, the
receivership is equivalent to an injunction to restrain the bank officers from intermeddling with the
property of the bank in any way.

With respondent bank having been already placed under receivership, its officers, inclusive of its
acting president, Vicente G. Puyat, were no longer authorized to transact business in connection
with the bank’s assets and property. Clearly then, the "exclusive option to purchase" granted by
Vicente G. Puyat was and still is unenforceable against Manila Bank. 13

Petitioner, however, asseverates that the "exclusive option to purchase" was ratified by Manila
Bank’s receiver, Atty. Renan Santos, during a lunch meeting held with Benjamin Bitanga in March
1990.

Petitioner’s argument is tenuous at best. Concededly, a contract unenforceable for lack of authority
by one of the parties may be ratified by the person in whose name the contract was executed.
However, even assuming, in gratia argumenti, that Atty. Renan Santos, Manila Bank’s receiver,
approved the "exclusive option to purchase" granted by Vicente G. Puyat, the same would still be of
no force and effect.

Section 29 of the Central Bank Act, as amended,14 pertinently provides:

Sec. 29. Proceedings upon insolvency. – Whenever, upon examination by the head of the appropriate
supervising and examining department or his examiners or agents into the condition of any banking
institution, it shall be disclosed that the condition of the same is one of insolvency, or that its
continuance in business would involve probable loss to its depositors or creditors, it shall be the duty
of the department head concerned forthwith, in writing, to inform the Monetary Board of the facts,
and the Board may, upon finding the statements of the department head to be true, forbid the
institution to do business in the Philippines and shall designate an official of the Central Bank as
receiver to immediately take charge of its assets and liabilities, as expeditiously as possible collect and
gather all the assets and administer the same for the benefit of its creditors, exercising all the
powers necessary for these purposes including, but not limited to, bringing suits and foreclosing
mortgages in the name of the banking institution. (Emphasis supplied)

Clearly, the receiver appointed by the Central Bank to take charge of the properties of Manila Bank
only had authority to administer the same for the benefit of its creditors. Granting or approving
an "exclusive option to purchase" is not an act of administration, but an act of strict ownership,
involving, as it does, the disposition of property of the bank. Not being an act of administration, the
so-called "approval" by Atty. Renan Santos amounts to no approval at all, a bank receiver not being
authorized to do so on his own.

For sure, Congress itself has recognized that a bank receiver only has powers of administration.
Section 30 of the New Central Bank Act15 expressly provides that "[t]he receiver shall immediately
gather and take charge of all the assets and liabilities of the institution, administer the same for the
benefit of its creditors, and exercise the general powers of a receiver under the Revised Rules of Court
but shall not, with the exception of administrative expenditures, pay or commit any act that will
involve the transfer or disposition of any asset of the institution…"

In all, respondent bank’s receiver was without any power to approve or ratify the "exclusive option to
purchase" granted by the late Vicente G. Puyat, who, in the first place, was himself bereft of any
authority, to bind the bank under such exclusive option. Respondent Manila Bank may not thus be
compelled to sell the land and building in question to petitioner Abacus under the terms of the
latter’s "exclusive option to purchase".

WHEREFORE, the instant petition is DENIED and the challenged issuances of the Court of
Appeals AFFIRMED.

Costs against petitioner.

SO ORDERED.

Villanueva v. CA

Do petitioners have a better right than private respondent Ildefonso Ong to purchase from the
Philippine Veterans Bank (PVB) the two parcels of land described as Lot No. 210-D-1 and Lot No.
210-D-2 situated at Muntinglupa, Metro Manila, containing an area of 529 and 300 square meters,
respectively? This is the principal legal issue raised in this petition.

In its decision of 27 January 1994 in CA-G.R. CV No. 35890, 1 the Court of Appeals held for Ong,
while the trial court, Branch 39 of the Regional Trial Court (RTC) of Manila, ruled for the petitioners
in its joint decision of 31 October 1991 in Civil Case No. 87-42550 2 and Sp. Proc. No. 85-32311. 3

The operative antecedent facts are set forth in the challenged decision as follows:

The disputed lots were originally owned by the spouses Celestino Villanueva and
Miguela Villanueva, acquired by the latter during her husband's sojourn in the
United States since 1968. Sometime in 1975, Miguela Villanueva sought the help of
one Jose Viudez, the then Officer-in-Charge of the PVB branch in Makati if she could
obtain a loan from said bank. Jose Viudez told Miguela Villanueva to surrender the
titles of said lots as collaterals. And to further facilitate a bigger loan, Viudez, in
connivance with one Andres Sebastian, swayed Miguela Villanueva to execute a deed
of sale covering the two (2) disputed lots, which she did but without the signature of
her husband Celestino. Miguela Villanueva, however, never got the loan she was
expecting. Subsequent attempts to contact Jose Viudez proved futile, until Miguela
Villanueva thereafter found out that new titles over the two (2) lots were already
issued in the name of the PVB. It appeared upon inquiry from the Registry of Deeds
that the original titles of these lots were canceled and new ones were issued to Jose
Viudez, which in turn were again canceled and new titles issued in favor of Andres
Sebastian, until finally new titles were issued in the name of PNB [should be PVB]
after the lots were foreclosed for failure to pay the loan granted in the name of
Andres Sebastian.

Miguela Villanueva sought to repurchase the lots from the PVB after being informed
that the lots were about to be sold at auction. The PVB told her that she can redeem
the lots for the price of P110,416.00. Negotiations for the repurchase of the lots
nevertheless were stalled by the filing of liquidation proceedings against the PVB on
August of 1985.

Plaintiff-appellant [Ong] on the other hand expounds on his claim over the disputed
lots in this manner:
 In October 1984, plaintiff-appellant offered to purchase two pieces of
Land that had been acquired by PVB through foreclosure. To back-up
plaintiff-appellant's offer he deposited the sum of P10,000.00.

In 23 November 1984, while appellant was still abroad, PVB

approved his subject offer under Board Resolution No. 10901-84.
Among the conditions imposed by PVB is that: "The purchase price
shall be P110,000.00 (Less deposit of P10,000.00) payable in cash
within fifteen (15) days from receipt of approval of the offer."

In mid-April 1985, appellant returned to the country. He immediately

verified the status of his offer with the PVB, now under the control of
CB, where he was informed that the same had already been
approved. On 16 April 1985, appellant formally informed CB of his
desire to pay the subject balance provided the bank should execute in
his favor the corresponding deed of conveyance. The letter was not
answered.

Plaintiff-appellant sent follow-up Letters that went unheeded, the

last of which was on 21 May 1987. On 26 May 1987, appellant's
payment for the balance of the subject properties were accepted by
CB under Official Receipt #0816.

On 17 September 1987, plaintiff-appellant through his counsel, sent a

letter to CB demanding for the latter to execute the corresponding
deed of conveyance in favor of appellant. CB did not bother to answer
the same. Hence, the instant case.

While appellant's action for specific performance against CB was

pending, Miguela Villanueva and her children filed their claims with
the Liquidation court. (Appellant's Brief, pp. 3-4). 4

From the pleadings, the following additional or amplificatory facts are established:

The efforts of Miguela Villanueva to reacquire the property began on 8 June 1983 when she offered
to purchase the lots for P60,000.00 with a 20%
downpayment and the balance payable in five years on a quarterly amortization basis. 5

Her offer not having been accepted, 6 Miguela Villanueva increased her bid to P70,000.00. It was only
at this time that she disclosed to the bank her private transactions with Jose Viudez. 7

After this and her subsequent offers were rejected, 8 Miguela sent her sealed bid of P110,417.00
pursuant to the written advice of the vice president of the PVB. 9

The PVB was placed under receivership pursuant to Monetary Board (MB) Resolution No. 334 dated
3 April 1985 and later, under liquidation pursuant to MB Resolution No. 612 dated 7 June 1985.
Afterwards, a petition for liquidation was filed with the RTC of Manila, which was docketed as Sp.
Proc. No. 85-32311 and assigned to Branch 39 of the said court.

On 26 May 1987, Ong tendered the sum of P100,000.00 representing the balance of the purchase
price of the litigated lots. 10 An employee of the PVB received the amount conditioned upon approval
by the Central Bank
liquidator. 11 Ong's demand for a deed of conveyance having gone unheeded, he filed on 23 October
1987 with the RTC of Manila an action for specific performance against the Central Bank. 12 It was
raffled to Branch 47 thereof. Upon learning that the PVB had been placed under liquidation, the
presiding judge of Branch 47 ordered the transfer of the case to Branch 39, the liquidation court. 13

On 15 June 1989, then Presiding Judge Enrique B. Inting issued an order allowing the purchase of
the two lots at the price of P150,000.00. 14 The Central Bank liquidator of the PVB moved for the
reconsideration of the order asserting that it is contrary to law as the disposal of the lots should be
made through public auction. 15

On 26 July 1989, Miguela Villanueva filed her claim with the liquidation court. She averred, among
others, that she is the lawful and registered owner of the subject lots which were mortgaged in favor
of the PVB thru the falsification committed by Jose Viudez, the manager of the PVB Makati Branch,
in collusion with Andres Sebastian; that upon discovering this fraudulent transaction, she offered to
purchase the property from the bank; and that she reported the matter to the PC/INP Criminal
Investigation Service Command, Camp Crame, and after investigation, the CIS officer recommended
the filing of a complaint for estafa through falsification of public documents against Jose Viudez and
Andres Sebastian. She then asked that the lots be excluded from the assets of the PVB and be
conveyed back to her. 16 Later, in view of the death of her husband, she amended her claim to include
her children, herein petitioners Mercedita Villanueva-Tirados and Richard Villanueva. 17

On 31 October 1991, the trial court rendered judgment 18 holding that while the board resolution
approving Ong's offer may have created in his favor a vested right which may be enforced against the
PVB at the time or against the liquidator after the bank was placed under liquidation proceedings,
the said right was no longer enforceable, as he failed to exercise it within the prescribed 15-day
period. As to Miguela's claim, the court ruled that the principle of estoppel bars her from questioning
the transaction with Viudez and the subsequent transactions because she was a co-participant
thereto, though only with respect to her undivided one-half (1/2) conjugal share in the disputed lots
and her one-third (1/3) hereditary share in the estate of her husband.

Nevertheless, the trial court allowed her to purchase the lots if only to restore their status as
conjugal properties. It further held that by reason of estoppel, the transactions having been
perpetrated by a responsible officer of the PVB, and for reasons of equity, the PVB should not be
allowed to charge interest on the price of the lots; hence, the purchase price should be the PVB's
claim as of 29 August 1984 when it considered the sealed bids, i.e., P110,416.20, which should be
borne by Miguela Villanueva alone.

The dispositive portion of the decision of the trial court reads as follows:

WHEREFORE, judgment is hereby rendered as follows:

1. Setting aside the order of this court issued on June

15, 1989 under the caption Civil Case No. 87-42550
entitled "Ildefonso Ong vs. Central Bank of the Phils.,
et al.;

2. Dismissing the claim of Ildefonso Ong over the two

parcels of land originally covered by TCT No. 438073
and 366364 in the names of Miguela Villanueva and
Celestino Villanueva, respectively which are now
covered by TCT No. 115631 and 115632 in the name
of the PVB;
 3. Declaring the Deed of Absolute Sale bearing the
signature of Miguela Villanueva and the falsified
signature of Celestino [sic] Viudez under date May 6,
1975 and all transactions and related documents
executed thereafter referring to the two lots covered
by the above stated titles as null and void;

4. Ordering the Register of Deeds of Makati which has

jurisdiction over the two parcels of land in question to
re-instate in his land records, TCT No. 438073 in the
name of Miguela Villanueva and TCT No. 366364 in
the name of Celestino Villanueva who were the
registered owners thereof, and to cancel all
subsequent titles emanating therefrom; and

5. Ordering the Liquidator to reconvey the two lots

described in TCT No. 115631 and 115632 and
executing the corresponding deed of conveyance of the
said lots upon the payment of One Hundred Ten
Thousand Four Hundred Sixteen and 20/100
(P110,416.20) Pesos without interest and less the
amount deposited by the claimant, Miguela
Villanueva in connection with the bidding where she
had participated and conducted by the PVB on August
29, 1984.

Cost against Ildefonso Ong and the PVB.

SO ORDERED. 19

Only Ong appealed the decision to the Court of Appeals. The appeal was docketed as CA-G.R. CV No.
35890. In its decision of 27 January 1994, the Court of Appeals reversed the decision of the trial
court and ruled as follows:

WHEREFORE, premises considered, the assailed decision is hereby REVERSED and

SET ASIDE, and a new one entered ordering the disputed-lots be awarded in favor of
plaintiff-appellant Ildefonso Ong upon defendant-appellee Central Bank's execution
of the corresponding deed of sale in his favor. 20

In support thereof, the Court of Appeals declared that Ong's failure to pay the balance within the
prescribed period was excusable because the PVB neither notified him of the approval of his bid nor
answered his letters manifesting his readiness to pay the balance, for which reason he could not
have known when to reckon the 15-day period prescribed under its resolution. It went further to
suggest that the Central Bank was in estoppel because it accepted Ong's late-payment of the
balance. As to the petitioners' claim, the Court of Appeals stated:

The conclusion reached by the lower court favorable to Miguela Villanueva is, as
aptly pointed out by plaintiff-appellant, indeed confusing. While the lower court's
decision declared Miguela Villanueva as estopped from recovering her proportionate
share and interest in the two (2) disputed lots for being a "co-participant" in the
fraudulent scheme perpetrated by Jose Viudez and Andres Sebastian — a factual
finding which We conform to and which Miguela Villanueva does not controvert in
 this appeal by not filing her appellee's brief, yet it ordered the reconveyance of the
disputed lots to Miguela Villanueva as the victorious party upon her payment of
P110,416.20. Would not estoppel defeat the claim of the party estopped? If so, which
in fact must be so, would it not then be absurd or even defiant for the lower court to
finally entitle Miguela Villanueva to the disputed lots after having been precluded
from assailing their subsequent conveyance in favor of Jose Viudez by reason of her
own negligence and/or complicity therein? The intended punitive effect of estoppel
would merely be a dud if this Court leaves the lower court's conclusion unrectified. 21

Their motion for reconsideration 22 having been denied, 23 the petitioners filed this petition for review
on certiorari. 24

Subsequently, the respondent Central Bank apprised this Court that the PVB was no longer under
receivership or liquidation and that the PVB has been back in operation since 3 August 1992. It then
prayed that it be dropped from this case or at least be substituted by the PVB, which is the real
party in interest. 25

In its Manifestation and Entry of Appearance, the PVB declared that it submits to the jurisdiction of
this Court and that it has no objection to its inclusion as a party respondent in this case in lieu of the
Central Bank. 26 The petitioners did not object to the substitution. 27

Later, in its Comment dated 10 October 1994, the PVB stated that it "submits to and shall abide by
whatever judgment this Honorable Supreme Tribunal may announce as to whom said lands may be
awarded without any touch of preference in favor of one or the other party litigant in the instant
case." 28

In support of their contention that the Court of Appeals gravely erred in holding that Ong is better
entitled to purchase the disputed lots, the petitioners maintain that Ong is a disqualified bidder, his
bid of P110,000.00 being lower than the starting price of P110,417.00 and his deposit of P10,000.00
being less than the required 10% of the bid price; that Ong failed to pay the balance of the price
within the 15-day period from notice of the approval of his bid; and that his offer of payment is
ineffective since it was conditioned on PVB's execution of the deed of absolute sale in his favor.

On the other hand, Ong submits that his offer, though lower than Miguela ViIlanueva's bid by
P417.00, is much better, as the same is payable in cash, while Villanueva's bid is payable in
installment; that his payment could not be said to have been made after the expiration of the 15-day
period because this period has not even started to run, there being no notice yet of the approval of his
offer; and that he has a legal right to compel the PVB or its liquidator to execute the corresponding
deed of conveyance.

There is no doubt that the approval of Ong's offer constitutes an acceptance, the effect of which is to
perfect the contract of sale upon notice thereof to Ong. 29 The peculiar circumstances in this case,
however, pose a legal obstacle to his claim of a better right and deny support to the conclusion of the
Court of Appeals.

Ong did not receive any notice of the approval of his offer. It was only sometime in mid-April 1985
when he returned from the United States and inquired about the status of his bid that he came to
know of the approval.

It must be recalled that the PVB was placed under receivership pursuant to the MB Resolution of 3
April 1985 after a finding that it was insolvent, illiquid, and could not operate profitably, and that its
continuance in business would involve probable loss to its depositors and creditors. The PVB was
then prohibited from doing business in the Philippines, and the receiver appointed was directed to
"immediately take charge of its assets and liabilities, as expeditiously as possible collect and gather
all the assets and administer the same for the benefit of its creditors, exercising all the powers
necessary for these purposes."

Under Article 1323 of the Civil Code, an offer becomes ineffective upon the death, civil interdiction,
insanity, or insolvency of either party before acceptance is conveyed. The reason for this is that:

[T]he contract is not perfected except by the concurrence of two wills which exist and
continue until the moment that they occur. The contract is not yet perfected at any
time before acceptance is conveyed; hence, the disappearance of either party or his
loss of capacity before perfection prevents the contractual tie from being formed. 30

It has been said that where upon the insolvency of a bank a receiver therefor is appointed, the assets
of the bank pass beyond its control into the possession and control of the receiver whose duty it is to
administer the assets for the benefit of the creditors of the bank. 31 Thus, the appointment of a
receiver operates to suspend the authority of the bank and of its directors and officers over its
property and effects, such authority being reposed in the receiver, and in this respect, the
receivership is equivalent to an injunction to restrain the bank officers from intermeddling with the
property of the bank in any way. 32

Section 29 of the Central Bank Act, as amended, provides thus:

Sec. 29. Proceedings upon insolvency. — Whenever, upon examination by the head of
the appropriate supervising or examining department or his examiners or agents into
the condition of any bank or non-bank financial intermediary performing quasi-
banking functions, it shall be disclosed that the condition of the same is one of
insolvency, or that its continuance in business would involve probable loss to its
depositors or creditors, shall be the duty of the department head concerned forthwith,
in writing, to inform the Monetary Board of the facts. The Board may, upon finding
the statements of the department head to be true, forbid the institution to do
business in the Philippines and designate an official of the Central Bank or a person
of recognized competence in banking or finance as receiver to immediately take
charge of its assets and liabilities, as expeditiously as possible collect and gather all
the assets and administer the same for the benefit of its creditors . . . exercising all
the powers necessary for these purposes. . . .

xxx xxx xxx

The assets of an institution under receivership or liquidation shall be deemed

in custodia legis in the hands of the receiver or liquidator and shall, from the moment
of such receivership or liquidation, be exemp from any order of garnishment, levy,
attachment, or execution.

In a nutshell, the insolvency of a bank and the consequent appointment of a receiver restrict the
bank's capacity to act, especially in relation to its property, Applying Article 1323 of the Civil Code,
Ong's offer to purchase the subject lots became ineffective because the PVB became insolvent before
the bank's acceptance of the offer came to his knowledge. Hence, the purported contract of sale
between them did not reach the stage of perfection. Corollarily, he cannot invoke the resolution of
the bank approving his bid as basis for his alleged right to buy the disputed properties.
Nor may the acceptance by an employee of the PVB of Ong's payment of P100,000.00 benefit him
since the receipt of the payment was made subject to the approval by the Central Bank liquidator of
the PVB thus:

Payment for the purchase price of the former property of Andres Sebastian per
approved BR No. 10902-84 dated 11/13/84, subject to the approval of CB liquidator. 33

This payment was disapproved on the ground that the subject property was already
in custodia legis, and hence, disposable only by public auction and subject to the approval of
the liquidation court. 34

The Court of Appeals therefore erred when it held that Ong had a better right than the petitioners to
the purchase of the disputed lots.

Considering then that only Ong appealed the decision of the trial court, the PVB and the Central
Bank, as well as the petitioners, are deemed to have fully and unqualifiedly accepted the judgment,
which thus became final as to them for their failure to appeal.

WHEREFORE, the instant petition is GRANTED and the challenged decision of the Court of
Appeals of 27 January 1994 in CA-G.R. CV No. 35890 is hereby SET ASIDE. The decision of Branch
39 of the Regional Trial Court of Manila of 31 October 1991 in Civil Case No. 87-42550 and Sp. Proc.
No. 85-32311 is hereby REINSTATED.

Respondent Philippine Veterans Bank is further directed to return to private respondent Ildefonso
C. Ong the amount of P100,000.00.

No pronouncement as to costs.

SO ORDERED.

Pacific Banking Corp. EE’s Org. v. CA

These cases have been consolidated because the principal question involved is the same: whether a
petition for liquidation under §29 of Rep. Act No. 265, otherwise known as the Central Bank Act, is a
special proceeding or an ordinary civil action. The Fifth and the Fourteenth Divisions of the Court of
Appeals reached opposite results on this question and consequently applied different periods for
appealing.

The facts are as follows:

I.

Proceedings in the CB and the RTC

On July 5, 1985, the Pacific Banking Corporation (PaBC) was placed under receivership by the
Central Bank of the Philippines pursuant to Resolution No. 699 of its Monetary Board. A few months
later, it was placed under liquidation 1 and a Liquidator was appointed. 2

On April 7, 1986, the Central Bank filed with the Regional Trial Court of Manila Branch 31, a
petition entitled "Petition for Assistance in the Liquidation of Pacific Banking Corporation." 3 The
petition was approved, after which creditors filed their claims with the court.
On May 17, 1991, a new Liquidator, Vitaliano N. Nañagas, 4 President of the Philippine Deposit
Insurance Corporation (PDIC), was appointed by the Central Bank.

On March 13, 1989 the Pacific Banking Corporation Employees Organization (Union for short),
petitioner in G.R. No. 109373, filed a complaint-in-intervention seeking payment of holiday pay, 13th
month pay differential, salary increase differential, Christmas bonus, and cash equivalent of Sick
Leave Benefit due its members as employees of PaBC. In its order dated September 13, 1991, the
trial court ordered payment of the principal claims of the Union. 5

The Liquidator received a copy of the order on September 16, 1991. On October 16, 1991, he filed a
Motion for Reconsideration and Clarification of the order. In his order of December 6, 1991, the judge
modified his September 13, 1991 6 but in effect denied the Liquidator's motion for reconsideration.
This order was received by the Liquidator on December 9, 1991. The following day, December 10,
1991, he filed a Notice of Appeal and a Motion for Additional Time to Submit Record on Appeal. On
December 23, 1991, another Notice of Appeal was filed by the Office of the Solicitor General in behalf
of Nañagas.

In his order of February 10, 1992, respondent judge disallowed the Liquidator's Notice of Appeal on
the ground that it was late, i.e., more than 15 days after receipt of the decision. The judge declared
his September 13, 1991 order and subsequent orders to be final and executory and denied
reconsideration. On March 27, 1992, he granted the Union's Motion for issuance of a writ of
Execution.

Ang Keong Lan and E.J. Ang Int'l., private respondents in G.R. No. 112991, likewise filed claims for
the payment of investment in the PaBC allegedly in the form of shares of stocks amounting to
US$2,531,632.18. The shares of stocks, consisting of 154,462 common shares, constituted 11% of the
total subscribed capital stock of the PaBC. They alleged that their claim constituted foreign
exchange capital investment entitled to preference in payment under the Foreign Investments Law.

In his order dated September 11, 1992, respondent judge of the RTC directed the Liquidator to pay
private respondents the total amount of their claim as preferred creditors. 7

The Liquidator received the order on September 16, 1992. On September 30, 1992 he moved for
reconsideration, but his motion was denied by the court on October 2, 1992. He received the order
denying his Motion for Reconsideration on October 5, 1992. On October 14, 1992 he filed a Notice of
Appeal from the orders of September 16, 1992 and October 2, 1992. As in the case of the Union,
however, the judge ordered the Notice of Appeal stricken off the record on the ground that it had
been filed without authority of the Central Bank and beyond 15 days. In his order of October 28,
1992, the judge directed the execution of his September 11, 1992 order granting the Stockholders/
Investors' claim.

II.

Proceedings in the Court of Appeals

The Liquidator filed separate Petitions for Certiorari, Prohibition and Mandamus in the Court of
Appeals to set aside the orders of the trial court denying his appeal from the orders granting the
claims of Union and of the Stockholders/Investors. The two Divisions of the Court of Appeals, to
which the cases were separately raffled, rendered conflicting rulings.

In its decision of November 17, 1992 in CA-G.R. SP No. 27751 (now G.R. No. 09373) the Fifth
Division 8 held in the case of the Union that the proceeding before the trial court was a special
proceeding and, therefore, the period for appealing from any decision or final order rendered therein
is 30 days. Since the notice of appeal of the Liquidator was filed on the 30th day of his receipt of the
decision granting the Union's claims, the appeal was brought on time. The Fifth Division, therefore,
set aside the orders of the lower court and directed the latter to give due course to the appeal of the
Liquidator and set the Record on Appeal he had filed for hearing.

On the other hand, on December 16, 1993, the Fourteenth Division 9 ruled in CA-G.R. SP No. 29351
(now G.R. No. 112991) in the case of the Stockholders/Investors that a liquidation proceeding is an
ordinary action. Therefore, the period for appealing from any decision or final order rendered therein
is 15 days and that since the Liquidator's appeal notice was filed on the 23rd day of his receipt of the
order appealed from, deducting the period during which his motion for reconsideration was pending,
the notice of appeal was filed late. Accordingly, the Fourteenth Division dismissed the Liquidator's
petition.

III.

Present Proceedings

The Union and the Liquidator then separately filed petitions before this Court.

In G.R. No. 109373 the Union contends that:

1. The Court of Appeals acted without jurisdiction over the subject matter or nature
of the suit.

2. The Court of Appeals gravely erred in taking cognizance of the petition

for certiorari filed by Nañagas who was without any legal authority to file it.

3. The Court of Appeals erred in concluding that the case is a special proceeding
governed by Rules 72 to 109 of the Revised Rules of Court.

4. The Court of Appeals erred seriously in concluding that the notice of appeal filed
by Nañagas was filed on time.

5. The Court of Appeals erred seriously in declaring that the second notice of appeal
filed on December 23, 1991 by the Solicitor General is a superfluity.

On the other hand, in G.R. No. 112991 the Liquidator contends that:

1. The Petition for Assistance in the Liquidation of the Pacific Banking Corporation s
a Special Proceeding case and/or one which allows multiple appeals, in which case
the period of appeal is 30 days and not 15 days from receipt of the order/judgment
appealed from.

2. Private respondents are not creditors of PaBC but are plain stockholders whose
right to receive payment as such would accrue only after all the creditors of the
insolvent bank have been paid.

3. The claim of private respondents in the amount of US$22,531,632.18 is not in the

nature of foreign investment as it is understood in law.
 4. The claim of private respondents has not been clearly established and proved.

5. The issuance of a writ of execution against the assets of PaBC was made with
grave abuse of discretion.

The petitions in these cases must be dismissed.

First. As stated in the beginning, the principal question in these cases is whether a petition for
liquidation under §29 of Rep. Act No. 265 is in the nature of a special proceeding. If it is, then the
period of appeal is 30 days and the party appealing must, in addition to a notice of appeal, file with
the trial court a record on appeal in order to perfect his appeal. Otherwise, if a liquidation proceeding
is an ordinary action, the period of appeal is 15 days from notice of the decision or final order
appealed from.

BP Blg. 129 provides:

§39. Appeals. — The period for appeal from final orders, resolutions, awards,
judgments, or decisions of any court in all cases shall be fifteen (15) days counted
from the notice of the final order, resolution, award, judgment or decision appealed
from: Provided, however, that in habeas corpuscases the period for appeal shall be
forty-eight (48) hours from the notice of the judgment appealed from.

No record on appeal shall be required to take an appeal. In lieu thereof, the entire
record shall be transmitted with all the pages prominently numbered consecutively,
together with an index of the contents thereof.

This section shall not apply in appeals in special proceedings and in other cases
wherein multiple appeals are allowed under applicable provisions of the Rules of
Court.

The Interim Rules and Guidelines to implement BP Blg. 129 provides:

19. Period of Appeals. —

(a) All appeals, except in habeas corpus cases and in the cases
referred to in paragraph (b) hereof, must be taken within fifteen (15)
days from notice of the judgment, order, resolution or award appealed
from.

(b) In appeals in special proceedings in accordance with Rule 109 of

the Rules of Court and other cases wherein multiple appeals are
allowed, the period of appeals shall be thirty (30) days, a record on
appeal being required.

The Fourteenth Division of the Court of Appeals held that the proceeding is an ordinary action
similar to an action for interpleader under Rule 63. 10 The Fourteenth Division stated:

The petition filed is akin to an interpleader under Rule 63 of the Rules of Court
where there are conflicting claimants or several claims upon the same subject
matter, a person who claims no interest thereon may file an action for interpleader to
 compel the claimants to "interplead" and litigate their several claims among
themselves. (Section I Rule 63).

An interpleader is in the category of a special civil action under Rule 62 which, like
an ordinary action, may be appealed only within fifteen (15) days from notice of the
judgment or order appealed from. Under Rule 62, the preceding rules covering
ordinary civil actions which are not inconsistent with or may serve to supplement the
provisions of the rule relating to such civil actions are applicable to special civil
actions. This embraces Rule 41 covering appeals from the regional trial court to the
Court of Appeals.

xxx xxx xxx

Thus, under Section 1 Rule 2 of the Rules of Court, an action is defined as "an
ordinary suit in a court of justice by which one party prosecutes another for the
enforcement or protection of a right or the prevention or redress of a wrong." On the
other hand, Section 2 of the same Rule states that "every other remedy including one
to establish the status or right of a party or a particular fact shall be by special
proceeding."

To our mind, from the aforequoted definitions of an action and a special proceeding,
the petition for assistance of the court in the liquidation of an asset of a bank is not
"one to establish the status or right of a party or a particular fact." Contrary to the
submission of the petitioner, the petition is not intended to establish the fact of
insolvency of the bank. The insolvency of the bank had already been previously
determined by the Central Bank in accordance with Section 9 of the CB Act before
the petition was filed. All that needs to be done is to liquidate the assets of the bank
and thus the assistance of the respondent court is sought for that purpose.

It should be pointed out that this petition filed is not among the cases categorized as
a special proceeding under Section 1, Rule 72 of the Rules of Court, nor among the
special proceedings that may be appealed under Section 1, Rule 109 of the Rules.

We disagree with the foregoing view of the Fourteenth Division. Rule 2 of the Rules of Court provide:

§1. Action defined. — Action means an ordinary suit in a court of justice, by which
the party prosecutes another for the enforcement or protection of a right, or the
prevention or redress of a wrong.

§2. Special Proceeding Distinguished. — Every other remedy, including one to

establish the status or right of a party or a particular fact, shall be by special
proceeding.

Elucidating the crucial distinction between an ordinary action and a special proceeding, Chief
Justice Moran states:" 11

Action is the act by which one sues another in a court of justice for the enforcement
or protection of a right, or the prevention or redress of a wrong while special
proceeding is the act by which one seeks to establish the status or right of a party, or
a particular fact. Hence, action is distinguished from special proceeding in that the
former is a formal demand of a right by one against another, while the latter is but a
petition for a declaration of a status, right or fact. Where a party litigant seeks to
 recover property from another, his remedy is to file an action. Where his purpose is to
seek the appointment of a guardian for an insane, his remedy is a special proceeding
to establish the fact or status of insanity calling for an appointment of guardianship.

Considering this distinction, a petition for liquidation of an insolvent corporation should be classified
a special proceeding and not an ordinary action. Such petition does not seek the enforcement or
protection of a right nor the prevention or redress of a wrong against a party. It does not pray for
affirmative relief for injury arising from a party's wrongful act or omission nor state a cause of action
that can be enforced against any person.

What it seeks is merely a declaration by the trial court of the corporation's insolvency so that its
creditors may be able to file their claims in the settlement of the corporation's debts and obligations.
Put in another way, the petition only seeks a declaration of the corporation's debts and obligations.
Put in another way, the petition only seeks a declaration of the corporation's state of insolvency and
the concomitant right of creditors and the order of payment of their claims in the disposition of the
corporation's assets.

Contrary to the rulings of the Fourteenth Division, liquidation proceedings do not resemble petitions
for interpleader. For one, an action for interpleader involves claims on a subject matter against a
person who has no interest therein. 12 This is not the case in a liquidation proceeding where the
Liquidator, as representative of the corporation, takes charge of its assets and liabilities for the
benefit of the creditors. 13 He is thus charged with insuring that the assets of the corporation are
paid only to rightful claimants and in the order of payment provided by law.

Rather, a liquidation proceeding resembles the proceeding for the settlement of state of deceased
persons under Rules 73 to 91 of the Rules of Court. The two have a common purpose: the
determination of all the assets and the payment of all the debts and liabilities of the insolvent
corporation or the estate. The Liquidator and the administrator or executor are both charged with
the assets for the benefit of the claimants. In both instances, the liability of the corporation and the
estate is not disputed. The court's concern is with the declaration of creditors and their rights and
the determination of their order of payment.

Furthermore, as in the settlement of estates, multiple appeals are allowed in proceedings for
liquidation of an insolvent corporation. As the Fifth Division of the Court of Appeals, quoting the
Liquidator, correctly noted:

A liquidation proceeding is a single proceeding which consists of a number of cases

properly classified as "claims." It is basically a two-phased proceeding. The first
phase is concerned with the approval and disapproval of claims. Upon the approval of
the petition seeking the assistance of the proper court in the liquidation of a close
entity, all money claims against the bank are required to be filed with the liquidation
court. This phase may end with the declaration by the liquidation court that the
claim is not proper or without basis. On the other hand, it may also end with the
liquidation court allowing the claim. In the latter case, the claim shall be classified
whether it is ordinary or preferred, and thereafter included Liquidator. In either
case, the order allowing or disallowing a particular claim is final order, and may be
appealed by the party aggrieved thereby.

The second phase involves the approval by the Court of the distribution plan
prepared by the duly appointed liquidator. The distribution plan specifies in detail
the total amount available for distribution to creditors whose claim were earlier
allowed. The Order finally disposes of the issue of how much property is available for
 disposal. Moreover, it ushers in the final phase of the liquidation proceeding —
payment of all allowed claims in accordance with the order of legal priority and the
approved distribution plan.

Verily, the import of the final character of an Order of allowance or disallowance of a

particular claim cannot be overemphasized. It is the operative fact that constitutes a
liquidation proceeding a "case where multiple appeals are allowed by law." The
issuance of an Order which, by its nature, affects only the particular claims involved,
and which may assume finality if no appeal is made therefrom, ipso facto creates a
situation where multiple appeals are allowed.

A liquidation proceeding is commenced by the filing of a single petition by the

Solicitor General with a court of competent jurisdiction entitled, "Petition for
Assistance in the Liquidation of e.g., Pacific Banking Corporation. All claims against
the insolvent are required to be filed with the liquidation court. Although the claims
are litigated in the same proceeding, the treatment is individual. Each claim is heard
separately. And the Order issued relative to a particular claim applies only to said
claim, leaving the other claims unaffected, as each claim is considered separate and
distinct from the others. Obviously, in the event that an appeal from an Order
allowing or disallowing a particular claim is made, only said claim is affected, leaving
the others to proceed with their ordinary course. In such case, the original records of
the proceeding are not elevated to the appellate court. They remain with the
liquidation court. In lieu of the original record, a record of appeal is instead required
to be prepared and transmitted to the appellate court.

Inevitably, multiple appeals are allowed in liquidation proceedings. Consequently, a

record on appeal is necessary in each and every appeal made. Hence, the period to
appeal therefrom should be thirty (30) days, a record on appeal being required.
(Record pp. 162-164).

In G.R. No. 112991 (the case of the Stockholders/Investors), the Liquidator's notice of appeal was
filed on time, having been filed on the 23rd day of receipt of the order granting the claims of the
Stockholders/Investors. However, the Liquidator did not file a record on appeal with the result that
he failed to perfect his appeal. As already stated a record on appeal is required under the Interim
Rules and Guidelines in special proceedings and for cases where multiple appeals are allowed. The
reason for this is that the several claims are actually separate ones and a decision or final order with
respect to any claim can be appealed. Necessarily the original record on appeal must remain in the
trial court where other claims may still be pending.

Because of the Liquidator's failure to perfect his appeal, the order granting the claims of the
Stockholders/Investors became final. Consequently. the Fourteenth Division's decision dismissing
the Liquidator's Petition for Certiorari, Prohibition and Mandamus must be affirmed albeit for a
different reason.

On the other hand, in G.R. No. 109373 (case of the Labor Union), we find that the Fifth Division
correctly granted the Liquidator's Petition for Certiorari. Prohibition and Mandamus. As already
noted, the Liquidator filed a notice of appeal and a motion for extension to file a record on appeal on
December 10, 1991, i.e., within 30 days of his receipt of the order granting the Union's claim.
Without waiting for the resolution of his motion for extension, he filed on December 20, 1991 within
the extension sought a record on appeal. Respondent judge thus erred in disallowing the notice on
appeal and denying the Liquidator's motion for extension to file a record on appeal.
The Fifth Division of the Court of Appeals correctly granted the Liquidator's Petition for Certiorari,
Prohibition and Mandamus and its decision should, therefore, be affirmed.

Second. In G.R. No. 109373, The Union claims that under §29 of Rep. Act No. 265, the court
merely assists in adjudicating the claims of creditors, preserves the assets of the institution,
and implements the liquidation plan approved by the Monetary Board and that, therefore, as
representative of the Monetary Board, the Liquidator cannot question the order of the court or
appeal from it. It contends that since the Monetary Board had previously admitted PaBC's liability
to the laborers by in fact setting aside the amount of P112,234,292.44 for the payment of their
claims, there was nothing else for the Liquidator to do except to comply with the order of the court.

The Union's contention is untenable. In liquidation proceedings, the function of the trial court is not
limited to assisting in the implementation of the orders of the Monetary Board. Under the same
section (§29) of the law invoked by the Union, the court has authority to set aside the decision of the
Monetary Board "if there is a convincing proof that the action is plainly arbitrary and made in bad
faith." 14 As this Court held in Rural Bank of Buhi, Inc. v. Court of Appeals: 15

There is no question, that the action of the monetary Board in this regard may be
subject to judicial review. Thus, it has been held that the Court's may interfere with
the Central Bank's exercise of discretion in determining whether or not a distressed
bank shall be supported or liquidated. Discretion has its limits and has never been
held to include arbitrariness, discrimination or bad faith (Ramos v. Central Bank of
the Philippines, 41 SCRA 567 [1971]).

In truth, the Liquidator is the representative not only of the Central Bank but also of the insolvent
bank. Under §§28A-29 of Rep. Act No. 265 he acts in behalf of the bank "personally or through
counsel as he may retain, in all actions or proceedings or against the corporation" and he has
authority "to do whatever may be necessary for these purposes." This authority includes the power to
appeal from the decisions or final orders of the court which he believes to be contrary to the interest
of the bank.

Finally the Union contends that the notice of appeal and motion for extension of time to file the
record on appeal filed in behalf of the Central Bank was not filed by the office of the Solicitor General
as counsel for the Central Bank. This contention has no merit. On October 22, 1992, as Assistant
Solicitor General Cecilio O. Estoesta informed the trial court in March 27, 1992, the OSG had
previously authorized lawyers of the PDIC to prepare and sign pleadings in the case. 16 Conformably
thereto the Notice of Appeal and the Motion for Additional Time to submit Record on Appeal filed
were jointly signed by Solicitor Reynaldo I. Saludares in behalf of the OSG and by lawyers of the
PDIC. 17

WHEREFORE, in G.R. No. 109373 and G.R. No 112991, the decisions appealed from are
AFFIRMED.

SO ORDERED.

PVB v. Vega

May a liquidation court continue with liquidation proceedings of the Philippine Veterans Bank
(PVB) when Congress had mandated its rehabilitation and reopening?

This is the sole issue raised in the instant Petition for Prohibition with Petition for Preliminary
Injunction and application for Ex Parte Temporary Restraining Order.
The antecedent facts of the case are as follows:

Sometime in 1985, the Central Bank of the Philippines (Central Bank, for brevity) filed with Branch
39 of the Regional Trial Court of Manila a Petition for Assistance in the Liquidation of the Philippine
Veterans Bank, the same docketed as Case No. SP-32311. Thereafter, the Philipppine Veterans
Bank Employees Union-N.U.B.E., herein petitioner, represented by petitioner Perfecto V.
Fernandez, filed claims for accrued and unpaid employee wages and benefits with said court in SP-
32311.1

After lengthy proceedings, partial payment of the sums due to the employees were made. However,
due to the piecemeal hearings on the benefits, many remain unpaid.2

On March 8, 1991, petitioners moved to disqualify the respondent judge from hearing the above case
on grounds of bias and hostility towards petitioners.3

On January 2, 1992, the Congress enacted Republic Act No. 7169 providing for the rehabilitation of
the Philippine Veterans Bank.4

Thereafter, petitioners filed with the labor tribunals their residual claims for benefits and for
reinstatement upon reopening of the bank.5

Sometime in May 1992, the Central Bank issued a certificate of authority allowing the PVB to
reopen.6

Despite the legislative mandate for rehabilitation and reopening of PVB, respondent judge continued
with the liquidation proceedings of the bank. Moreover, petitioners learned that respondents were
set to order the payment and release of employee benefits upon motion of another lawyer, while
petitioners’ claims have been frozen to their prejudice.

Hence, the instant petition.

Petitioners argue that with the passage of R.A. 7169, the liquidation court became functus officio,
and no longer had the authority to continue with liquidation proceedings.

In a Resolution, dated June 8, 1992, the Supreme Court resolved to issue a Temporary Restraining
Order enjoining the trial court from further proceeding with the case.

On June 22, 1992, VOP Security & Detective Agency (VOPSDA) and its 162 security guards filed a
Motion for Intervention with prayer that they be excluded from the operation of the Temporary
Restraining Order issued by the Court. They alleged that they had filed a motion before Branch 39 of
the RTC of Manila, in SP-No. 32311, praying that said court order PVB to pay their backwages and
salary differentials by authority of R.A. No 6727, Wage Orders No. NCR-01 and NCR-01-Ad and
Wage Orders No. NCR-02 and NCR-02-A; and, that said court, in an Order dated June 5, 1992,
approved therein movants’ case and directed the bank liquidator or PVB itself to pay the backwages
and differentials in accordance with the computation incorporated in the order. Said intervenors
likewise manifested that there was an error in the computation of the monetary benefits due them.

On August 18, 1992, petitioners, pursuant to the Resolution of this Court, dated July 6, 1992, filed
their Comment opposing the Motion for Leave to File Intervention and for exclusion from the
operation of the T.R.O. on the grounds that the movants have no legal interest in the subject matter
of the pending action; that allowing intervention would only cause delay in the proceedings; and that
the motion to exclude the movants from the T.R.O. is without legal basis and would render moot the
relief sought in the petition.

On September 3, 1992, the PVB filed a Petition-In-Intervention praying for the issuance of the writs
of certiorari and prohibition under Rule 65 of the Rules of Court in connection with the issuance by
respondent judge of several orders involving acts of liquidation of PVB even after the effectivity of
R.A. No. 7169. PVB further alleges that respondent judge clearly acted in excess of or without
jurisdiction when he issued the questioned orders.

We find for the petitioners.

Republic Act No. 7169 entitled "An Act To Rehabilitate The Philippine Veterans Bank Created
Under Republic Act No. 3518, Providing The Mechanisms Therefor, And For Other Purposes", which
was signed into law by President Corazon C. Aquino on January 2, 1992 and which was published in
the Official Gazette on February 24, 1992, provides in part for the reopening of the Philippine
Veterans Bank together with all its branches within the period of three (3) years from the date of the
reopening of the head office.7 The law likewise provides for the creation of a rehabilitation committee
in order to facilitate the implementation of the provisions of the same. 8

Pursuant to said R.A. No. 7169, the Rehabilitation Committee submitted the proposed Rehabilitation
Plan of the PVB to the Monetary Board for its approval. Meanwhile, PVB filed a Motion to
Terminate Liquidation of Philippine Veterans Bank dated March 13, 1992 with the respondent judge
praying that the liquidation proceedings be immediately terminated in view of the passage of R.A.
No. 7169.

On April 10, 1992, the Monetary Board issued Monetary Board Resolution No. 348 which approved
the Rehabilitation Plan submitted by the Rehabilitaion Committee.

Thereafter, the Monetary Board issued a Certificate of Authority allowing PVB to reopen.

On June 3, 1992, the liquidator filed A Motion for the Termination of the Liquidation Proceedings of
the Philippine Veterans Bank with the respondent judge.

As stated above, the Court, in a Resolution dated June 8, 1992, issued a temporary restraining order
in the instant case restraining respondent judge from further proceeding with the liquidation of
PVB.

On August 3, 1992, the Philippine Veterans Bank opened its doors to the public and started regular
banking operations.

Clearly, the enactment of Republic Act No. 7169, as well as the subsequent developments has
rendered the liquidation court functus officio. Consequently, respondent judge has been stripped of
the authority to issue orders involving acts of liquidation.

Liquidation, in corporation law, connotes a winding up or settling with creditors and debtors. 9 It is
the winding up of a corporation so that assets are distributed to those entitled to receive them. It is
the process of reducing assets to cash, discharging liabilities and dividing surplus or loss.

On the opposite end of the spectrum is rehabilitation which connotes a reopening or reorganization.
Rehabilitation contemplates a continuance of corporate life and activities in an effort to restore and
reinstate the corporation to its former position of successful operation and solvency. 10
It is crystal clear that the concept of liquidation is diametrically opposed or contrary to the concept of
rehabilitation, such that both cannot be undertaken at the same time. To allow the liquidation
proceedings to continue would seriously hinder the rehabilitation of the subject bank.

Anent the claim of respondents Central Bank and Liquidator of PVB that R.A. No. 7169 became
effective only on March 10, 1992 or fifteen (15) days after its publication in the Official Gazette; and,
the contention of intervenors VOP Security, et. al. that the effectivity of said law is conditioned on
the approval of a rehabilitation plan by the Monetary Board, among others, the Court is of the view
that both contentions are bereft of merit.

While as a rule, laws take effect after fifteen (15) days following the completion of their publication
in the Official Gazette or in a newspaper of general circulation in the Philippines, the legislature has
the authority to provide for exceptions, as indicated in the clause "unless otherwise provided."

In the case at bar, Section 10 of R.A. No. 7169 provides:

Sec. 10. Effectivity. - This Act shall take effect upon its approval.

Hence, it is clear that the legislature intended to make the law effective immediately upon its
approval. It is undisputed that R.A. No. 7169 was signed into law by President Corazon C. Aquino on
January 2, 1992. Therefore, said law became effective on said date.

Assuming for the sake of argument that publication is necessary for the effectivity of R.A. No. 7169,
then it became legally effective on February 24, 1992, the date when the same was published in the
Official Gazette, and not on March 10, 1992, as erroneously claimed by respondents Central Bank
and Liquidator.

WHEREFORE, in view of the foregoing, the instant petition is hereby GIVEN DUE COURSE and
GRANTED. Respondent Judge is hereby PERMANENTLY ENJOINED from further proceeding with
Civil Case No. SP- 32311.

SO ORDERED.

I.C.7. Freezing of Monetary Instruments or Property

Republic of the Philippines v. Hon. Eugenio Jr.

The present petition for certiorari and prohibition under Rule 65 assails the orders and resolutions
issued by two different courts in two different cases. The courts and cases in question are the
Regional Trial Court of Manila, Branch 24, which heard SP Case No. 06-1142001 and the Court of
Appeals, Tenth Division, which heared CA-G.R. SP No. 95198.2 Both cases arose as part of the
aftermath of the ruling of this Court in Agan v. PIATCO3nullifying the concession agreement
awarded to the Philippine International Airport Terminal Corporation (PIATCO) over the Ninoy
Aquino International Airport – International Passenger Terminal 3 (NAIA 3) Project.

I.

Following the promulgation of Agan, a series of investigations concerning the award of the NAIA 3
contracts to PIATCO were undertaken by the Ombudsman and the Compliance and Investigation
Staff (CIS) of petitioner Anti-Money Laundering Council (AMLC). On 24 May 2005, the Office of the
Solicitor General (OSG) wrote the AMLC requesting the latter’s assistance "in obtaining more
evidence to completely reveal the financial trail of corruption surrounding the [NAIA 3] Project," and
also noting that petitioner Republic of the Philippines was presently defending itself in two
international arbitration cases filed in relation to the NAIA 3 Project. 4 The CIS conducted an
intelligence database search on the financial transactions of certain individuals involved in the
award, including respondent Pantaleon Alvarez (Alvarez) who had been the Chairman of the PBAC
Technical Committee, NAIA-IPT3 Project.5 By this time, Alvarez had already been charged by the
Ombudsman with violation of Section 3(j) of R.A. No. 3019. 6 The search revealed that Alvarez
maintained eight (8) bank accounts with six (6) different banks. 7

On 27 June 2005, the AMLC issued Resolution No. 75, Series of 2005, 8 whereby the Council resolved
to authorize the Executive Director of the AMLC "to sign and verify an application to inquire into
and/or examine the [deposits] or investments of Pantaleon Alvarez, Wilfredo Trinidad, Alfredo
Liongson, and Cheng Yong, and their related web of accounts wherever these may be found, as
defined under Rule 10.4 of the Revised Implementing Rules and Regulations;" and to authorize the
AMLC Secretariat "to conduct an inquiry into subject accounts once the Regional Trial Court grants
the application to inquire into and/or examine the bank accounts" of those four individuals.9 The
resolution enumerated the particular bank accounts of Alvarez, Wilfredo Trinidad (Trinidad),
Alfredo Liongson (Liongson) and Cheng Yong which were to be the subject of the inquiry. 10 The
rationale for the said resolution was founded on the cited findings of the CIS that amounts were
transferred from a Hong Kong bank account owned by Jetstream Pacific Ltd. Account to bank
accounts in the Philippines maintained by Liongson and Cheng Yong. 11 The Resolution also noted
that "[b]y awarding the contract to PIATCO despite its lack of financial capacity, Pantaleon Alvarez
caused undue injury to the government by giving PIATCO unwarranted benefits, advantage, or
preference in the discharge of his official administrative functions through manifest partiality,
evident bad faith, or gross inexcusable negligence, in violation of Section 3(e) of Republic Act No.
3019."12

Under the authority granted by the Resolution, the AMLC filed an application to inquire into or
examine the deposits or investments of Alvarez, Trinidad, Liongson and Cheng Yong before the RTC
of Makati, Branch 138, presided by Judge (now Court of Appeals Justice) Sixto Marella, Jr. The
application was docketed as AMLC No. 05-005.13 The Makati RTC heard the testimony of the Deputy
Director of the AMLC, Richard David C. Funk II, and received the documentary evidence of the
AMLC.14 Thereafter, on 4 July 2005, the Makati RTC rendered an Order (Makati RTC bank inquiry
order) granting the AMLC the authority to inquire and examine the subject bank accounts of
Alvarez, Trinidad, Liongson and Cheng Yong, the trial court being satisfied that there existed
"[p]robable cause [to] believe that the deposits in various bank accounts, details of which appear in
paragraph 1 of the Application, are related to the offense of violation of Anti-Graft and Corrupt
Practices Act now the subject of criminal prosecution before the Sandiganbayan as attested to by the
Informations, Exhibits C, D, E, F, and G."15Pursuant to the Makati RTC bank inquiry order, the CIS
proceeded to inquire and examine the deposits, investments and related web accounts of the four.16

Meanwhile, the Special Prosecutor of the Office of the Ombudsman, Dennis Villa-Ignacio, wrote a
letter dated 2 November 2005, requesting the AMLC to investigate the accounts of Alvarez, PIATCO,
and several other entities involved in the nullified contract. The letter adverted to probable cause to
believe that the bank accounts "were used in the commission of unlawful activities that were
committed" in relation to the criminal cases then pending before the Sandiganbayan. 17 Attached to
the letter was a memorandum "on why the investigation of the [accounts] is necessary in the
prosecution of the above criminal cases before the Sandiganbayan." 18

In response to the letter of the Special Prosecutor, the AMLC promulgated on 9 December 2005
Resolution No. 121 Series of 2005,19 which authorized the executive director of the AMLC to inquire
into and examine the accounts named in the letter, including one maintained by Alvarez with DBS
Bank and two other accounts in the name of Cheng Yong with Metrobank. The Resolution
characterized the memorandum attached to the Special Prosecutor’s letter as "extensively
justif[ying] the existence of probable cause that the bank accounts of the persons and entities
mentioned in the letter are related to the unlawful activity of violation of Sections 3(g) and 3(e) of
Rep. Act No. 3019, as amended."20

Following the December 2005 AMLC Resolution, the Republic, through the AMLC, filed an
application21 before the Manila RTC to inquire into and/or examine thirteen (13) accounts and two
(2) related web of accounts alleged as having been used to facilitate corruption in the NAIA 3 Project.
Among said accounts were the DBS Bank account of Alvarez and the Metrobank accounts of Cheng
Yong. The case was raffled to Manila RTC, Branch 24, presided by respondent Judge Antonio
Eugenio, Jr., and docketed as SP Case No. 06-114200.

On 12 January 2006, the Manila RTC issued an Order (Manila RTC bank inquiry order) granting
the Ex ParteApplication expressing therein "[that] the allegations in said application to be impressed
with merit, and in conformity with Section 11 of R.A. No. 9160, as amended, otherwise known as the
Anti-Money Laundering Act (AMLA) of 2001 and Rules 11.1 and 11.2 of the Revised Implementing
Rules and Regulations."22 Authority was thus granted to the AMLC to inquire into the bank accounts
listed therein.

On 25 January 2006, Alvarez, through counsel, entered his appearance 23 before the Manila RTC in
SP Case No. 06-114200 and filed an Urgent Motion to Stay Enforcement of Order of January 12,
2006.24 Alvarez alleged that he fortuitously learned of the bank inquiry order, which was issued
following an ex parte application, and he argued that nothing in R.A. No. 9160 authorized the AMLC
to seek the authority to inquire into bank accounts ex parte.25 The day after Alvarez filed his motion,
26 January 2006, the Manila RTC issued an Order 26 staying the enforcement of its bank inquiry
order and giving the Republic five (5) days to respond to Alvarez’s motion.

The Republic filed an Omnibus Motion for Reconsideration 27 of the 26 January 2006 Manila RTC
Order and likewise sought to strike out Alvarez’s motion that led to the issuance of said order. For
his part, Alvarez filed a Reply and Motion to Dismiss28 the application for bank inquiry order. On 2
May 2006, the Manila RTC issued an Omnibus Order29 granting the Republic’s Motion for
Reconsideration, denying Alvarez’s motion to dismiss and reinstating "in full force and effect" the
Order dated 12 January 2006. In the omnibus order, the Manila RTC reiterated that the material
allegations in the application for bank inquiry order filed by the Republic stood as "the probable
cause for the investigation and examination of the bank accounts and investments of the
respondents."30

Alvarez filed on 10 May 2006 an Urgent Motion 31 expressing his apprehension that the AMLC would
immediately enforce the omnibus order and would thereby render the motion for reconsideration he
intended to file as moot and academic; thus he sought that the Republic be refrained from enforcing
the omnibus order in the meantime. Acting on this motion, the Manila RTC, on 11 May 2006, issued
an Order32 requiring the OSG to file a comment/opposition and reminding the parties that judgments
and orders become final and executory upon the expiration of fifteen (15) days from receipt thereof,
as it is the period within which a motion for reconsideration could be filed. Alvarez filed his Motion
for Reconsideration33 of the omnibus order on 15 May 2006, but the motion was denied by the Manila
RTC in an Order34 dated 5 July 2006.

On 11 July 2006, Alvarez filed an Urgent Motion and Manifestation 35 wherein he manifested having
received reliable information that the AMLC was about to implement the Manila RTC bank inquiry
order even though he was intending to appeal from it. On the premise that only a final and executory
judgment or order could be executed or implemented, Alvarez sought that the AMLC be immediately
ordered to refrain from enforcing the Manila RTC bank inquiry order.
On 12 July 2006, the Manila RTC, acting on Alvarez’s latest motion, issued an Order36 directing the
AMLC "to refrain from enforcing the order dated January 12, 2006 until the expiration of the period
to appeal, without any appeal having been filed." On the same day, Alvarez filed a Notice of
Appeal37 with the Manila RTC.

On 24 July 2006, Alvarez filed an Urgent Ex Parte Motion for Clarification.38 Therein, he alleged
having learned that the AMLC had began to inquire into the bank accounts of the other persons
mentioned in the application for bank inquiry order filed by the Republic. 39 Considering that the
Manila RTC bank inquiry order was issued ex parte, without notice to those other persons, Alvarez
prayed that the AMLC be ordered to refrain from inquiring into any of the other bank deposits and
alleged web of accounts enumerated in AMLC’s application with the RTC; and that the AMLC be
directed to refrain from using, disclosing or publishing in any proceeding or venue any information
or document obtained in violation of the 11 May 2006 RTC Order. 40

On 25 July 2006, or one day after Alvarez filed his motion, the Manila RTC issued an
Order41 wherein it clarified that "the Ex Parte Order of this Court dated January 12, 2006 can not be
implemented against the deposits or accounts of any of the persons enumerated in the AMLC
Application until the appeal of movant Alvarez is finally resolved, otherwise, the appeal would be
rendered moot and academic or even nugatory."42 In addition, the AMLC was ordered "not to disclose
or publish any information or document found or obtained in [v]iolation of the May 11, 2006 Order of
this Court."43 The Manila RTC reasoned that the other persons mentioned in AMLC’s application
were not served with the court’s 12 January 2006 Order. This 25 July 2006 Manila RTC Order is the
first of the four rulings being assailed through this petition.

In response, the Republic filed an Urgent Omnibus Motion for Reconsideration 44 dated 27 July 2006,
urging that it be allowed to immediately enforce the bank inquiry order against Alvarez and that
Alvarez’s notice of appeal be expunged from the records since appeal from an order of inquiry is
disallowed under the Anti money Laundering Act (AMLA).

Meanwhile, respondent Lilia Cheng filed with the Court of Appeals a Petition for Certiorari,
Prohibition and Mandamus with Application for TRO and/or Writ of Preliminary Injunction 45 dated
10 July 2006, directed against the Republic of the Philippines through the AMLC, Manila RTC
Judge Eugenio, Jr. and Makati RTC Judge Marella, Jr.. She identified herself as the wife of Cheng
Yong46 with whom she jointly owns a conjugal bank account with Citibank that is covered by the
Makati RTC bank inquiry order, and two conjugal bank accounts with Metrobank that are covered
by the Manila RTC bank inquiry order. Lilia Cheng imputed grave abuse of discretion on the part of
the Makati and Manila RTCs in granting AMLC’s ex parte applications for a bank inquiry order,
arguing among others that the ex parte applications violated her constitutional right to due process,
that the bank inquiry order under the AMLA can only be granted in connection with violations of the
AMLA and that the AMLA can not apply to bank accounts opened and transactions entered into
prior to the effectivity of the AMLA or to bank accounts located outside the Philippines.47

On 1 August 2006, the Court of Appeals, acting on Lilia Cheng’s petition, issued a Temporary
Restraining Order48enjoining the Manila and Makati trial courts from implementing, enforcing or
executing the respective bank inquiry orders previously issued, and the AMLC from enforcing and
implementing such orders. On even date, the Manila RTC issued an Order 49 resolving to hold in
abeyance the resolution of the urgent omnibus motion for reconsideration then pending before it
until the resolution of Lilia Cheng’s petition for certiorari with the Court of Appeals. The Court of
Appeals Resolution directing the issuance of the temporary restraining order is the second of the four
rulings assailed in the present petition.
The third assailed ruling50 was issued on 15 August 2006 by the Manila RTC, acting on the Urgent
Motion for Clarification51 dated 14 August 2006 filed by Alvarez. It appears that the 1 August 2006
Manila RTC Order had amended its previous 25 July 2006 Order by deleting the last paragraph
which stated that the AMLC "should not disclose or publish any information or document found or
obtained in violation of the May 11, 2006 Order of this Court." 52 In this new motion, Alvarez argued
that the deletion of that paragraph would allow the AMLC to implement the bank inquiry orders and
publish whatever information it might obtain thereupon even before the final orders of the Manila
RTC could become final and executory.53 In the 15 August 2006 Order, the Manila RTC reiterated
that the bank inquiry order it had issued could not be implemented or enforced by the AMLC or any
of its representatives until the appeal therefrom was finally resolved and that any enforcement
thereof would be unauthorized.54

The present Consolidated Petition55 for certiorari and prohibition under Rule 65 was filed on 2
October 2006, assailing the two Orders of the Manila RTC dated 25 July and 15 August 2006 and the
Temporary Restraining Order dated 1 August 2006 of the Court of Appeals. Through an Urgent
Manifestation and Motion56 dated 9 October 2006, petitioner informed the Court that on 22
September 2006, the Court of Appeals hearing Lilia Cheng’s petition had granted a writ of
preliminary injunction in her favor.57 Thereafter, petitioner sought as well the nullification of the 22
September 2006 Resolution of the Court of Appeals, thereby constituting the fourth ruling assailed
in the instant petition.58

The Court had initially granted a Temporary Restraining Order 59 dated 6 October 2006 and later on
a Supplemental Temporary Restraining Order60 dated 13 October 2006 in petitioner’s favor,
enjoining the implementation of the assailed rulings of the Manila RTC and the Court of Appeals.
However, on respondents’ motion, the Court, through a Resolution 61 dated 11 December 2006,
suspended the implementation of the restraining orders it had earlier issued.

Oral arguments were held on 17 January 2007. The Court consolidated the issues for argument as
follows:

1. Did the RTC-Manila, in issuing the Orders dated 25 July 2006 and 15 August 2006 which
deferred the implementation of its Order dated 12 January 2006, and the Court of Appeals,
in issuing its Resolution dated 1 August 2006, which ordered the status quo in relation to the
1 July 2005 Order of the RTC-Makati and the 12 January 2006 Order of the RTC-Manila,
both of which authorized the examination of bank accounts under Section 11 of Rep. Act No.
9160 (AMLA), commit grave abuse of discretion?

(a) Is an application for an order authorizing inquiry into or examination of bank

accounts or investments under Section 11 of the AMLA ex-parte in nature or one
which requires notice and hearing?

(b) What legal procedures and standards should be observed in the conduct of the
proceedings for the issuance of said order?

(c) Is such order susceptible to legal challenges and judicial review?

2. Is it proper for this Court at this time and in this case to inquire into and pass upon the
validity of the 1 July 2005 Order of the RTC-Makati and the 12 January 2006 Order of the
RTC-Manila, considering the pendency of CA G.R. SP No. 95-198 (Lilia Cheng v. Republic)
wherein the validity of both orders was challenged?62
After the oral arguments, the parties were directed to file their respective memoranda, which they
did,63 and the petition was thereafter deemed submitted for resolution.

II.

Petitioner’s general advocacy is that the bank inquiry orders issued by the Manila and Makati RTCs
are valid and immediately enforceable whereas the assailed rulings, which effectively stayed the
enforcement of the Manila and Makati RTCs bank inquiry orders, are sullied with grave abuse of
discretion. These conclusions flow from the posture that a bank inquiry order, issued upon a finding
of probable cause, may be issued ex parte and, once issued, is immediately executory. Petitioner
further argues that the information obtained following the bank inquiry is necessarily beneficial, if
not indispensable, to the AMLC in discharging its awesome responsibility regarding the effective
implementation of the AMLA and that any restraint in the disclosure of such information to
appropriate agencies or other judicial fora would render meaningless the relief supplied by the bank
inquiry order.

Petitioner raises particular arguments questioning Lilia Cheng’s right to seek injunctive relief before
the Court of Appeals, noting that not one of the bank inquiry orders is directed against her. Her
"cryptic assertion" that she is the wife of Cheng Yong cannot, according to petitioner, "metamorphose
into the requisite legal standing to seek redress for an imagined injury or to maintain an action in
behalf of another." In the same breath, petitioner argues that Alvarez cannot assert any violation of
the right to financial privacy in behalf of other persons whose bank accounts are being inquired into,
particularly those other persons named in the Makati RTC bank inquiry order who did not take any
step to oppose such orders before the courts.

Ostensibly, the proximate question before the Court is whether a bank inquiry order issued in
accordance with Section 10 of the AMLA may be stayed by injunction. Yet in arguing that it does,
petitioner relies on what it posits as the final and immediately executory character of the bank
inquiry orders issued by the Manila and Makati RTCs. Implicit in that position is the notion that the
inquiry orders are valid, and such notion is susceptible to review and validation based on what
appears on the face of the orders and the applications which triggered their issuance, as well as the
provisions of the AMLA governing the issuance of such orders. Indeed, to test the viability of
petitioner’s argument, the Court will have to be satisfied that the subject inquiry orders are valid in
the first place. However, even from a cursory examination of the applications for inquiry order and
the orders themselves, it is evident that the orders are not in accordance with law.

III.

A brief overview of the AMLA is called for.

Money laundering has been generally defined by the International Criminal Police Organization
(Interpol) `as "any act or attempted act to conceal or disguise the identity of illegally obtained
proceeds so that they appear to have originated from legitimate sources."64 Even before the passage
of the AMLA, the problem was addressed by the Philippine government through the issuance of
various circulars by the Bangko Sentral ng Pilipinas. Yet ultimately, legislative proscription was
necessary, especially with the inclusion of the Philippines in the Financial Action Task Force’s list of
non-cooperative countries and territories in the fight against money laundering.65 The original
AMLA, Republic Act (R.A.) No. 9160, was passed in 2001. It was amended by R.A. No. 9194 in 2003.

Section 4 of the AMLA states that "[m]oney laundering is a crime whereby the proceeds of an
unlawful activity as [defined in the law] are transacted, thereby making them appear to have
originated from legitimate sources."66The section further provides the three modes through which
the crime of money laundering is committed. Section 7 creates the AMLC and defines its powers,
which generally relate to the enforcement of the AMLA provisions and the initiation of legal actions
authorized in the AMLA such as civil forefeiture proceedings and complaints for the prosecution of
money laundering offenses.67

In addition to providing for the definition and penalties for the crime of money laundering, the
AMLA also authorizes certain provisional remedies that would aid the AMLC in the enforcement of
the AMLA. These are the "freeze order" authorized under Section 10, and the "bank inquiry order"
authorized under Section 11.

Respondents posit that a bank inquiry order under Section 11 may be obtained only upon the pre-
existence of a money laundering offense case already filed before the courts. 68 The conclusion is
based on the phrase "upon order of any competent court in cases of violation of this Act," the word
"cases" generally understood as referring to actual cases pending with the courts.

We are unconvinced by this proposition, and agree instead with the then Solicitor General who
conceded that the use of the phrase "in cases of" was unfortunate, yet submitted that it should be
interpreted to mean "in the event there are violations" of the AMLA, and not that there are already
cases pending in court concerning such violations.69 If the contrary position is adopted, then the bank
inquiry order would be limited in purpose as a tool in aid of litigation of live cases, and wholly inutile
as a means for the government to ascertain whether there is sufficient evidence to sustain an
intended prosecution of the account holder for violation of the AMLA. Should that be the situation, in
all likelihood the AMLC would be virtually deprived of its character as a discovery tool, and thus
would become less circumspect in filing complaints against suspect account holders. After all, under
such set-up the preferred strategy would be to allow or even encourage the indiscriminate filing of
complaints under the AMLA with the hope or expectation that the evidence of money laundering
would somehow surface during the trial. Since the AMLC could not make use of the bank inquiry
order to determine whether there is evidentiary basis to prosecute the suspected malefactors, not
filing any case at all would not be an alternative. Such unwholesome set-up should not come to pass.
Thus Section 11 cannot be interpreted in a way that would emasculate the remedy it has established
and encourage the unfounded initiation of complaints for money laundering.

Still, even if the bank inquiry order may be availed of without need of a pre-existing case under the
AMLA, it does not follow that such order may be availed of ex parte. There are several reasons why
the AMLA does not generally sanction ex parte applications and issuances of the bank inquiry order.

IV.

It is evident that Section 11 does not specifically authorize, as a general rule, the issuance ex parte of
the bank inquiry order. We quote the provision in full:

SEC. 11. Authority to Inquire into Bank Deposits. ― Notwithstanding the provisions of
Republic Act No. 1405, as amended, Republic Act No. 6426, as amended, Republic Act No.
8791, and other laws, the AMLC may inquire into or examine any particular deposit or
investment with any banking institution or non bank financial institution upon order of any
competent court in cases of violation of this Act, when it has been established that there
is probable cause that the deposits or investments are related to an unlawful
activity as defined in Section 3(i) hereof or a money laundering offense under
Section 4 hereof, except that no court order shall be required in cases involving
unlawful activities defined in Sections 3(i)1, (2) and (12).
 To ensure compliance with this Act, the Bangko Sentral ng Pilipinas (BSP) may inquire into
or examine any deposit of investment with any banking institution or non bank financial
institution when the examination is made in the course of a periodic or special examination,
in accordance with the rules of examination of the BSP.70 (Emphasis supplied)

Of course, Section 11 also allows the AMLC to inquire into bank accounts without having to obtain a
judicial order in cases where there is probable cause that the deposits or investments are related to
kidnapping for ransom,71certain violations of the Comprehensive Dangerous Drugs Act of
2002,72 hijacking and other violations under R.A. No. 6235, destructive arson and murder. Since such
special circumstances do not apply in this case, there is no need for us to pass comment on this
proviso. Suffice it to say, the proviso contemplates a situation distinct from that which presently
confronts us, and for purposes of the succeeding discussion, our reference to Section 11 of the AMLA
excludes said proviso.

In the instances where a court order is required for the issuance of the bank inquiry order, nothing
in Section 11 specifically authorizes that such court order may be issued ex parte. It might be argued
that this silence does not preclude the ex parte issuance of the bank inquiry order since the same is
not prohibited under Section 11. Yet this argument falls when the immediately preceding provision,
Section 10, is examined.

SEC. 10. Freezing of Monetary Instrument or Property. ― The Court of Appeals,

upon application ex parteby the AMLC and after determination that probable
cause exists that any monetary instrument or property is in any way related to an unlawful
activity as defined in Section 3(i) hereof, may issue a freeze order which shall be
effective immediately. The freeze order shall be for a period of twenty (20) days unless
extended by the court.73

Although oriented towards different purposes, the freeze order under Section 10 and the bank
inquiry order under Section 11 are similar in that they are extraordinary provisional reliefs which
the AMLC may avail of to effectively combat and prosecute money laundering offenses. Crucially,
Section 10 uses specific language to authorize an ex parte application for the provisional relief
therein, a circumstance absent in Section 11. If indeed the legislature had intended to authorize ex
parte proceedings for the issuance of the bank inquiry order, then it could have easily expressed such
intent in the law, as it did with the freeze order under Section 10.

Even more tellingly, the current language of Sections 10 and 11 of the AMLA was crafted at the
same time, through the passage of R.A. No. 9194. Prior to the amendatory law, it was the AMLC, not
the Court of Appeals, which had authority to issue a freeze order, whereas a bank inquiry order
always then required, without exception, an order from a competent court. 74 It was through the same
enactment that ex parte proceedings were introduced for the first time into the AMLA, in the case of
the freeze order which now can only be issued by the Court of Appeals. It certainly would have been
convenient, through the same amendatory law, to allow a similar ex parte procedure in the case of a
bank inquiry order had Congress been so minded. Yet nothing in the provision itself, or even the
available legislative record, explicitly points to an ex parte judicial procedure in the application for a
bank inquiry order, unlike in the case of the freeze order.

That the AMLA does not contemplate ex parte proceedings in applications for bank inquiry orders is
confirmed by the present implementing rules and regulations of the AMLA, promulgated upon the
passage of R.A. No. 9194. With respect to freeze orders under Section 10, the implementing rules do
expressly provide that the applications for freeze orders be filed ex parte,75 but no similar clearance is
granted in the case of inquiry orders under Section 11. 76 These implementing rules were
promulgated by the Bangko Sentral ng Pilipinas, the Insurance Commission and the Securities and
Exchange Commission,77 and if it was the true belief of these institutions that inquiry orders could
be issued ex parte similar to freeze orders, language to that effect would have been incorporated in
the said Rules. This is stressed not because the implementing rules could authorize ex
parteapplications for inquiry orders despite the absence of statutory basis, but rather because the
framers of the law had no intention to allow such ex parte applications.

Even the Rules of Procedure adopted by this Court in A.M. No. 05-11-04-SC78 to enforce the
provisions of the AMLA specifically authorize ex parte applications with respect to freeze orders
under Section 1079 but make no similar authorization with respect to bank inquiry orders under
Section 11.

The Court could divine the sense in allowing ex parte proceedings under Section 10 and in
proscribing the same under Section 11. A freeze order under Section 10 on the one hand is aimed at
preserving monetary instruments or property in any way deemed related to unlawful activities as
defined in Section 3(i) of the AMLA. The owner of such monetary instruments or property would
thus be inhibited from utilizing the same for the duration of the freeze order. To make such freeze
order anteceded by a judicial proceeding with notice to the account holder would allow for or lead to
the dissipation of such funds even before the order could be issued.

On the other hand, a bank inquiry order under Section 11 does not necessitate any form of physical
seizure of property of the account holder. What the bank inquiry order authorizes is the examination
of the particular deposits or investments in banking institutions or non-bank financial institutions.
The monetary instruments or property deposited with such banks or financial institutions are not
seized in a physical sense, but are examined on particular details such as the account holder’s record
of deposits and transactions. Unlike the assets subject of the freeze order, the records to be inspected
under a bank inquiry order cannot be physically seized or hidden by the account holder. Said records
are in the possession of the bank and therefore cannot be destroyed at the instance of the account
holder alone as that would require the extraordinary cooperation and devotion of the bank.

Interestingly, petitioner’s memorandum does not attempt to demonstrate before the Court that the
bank inquiry order under Section 11 may be issued ex parte, although the petition itself did devote
some space for that argument. The petition argues that the bank inquiry order is "a special and
peculiar remedy, drastic in its name, and made necessary because of a public necessity… [t]hus, by
its very nature, the application for an order or inquiry must necessarily, be ex parte." This argument
is insufficient justification in light of the clear disinclination of Congress to allow the issuance ex
parte of bank inquiry orders under Section 11, in contrast to the legislature’s clear inclination to
allow the ex parte grant of freeze orders under Section 10.

Without doubt, a requirement that the application for a bank inquiry order be done with notice to
the account holder will alert the latter that there is a plan to inspect his bank account on the belief
that the funds therein are involved in an unlawful activity or money laundering offense. 80 Still, the
account holder so alerted will in fact be unable to do anything to conceal or cleanse his bank account
records of suspicious or anomalous transactions, at least not without the whole-hearted cooperation
of the bank, which inherently has no vested interest to aid the account holder in such manner.

V.

The necessary implication of this finding that Section 11 of the AMLA does not generally authorize
the issuance ex parte of the bank inquiry order would be that such orders cannot be issued unless
notice is given to the owners of the account, allowing them the opportunity to contest the issuance of
the order. Without such a consequence, the legislated distinction between ex parte proceedings under
Section 10 and those which are not ex parte under Section 11 would be lost and rendered useless.
There certainly is fertile ground to contest the issuance of an ex parte order. Section 11 itself requires
that it be established that "there is probable cause that the deposits or investments are related to
unlawful activities," and it obviously is the court which stands as arbiter whether there is indeed
such probable cause. The process of inquiring into the existence of probable cause would involve the
function of determination reposed on the trial court. Determination clearly implies a function of
adjudication on the part of the trial court, and not a mechanical application of a standard pre-
determination by some other body. The word "determination" implies deliberation and is, in normal
legal contemplation, equivalent to "the decision of a court of justice." 81

The court receiving the application for inquiry order cannot simply take the AMLC’s word that
probable cause exists that the deposits or investments are related to an unlawful activity. It will
have to exercise its

own determinative function in order to be convinced of such fact. The account holder would be
certainly capable of contesting such probable cause if given the opportunity to be apprised of the
pending application to inquire into his account; hence a notice requirement would not be an empty
spectacle. It may be so that the process of obtaining the inquiry order may become more cumbersome
or prolonged because of the notice requirement, yet we fail to see any unreasonable burden cast by
such circumstance. After all, as earlier stated, requiring notice to the account holder should not, in
any way, compromise the integrity of the bank records subject of the inquiry which remain in the
possession and control of the bank.

Petitioner argues that a bank inquiry order necessitates a finding of probable cause, a characteristic
similar to a search warrant which is applied to and heard ex parte. We have examined the supposed
analogy between a search warrant and a bank inquiry order yet we remain to be unconvinced by
petitioner.

The Constitution and the Rules of Court prescribe particular requirements attaching to search
warrants that are not imposed by the AMLA with respect to bank inquiry orders. A constitutional
warrant requires that the judge personally examine under oath or affirmation the complainant and
the witnesses he may produce,82 such examination being in the form of searching questions and
answers.83 Those are impositions which the legislative did not specifically prescribe as to the bank
inquiry order under the AMLA, and we cannot find sufficient legal basis to apply them to Section 11
of the AMLA. Simply put, a bank inquiry order is not a search warrant or warrant of arrest as it
contemplates a direct object but not the seizure of persons or property.

Even as the Constitution and the Rules of Court impose a high procedural standard for the
determination of probable cause for the issuance of search warrants which Congress chose not to
prescribe for the bank inquiry order under the AMLA, Congress nonetheless disallowed ex
parte applications for the inquiry order. We can discern that in exchange for these procedural
standards normally applied to search warrants, Congress chose instead to legislate a right to notice
and a right to be heard— characteristics of judicial proceedings which are not ex parte. Absent any
demonstrable constitutional infirmity, there is no reason for us to dispute such legislative policy
choices.

VI.

The Court’s construction of Section 11 of the AMLA is undoubtedly influenced by right to privacy
considerations. If sustained, petitioner’s argument that a bank account may be inspected by the
government following an ex parteproceeding about which the depositor would know nothing would
have significant implications on the right to privacy, a right innately cherished by all
notwithstanding the legally recognized exceptions thereto. The notion that the government could be
so empowered is cause for concern of any individual who values the right to privacy which, after all,
embodies even the right to be "let

alone," the most comprehensive of rights and the right most valued by civilized people. 84

One might assume that the constitutional dimension of the right to privacy, as applied to bank
deposits, warrants our present inquiry. We decline to do so. Admittedly, that question has proved
controversial in American jurisprudence. Notably, the United States Supreme Court in U.S. v.
Miller85 held that there was no legitimate expectation of privacy as to the bank records of a
depositor.86 Moreover, the text of our Constitution has not bothered with the triviality of allocating
specific rights peculiar to bank deposits.

However, sufficient for our purposes, we can assert there is a right to privacy governing bank
accounts in the Philippines, and that such right finds application to the case at bar. The source of
such right is statutory, expressed as it is in R.A. No. 1405 otherwise known as the Bank Secrecy Act
of 1955. The right to privacy is enshrined in Section 2 of that law, to wit:

SECTION 2. All deposits of whatever nature with banks or banking institutions in

the Philippines including investments in bonds issued by the Government of the
Philippines, its political subdivisions and its instrumentalities, are hereby
considered as of an absolutely confidential nature and may not be examined, inquired
or looked into by any person, government official, bureau or office, except upon written
permission of the depositor, or in cases of impeachment, or upon order of a competent court
in cases of bribery or dereliction of duty of public officials, or in cases where the money
deposited or invested is the subject matter of the litigation. (Emphasis supplied)

Because of the Bank Secrecy Act, the confidentiality of bank deposits remains a basic state policy in
the Philippines.87 Subsequent laws, including the AMLA, may have added exceptions to the Bank
Secrecy Act, yet the secrecy of bank deposits still lies as the general rule. It falls within the zones of
privacy recognized by our laws.88The framers of the 1987 Constitution likewise recognized that bank
accounts are not covered by either the right to information89 under Section 7, Article III or under the
requirement of full public disclosure 90 under Section 28, Article II.91 Unless the Bank Secrecy Act is
repealed or

amended, the legal order is obliged to conserve the absolutely confidential nature of Philippine bank
deposits.

Any exception to the rule of absolute confidentiality must be specifically legislated. Section 2 of the
Bank Secrecy Act itself prescribes exceptions whereby these bank accounts may be examined by "any
person, government official, bureau or office"; namely when: (1) upon written permission of the
depositor; (2) in cases of impeachment; (3) the examination of bank accounts is upon order of a
competent court in cases of bribery or dereliction of duty of public officials; and (4) the money
deposited or invested is the subject matter of the litigation. Section 8 of R.A. Act No. 3019, the Anti-
Graft and Corrupt Practices Act, has been recognized by this Court as constituting an additional
exception to the rule of absolute confidentiality, 92 and there have been other similar recognitions as
well.93

The AMLA also provides exceptions to the Bank Secrecy Act. Under Section 11, the AMLC may
inquire into a bank account upon order of any competent court in cases of violation of the AMLA, it
having been established that there is probable cause that the deposits or investments are related to
unlawful activities as defined in Section 3(i) of the law, or a money laundering offense under Section
4 thereof. Further, in instances where there is probable cause that the deposits or investments are
related to kidnapping for ransom,94 certain violations of the Comprehensive Dangerous Drugs Act of
2002,95 hijacking and other violations under R.A. No. 6235, destructive arson and murder, then there
is no need for the AMLC to obtain a court order before it could inquire into such accounts.

It cannot be successfully argued the proceedings relating to the bank inquiry order under Section 11
of the AMLA is a "litigation" encompassed in one of the exceptions to the Bank Secrecy Act which is
when "the money deposited or invested is the subject matter of the litigation." The orientation of the
bank inquiry order is simply to serve as a provisional relief or remedy. As earlier stated, the
application for such does not entail a full-blown trial.

Nevertheless, just because the AMLA establishes additional exceptions to the Bank Secrecy Act it
does not mean that the later law has dispensed with the general principle established in the older
law that "[a]ll deposits of whatever nature with banks or banking institutions in the Philippines x x
x are hereby considered as of an absolutely confidential nature." 96 Indeed, by force of statute, all
bank deposits are absolutely confidential, and that nature is unaltered even by the legislated
exceptions referred to above. There is disfavor towards construing these exceptions in such a manner
that would authorize unlimited discretion on the part of the government or of any party seeking to
enforce those exceptions and inquire into bank deposits. If there are doubts in upholding the
absolutely confidential nature of bank deposits against affirming the authority to inquire into such
accounts, then such doubts must be resolved in favor of the former. Such a stance would persist
unless Congress passes a law reversing the general state policy of preserving the absolutely
confidential nature of Philippine bank accounts.

The presence of this statutory right to privacy addresses at least one of the arguments raised by
petitioner, that Lilia Cheng had no personality to assail the inquiry orders before the Court of
Appeals because she was not the subject of said orders. AMLC Resolution No. 75, which served as
the basis in the successful application for the Makati inquiry order, expressly adverts to Citibank
Account No. 88576248 "owned by Cheng Yong and/or Lilia G. Cheng with Citibank N.A.," 97 whereas
Lilia Cheng’s petition before the Court of Appeals is accompanied by a certification from Metrobank
that Account Nos. 300852436-0 and 700149801-7, both of which are among the subjects of the Manila
inquiry order, are accounts in the name of "Yong Cheng or Lilia Cheng." 98 Petitioner does not
specifically deny that Lilia Cheng holds rights of ownership over the three said accounts, laying focus
instead on the fact that she was not named as a subject of either the Makati or Manila RTC inquiry
orders. We are reasonably convinced that Lilia Cheng has sufficiently demonstrated her joint
ownership of the three accounts, and such conclusion leads us to acknowledge that she has the
standing to assail via certiorari the inquiry orders authorizing the examination of her bank accounts
as the orders interfere with her statutory right to maintain the secrecy of said accounts.

While petitioner would premise that the inquiry into Lilia Cheng’s accounts finds root in Section 11
of the AMLA, it cannot be denied that the authority to inquire under Section 11 is only exceptional in
character, contrary as it is to the general rule preserving the secrecy of bank deposits. Even though
she may not have been the subject of the inquiry orders, her bank accounts nevertheless were, and
she thus has the standing to vindicate the right to secrecy that attaches to said accounts and their
owners. This statutory right to privacy will not prevent the courts from authorizing the inquiry
anyway upon the fulfillment of the requirements set forth under Section 11 of the AMLA or Section 2
of the Bank Secrecy Act; at the same time, the owner of the accounts have the right to challenge
whether the requirements were indeed complied with.

VII.

There is a final point of concern which needs to be addressed. Lilia Cheng argues that the AMLA,
being a substantive penal statute, has no retroactive effect and the bank inquiry order could not
apply to deposits or investments opened prior to the effectivity of Rep. Act No. 9164, or on 17 October
2001. Thus, she concludes, her subject bank accounts, opened between 1989 to 1990, could not be the
subject of the bank inquiry order lest there be a violation of the constitutional prohibition against ex
post facto laws.

No ex post facto law may be enacted,99 and no law may be construed in such fashion as to permit a
criminal prosecution offensive to the ex post facto clause. As applied to the AMLA, it is plain that no
person may be prosecuted under the penal provisions of the AMLA for acts committed prior to the
enactment of the law on 17 October 2001. As much was understood by the lawmakers since they
deliberated upon the AMLA, and indeed there is no serious dispute on that point.

Does the proscription against ex post facto laws apply to the interpretation of Section 11, a provision
which does not provide for a penal sanction but which merely authorizes the inspection of suspect
accounts and deposits? The answer is in the affirmative. In this jurisdiction, we have defined an ex
post facto law as one which either:

(1) makes criminal an act done before the passage of the law and which was innocent when
done, and punishes such an act;

(2) aggravates a crime, or makes it greater than it was, when committed;

(3) changes the punishment and inflicts a greater punishment than the law annexed to the
crime when committed;

(4) alters the legal rules of evidence, and authorizes conviction upon less or different
testimony than the law required at the time of the commission of the offense;

(5) assuming to regulate civil rights and remedies only, in effect imposes penalty or
deprivation of a right for something which when done was lawful; and

(6) deprives a person accused of a crime of some lawful protection to which he has
become entitled, such as the protection of a former conviction or acquittal, or a
proclamation of amnesty.(Emphasis supplied)100

Prior to the enactment of the AMLA, the fact that bank accounts or deposits were involved in
activities later on enumerated in Section 3 of the law did not, by itself, remove such accounts from
the shelter of absolute confidentiality. Prior to the AMLA, in order that bank accounts could be
examined, there was need to secure either the written permission of the depositor or a court order
authorizing such examination, assuming that they were involved in cases of bribery or dereliction of
duty of public officials, or in a case where the money deposited or invested was itself the subject
matter of the litigation. The passage of the AMLA stripped another layer off the rule on absolute
confidentiality that provided a measure of lawful protection to the account holder. For that reason,
the application of the bank inquiry order as a means of inquiring into records of transactions entered
into prior to the passage of the AMLA would be constitutionally infirm, offensive as it is to the ex
post facto clause.

Still, we must note that the position submitted by Lilia Cheng is much broader than what we are
willing to affirm. She argues that the proscription against ex post facto laws goes as far as to prohibit
any inquiry into deposits or investments included in bank accounts opened prior to the effectivity of
the AMLA even if the suspect transactions were entered into when the law had already taken effect.
The Court recognizes that if this argument were to be affirmed, it would create a horrible loophole in
the AMLA that would in turn supply the means to fearlessly engage in money laundering in the
Philippines; all that the criminal has to do is to make sure that the money laundering activity is
facilitated through a bank account opened prior to 2001. Lilia Cheng admits that "actual money
launderers could utilize the ex post facto provision of the Constitution as a shield" but that the
remedy lay with Congress to amend the law. We can hardly presume that Congress intended to
enact a self-defeating law in the first place, and the courts are inhibited from such a construction by
the cardinal rule that "a law should be interpreted with a view to upholding rather than destroying
it."101

Besides, nowhere in the legislative record cited by Lilia Cheng does it appear that there was an
unequivocal intent to exempt from the bank inquiry order all bank accounts opened prior to the
passage of the AMLA. There is a cited exchange between Representatives Ronaldo Zamora and
Jaime Lopez where the latter confirmed to the former that "deposits are supposed to be exempted
from scrutiny or monitoring if they are already in place as of the time the law is enacted." 102 That
statement does indicate that transactions already in place when the AMLA was passed are indeed
exempt from scrutiny through a bank inquiry order, but it cannot yield any interpretation that
records of transactions undertaken after the enactment of the AMLA are similarly exempt. Due to
the absence of cited authority from the legislative record that unqualifiedly supports respondent
Lilia Cheng’s thesis, there is no cause for us to sustain her interpretation of the AMLA, fatal as it is
to the anima of that law.

IX.

We are well aware that Lilia Cheng’s petition presently pending before the Court of Appeals likewise
assails the validity of the subject bank inquiry orders and precisely seeks the annulment of said
orders. Our current declarations may indeed have the effect of preempting that0 petition. Still, in
order for this Court to rule on the petition at bar which insists on the enforceability of the said bank
inquiry orders, it is necessary for us to consider and rule on the same question which after all is a
pure question of law.

WHEREFORE, the PETITION is DISMISSED. No pronouncement as to costs.

SO ORDERED.

Republic of the Philippines v. Glasgow Credit and Collection Services Inc.

This is a petition for review1 of the order2 dated October 27, 2005 of the Regional Trial Court (RTC)
of Manila, Branch 47, dismissing the complaint for forfeiture 3 filed by the Republic of the
Philippines, represented by the Anti-Money Laundering Council (AMLC) against respondents
Glasgow Credit and Collection Services, Inc. (Glasgow) and Citystate Savings Bank, Inc. (CSBI).

On July 18, 2003, the Republic filed a complaint in the RTC Manila for civil forfeiture of assets (with
urgent plea for issuance of temporary restraining order [TRO] and/or writ of preliminary injunction)
against the bank deposits in account number CA-005-10-000121-5 maintained by Glasgow in CSBI.
The case, filed pursuant to RA 9160 (the Anti-Money Laundering Act of 2001), as amended, was
docketed as Civil Case No. 03-107319.

Acting on the Republic’s urgent plea for the issuance of a TRO, the executive judge4 of RTC Manila
issued a 72-hour TRO dated July 21, 2003. The case was thereafter raffled to Branch 47 and the
hearing on the application for issuance of a writ of preliminary injunction was set on August 4, 2003.
After hearing, the trial court (through then Presiding Judge Marivic T. Balisi-Umali) issued an order
granting the issuance of a writ of preliminary injunction. The injunctive writ was issued on August
8, 2003.

Meanwhile, summons to Glasgow was returned "unserved" as it could no longer be found at its last
known address.

On October 8, 2003, the Republic filed a verified omnibus motion for (a) issuance of alias summons
and (b) leave of court to serve summons by publication. In an order dated October 15, 2003, the trial
court directed the issuance of alias summons. However, no mention was made of the motion for leave
of court to serve summons by publication.

In an order dated January 30, 2004, the trial court archived the case allegedly for failure of the
Republic to serve the alias summons. The Republic filed an ex parte omnibus motion to (a) reinstate
the case and (b) resolve its pending motion for leave of court to serve summons by publication.

In an order dated May 31, 2004, the trial court ordered the reinstatement of the case and directed
the Republic to serve the alias summons on Glasgow and CSBI within 15 days. However, it did not
resolve the Republic’s motion for leave of court to serve summons by publication declaring:

Until and unless a return is made on the alias summons, any action on [the Republic’s]
motion for leave of court to serve summons by publication would be untenable if not
premature.

On July 12, 2004, the Republic (through the Office of the Solicitor General [OSG]) received a copy of
the sheriff’s return dated June 30, 2004 stating that the alias summons was returned "unserved" as
Glasgow was no longer holding office at the given address since July 2002 and left no forwarding
address.

Meanwhile, the Republic’s motion for leave of court to serve summons by publication remained
unresolved. Thus, on August 11, 2005, the Republic filed a manifestation and ex parte motion to
resolve its motion for leave of court to serve summons by publication.

On August 12, 2005, the OSG received a copy of Glasgow’s "Motion to Dismiss (By Way of Special
Appearance)" dated August 11, 2005. It alleged that (1) the court had no jurisdiction over its person
as summons had not yet been served on it; (2) the complaint was premature and stated no cause of
action as there was still no conviction for estafa or other criminal violations implicating Glasgow and
(3) there was failure to prosecute on the part of the Republic.

The Republic opposed Glasgow’s motion to dismiss. It contended that its suit was an action quasi in
rem where jurisdiction over the person of the defendant was not a prerequisite to confer jurisdiction
on the court. It asserted that prior conviction for unlawful activity was not a precondition to the
filing of a civil forfeiture case and that its complaint alleged ultimate facts sufficient to establish a
cause of action. It denied that it failed to prosecute the case.

On October 27, 2005, the trial court issued the assailed order. It dismissed the case on the following
grounds: (1) improper venue as it should have been filed in the RTC of Pasig where CSBI, the
depository bank of the account sought to be forfeited, was located; (2) insufficiency of the complaint
in form and substance and (3) failure to prosecute. It lifted the writ of preliminary injunction and
directed CSBI to release to Glasgow or its authorized representative the funds in CA-005-10-000121-
5.
Raising questions of law, the Republic filed this petition.

On November 23, 2005, this Court issued a TRO restraining Glasgow and CSBI, their agents,
representatives and/or persons acting upon their orders from implementing the assailed October 27,
2005 order. It restrained Glasgow from removing, dissipating or disposing of the funds in account no.
CA-005-10-000121-5 and CSBI from allowing any transaction on the said account.

The petition essentially presents the following issue: whether the complaint for civil forfeiture was
correctly dismissed on grounds of improper venue, insufficiency in form and substance and failure to
prosecute.

The Court agrees with the Republic.

The Complaint Was Filed In The Proper Venue

In its assailed order, the trial court cited the grounds raised by Glasgow in support of its motion to
dismiss:

1. That this [c]ourt has no jurisdiction over the person of Glasgow considering that no
[s]ummons has been served upon it, and it has not entered its appearance voluntarily;

2. That the [c]omplaint for forfeiture is premature because of the absence of a prior finding
by any tribunal that Glasgow was engaged in unlawful activity: [i]n connection therewith[,]
Glasgow argues that the [c]omplaint states no cause of action; and

3. That there is failure to prosecute, in that, up to now, summons has yet to be served upon
Glasgow.5

But inasmuch as Glasgow never questioned the venue of the Republic’s complaint for civil forfeiture
against it, how could the trial court have dismissed the complaint for improper venue? In Dacoycoy v.
Intermediate Appellate Court6 (reiterated in Rudolf Lietz Holdings, Inc. v. Registry of Deeds of
Parañaque City),7 this Court ruled:

The motu proprio dismissal of petitioner’s complaint by [the] trial court on the ground of
improper venue is plain error…. (emphasis supplied)

At any rate, the trial court was a proper venue.

On November 15, 2005, this Court issued A.M. No. 05-11-04-SC, the Rule of Procedure in Cases of
Civil Forfeiture, Asset Preservation, and Freezing of Monetary Instrument, Property, or Proceeds
Representing, Involving, or Relating to an Unlawful Activity or Money Laundering Offense under RA
9160, as amended (Rule of Procedure in Cases of Civil Forfeiture). The order dismissing the
Republic’s complaint for civil forfeiture of Glasgow’s account in CSBI has not yet attained finality on
account of the pendency of this appeal. Thus, the Rule of Procedure in Cases of Civil Forfeiture
applies to the Republic’s complaint.8 Moreover, Glasgow itself judicially admitted that the Rule of
Procedure in Cases of Civil Forfeiture is "applicable to the instant case."9

Section 3, Title II (Civil Forfeiture in the Regional Trial Court) of the Rule of Procedure in Cases of
Civil Forfeiture provides:
 Sec. 3. Venue of cases cognizable by the regional trial court. – A petition for civil forfeiture
shall be filed in any regional trial court of the judicial region where the monetary
instrument, property or proceeds representing, involving, or relating to an
unlawful activity or to a money laundering offense are located; provided,
however, that where all or any portion of the monetary instrument, property or proceeds is
located outside the Philippines, the petition may be filed in the regional trial court in Manila
or of the judicial region where any portion of the monetary instrument, property, or proceeds
is located, at the option of the petitioner. (emphasis supplied)

Under Section 3, Title II of the Rule of Procedure in Cases of Civil Forfeiture, therefore, the venue of
civil forfeiture cases is any RTC of the judicial region where the monetary instrument, property or
proceeds representing, involving, or relating to an unlawful activity or to a money laundering offense
are located. Pasig City, where the account sought to be forfeited in this case is situated, is within the
National Capital Judicial Region (NCJR). Clearly, the complaint for civil forfeiture of the account
may be filed in any RTC of the NCJR. Since the RTC Manila is one of the RTCs of the NCJR, 10 it was
a proper venue of the Republic’s complaint for civil forfeiture of Glasgow’s account.

The Complaint Was Sufficient In Form And Substance

In the assailed order, the trial court evaluated the Republic’s complaint to determine its sufficiency
in form and substance:

At the outset, this [c]ourt, before it proceeds, takes the opportunity to examine the
[c]omplaint and determine whether it is sufficient in form and substance.

Before this [c]ourt is a [c]omplaint for Civil Forfeiture of Assets filed by the [AMLC],
represented by the Office of the Solicitor General[,] against Glasgow and [CSBI] as necessary
party. The [c]omplaint principally alleges the following:

(a) Glasgow is a corporation existing under the laws of the Philippines, with principal office
address at Unit 703, 7th Floor, Citystate Center [Building], No. 709 Shaw Boulevard[,] Pasig
City;

(b) [CSBI] is a corporation existing under the laws of the Philippines, with principal office at
Citystate Center Building, No. 709 Shaw Boulevard, Pasig City;

(c) Glasgow has funds in the amount of P21,301,430.28 deposited with [CSBI], under CA 005-
10-000121-5;

(d) As events have proved, aforestated bank account is related to the unlawful activities of
Estafa and violation of Securities Regulation Code;

(e) The deposit has been subject of Suspicious Transaction Reports;

(f) After appropriate investigation, the AMLC issued Resolutions No. 094 (dated July 10,
2002), 096 (dated July 12, 2002), 101 (dated July 23, 2002), and 108 (dated August 2, 2002),
directing the issuance of freeze orders against the bank accounts of Glasgow;

(g) Pursuant to said AMLC Resolutions, Freeze Orders Nos. 008-010, 011 and 013 were
issued on different dates, addressed to the concerned banks;
 (h) The facts and circumstances plainly showing that defendant Glasgow’s bank account and
deposit are related to the unlawful activities of Estafa and violation of Securities Regulation
Code, as well as to a money laundering offense [which] [has] been summarized by the AMLC
in its Resolution No. 094; and

(i) Because defendant Glasgow’s bank account and deposits are related to the unlawful
activities of Estafa and violation of Securities Regulation Code, as well as [to] money
laundering offense as aforestated, and being the subject of covered transaction reports and
eventual freeze orders, the same should properly be forfeited in favor of the government in
accordance with Section 12, R.A. 9160, as amended.11

In a motion to dismiss for failure to state a cause of action, the focus is on the sufficiency, not the
veracity, of the material allegations.12 The determination is confined to the four corners of the
complaint and nowhere else.13

In a motion to dismiss a complaint based on lack of cause of action, the question submitted to
the court for determination is the sufficiency of the allegations made in the complaint to
constitute a cause of action and not whether those allegations of fact are true, for said motion
must hypothetically admit the truth of the facts alleged in the complaint.

The test of the sufficiency of the facts alleged in the complaint is whether or not,
admitting the facts alleged, the court could render a valid judgment upon the same
in accordance with the prayer of the complaint.14 (emphasis ours)

In this connection, Section 4, Title II of the Rule of Procedure in Cases of Civil Forfeiture provides:

Sec. 4. Contents of the petition for civil forfeiture. - The petition for civil forfeiture shall be
verified and contain the following allegations:

(a) The name and address of the respondent;

(b) A description with reasonable particularity of the monetary instrument, property,

or proceeds, and their location; and

(c) The acts or omissions prohibited by and the specific provisions of the Anti-Money
Laundering Act, as amended, which are alleged to be the grounds relied upon for the
forfeiture of the monetary instrument, property, or proceeds; and

[(d)] The reliefs prayed for.

Here, the verified complaint of the Republic contained the following allegations:

(a) the name and address of the primary defendant therein, Glasgow; 15

(b) a description of the proceeds of Glasgow’s unlawful activities with particularity, as well as
the location thereof, account no. CA-005-10-000121-5 in the amount of P21,301,430.28
maintained with CSBI;

(c) the acts prohibited by and the specific provisions of RA 9160, as amended, constituting
the grounds for the forfeiture of the said proceeds. In particular, suspicious transaction
reports showed that Glasgow engaged in unlawful activities of estafa and violation of the
 Securities Regulation Code (under Section 3(i)(9) and (13), RA 9160, as amended); the
proceeds of the unlawful activities were transacted and deposited with CSBI in account no.
CA-005-10-000121-5 thereby making them appear to have originated from legitimate
sources; as such, Glasgow engaged in money laundering (under Section 4, RA 9160, as
amended); and the AMLC subjected the account to freeze order and

(d) the reliefs prayed for, namely, the issuance of a TRO or writ of preliminary injunction and
the forfeiture of the account in favor of the government as well as other reliefs just and
equitable under the premises.

The form and substance of the Republic’s complaint substantially conformed with Section 4, Title II
of the Rule of Procedure in Cases of Civil Forfeiture.

Moreover, Section 12(a) of RA 9160, as amended, provides:

SEC. 12. Forfeiture Provisions. –

(a) Civil Forfeiture. – When there is a covered transaction report made, and the court has, in
a petition filed for the purpose ordered seizure of any monetary instrument or property, in
whole or in part, directly or indirectly, related to said report, the Revised Rules of Court on
civil forfeiture shall apply.

In relation thereto, Rule 12.2 of the Revised Implementing Rules and Regulations of RA 9160, as
amended, states:

RULE 12
Forfeiture Provisions

xxx xxx xxx

Rule 12.2. When Civil Forfeiture May be Applied. – When there is a SUSPICIOUS
TRANSACTION REPORT OR A COVERED TRANSACTION REPORT DEEMED
SUSPICIOUS AFTER INVESTIGATION BY THE AMLC, and the court has, in a petition
filed for the purpose, ordered the seizure of any monetary instrument or property, in whole
or in part, directly or indirectly, related to said report, the Revised Rules of Court on civil
forfeiture shall apply.

RA 9160, as amended, and its implementing rules and regulations lay down two conditions when
applying for civil forfeiture:

(1) when there is a suspicious transaction report or a covered transaction report deemed
suspicious after investigation by the AMLC and

(2) the court has, in a petition filed for the purpose, ordered the seizure of any monetary
instrument or property, in whole or in part, directly or indirectly, related to said report.

It is the preliminary seizure of the property in question which brings it within the reach of the
judicial process.16 It is actually within the court’s possession when it is submitted to the process of
the court.17 The injunctive writ issued on August 8, 2003 removed account no. CA-005-10-000121-5
from the effective control of either Glasgow or CSBI or their representatives or agents and subjected
it to the process of the court.
Since account no. CA-005-10-000121-5 of Glasgow in CSBI was (1) covered by several suspicious
transaction reports and (2) placed under the control of the trial court upon the issuance of the writ of
preliminary injunction, the conditions provided in Section 12(a) of RA 9160, as amended, were
satisfied. Hence, the Republic, represented by the AMLC, properly instituted the complaint for civil
forfeiture.

Whether or not there is truth in the allegation that account no. CA-005-10-000121-5 contains the
proceeds of unlawful activities is an evidentiary matter that may be proven during trial. The
complaint, however, did not even have to show or allege that Glasgow had been implicated in a
conviction for, or the commission of, the unlawful activities of estafa and violation of the Securities
Regulation Code.

A criminal conviction for an unlawful activity is not a prerequisite for the institution of a civil
forfeiture proceeding. Stated otherwise, a finding of guilt for an unlawful activity is not an essential
element of civil forfeiture.

Section 6 of RA 9160, as amended, provides:

SEC. 6. Prosecution of Money Laundering. –

(a) Any person may be charged with and convicted of both the offense of money laundering
and the unlawful activity as herein defined.

(b) Any proceeding relating to the unlawful activity shall be given precedence over the
prosecution of any offense or violation under this Act without prejudice to the freezing
and other remedies provided. (emphasis supplied)

Rule 6.1 of the Revised Implementing Rules and Regulations of RA 9160, as amended, states:

Rule 6.1. Prosecution of Money Laundering –

(a) Any person may be charged with and convicted of both the offense of money laundering
and the unlawful activity as defined under Rule 3(i) of the AMLA.

(b) Any proceeding relating to the unlawful activity shall be given precedence over the
prosecution of any offense or violation under the AMLA without prejudice to
the application ex-parte by the AMLC to the Court of Appeals for a freeze order with respect
to the monetary instrument or property involved therein and resort to other remedies
provided under the AMLA, the Rules of Court and other pertinent laws and rules.
(emphasis supplied)

Finally, Section 27 of the Rule of Procedure in Cases of Civil Forfeiture provides:

Sec. 27. No prior charge, pendency or conviction necessary. – No prior criminal charge,
pendency of or conviction for an unlawful activity or money laundering offense is
necessary for the commencementor the resolution of a petition for civil forfeiture.
(emphasis supplied)

Thus, regardless of the absence, pendency or outcome of a criminal prosecution for the unlawful
activity or for money laundering, an action for civil forfeiture may be separately and independently
prosecuted and resolved.
There Was No Failure To Prosecute

The trial court faulted the Republic for its alleged failure to prosecute the case. Nothing could be
more erroneous.

Immediately after the complaint was filed, the trial court ordered its deputy sheriff/process server to
serve summons and notice of the hearing on the application for issuance of TRO and/or writ of
preliminary injunction. The subpoena to Glasgow was, however, returned unserved as Glasgow
"could no longer be found at its given address" and had moved out of the building since August 1,
2002.

Meanwhile, after due hearing, the trial court issued a writ of preliminary injunction enjoining
Glasgow from removing, dissipating or disposing of the subject bank deposits and CSBI from
allowing any transaction on, withdrawal, transfer, removal, dissipation or disposition thereof.

As the summons on Glasgow was returned "unserved," and considering that its whereabouts could
not be ascertained despite diligent inquiry, the Republic filed a verified omnibus motion for (a)
issuance of alias summons and (b) leave of court to serve summons by publication on October 8,
2003. While the trial court issued an aliassummons in its order dated October 15, 2003, it kept quiet
on the prayer for leave of court to serve summons by publication.

Subsequently, in an order dated January 30, 2004, the trial court archived the case for failure of the
Republic to cause the service of alias summons. The Republic filed an ex parte omnibus motion to (a)
reinstate the case and (b) resolve its pending motion for leave of court to serve summons by
publication.

In an order dated May 31, 2004, the trial court ordered the reinstatement of the case and directed
the Republic to cause the service of the alias summons on Glasgow and CSBI within 15 days.
However, it deferred its action on the Republic’s motion for leave of court to serve summons by
publication until a return was made on the aliassummons.

Meanwhile, the Republic continued to exert efforts to obtain information from other government
agencies on the whereabouts or current status of respondent Glasgow if only to save on expenses of
publication of summons. Its efforts, however, proved futile. The records on file with the Securities
and Exchange Commission provided no information. Other inquiries yielded negative results.

On July 12, 2004, the Republic received a copy of the sheriff’s return dated June 30, 2004 stating
that the aliassummons had been returned "unserved" as Glasgow was no longer holding office at the
given address since July 2002 and left no forwarding address. Still, no action was taken by the trial
court on the Republic’s motion for leave of court to serve summons by publication. Thus, on August
11, 2005, the Republic filed a manifestation and ex parte motion to resolve its motion for leave of
court to serve summons by publication.

It was at that point that Glasgow filed a motion to dismiss by way of special appearance which the
Republic vigorously opposed. Strangely, to say the least, the trial court issued the assailed order
granting Glasgow’s motion.

Given these circumstances, how could the Republic be faulted for failure to prosecute the complaint
for civil forfeiture? While there was admittedly a delay in the proceeding, it could not be entirely or
primarily ascribed to the Republic. That Glasgow’s whereabouts could not be ascertained was not
only beyond the Republic’s control, it was also attributable to Glasgow which left its principal office
address without informing the Securities and Exchange Commission or any official regulatory body
(like the Bureau of Internal Revenue or the Department of Trade and Industry) of its new address.
Moreover, as early as October 8, 2003, the Republic was already seeking leave of court to serve
summons by publication.

In Marahay v. Melicor,18 this Court ruled:

While a court can dismiss a case on the ground of non prosequitur, the real test for the
exercise of such power is whether, under the circumstances, plaintiff is chargeable with want
of due diligence in failing to proceed with reasonable promptitude. In the absence of a
pattern or scheme to delay the disposition of the case or a wanton failure to
observe the mandatory requirement of the rules on the part of the plaintiff, as in
the case at bar, courts should decide to dispense with rather than wield their
authority to dismiss. (emphasis supplied)

We see no pattern or scheme on the part of the Republic to delay the disposition of the case or a
wanton failure to observe the mandatory requirement of the rules. The trial court should not have so
eagerly wielded its power to dismiss the Republic’s complaint.

Service Of Summons May Be By Publication

In Republic v. Sandiganbayan,19 this Court declared that the rule is settled that forfeiture
proceedings are actions in rem. While that case involved forfeiture proceedings under RA 1379, the
same principle applies in cases for civil forfeiture under RA 9160, as amended, since both cases do
not terminate in the imposition of a penalty but merely in the forfeiture of the properties either
acquired illegally or related to unlawful activities in favor of the State.

As an action in rem, it is a proceeding against the thing itself instead of against the person. 20 In
actions in rem or quasi in rem, jurisdiction over the person of the defendant is not a prerequisite to
conferring jurisdiction on the court, provided that the court acquires jurisdiction over
the res.21 Nonetheless, summons must be served upon the defendant in order to satisfy the
requirements of due process.22 For this purpose, service may be made by publication as such mode of
service is allowed in actions in rem and quasi in rem.23

In this connection, Section 8, Title II of the Rule of Procedure in Cases of Civil Forfeiture provides:

Sec. 8. Notice and manner of service. - (a) The respondent shall be given notice of the petition in the
same manner as service of summons under Rule 14 of the Rules of Court and the following rules:

1. The notice shall be served on respondent personally, or by any other means prescribed in
Rule 14 of the Rules of Court;

2. The notice shall contain: (i) the title of the case; (ii) the docket number; (iii) the cause of
action; and (iv) the relief prayed for; and

3. The notice shall likewise contain a proviso that, if no comment or opposition is filed within
the reglementary period, the court shall hear the case ex parte and render such judgment as
may be warranted by the facts alleged in the petition and its supporting evidence.

(b) Where the respondent is designated as an unknown owner or whenever his

whereabouts are unknown and cannot be ascertained by diligent inquiry,
service may, by leave of court, be effected upon him by publication of the
 notice of the petition in a newspaper of general circulation in such places
and for such time as the court may order. In the event that the cost of
publication exceeds the value or amount of the property to be forfeited by ten percent,
publication shall not be required. (emphasis supplied)

WHEREFORE, the petition is hereby GRANTED. The October 27, 2005 order of the Regional Trial
Court of Manila, Branch 47, in Civil Case No. 03-107319 is SET ASIDE. The August 11, 2005
motion to dismiss of Glasgow Credit and Collection Services, Inc. is DENIED. And the complaint for
forfeiture of the Republic of the Philippines, represented by the Anti-Money Laundering Council,
is REINSTATED.

The case is hereby REMANDED to the Regional Trial Court of Manila, Branch 47 which shall
forthwith proceed with the case pursuant to the provisions of A.M. No. 05-11-04-SC. Pending final
determination of the case, the November 23, 2005 temporary restraining order issued by this Court
is hereby MAINTAINED.

SO ORDERED.

II.A.2. Foreign Investment Negative List

Hahn v. CA

This is a petition for review of the decision 1 of the Court of Appeals dismissing a complaint for
specific performance which petitioner had filed against private respondent on the ground that the
Regional Trial Court of Quezon City did not acquire jurisdiction over private respondent, a
nonresident foreign corporation, and of the appellate court's order denying petitioner's motion for
reconsideration.

The following are the facts:

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

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

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

WHEREAS, the ASSIGNOR has agreed to transfer and consequently record said transfer of
the said BMW trademark and device in favor of the ASSIGNEE herein with the Philippines
Patent Office;
 NOW THEREFORE, in view of the foregoing and in consideration of the stipulations
hereunder stated, the ASSIGNOR hereby affirms the said assignment and transfer in favor
of the ASSIGNEE under the following terms and conditions:

1. The ASSIGNEE shall take appropriate steps against any user other than ASSIGNOR or
infringer of the BMW trademark in the Philippines; for such purpose, the ASSIGNOR shall
inform the ASSIGNEE immediately of any such use or infringement of the said trademark
which comes to his knowledge and upon such information the ASSIGNOR shall
automatically act as Attorney-In-Fact of the ASSIGNEE for such case, with full power,
authority and responsibility to prosecute unilaterally or in concert with ASSIGNEE, any
such infringer of the subject mark and for purposes hereof the ASSIGNOR is hereby named
and constituted as ASSIGNEE's Attorney-In-Fact, but any such suit without ASSIGNEE's
consent will exclusively be the responsibility and for the account of the ASSIGNOR,

2. That the ASSIGNOR and the ASSIGNEE shall continue business relations as has been
usual in the past without a formal contract, and for that purpose, the dealership of
ASSIGNOR shall cover the ASSIGNEE's complete production program with the only
limitation that, for the present, in view of ASSIGNEE's limited production, the latter shall
not be able to supply automobiles to ASSIGNOR.

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

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

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

Hahn found the proposal unacceptable. On May 14, 1993, he filed a complaint for specific
performance and damages against BMW to compel it to continue the exclusive dealership. Later he
filed an amended complaint to include an application for temporary restraining order and for writs of
preliminary, mandatory and prohibitory injunction to enjoin BMW from terminating his exclusive
dealership. Hahn's amended complaint alleged in pertinent parts:
 2. Defendant [BMW] is a foreign corporation doing business in the Philippines with principal
offices at Munich, Germany. It may be served with summons and other court processes
through the Secretary of the Department of Trade and Industry of the Philippines. . . .

xxx xxx xxx

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

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

xxx xxx xxx

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

xxx xxx xxx

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

xxx xxx xxx

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

The case was docketed as Civil Case No. Q-93-15933 and raffled to Branch 104 of the Quezon City
Regional Trial Court, which on June 14, 1993 issued a temporary restraining order. Summons and
copies of the complaint and amended complaint were thereafter served on the private respondent
through the Department of Trade and Industry, pursuant to Rule 14, §14 of the Rules of Court. The
order, summons and copies of the complaint and amended complaint were later sent by the DTI to
BMW via registered mail on June 15, 1993 5 and received by the latter on June 24, 1993.

On June 17, 1993, without proof of service on BMW, the hearing on the application for the writ of
preliminary injunction proceeded ex parte, with petitioner Hahn testifying. On June 30, 1993, the
trial court issued an order granting the writ of preliminary injunction upon the filing of a bond of
P100,000.00. On July 13, 1993, following the posting of the required bond, a writ of preliminary
injunction was issued.
On July 1, 1993, BMW moved to dismiss the case, contending that the trial court did not acquire
jurisdiction over it through the service of summons on the Department of Trade and Industry,
because it (BMW) was a foreign corporation and it was not doing business in the Philippines. It
contended that the execution of the Deed of Assignment was an isolated transaction; that Hahn was
not its agent because the latter undertook to assemble and sell BMW cars and products without the
participation of BMW and sold other products; and that Hahn was an indentor or middleman
transacting business in his own name and for his own account.

Petitioner Alfred Hahn opposed the motion. He argued that BMW was doing business in the
Philippines through him as its agent, as shown by the fact that BMW invoices and order forms were
used to document his transactions; that he gave warranties as exclusive BMW dealer; that BMW
officials periodically inspected standards of service rendered by him; and that he was described in
service booklets and international publications of BMW as a "BMW Importer" or "BMW Trading
Company" in the Philippines.

The trial court 6 deferred resolution of the motion to dismiss until after trial on the merits for the
reason that the grounds advanced by BMW in its motion did not seem to be indubitable.

Without seeking reconsideration of the aforementioned order, BMW filed a petition

for certiorari with the Court of Appeals alleging that:

I. THE RESPONDENT JUDGE ACTED WITH UNDUE HASTE OR OTHERWISE

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

II. THE RESPONDENT JUDGE PATENTLY ERRED IN DEFERRING RESOLUTION OF

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

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

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

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

xxx xxx xxx

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

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

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

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

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

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

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

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

(f) "Doing business" shall be any act or combination of acts, enumerated in Article 44 of the
Code. In particular, "doing business" includes:
 (1) . . . A foreign firm which does business through middlemen acting in their own names,
such as indentors, commercial brokers or commission merchants, shall not be deemed doing
business in the Philippines. But such indentors, commercial brokers or commission
merchants shall be the ones deemed to be doing business in the Philippines.

The question is whether petitioner Alfred Hahn is the agent or distributor in the Philippines of
private respondent BMW. If he is, BMW may be considered doing business in the Philippines and
the trial court acquired jurisdiction over it (BMW) by virtue of the service of summons on the
Department of Trade and Industry. Otherwise, if Hahn is not the agent of BMW but an independent
dealer, albeit of BMW cars and products, BMW, a foreign corporation, is not considered doing
business in the Philippines within the meaning of the Foreign Investments Act of 1991 and the IRR,
and the trial court did not acquire jurisdiction over it (BMW).

The Court of Appeals held that petitioner Alfred Hahn acted in his own name and for his own
account and not as agent or distributor in the Philippines of BMW on the ground that "he alone had
contacts with individuals or entities interested in acquiring BMW vehicles. Independence
characterizes Hahn's undertakings, for which reason he is to be considered, under governing
statutes, as doing business." (p. 13) In support of this conclusion, the appellate court cited the
following allegations in Hahn's amended complaint:

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

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

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

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

9.5. It is Hahn who picks up the vehicles from the Philippine ports, for purposes of
conducting pre-delivery inspections. Thereafter, he delivers the vehicles to the purchasers.
 9.6. As soon as BMW invoices the vehicle ordered, Hahn is credited with a commission of
fourteen percent (14%) of the full purchase price thereof, and as soon as he confirms in
writing that the vehicles have been registered in the Philippines and have been serviced by
him, he will receive an additional three percent (3%) of the full purchase prices as
commission.

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

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

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

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

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

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

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

The Court of Appeals also found that petitioner Alfred Hahn dealt in other products, and not
exclusively in BMW products, and, on this basis, ruled that Hahn was not an agent of BMW. (p. 14)
This finding is based entirely on allegations of BMW in its motion to dismiss filed in the trial court
and in its petition for certiorari before the Court of Appeals. 14 But this allegation was denied by
Hahn 15 and therefore the Court of Appeals should not have cited it as if it were the fact.

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

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

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

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

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

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

SO ORDERED.
Gamboa v. Teves (1)

The Case

This is an original petition for prohibition, injunction, declaratory relief and declaration of nullity of
the sale of shares of stock of Philippine Telecommunications Investment Corporation (PTIC) by the
government of the Republic of the Philippines to Metro Pacific Assets Holdings, Inc. (MPAH), an
affiliate of First Pacific Company Limited (First Pacific).

The Antecedents

The facts, according to petitioner Wilson P. Gamboa, a stockholder of Philippine Long Distance
Telephone Company (PLDT), are as follows:1

On 28 November 1928, the Philippine Legislature enacted Act No. 3436 which granted PLDT a
franchise and the right to engage in telecommunications business. In 1969, General Telephone and
Electronics Corporation (GTE), an American company and a major PLDT stockholder, sold 26
percent of the outstanding common shares of PLDT to PTIC. In 1977, Prime Holdings, Inc. (PHI) was
incorporated by several persons, including Roland Gapud and Jose Campos, Jr. Subsequently, PHI
became the owner of 111,415 shares of stock of PTIC by virtue of three Deeds of Assignment
executed by PTIC stockholders Ramon Cojuangco and Luis Tirso Rivilla. In 1986, the 111,415 shares
of stock of PTIC held by PHI were sequestered by the Presidential Commission on Good Government
(PCGG). The 111,415 PTIC shares, which represent about 46.125 percent of the outstanding capital
stock of PTIC, were later declared by this Court to be owned by the Republic of the Philippines. 2

In 1999, First Pacific, a Bermuda-registered, Hong Kong-based investment firm, acquired the
remaining 54 percent of the outstanding capital stock of PTIC. On 20 November 2006, the Inter-
Agency Privatization Council (IPC) of the Philippine Government announced that it would sell the
111,415 PTIC shares, or 46.125 percent of the outstanding capital stock of PTIC, through a public
bidding to be conducted on 4 December 2006. Subsequently, the public bidding was reset to 8
December 2006, and only two bidders, Parallax Venture Fund XXVII (Parallax) and Pan-Asia
Presidio Capital, submitted their bids. Parallax won with a bid of P25.6 billion or US$510 million.

Thereafter, First Pacific announced that it would exercise its right of first refusal as a PTIC
stockholder and buy the 111,415 PTIC shares by matching the bid price of Parallax. However, First
Pacific failed to do so by the 1 February 2007 deadline set by IPC and instead, yielded its right to
PTIC itself which was then given by IPC until 2 March 2007 to buy the PTIC shares. On 14
February 2007, First Pacific, through its subsidiary, MPAH, entered into a Conditional Sale and
Purchase Agreement of the 111,415 PTIC shares, or 46.125 percent of the outstanding capital stock
of PTIC, with the Philippine Government for the price of P25,217,556,000 or US$510,580,189. The
sale was completed on 28 February 2007.

Since PTIC is a stockholder of PLDT, the sale by the Philippine Government of 46.125 percent of
PTIC shares is actually an indirect sale of 12 million shares or about 6.3 percent of the outstanding
common shares of PLDT. With the sale, First Pacific’s common shareholdings in PLDT
increased from 30.7 percent to 37 percent, thereby increasing the common shareholdings
of foreigners in PLDT to about 81.47 percent. This violates Section 11, Article XII of the 1987
Philippine Constitution which limits foreign ownership of the capital of a public utility to not more
than 40 percent.3

On the other hand, public respondents Finance Secretary Margarito B. Teves, Undersecretary John
P. Sevilla, and PCGG Commissioner Ricardo Abcede allege the following relevant facts:
On 9 November 1967, PTIC was incorporated and had since engaged in the business of investment
holdings. PTIC held 26,034,263 PLDT common shares, or 13.847 percent of the total PLDT
outstanding common shares. PHI, on the other hand, was incorporated in 1977, and became the
owner of 111,415 PTIC shares or 46.125 percent of the outstanding capital stock of PTIC by virtue of
three Deeds of Assignment executed by Ramon Cojuangco and Luis Tirso Rivilla. In 1986, the
111,415 PTIC shares held by PHI were sequestered by the PCGG, and subsequently declared by this
Court as part of the ill-gotten wealth of former President Ferdinand Marcos. The sequestered PTIC
shares were reconveyed to the Republic of the Philippines in accordance with this Court’s
decision4 which became final and executory on 8 August 2006.

The Philippine Government decided to sell the 111,415 PTIC shares, which represent 6.4 percent of
the outstanding common shares of stock of PLDT, and designated the Inter-Agency Privatization
Council (IPC), composed of the Department of Finance and the PCGG, as the disposing entity. An
invitation to bid was published in seven different newspapers from 13 to 24 November 2006. On 20
November 2006, a pre-bid conference was held, and the original deadline for bidding scheduled on 4
December 2006 was reset to 8 December 2006. The extension was published in nine different
newspapers.

During the 8 December 2006 bidding, Parallax Capital Management LP emerged as the highest
bidder with a bid of P25,217,556,000. The government notified First Pacific, the majority owner of
PTIC shares, of the bidding results and gave First Pacific until 1 February 2007 to exercise its right
of first refusal in accordance with PTIC’s Articles of Incorporation. First Pacific announced its
intention to match Parallax’s bid.

On 31 January 2007, the House of Representatives (HR) Committee on Good Government conducted
a public hearing on the particulars of the then impending sale of the 111,415 PTIC shares.
Respondents Teves and Sevilla were among those who attended the public hearing. The HR
Committee Report No. 2270 concluded that: (a) the auction of the government’s 111,415 PTIC shares
bore due diligence, transparency and conformity with existing legal procedures; and (b) First
Pacific’s intended acquisition of the government’s 111,415 PTIC shares resulting in First
Pacific’s 100% ownership of PTIC will not violate the 40 percent constitutional limit on
foreign ownership of a public utility since PTIC holds only 13.847 percent of the total
outstanding common shares of PLDT.5 On 28 February 2007, First Pacific completed the
acquisition of the 111,415 shares of stock of PTIC.

Respondent Manuel V. Pangilinan admits the following facts: (a) the IPC conducted a public bidding
for the sale of 111,415 PTIC shares or 46 percent of the outstanding capital stock of PTIC (the
remaining 54 percent of PTIC shares was already owned by First Pacific and its affiliates); (b)
Parallax offered the highest bid amounting to P25,217,556,000; (c) pursuant to the right of first
refusal in favor of PTIC and its shareholders granted in PTIC’s Articles of Incorporation, MPAH, a
First Pacific affiliate, exercised its right of first refusal by matching the highest bid offered for PTIC
shares on 13 February 2007; and (d) on 28 February 2007, the sale was consummated when MPAH
paid IPC P25,217,556,000 and the government delivered the certificates for the 111,415 PTIC
shares. Respondent Pangilinan denies the other allegations of facts of petitioner.

On 28 February 2007, petitioner filed the instant petition for prohibition, injunction, declaratory
relief, and declaration of nullity of sale of the 111,415 PTIC shares. Petitioner claims, among others,
that the sale of the 111,415 PTIC shares would result in an increase in First Pacific’s common
shareholdings in PLDT from 30.7 percent to 37 percent, and this, combined with Japanese NTT
DoCoMo’s common shareholdings in PLDT, would result to a total foreign common shareholdings in
PLDT of 51.56 percent which is over the 40 percent constitutional limit. 6 Petitioner asserts:
If and when the sale is completed, First Pacific’s equity in PLDT will go up from 30.7 percent to 37.0
percent of its common – or voting- stockholdings, x x x. Hence, the consummation of the sale will put
the two largest foreign investors in PLDT – First Pacific and Japan’s NTT DoCoMo, which is the
world’s largest wireless telecommunications firm, owning 51.56 percent of PLDT common equity. x x
x With the completion of the sale, data culled from the official website of the New York Stock
Exchange (www.nyse.com) showed that those foreign entities, which own at least five percent of
common equity, will collectively own 81.47 percent of PLDT’s common equity. x x x

x x x as the annual disclosure reports, also referred to as Form 20-K reports x x x which PLDT
submitted to the New York Stock Exchange for the period 2003-2005, revealed that First Pacific and
several other foreign entities breached the constitutional limit of 40 percent ownership as early as
2003. x x x"7

Petitioner raises the following issues: (1) whether the consummation of the then impending sale of
111,415 PTIC shares to First Pacific violates the constitutional limit on foreign ownership of a public
utility; (2) whether public respondents committed grave abuse of discretion in allowing the sale of
the 111,415 PTIC shares to First Pacific; and (3) whether the sale of common shares to foreigners in
excess of 40 percent of the entire subscribed common capital stock violates the constitutional limit on
foreign ownership of a public utility.8

On 13 August 2007, Pablito V. Sanidad and Arno V. Sanidad filed a Motion for Leave to Intervene
and Admit Attached Petition-in-Intervention. In the Resolution of 28 August 2007, the Court granted
the motion and noted the Petition-in-Intervention.

Petitioners-in-intervention "join petitioner Wilson Gamboa x x x in seeking, among others, to enjoin

and/or nullify the sale by respondents of the 111,415 PTIC shares to First Pacific or assignee."
Petitioners-in-intervention claim that, as PLDT subscribers, they have a "stake in the outcome of the
controversy x x x where the Philippine Government is completing the sale of government owned
assets in [PLDT], unquestionably a public utility, in violation of the nationality restrictions of the
Philippine Constitution."

The Issue

This Court is not a trier of facts. Factual questions such as those raised by petitioner, 9 which
indisputably demand a thorough examination of the evidence of the parties, are generally beyond
this Court’s jurisdiction. Adhering to this well-settled principle, the Court shall confine the
resolution of the instant controversy solely on the threshold and purely legal issue of whether
the term "capital" in Section 11, Article XII of the Constitution refers to the total common shares
only or to the total outstanding capital stock (combined total of common and non-voting preferred
shares) of PLDT, a public utility.

The Ruling of the Court

The petition is partly meritorious.

Petition for declaratory relief treated as petition for mandamus

At the outset, petitioner is faced with a procedural barrier. Among the remedies petitioner seeks,
only the petition for prohibition is within the original jurisdiction of this court, which however is not
exclusive but is concurrent with the Regional Trial Court and the Court of Appeals. The actions for
declaratory relief,10 injunction, and annulment of sale are not embraced within the original
jurisdiction of the Supreme Court. On this ground alone, the petition could have been dismissed
outright.

While direct resort to this Court may be justified in a petition for prohibition, 11 the Court shall
nevertheless refrain from discussing the grounds in support of the petition for prohibition since on 28
February 2007, the questioned sale was consummated when MPAH paid IPC P25,217,556,000 and
the government delivered the certificates for the 111,415 PTIC shares.

However, since the threshold and purely legal issue on the definition of the term "capital" in Section
11, Article XII of the Constitution has far-reaching implications to the national economy, the Court
treats the petition for declaratory relief as one for mandamus. 12

In Salvacion v. Central Bank of the Philippines,13 the Court treated the petition for declaratory relief
as one for mandamus considering the grave injustice that would result in the interpretation of a
banking law. In that case, which involved the crime of rape committed by a foreign tourist against a
Filipino minor and the execution of the final judgment in the civil case for damages on the tourist’s
dollar deposit with a local bank, the Court declared Section 113 of Central Bank Circular No. 960,
exempting foreign currency deposits from attachment, garnishment or any other order or process of
any court, inapplicable due to the peculiar circumstances of the case. The Court held that "injustice
would result especially to a citizen aggrieved by a foreign guest like accused x x x" that would
"negate Article 10 of the Civil Code which provides that ‘in case of doubt in the interpretation or
application of laws, it is presumed that the lawmaking body intended right and justice to prevail.’"
The Court therefore required respondents Central Bank of the Philippines, the local bank, and the
accused to comply with the writ of execution issued in the civil case for damages and to release the
dollar deposit of the accused to satisfy the judgment.

In Alliance of Government Workers v. Minister of Labor,14 the Court similarly brushed aside the
procedural infirmity of the petition for declaratory relief and treated the same as one for mandamus.
In Alliance, the issue was whether the government unlawfully excluded petitioners, who were
government employees, from the enjoyment of rights to which they were entitled under the law.
Specifically, the question was: "Are the branches, agencies, subdivisions, and instrumentalities of the
Government, including government owned or controlled corporations included among the four
‘employers’ under Presidential Decree No. 851 which are required to pay their employees x x x a
thirteenth (13th) month pay x x x ?" The Constitutional principle involved therein affected all
government employees, clearly justifying a relaxation of the technical rules of procedure, and
certainly requiring the interpretation of the assailed presidential decree.

In short, it is well-settled that this Court may treat a petition for declaratory relief as one for
mandamus if the issue involved has far-reaching implications. As this Court held in Salvacion:

The Court has no original and exclusive jurisdiction over a petition for declaratory relief. However,
exceptions to this rule have been recognized. Thus, where the petition has far-reaching
implications and raises questions that should be resolved, it may be treated as one for
mandamus.15 (Emphasis supplied)

In the present case, petitioner seeks primarily the interpretation of the term "capital" in Section 11,
Article XII of the Constitution. He prays that this Court declare that the term "capital" refers to
common shares only, and that such shares constitute "the sole basis in determining foreign equity in
a public utility." Petitioner further asks this Court to declare any ruling inconsistent with such
interpretation unconstitutional.
The interpretation of the term "capital" in Section 11, Article XII of the Constitution has far-reaching
implications to the national economy. In fact, a resolution of this issue will determine whether
Filipinos are masters, or second class citizens, in their own country. What is at stake here is whether
Filipinos or foreigners will have effective control of the national economy. Indeed, if ever there is a
legal issue that has far-reaching implications to the entire nation, and to future generations of
Filipinos, it is the threshhold legal issue presented in this case.

The Court first encountered the issue on the definition of the term "capital" in Section 11, Article XII
of the Constitution in the case of Fernandez v. Cojuangco, docketed as G.R. No. 157360.16 That case
involved the same public utility (PLDT) and substantially the same private respondents. Despite the
importance and novelty of the constitutional issue raised therein and despite the fact that the
petition involved a purely legal question, the Court declined to resolve the case on the merits, and
instead denied the same for disregarding the hierarchy of courts. 17 There, petitioner Fernandez
assailed on a pure question of law the Regional Trial Court’s Decision of 21 February 2003 via a
petition for review under Rule 45. The Court’s Resolution, denying the petition, became final on 21
December 2004.

The instant petition therefore presents the Court with another opportunity to finally settle
this purely legal issuewhich is of transcendental importance to the national economy and a
fundamental requirement to a faithful adherence to our Constitution. The Court must forthwith
seize such opportunity, not only for the benefit of the litigants, but more significantly for the benefit
of the entire Filipino people, to ensure, in the words of the Constitution, "a self-reliant and
independent national economy effectively controlled by Filipinos."18 Besides, in the light of vague
and confusing positions taken by government agencies on this purely legal issue, present and future
foreign investors in this country deserve, as a matter of basic fairness, a categorical ruling from this
Court on the extent of their participation in the capital of public utilities and other nationalized
businesses.

Despite its far-reaching implications to the national economy, this purely legal issue has remained
unresolved for over 75 years since the 1935 Constitution. There is no reason for this Court to evade
this ever recurring fundamental issue and delay again defining the term "capital," which appears not
only in Section 11, Article XII of the Constitution, but also in Section 2, Article XII on co-production
and joint venture agreements for the development of our natural resources, 19 in Section 7, Article XII
on ownership of private lands,20 in Section 10, Article XII on the reservation of certain investments
to Filipino citizens,21 in Section 4(2), Article XIV on the ownership of educational institutions, 22 and
in Section 11(2), Article XVI on the ownership of advertising companies.23

Petitioner has locus standi

There is no dispute that petitioner is a stockholder of PLDT. As such, he has the right to question
the subject sale, which he claims to violate the nationality requirement prescribed in Section 11,
Article XII of the Constitution. If the sale indeed violates the Constitution, then there is a possibility
that PLDT’s franchise could be revoked, a dire consequence directly affecting petitioner’s interest as
a stockholder.

More importantly, there is no question that the instant petition raises matters of transcendental
importance to the public. The fundamental and threshold legal issue in this case, involving the
national economy and the economic welfare of the Filipino people, far outweighs any perceived
impediment in the legal personality of the petitioner to bring this action.

In Chavez v. PCGG,24 the Court upheld the right of a citizen to bring a suit on matters of
transcendental importance to the public, thus:
In Tañada v. Tuvera, the Court asserted that when the issue concerns a public right and the
object of mandamus is to obtain the enforcement of a public duty, the people are regarded
as the real parties in interest; and because it is sufficient that petitioner is a citizen and
as such is interested in the execution of the laws, he need not show that he has any legal
or special interest in the result of the action. In the aforesaid case, the petitioners sought to
enforce their right to be informed on matters of public concern, a right then recognized in Section 6,
Article IV of the 1973 Constitution, in connection with the rule that laws in order to be valid and
enforceable must be published in the Official Gazette or otherwise effectively promulgated. In ruling
for the petitioners’ legal standing, the Court declared that the right they sought to be enforced ‘is a
public right recognized by no less than the fundamental law of the land.’

Legaspi v. Civil Service Commission, while reiterating Tañada, further declared that ‘when a
mandamus proceeding involves the assertion of a public right, the requirement of
personal interest is satisfied by the mere fact that petitioner is a citizen and, therefore,
part of the general ‘public’ which possesses the right.’

Further, in Albano v. Reyes, we said that while expenditure of public funds may not have been
involved under the questioned contract for the development, management and operation of the
Manila International Container Terminal, ‘public interest [was] definitely involved
considering the important role [of the subject contract] . . . in the economic development
of the country and the magnitude of the financial consideration involved.’ We concluded
that, as a consequence, the disclosure provision in the Constitution would constitute sufficient
authority for upholding the petitioner’s standing. (Emphasis supplied)

Clearly, since the instant petition, brought by a citizen, involves matters of transcendental public
importance, the petitioner has the requisite locus standi.

Definition of the Term "Capital" in Section 11, Article XII of the 1987 Constitution

Section 11, Article XII (National Economy and Patrimony) of the 1987 Constitution mandates the
Filipinization of public utilities, to wit:

Section 11. No franchise, certificate, or any other form of authorization for the operation of
a public utility shall be granted except to citizens of the Philippines or to corporations or
associations organized under the laws of the Philippines, at least sixty per centum of
whose capital is owned by such citizens; nor shall such franchise, certificate, or authorization be
exclusive in character or for a longer period than fifty years. Neither shall any such franchise or
right be granted except under the condition that it shall be subject to amendment, alteration, or
repeal by the Congress when the common good so requires. The State shall encourage equity
participation in public utilities by the general public. The participation of foreign investors in the
governing body of any public utility enterprise shall be limited to their proportionate share in its
capital, and all the executive and managing officers of such corporation or association must be
citizens of the Philippines. (Emphasis supplied)

The above provision substantially reiterates Section 5, Article XIV of the 1973 Constitution, thus:

Section 5. No franchise, certificate, or any other form of authorization for the operation of
a public utility shall be granted except to citizens of the Philippines or to corporations or
associations organized under the laws of the Philippines at least sixty per centum of the
capital of which is owned by such citizens, nor shall such franchise, certificate, or authorization
be exclusive in character or for a longer period than fifty years. Neither shall any such franchise or
right be granted except under the condition that it shall be subject to amendment, alteration, or
repeal by the National Assembly when the public interest so requires. The State shall encourage
equity participation in public utilities by the general public. The participation of foreign investors in
the governing body of any public utility enterprise shall be limited to their proportionate share in the
capital thereof. (Emphasis supplied)

The foregoing provision in the 1973 Constitution reproduced Section 8, Article XIV of the 1935
Constitution, viz:

Section 8. No franchise, certificate, or any other form of authorization for the operation of
a public utility shall be granted except to citizens of the Philippines or to corporations or
other entities organized under the laws of the Philippines sixty per centum of the capital
of which is owned by citizens of the Philippines, nor shall such franchise, certificate, or
authorization be exclusive in character or for a longer period than fifty years. No franchise or right
shall be granted to any individual, firm, or corporation, except under the condition that it shall be
subject to amendment, alteration, or repeal by the Congress when the public interest so requires.
(Emphasis supplied)

Father Joaquin G. Bernas, S.J., a leading member of the 1986 Constitutional Commission, reminds
us that the Filipinization provision in the 1987 Constitution is one of the products of the spirit of
nationalism which gripped the 1935 Constitutional Convention. 25 The 1987 Constitution "provides
for the Filipinization of public utilities by requiring that any form of authorization for the operation
of public utilities should be granted only to ‘citizens of the Philippines or to corporations or
associations organized under the laws of the Philippines at least sixty per centum of whose capital is
owned by such citizens.’ The provision is [an express] recognition of the sensitive and vital
position of public utilities both in the national economy and for national security."26 The
evident purpose of the citizenship requirement is to prevent aliens from assuming control of public
utilities, which may be inimical to the national interest.27 This specific provision explicitly reserves
to Filipino citizens control of public utilities, pursuant to an overriding economic goal of the 1987
Constitution: to "conserve and develop our patrimony" 28 and ensure "a self-reliant and independent
national economy effectively controlled by Filipinos."29

Any citizen or juridical entity desiring to operate a public utility must therefore meet the minimum
nationality requirement prescribed in Section 11, Article XII of the Constitution. Hence, for a
corporation to be granted authority to operate a public utility, at least 60 percent of its "capital"
must be owned by Filipino citizens.

The crux of the controversy is the definition of the term "capital." Does the term "capital" in Section
11, Article XII of the Constitution refer to common shares or to the total outstanding capital stock
(combined total of common and non-voting preferred shares)?

Petitioner submits that the 40 percent foreign equity limitation in domestic public utilities refers
only to common shares because such shares are entitled to vote and it is through voting that control
over a corporation is exercised. Petitioner posits that the term "capital" in Section 11, Article XII of
the Constitution refers to "the ownership of common capital stock subscribed and outstanding, which
class of shares alone, under the corporate set-up of PLDT, can vote and elect members of the board of
directors." It is undisputed that PLDT’s non-voting preferred shares are held mostly by Filipino
citizens.30 This arose from Presidential Decree No. 217,31 issued on 16 June 1973 by then President
Ferdinand Marcos, requiring every applicant of a PLDT telephone line to subscribe to non-voting
preferred shares to pay for the investment cost of installing the telephone line.32

Petitioners-in-intervention basically reiterate petitioner’s arguments and adopt petitioner’s

definition of the term "capital."33 Petitioners-in-intervention allege that "the approximate foreign
ownership of common capital stock of PLDT x x x already amounts to at least 63.54% of the total
outstanding common stock," which means that foreigners exercise significant control over PLDT,
patently violating the 40 percent foreign equity limitation in public utilities prescribed by the
Constitution.

Respondents, on the other hand, do not offer any definition of the term "capital" in Section 11, Article
XII of the Constitution. More importantly, private respondents Nazareno and Pangilinan of PLDT do
not dispute that more than 40 percent of the common shares of PLDT are held by foreigners.

In particular, respondent Nazareno’s Memorandum, consisting of 73 pages, harps mainly on the

procedural infirmities of the petition and the supposed violation of the due process rights of the
"affected foreign common shareholders." Respondent Nazareno does not deny petitioner’s allegation
of foreigners’ dominating the common shareholdings of PLDT. Nazareno stressed mainly that the
petition "seeks to divest foreign common shareholders purportedly exceeding 40% of the
total common shareholdings in PLDT of their ownership over their shares." Thus, "the
foreign natural and juridical PLDT shareholders must be impleaded in this suit so that they can be
heard."34 Essentially, Nazareno invokes denial of due process on behalf of the foreign common
shareholders.

While Nazareno does not introduce any definition of the term "capital," he states that "among the
factual assertions that need to be established to counter petitioner’s allegations is the
uniform interpretation by government agencies (such as the SEC), institutions and
corporations (such as the Philippine National Oil Company-Energy Development
Corporation or PNOC-EDC) of including both preferred shares and common shares in
"controlling interest" in view of testing compliance with the 40% constitutional limitation
on foreign ownership in public utilities."35

Similarly, respondent Manuel V. Pangilinan does not define the term "capital" in Section 11, Article
XII of the Constitution. Neither does he refute petitioner’s claim of foreigners holding more than 40
percent of PLDT’s common shares. Instead, respondent Pangilinan focuses on the procedural flaws of
the petition and the alleged violation of the due process rights of foreigners. Respondent Pangilinan
emphasizes in his Memorandum (1) the absence of this Court’s jurisdiction over the petition; (2)
petitioner’s lack of standing; (3) mootness of the petition; (4) non-availability of declaratory relief;
and (5) the denial of due process rights. Moreover, respondent Pangilinan alleges that the issue
should be whether "owners of shares in PLDT as well as owners of shares in companies holding
shares in PLDT may be required to relinquish their shares in PLDT and in those companies without
any law requiring them to surrender their shares and also without notice and trial."

Respondent Pangilinan further asserts that "Section 11, [Article XII of the Constitution]
imposes no nationality requirement on the shareholders of the utility company as a
condition for keeping their shares in the utility company." According to him, "Section 11 does
not authorize taking one person’s property (the shareholder’s stock in the utility company) on the
basis of another party’s alleged failure to satisfy a requirement that is a condition only for that other
party’s retention of another piece of property (the utility company being at least 60% Filipino-owned
to keep its franchise)."36

The OSG, representing public respondents Secretary Margarito Teves, Undersecretary John P.
Sevilla, Commissioner Ricardo Abcede, and Chairman Fe Barin, is likewise silent on the definition of
the term "capital." In its Memorandum37 dated 24 September 2007, the OSG also limits its
discussion on the supposed procedural defects of the petition, i.e. lack of standing, lack of
jurisdiction, non-inclusion of interested parties, and lack of basis for injunction. The OSG does not
present any definition or interpretation of the term "capital" in Section 11, Article XII of the
Constitution. The OSG contends that "the petition actually partakes of a collateral attack on PLDT’s
franchise as a public utility," which in effect requires a "full-blown trial where all the parties in
interest are given their day in court."38

Respondent Francisco Ed Lim, impleaded as President and Chief Executive Officer of the Philippine
Stock Exchange (PSE), does not also define the term "capital" and seeks the dismissal of the petition
on the following grounds: (1) failure to state a cause of action against Lim; (2) the PSE allegedly
implemented its rules and required all listed companies, including PLDT, to make proper and timely
disclosures; and (3) the reliefs prayed for in the petition would adversely impact the stock market.

In the earlier case of Fernandez v. Cojuangco, petitioner Fernandez who claimed to be a stockholder
of record of PLDT, contended that the term "capital" in the 1987 Constitution refers to shares
entitled to vote or the common shares. Fernandez explained thus:

The forty percent (40%) foreign equity limitation in public utilities prescribed by the Constitution
refers to ownership of shares of stock entitled to vote, i.e., common shares, considering that it is
through voting that control is being exercised. x x x

Obviously, the intent of the framers of the Constitution in imposing limitations and restrictions on
fully nationalized and partially nationalized activities is for Filipino nationals to be always in control
of the corporation undertaking said activities. Otherwise, if the Trial Court’s ruling upholding
respondents’ arguments were to be given credence, it would be possible for the ownership structure
of a public utility corporation to be divided into one percent (1%) common stocks and ninety-nine
percent (99%) preferred stocks. Following the Trial Court’s ruling adopting respondents’ arguments,
the common shares can be owned entirely by foreigners thus creating an absurd situation wherein
foreigners, who are supposed to be minority shareholders, control the public utility corporation.

xxxx

Thus, the 40% foreign ownership limitation should be interpreted to apply to both the beneficial
ownership and the controlling interest.

xxxx

Clearly, therefore, the forty percent (40%) foreign equity limitation in public utilities prescribed by
the Constitution refers to ownership of shares of stock entitled to vote, i.e., common shares.
Furthermore, ownership of record of shares will not suffice but it must be shown that the legal and
beneficial ownership rests in the hands of Filipino citizens. Consequently, in the case of petitioner
PLDT, since it is already admitted that the voting interests of foreigners which would gain entry to
petitioner PLDT by the acquisition of SMART shares through the Questioned Transactions is
equivalent to 82.99%, and the nominee arrangements between the foreign principals and the Filipino
owners is likewise admitted, there is, therefore, a violation of Section 11, Article XII of the
Constitution.

Parenthetically, the Opinions dated February 15, 1988 and April 14, 1987 cited by the Trial Court to
support the proposition that the meaning of the word "capital" as used in Section 11, Article XII of
the Constitution allegedly refers to the sum total of the shares subscribed and paid-in by the
shareholder and it allegedly is immaterial how the stock is classified, whether as common or
preferred, cannot stand in the face of a clear legislative policy as stated in the FIA which took effect
in 1991 or way after said opinions were rendered, and as clarified by the above-quoted Amendments.
In this regard, suffice it to state that as between the law and an opinion rendered by an
administrative agency, the law indubitably prevails. Moreover, said Opinions are merely advisory
and cannot prevail over the clear intent of the framers of the Constitution.

In the same vein, the SEC’s construction of Section 11, Article XII of the Constitution is at best
merely advisory for it is the courts that finally determine what a law means.39

On the other hand, respondents therein, Antonio O. Cojuangco, Manuel V. Pangilinan, Carlos A.
Arellano, Helen Y. Dee, Magdangal B. Elma, Mariles Cacho-Romulo, Fr. Bienvenido F. Nebres, Ray
C. Espinosa, Napoleon L. Nazareno, Albert F. Del Rosario, and Orlando B. Vea, argued that the term
"capital" in Section 11, Article XII of the Constitution includes preferred shares since the
Constitution does not distinguish among classes of stock, thus:

16. The Constitution applies its foreign ownership limitation on the corporation’s "capital," without
distinction as to classes of shares. x x x

In this connection, the Corporation Code – which was already in force at the time the present (1987)
Constitution was drafted – defined outstanding capital stock as follows:

Section 137. Outstanding capital stock defined. – The term "outstanding capital stock", as used in
this Code, means the total shares of stock issued under binding subscription agreements to
subscribers or stockholders, whether or not fully or partially paid, except treasury shares.

Section 137 of the Corporation Code also does not distinguish between common and preferred shares,
nor exclude either class of shares, in determining the outstanding capital stock (the "capital") of a
corporation. Consequently, petitioner’s suggestion to reckon PLDT’s foreign equity only on the basis
of PLDT’s outstanding common shares is without legal basis. The language of the Constitution
should be understood in the sense it has in common use.

xxxx

17. But even assuming that resort to the proceedings of the Constitutional Commission is necessary,
there is nothing in the Record of the Constitutional Commission (Vol. III) – which petitioner
misleadingly cited in the Petition x x x – which supports petitioner’s view that only common shares
should form the basis for computing a public utility’s foreign equity.

xxxx

18. In addition, the SEC – the government agency primarily responsible for implementing the
Corporation Code, and which also has the responsibility of ensuring compliance with the
Constitution’s foreign equity restrictions as regards nationalized activities x x x – has categorically
ruled that both common and preferred shares are properly considered in determining outstanding
capital stock and the nationality composition thereof.40

We agree with petitioner and petitioners-in-intervention. The term "capital" in Section 11, Article
XII of the Constitution refers only to shares of stock entitled to vote in the election of directors, and
thus in the present case only to common shares,41 and not to the total outstanding capital stock
comprising both common and non-voting preferred shares.

The Corporation Code of the Philippines42 classifies shares as common or preferred, thus:
Sec. 6. Classification of shares. - The shares of stock of stock corporations may be divided into classes
or series of shares, or both, any of which classes or series of shares may have such rights, privileges
or restrictions as may be stated in the articles of incorporation: Provided, That no share may be
deprived of voting rights except those classified and issued as "preferred" or "redeemable"
shares, unless otherwise provided in this Code: Provided, further, That there shall always be a
class or series of shares which have complete voting rights. Any or all of the shares or series of
shares may have a par value or have no par value as may be provided for in the articles of
incorporation: Provided, however, That banks, trust companies, insurance companies, public
utilities, and building and loan associations shall not be permitted to issue no-par value shares of
stock.

Preferred shares of stock issued by any corporation may be given preference in the distribution of the
assets of the corporation in case of liquidation and in the distribution of dividends, or such other
preferences as may be stated in the articles of incorporation which are not violative of the provisions
of this Code: Provided, That preferred shares of stock may be issued only with a stated par value.
The Board of Directors, where authorized in the articles of incorporation, may fix the terms and
conditions of preferred shares of stock or any series thereof: Provided, That such terms and
conditions shall be effective upon the filing of a certificate thereof with the Securities and Exchange
Commission.

Shares of capital stock issued without par value shall be deemed fully paid and non-assessable and
the holder of such shares shall not be liable to the corporation or to its creditors in respect thereto:
Provided; That shares without par value may not be issued for a consideration less than the value of
five (P5.00) pesos per share: Provided, further, That the entire consideration received by the
corporation for its no-par value shares shall be treated as capital and shall not be available for
distribution as dividends.

A corporation may, furthermore, classify its shares for the purpose of insuring compliance with
constitutional or legal requirements.

Except as otherwise provided in the articles of incorporation and stated in the certificate of stock,
each share shall be equal in all respects to every other share.

Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code,
the holders of such shares shall nevertheless be entitled to vote on the following matters:

1. Amendment of the articles of incorporation;

2. Adoption and amendment of by-laws;

3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the
corporate property;

4. Incurring, creating or increasing bonded indebtedness;

5. Increase or decrease of capital stock;

6. Merger or consolidation of the corporation with another corporation or other corporations;

7. Investment of corporate funds in another corporation or business in accordance with this

Code; and
 8. Dissolution of the corporation.

Except as provided in the immediately preceding paragraph, the vote necessary to approve a
particular corporate act as provided in this Code shall be deemed to refer only to stocks with voting
rights.

Indisputably, one of the rights of a stockholder is the right to participate in the control or
management of the corporation.43 This is exercised through his vote in the election of directors
because it is the board of directors that controls or manages the corporation.44 In the absence of
provisions in the articles of incorporation denying voting rights to preferred shares, preferred shares
have the same voting rights as common shares. However, preferred shareholders are often excluded
from any control, that is, deprived of the right to vote in the election of directors and on other
matters, on the theory that the preferred shareholders are merely investors in the corporation for
income in the same manner as bondholders.45 In fact, under the Corporation Code only preferred or
redeemable shares can be deprived of the right to vote.46 Common shares cannot be deprived of the
right to vote in any corporate meeting, and any provision in the articles of incorporation restricting
the right of common shareholders to vote is invalid.47

Considering that common shares have voting rights which translate to control, as opposed to
preferred shares which usually have no voting rights, the term "capital" in Section 11, Article XII of
the Constitution refers only to common shares. However, if the preferred shares also have the right
to vote in the election of directors, then the term "capital" shall include such preferred shares
because the right to participate in the control or management of the corporation is exercised through
the right to vote in the election of directors. In short, the term "capital" in Section 11, Article
XII of the Constitution refers only to shares of stock that can vote in the election of
directors.

This interpretation is consistent with the intent of the framers of the Constitution to place in the
hands of Filipino citizens the control and management of public utilities. As revealed in the
deliberations of the Constitutional Commission, "capital" refers to the voting stock or controlling
interest of a corporation, to wit:

MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or Filipino equity and foreign
equity; namely, 60-40 in Section 3, 60-40 in Section 9 and 2/3-1/3 in Section 15.

MR. VILLEGAS. That is right.

MR. NOLLEDO. In teaching law, we are always faced with this question: "Where do we base the
equity requirement, is it on the authorized capital stock, on the subscribed capital stock, or on the
paid-up capital stock of a corporation"? Will the Committee please enlighten me on this?

MR. VILLEGAS. We have just had a long discussion with the members of the team from the UP Law
Center who provided us a draft. The phrase that is contained here which we adopted from
the UP draft is "60 percent of voting stock."

MR. NOLLEDO. That must be based on the subscribed capital stock, because unless declared
delinquent, unpaid capital stock shall be entitled to vote.

MR. VILLEGAS. That is right.

MR. NOLLEDO. Thank you.

With respect to an investment by one corporation in another corporation, say, a corporation with 60-
40 percent equity invests in another corporation which is permitted by the Corporation Code, does
the Committee adopt the grandfather rule?

MR. VILLEGAS. Yes, that is the understanding of the Committee.

MR. NOLLEDO. Therefore, we need additional Filipino capital?

MR. VILLEGAS. Yes.48

xxxx

MR. AZCUNA. May I be clarified as to that portion that was accepted by the Committee.

MR. VILLEGAS. The portion accepted by the Committee is the deletion of the phrase "voting stock
or controlling interest."

MR. AZCUNA. Hence, without the Davide amendment, the committee report would read:
"corporations or associations at least sixty percent of whose CAPITAL is owned by such citizens."

MR. VILLEGAS. Yes.

MR. AZCUNA. So if the Davide amendment is lost, we are stuck with 60 percent of the capital to be
owned by citizens.

MR. VILLEGAS. That is right.

MR. AZCUNA. But the control can be with the foreigners even if they are the minority.
Let us say 40 percent of the capital is owned by them, but it is the voting capital, whereas,
the Filipinos own the nonvoting shares. So we can have a situation where the corporation
is controlled by foreigners despite being the minority because they have the voting
capital. That is the anomaly that would result here.

MR. BENGZON. No, the reason we eliminated the word "stock" as stated in the 1973 and
1935 Constitutions is that according to Commissioner Rodrigo, there are associations that
do not have stocks. That is why we say "CAPITAL."

MR. AZCUNA. We should not eliminate the phrase "controlling interest."

MR. BENGZON. In the case of stock corporations, it is assumed.49 (Emphasis supplied)

Thus, 60 percent of the "capital" assumes, or should result in, "controlling interest" in the
corporation. Reinforcing this interpretation of the term "capital," as referring to controlling interest
or shares entitled to vote, is the definition of a "Philippine national" in the Foreign Investments Act
of 1991,50 to wit:

SEC. 3. Definitions. - As used in this Act:

a. The term "Philippine national" shall mean a citizen of the Philippines; or a domestic partnership
or association wholly owned by citizens of the Philippines; or a corporation organized under the
laws of the Philippines of which at least sixty percent (60%) of the capital stock
outstanding and entitled to vote is owned and held by citizens of the Philippines; or a
corporation organized abroad and registered as doing business in the Philippines under the
Corporation Code of which one hundred percent (100%) of the capital stock outstanding and entitled
to vote is wholly owned by Filipinos or a trustee of funds for pension or other employee retirement or
separation benefits, where the trustee is a Philippine national and at least sixty percent (60%) of the
fund will accrue to the benefit of Philippine nationals: Provided, That where a corporation and its
non-Filipino stockholders own stocks in a Securities and Exchange Commission (SEC) registered
enterprise, at least sixty percent (60%) of the capital stock outstanding and entitled to vote of each of
both corporations must be owned and held by citizens of the Philippines and at least sixty percent
(60%) of the members of the Board of Directors of each of both corporations must be citizens of the
Philippines, in order that the corporation, shall be considered a "Philippine national." (Emphasis
supplied)

In explaining the definition of a "Philippine national," the Implementing Rules and Regulations of
the Foreign Investments Act of 1991 provide:

b. "Philippine national" shall mean a citizen of the Philippines or a domestic partnership or

association wholly owned by the citizens of the Philippines; or a corporation organized under the
laws of the Philippines of which at least sixty percent [60%] of the capital stock
outstanding and entitled to vote is owned and held by citizens of the Philippines; or a
trustee of funds for pension or other employee retirement or separation benefits, where the trustee is
a Philippine national and at least sixty percent [60%] of the fund will accrue to the benefit of the
Philippine nationals; Provided, that where a corporation its non-Filipino stockholders own stocks in
a Securities and Exchange Commission [SEC] registered enterprise, at least sixty percent [60%] of
the capital stock outstanding and entitled to vote of both corporations must be owned and held by
citizens of the Philippines and at least sixty percent [60%] of the members of the Board of Directors
of each of both corporation must be citizens of the Philippines, in order that the corporation shall be
considered a Philippine national. The control test shall be applied for this purpose.

Compliance with the required Filipino ownership of a corporation shall be determined on

the basis of outstanding capital stock whether fully paid or not, but only such stocks
which are generally entitled to vote are considered.

For stocks to be deemed owned and held by Philippine citizens or Philippine nationals,
mere legal title is not enough to meet the required Filipino equity. Full beneficial
ownership of the stocks, coupled with appropriate voting rights is essential. Thus, stocks,
the voting rights of which have been assigned or transferred to aliens cannot be
considered held by Philippine citizens or Philippine nationals.

Individuals or juridical entities not meeting the aforementioned qualifications are

considered as non-Philippine nationals. (Emphasis supplied)

Mere legal title is insufficient to meet the 60 percent Filipino-owned "capital" required in the
Constitution. Full beneficial ownership of 60 percent of the outstanding capital stock, coupled with
60 percent of the voting rights, is required. The legal and beneficial ownership of 60 percent of the
outstanding capital stock must rest in the hands of Filipino nationals in accordance with the
constitutional mandate. Otherwise, the corporation is "considered as non-Philippine national[s]."

Under Section 10, Article XII of the Constitution, Congress may "reserve to citizens of the
Philippines or to corporations or associations at least sixty per centum of whose capital is owned by
such citizens, or such higher percentage as Congress may prescribe, certain areas of investments."
Thus, in numerous laws Congress has reserved certain areas of investments to Filipino citizens or to
corporations at least sixty percent of the "capital" of which is owned by Filipino citizens. Some of
these laws are: (1) Regulation of Award of Government Contracts or R.A. No. 5183; (2) Philippine
Inventors Incentives Act or R.A. No. 3850; (3) Magna Carta for Micro, Small and Medium
Enterprises or R.A. No. 6977; (4) Philippine Overseas Shipping Development Act or R.A. No. 7471;
(5) Domestic Shipping Development Act of 2004 or R.A. No. 9295; (6) Philippine Technology Transfer
Act of 2009 or R.A. No. 10055; and (7) Ship Mortgage Decree or P.D. No. 1521. Hence, the term
"capital" in Section 11, Article XII of the Constitution is also used in the same context in
numerous laws reserving certain areas of investments to Filipino citizens.

To construe broadly the term "capital" as the total outstanding capital stock, including both common
and non-voting preferred shares, grossly contravenes the intent and letter of the Constitution that
the "State shall develop a self-reliant and independent national economy effectively controlled by
Filipinos." A broad definition unjustifiably disregards who owns the all-important voting stock,
which necessarily equates to control of the public utility.

We shall illustrate the glaring anomaly in giving a broad definition to the term "capital." Let us
assume that a corporation has 100 common shares owned by foreigners and 1,000,000 non-voting
preferred shares owned by Filipinos, with both classes of share having a par value of one peso
(P1.00) per share. Under the broad definition of the term "capital," such corporation would be
considered compliant with the 40 percent constitutional limit on foreign equity of public utilities
since the overwhelming majority, or more than 99.999 percent, of the total outstanding capital stock
is Filipino owned. This is obviously absurd.

In the example given, only the foreigners holding the common shares have voting rights in the
election of directors, even if they hold only 100 shares. The foreigners, with a minuscule equity of
less than 0.001 percent, exercise control over the public utility. On the other hand, the Filipinos,
holding more than 99.999 percent of the equity, cannot vote in the election of directors and hence,
have no control over the public utility. This starkly circumvents the intent of the framers of the
Constitution, as well as the clear language of the Constitution, to place the control of public utilities
in the hands of Filipinos. It also renders illusory the State policy of an independent national
economy effectively controlled by Filipinos.

The example given is not theoretical but can be found in the real world, and in fact exists in the
present case.

Holders of PLDT preferred shares are explicitly denied of the right to vote in the election of directors.
PLDT’s Articles of Incorporation expressly state that "the holders of Serial Preferred Stock
shall not be entitled to vote at any meeting of the stockholders for the election of
directors or for any other purpose or otherwise participate in any action taken by the
corporation or its stockholders, or to receive notice of any meeting of stockholders." 51

On the other hand, holders of common shares are granted the exclusive right to vote in the election
of directors. PLDT’s Articles of Incorporation52 state that "each holder of Common Capital Stock
shall have one vote in respect of each share of such stock held by him on all matters voted upon by
the stockholders, and the holders of Common Capital Stock shall have the exclusive right to
vote for the election of directors and for all other purposes."53

In short, only holders of common shares can vote in the election of directors, meaning only common
shareholders exercise control over PLDT. Conversely, holders of preferred shares, who have no
voting rights in the election of directors, do not have any control over PLDT. In fact, under PLDT’s
Articles of Incorporation, holders of common shares have voting rights for all purposes, while holders
of preferred shares have no voting right for any purpose whatsoever.
It must be stressed, and respondents do not dispute, that foreigners hold a majority of the
common shares of PLDT. In fact, based on PLDT’s 2010 General Information Sheet (GIS), 54 which is
a document required to be submitted annually to the Securities and Exchange
Commission,55 foreigners hold 120,046,690 common shares of PLDT whereas Filipinos hold only
66,750,622 common shares.56 In other words, foreigners hold 64.27% of the total number of PLDT’s
common shares, while Filipinos hold only 35.73%. Since holding a majority of the common shares
equates to control, it is clear that foreigners exercise control over PLDT. Such amount of control
unmistakably exceeds the allowable 40 percent limit on foreign ownership of public utilities
expressly mandated in Section 11, Article XII of the Constitution.

Moreover, the Dividend Declarations of PLDT for 2009,57 as submitted to the SEC, shows that per
share the SIP58 preferred shares earn a pittance in dividends compared to the common shares. PLDT
declared dividends for the common shares at P70.00 per share, while the declared dividends for the
preferred shares amounted to a measly P1.00 per share.59 So the preferred shares not only cannot
vote in the election of directors, they also have very little and obviously negligible dividend earning
capacity compared to common shares.

As shown in PLDT’s 2010 GIS,60 as submitted to the SEC, the par value of PLDT common shares
is P5.00 per share, whereas the par value of preferred shares is P10.00 per share. In other words,
preferred shares have twice the par value of common shares but cannot elect directors and have only
1/70 of the dividends of common shares. Moreover, 99.44% of the preferred shares are owned by
Filipinos while foreigners own only a minuscule 0.56% of the preferred shares. 61 Worse, preferred
shares constitute 77.85% of the authorized capital stock of PLDT while common shares constitute
only 22.15%.62 This undeniably shows that beneficial interest in PLDT is not with the non-voting
preferred shares but with the common shares, blatantly violating the constitutional requirement of
60 percent Filipino control and Filipino beneficial ownership in a public utility.

The legal and beneficial ownership of 60 percent of the outstanding capital stock must rest in the
hands of Filipinos in accordance with the constitutional mandate. Full beneficial ownership of 60
percent of the outstanding capital stock, coupled with 60 percent of the voting rights, is
constitutionally required for the State’s grant of authority to operate a public utility. The undisputed
fact that the PLDT preferred shares, 99.44% owned by Filipinos, are non-voting and earn only 1/70
of the dividends that PLDT common shares earn, grossly violates the constitutional requirement of
60 percent Filipino control and Filipino beneficial ownership of a public utility.

In short, Filipinos hold less than 60 percent of the voting stock, and earn less than 60
percent of the dividends, of PLDT. This directly contravenes the express command in Section 11,
Article XII of the Constitution that "[n]o franchise, certificate, or any other form of authorization for
the operation of a public utility shall be granted except to x x x corporations x x x organized under
the laws of the Philippines, at least sixty per centum of whose capital is owned by such
citizens x x x."

To repeat, (1) foreigners own 64.27% of the common shares of PLDT, which class of shares exercises
the soleright to vote in the election of directors, and thus exercise control over PLDT; (2) Filipinos
own only 35.73% of PLDT’s common shares, constituting a minority of the voting stock, and thus do
not exercise control over PLDT; (3) preferred shares, 99.44% owned by Filipinos, have no voting
rights; (4) preferred shares earn only 1/70 of the dividends that common shares earn; 63 (5) preferred
shares have twice the par value of common shares; and (6) preferred shares constitute 77.85% of the
authorized capital stock of PLDT and common shares only 22.15%. This kind of ownership and
control of a public utility is a mockery of the Constitution.
Incidentally, the fact that PLDT common shares with a par value of P5.00 have a current stock
market value of P2,328.00 per share,64 while PLDT preferred shares with a par value of P10.00 per
share have a current stock market value ranging from only P10.92 to P11.06 per share,65 is a glaring
confirmation by the market that control and beneficial ownership of PLDT rest with the common
shares, not with the preferred shares.

Indisputably, construing the term "capital" in Section 11, Article XII of the Constitution to include
both voting and non-voting shares will result in the abject surrender of our telecommunications
industry to foreigners, amounting to a clear abdication of the State’s constitutional duty to limit
control of public utilities to Filipino citizens. Such an interpretation certainly runs counter to the
constitutional provision reserving certain areas of investment to Filipino citizens, such as the
exploitation of natural resources as well as the ownership of land, educational institutions and
advertising businesses. The Court should never open to foreign control what the Constitution has
expressly reserved to Filipinos for that would be a betrayal of the Constitution and of the national
interest. The Court must perform its solemn duty to defend and uphold the intent and letter of the
Constitution to ensure, in the words of the Constitution, "a self-reliant and independent national
economy effectively controlled by Filipinos."

Section 11, Article XII of the Constitution, like other provisions of the Constitution expressly
reserving to Filipinos specific areas of investment, such as the development of natural resources and
ownership of land, educational institutions and advertising business, is self-executing. There is no
need for legislation to implement these self-executing provisions of the Constitution. The rationale
why these constitutional provisions are self-executing was explained in Manila Prince Hotel v.
GSIS,66 thus:

x x x Hence, unless it is expressly provided that a legislative act is necessary to enforce a

constitutional mandate, the presumption now is that all provisions of the constitution are self-
executing. If the constitutional provisions are treated as requiring legislation instead of self-
executing, the legislature would have the power to ignore and practically nullify the mandate of the
fundamental law. This can be cataclysmic. That is why the prevailing view is, as it has always been,
that —

. . . in case of doubt, the Constitution should be considered self-executing rather than non-self-
executing. . . . Unless the contrary is clearly intended, the provisions of the Constitution
should be considered self-executing, as a contrary rule would give the legislature
discretion to determine when, or whether, they shall be effective. These provisions would be
subordinated to the will of the lawmaking body, which could make them entirely meaningless by
simply refusing to pass the needed implementing statute. (Emphasis supplied)

In Manila Prince Hotel, even the Dissenting Opinion of then Associate Justice Reynato S. Puno, later
Chief Justice, agreed that constitutional provisions are presumed to be self-executing. Justice Puno
stated:

Courts as a rule consider the provisions of the Constitution as self-executing, rather than as
requiring future legislation for their enforcement. The reason is not difficult to discern. For if they
are not treated as self-executing, the mandate of the fundamental law ratified by the
sovereign people can be easily ignored and nullified by Congress. Suffused with wisdom
of the ages is the unyielding rule that legislative actions may give breath to constitutional
rights but congressional inaction should not suffocate them.

Thus, we have treated as self-executing the provisions in the Bill of Rights on arrests, searches and
seizures, the rights of a person under custodial investigation, the rights of an accused, and the
privilege against self-incrimination. It is recognized that legislation is unnecessary to enable courts
to effectuate constitutional provisions guaranteeing the fundamental rights of life, liberty and the
protection of property. The same treatment is accorded to constitutional provisions forbidding the
taking or damaging of property for public use without just compensation. (Emphasis supplied)

Thus, in numerous cases,67 this Court, even in the absence of implementing legislation, applied
directly the provisions of the 1935, 1973 and 1987 Constitutions limiting land ownership to Filipinos.
In Soriano v. Ong Hoo,68this Court ruled:

x x x As the Constitution is silent as to the effects or consequences of a sale by a citizen of his land to
an alien, and as both the citizen and the alien have violated the law, none of them should have a
recourse against the other, and it should only be the State that should be allowed to intervene and
determine what is to be done with the property subject of the violation. We have said that what the
State should do or could do in such matters is a matter of public policy, entirely beyond the scope of
judicial authority. (Dinglasan, et al. vs. Lee Bun Ting, et al., 6 G. R. No. L-5996, June 27,
1956.) While the legislature has not definitely decided what policy should be followed in
cases of violations against the constitutional prohibition, courts of justice cannot go
beyond by declaring the disposition to be null and void as violative of the Constitution. x
x x (Emphasis supplied)

To treat Section 11, Article XII of the Constitution as not self-executing would mean that since the
1935 Constitution, or over the last 75 years, not one of the constitutional provisions expressly
reserving specific areas of investments to corporations, at least 60 percent of the "capital" of which is
owned by Filipinos, was enforceable. In short, the framers of the 1935, 1973 and 1987 Constitutions
miserably failed to effectively reserve to Filipinos specific areas of investment, like the operation by
corporations of public utilities, the exploitation by corporations of mineral resources, the ownership
by corporations of real estate, and the ownership of educational institutions. All the legislatures that
convened since 1935 also miserably failed to enact legislations to implement these vital
constitutional provisions that determine who will effectively control the national economy, Filipinos
or foreigners. This Court cannot allow such an absurd interpretation of the Constitution.

This Court has held that the SEC "has both regulatory and adjudicative functions." 69 Under its
regulatory functions, the SEC can be compelled by mandamus to perform its statutory duty when it
unlawfully neglects to perform the same. Under its adjudicative or quasi-judicial functions, the SEC
can be also be compelled by mandamus to hear and decide a possible violation of any law it
administers or enforces when it is mandated by law to investigate such violation.1awphi1

Under Section 17(4)70 of the Corporation Code, the SEC has the regulatory function to reject or
disapprove the Articles of Incorporation of any corporation where "the required percentage of
ownership of the capital stock to be owned by citizens of the Philippines has not been
complied with as required by existing laws or the Constitution." Thus, the SEC is the
government agency tasked with the statutory duty to enforce the nationality requirement prescribed
in Section 11, Article XII of the Constitution on the ownership of public utilities. This Court, in a
petition for declaratory relief that is treated as a petition for mandamus as in the present case, can
direct the SEC to perform its statutory duty under the law, a duty that the SEC has apparently
unlawfully neglected to do based on the 2010 GIS that respondent PLDT submitted to the SEC.

Under Section 5(m) of the Securities Regulation Code, 71 the SEC is vested with the "power and
function" to "suspend or revoke, after proper notice and hearing, the franchise or
certificate of registration of corporations, partnerships or associations, upon any of the
grounds provided by law." The SEC is mandated under Section 5(d) of the same Code with the
"power and function" to "investigate x x x the activities of persons to ensure compliance"
with the laws and regulations that SEC administers or enforces. The GIS that all corporations are
required to submit to SEC annually should put the SEC on guard against violations of the
nationality requirement prescribed in the Constitution and existing laws. This Court can compel the
SEC, in a petition for declaratory relief that is treated as a petition for mandamus as in the present
case, to hear and decide a possible violation of Section 11, Article XII of the Constitution in view of
the ownership structure of PLDT’s voting shares, as admitted by respondents and as stated in
PLDT’s 2010 GIS that PLDT submitted to SEC.

WHEREFORE, we PARTLY GRANT the petition and rule that the term "capital" in Section 11,
Article XII of the 1987 Constitution refers only to shares of stock entitled to vote in the election of
directors, and thus in the present case only to common shares, and not to the total outstanding
capital stock (common and non-voting preferred shares). Respondent Chairperson of the Securities
and Exchange Commission is DIRECTED to apply this definition of the term "capital" in
determining the extent of allowable foreign ownership in respondent Philippine Long Distance
Telephone Company, and if there is a violation of Section 11, Article XII of the Constitution, to
impose the appropriate sanctions under the law.

SO ORDERED.

Gamboa v. Teves (2)

This resolves the motions for reconsideration of the 28 June 2011 Decision filed by (1) the Philippine
Stock Exchange's (PSE) President, 1 (2) Manuel V. Pangilinan (Pangilinan),2 (3) Napoleon L.
Nazareno (Nazareno ),3and ( 4) the Securities and Exchange Commission (SEC) 4 (collectively,
movants ).

The Office of the Solicitor General (OSG) initially filed a motion for reconsideration on behalfofthe
SEC,5 assailing the 28 June 2011 Decision. However, it subsequently filed a Consolidated Comment
on behalf of the State,6declaring expressly that it agrees with the Court's definition of the term
"capital" in Section 11, Article XII of the Constitution. During the Oral Arguments on 26 June 2012,
the OSG reiterated its position consistent with the Court's 28 June 2011 Decision.

We deny the motions for reconsideration.

I. Far-reaching implications of the legal issue justify treatment of petition for declaratory
relief as one for mandamus.

As we emphatically stated in the 28 June 2011 Decision, the interpretation of the term "capital" in
Section 11, Article XII of the Constitution has far-reaching implications to the national economy. In
fact, a resolution of this issue will determine whether Filipinos are masters, or second-class citizens,
in their own country. What is at stake here is whether Filipinos or foreigners will have effective
control of the Philippine national economy. Indeed, if ever there is a legal issue that has far-
reaching implications to the entire nation, and to future generations of Filipinos, it is the threshold
legal issue presented in this case.

Contrary to Pangilinan’s narrow view, the serious economic consequences resulting in the
interpretation of the term "capital" in Section 11, Article XII of the Constitution undoubtedly
demand an immediate adjudication of this issue. Simply put, the far-reaching implications of
this issue justify the treatment of the petition as one for mandamus. 7

In Luzon Stevedoring Corp. v. Anti-Dummy Board,8 the Court deemed it wise and expedient to
resolve the case although the petition for declaratory relief could be outrightly dismissed for being
procedurally defective. There, appellant admittedly had already committed a breach of the Public
Service Act in relation to the Anti-Dummy Law since it had been employing non- American aliens
long before the decision in a prior similar case. However, the main issue in Luzon Stevedoring was of
transcendental importance, involving the exercise or enjoyment of rights, franchises, privileges,
properties and businesses which only Filipinos and qualified corporations could exercise or enjoy
under the Constitution and the statutes. Moreover, the same issue could be raised by appellant in an
appropriate action. Thus, in Luzon Stevedoring the Court deemed it necessary to finally dispose of
the case for the guidance of all concerned, despite the apparent procedural flaw in the petition.

The circumstances surrounding the present case, such as the supposed procedural defect of the
petition and the pivotal legal issue involved, resemble those in Luzon Stevedoring. Consequently, in
the interest of substantial justice and faithful adherence to the Constitution, we opted to resolve this
case for the guidance of the public and all concerned parties.

II.No change of any long-standing rule; thus, no redefinition of the term "capital."

Movants contend that the term "capital" in Section 11, Article XII of the Constitution has long been
settled and defined to refer to the total outstanding shares of stock, whether voting or non-voting. In
fact, movants claim that the SEC, which is the administrative agency tasked to enforce the 60-40
ownership requirement in favor of Filipino citizens in the Constitution and various statutes, has
consistently adopted this particular definition in its numerous opinions. Movants point out that with
the 28 June 2011 Decision, the Court in effect introduced a "new" definition or "midstream
redefinition"9 of the term "capital" in Section 11, Article XII of the Constitution.

This is egregious error.

For more than 75 years since the 1935 Constitution, the Court has not interpreted or defined the
term "capital" found in various economic provisions of the 1935, 1973 and 1987 Constitutions. There
has never been a judicial precedent interpreting the term "capital" in the 1935, 1973 and 1987
Constitutions, until now. Hence, it is patently wrong and utterly baseless to claim that the Court in
defining the term "capital" in its 28 June 2011 Decision modified, reversed, or set aside the
purported long-standing definition of the term "capital," which supposedly refers to the total
outstanding shares of stock, whether voting or non-voting. To repeat, until the present case there
has never been a Court ruling categorically defining the term "capital" found in the various economic
provisions of the 1935, 1973 and 1987 Philippine Constitutions.

The opinions of the SEC, as well as of the Department of Justice (DOJ), on the definition of the term
"capital" as referring to both voting and non-voting shares (combined total of common and preferred
shares) are, in the first place, conflicting and inconsistent. There is no basis whatsoever to the claim
that the SEC and the DOJ have consistently and uniformly adopted a definition of the term "capital"
contrary to the definition that this Court adopted in its 28 June 2011 Decision.

In DOJ Opinion No. 130, s. 1985,10 dated 7 October 1985, the scope of the term "capital" in Section 9,
Article XIV of the 1973 Constitution was raised, that is, whether the term "capital" includes "both
preferred and common stocks." The issue was raised in relation to a stock-swap transaction between
a Filipino and a Japanese corporation, both stockholders of a domestic corporation that owned lands
in the Philippines. Then Minister of Justice Estelito P. Mendoza ruled that the resulting ownership
structure of the corporation would be unconstitutional because 60% of the voting stock would be
owned by Japanese while Filipinos would own only 40% of the voting stock, although when the non-
voting stock is added, Filipinos would own 60% of the combined voting and non-voting stock. This
ownership structure is remarkably similar to the current ownership structure of PLDT.
Minister Mendoza ruled:
xxxx

Thus, the Filipino group still owns sixty (60%) of the entire subscribed capital stock (common and
preferred) while the Japanese investors control sixty percent (60%) of the common (voting) shares.

It is your position that x x x since Section 9, Article XIV of the Constitution uses the word
"capital," which is construed "to include both preferred and common shares" and "that
where the law does not distinguish, the courts shall not distinguish."

xxxx

In light of the foregoing jurisprudence, it is my opinion that the stock-swap transaction in

question may not be constitutionally upheld. While it may be ordinary corporate practice to
classify corporate shares into common voting shares and preferred non-voting shares, any
arrangement which attempts to defeat the constitutional purpose should be eschewed. Thus, the
resultant equity arrangement which would place ownership of 60% 11 of the common
(voting) shares in the Japanese group, while retaining 60% of the total percentage of
common and preferred shares in Filipino hands would amount to circumvention of the
principle of control by Philippine stockholders that is implicit in the 60% Philippine
nationality requirement in the Constitution. (Emphasis supplied)

In short, Minister Mendoza categorically rejected the theory that the term "capital" in Section 9,
Article XIV of the 1973 Constitution includes "both preferred and common stocks" treated as the
same class of shares regardless of differences in voting rights and privileges. Minister Mendoza
stressed that the 60-40 ownership requirement in favor of Filipino citizens in the Constitution is not
complied with unless the corporation "satisfies the criterion of beneficial ownership" and that
in applying the same "the primordial consideration is situs of control."

On the other hand, in Opinion No. 23-10 dated 18 August 2010, addressed to Castillo Laman Tan
Pantaleon & San Jose, then SEC General Counsel Vernette G. Umali-Paco applied the Voting
Control Test, that is, using only the voting stock to determine whether a corporation is a Philippine
national. The Opinion states:

Applying the foregoing, particularly the Control Test, MLRC is deemed as a Philippine national
because: (1) sixty percent (60%) of its outstanding capital stock entitled to vote is owned by a
Philippine national, the Trustee; and (2) at least sixty percent (60%) of the ERF will accrue to the
benefit of Philippine nationals. Still pursuant to the Control Test, MLRC’s investment in 60%
of BFDC’s outstanding capital stock entitled to vote shall be deemed as of Philippine
nationality, thereby qualifying BFDC to own private land.

Further, under, and for purposes of, the FIA, MLRC and BFDC are both Philippine nationals,
considering that: (1) sixty percent (60%) of their respective outstanding capital stock entitled to
vote is owned by a Philippine national (i.e., by the Trustee, in the case of MLRC; and by MLRC, in
the case of BFDC); and (2) at least 60% of their respective board of directors are Filipino citizens.
(Boldfacing and italicization supplied)

Clearly, these DOJ and SEC opinions are compatible with the Court’s interpretation of the 60-40
ownership requirement in favor of Filipino citizens mandated by the Constitution for certain
economic activities. At the same time, these opinions highlight the conflicting, contradictory, and
inconsistent positions taken by the DOJ and the SEC on the definition of the term "capital" found in
the economic provisions of the Constitution.
The opinions issued by SEC legal officers do not have the force and effect of SEC rules and
regulations because only the SEC en banc can adopt rules and regulations. As expressly provided in
Section 4.6 of the Securities Regulation Code,12 the SEC cannot delegate to any of its individual
Commissioner or staff the power to adopt any rule or regulation. Further, under Section 5.1 of the
same Code, it is the SEC as a collegial body, and not any of its legal officers, that is
empowered to issue opinions and approve rules and regulations. Thus:

4.6. The Commission may, for purposes of efficiency, delegate any of its functions to any department
or office of the Commission, an individual Commissioner or staff member of the
Commission exceptits review or appellate authority and its power to adopt, alter and
supplement any rule or regulation.

The Commission may review upon its own initiative or upon the petition of any interested party any
action of any department or office, individual Commissioner, or staff member of the Commission.

SEC. 5. Powers and Functions of the Commission.- 5.1. The Commission shall act with transparency
and shall have the powers and functions provided by this Code, Presidential Decree No. 902-A, the
Corporation Code, the Investment Houses Law, the Financing Company Act and other existing laws.
Pursuant thereto the Commission shall have, among others, the following powers and functions:

xxxx

(g) Prepare, approve, amend or repeal rules, regulations and orders, and
issue opinions and provide guidance on and supervise compliance with such rules,
regulations and orders;

x x x x (Emphasis supplied)

Thus, the act of the individual Commissioners or legal officers of the SEC in issuing opinions that
have the effect of SEC rules or regulations is ultra vires. Under Sections 4.6 and 5.1(g) of the Code,
only the SEC en banc can "issue opinions" that have the force and effect of rules or regulations.
Section 4.6 of the Code bars the SEC en banc from delegating to any individual Commissioner or
staff the power to adopt rules or regulations. In short, any opinion of individual
Commissioners or SEC legal officers does not constitute a rule or regulation of the SEC.

The SEC admits during the Oral Arguments that only the SEC en banc, and not any of its individual
commissioners or legal staff, is empowered to issue opinions which have the same binding effect as
SEC rules and regulations, thus:

JUSTICE CARPIO:

So, under the law, it is the Commission En Banc that can issue an

SEC Opinion, correct?

COMMISSIONER GAITE:13

That’s correct, Your Honor.

JUSTICE CARPIO:
 Can the Commission En Banc delegate this function to an SEC officer?

COMMISSIONER GAITE:

Yes, Your Honor, we have delegated it to the General Counsel.

JUSTICE CARPIO:

It can be delegated. What cannot be delegated by the Commission En Banc to a

commissioner or an individual employee of the Commission?

COMMISSIONER GAITE:

Novel opinions that [have] to be decided by the En Banc...

JUSTICE CARPIO:

What cannot be delegated, among others, is the power to adopt or amend rules and
regulations, correct?

COMMISSIONER GAITE:

That’s correct, Your Honor.

JUSTICE CARPIO:

So, you combine the two (2), the SEC officer, if delegated that power, can issue an
opinion but that opinion does not constitute a rule or regulation, correct?

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

So, all of these opinions that you mentioned they are not rules and regulations,
correct?

COMMISSIONER GAITE:

They are not rules and regulations.

JUSTICE CARPIO:

If they are not rules and regulations, they apply only to that particular situation and will not
constitute a precedent, correct?

COMMISSIONER GAITE:

Yes, Your Honor.14 (Emphasis supplied)

Significantly, the SEC en banc, which is the collegial body statutorily empowered to issue rules and
opinions on behalf of the SEC, has adopted even the Grandfather Rule in determining compliance
with the 60-40 ownership requirement in favor of Filipino citizens mandated by the Constitution for
certain economic activities. This prevailing SEC ruling, which the SEC correctly adopted to thwart
any circumvention of the required Filipino "ownership and control," is laid down in the 25 March
2010 SEC en banc ruling in Redmont Consolidated Mines, Corp. v. McArthur Mining, Inc., et al.,15 to
wit:

The avowed purpose of the Constitution is to place in the hands of Filipinos the exploitation of our
natural resources. Necessarily, therefore, the Rule interpreting the constitutional provision
should not diminish that right through the legal fiction of corporate ownership and
control. But the constitutional provision, as interpreted and practiced via the 1967 SEC Rules, has
favored foreigners contrary to the command of the Constitution. Hence, the Grandfather Rule
must be applied to accurately determine the actual participation, both direct and indirect,
of foreigners in a corporation engaged in a nationalized activity or business.

Compliance with the constitutional limitation(s) on engaging in nationalized activities must be

determined by ascertaining if 60% of the investing corporation’s outstanding capital stock is owned
by "Filipino citizens", or as interpreted, by natural or individual Filipino citizens. If such investing
corporation is in turn owned to some extent by another investing corporation, the same process must
be observed. One must not stop until the citizenships of the individual or natural stockholders of
layer after layer of investing corporations have been established, the very essence of the Grandfather
Rule.

Lastly, it was the intent of the framers of the 1987 Constitution to adopt the Grandfather
Rule. In one of the discussions on what is now Article XII of the present Constitution, the framers
made the following exchange:

MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or Filipino equity and foreign
equity; namely, 60-40 in Section 3, 60-40 in Section 9, and 2/3-1/3 in Section 15.

MR. VILLEGAS. That is right.

MR. NOLLEDO. In teaching law, we are always faced with the question: ‘Where do we base the
equity requirement, is it on the authorized capital stock, on the subscribed capital stock, or on the
paid-up capital stock of a corporation’? Will the Committee please enlighten me on this?

MR. VILLEGAS. We have just had a long discussion with the members of the team from the UP Law
Center who provided us a draft. The phrase that is contained here which we adopted from the UP
draft is ‘60 percent of voting stock.’

MR. NOLLEDO. That must be based on the subscribed capital stock, because unless declared
delinquent, unpaid capital stock shall be entitled to vote.

MR. VILLEGAS. That is right.

MR. NOLLEDO. Thank you. With respect to an investment by one corporation in another
corporation, say, a corporation with 60-40 percent equity invests in another corporation which is
permitted by the Corporation Code, does the Committee adopt the grandfather rule?

MR. VILLEGAS. Yes, that is the understanding of the Committee.

MR. NOLLEDO. Therefore, we need additional Filipino capital?

MR. VILLEGAS. Yes. (Boldfacing and underscoring supplied; italicization in the original)

This SEC en banc ruling conforms to our 28 June 2011 Decision that the 60-40 ownership
requirement in favor of Filipino citizens in the Constitution to engage in certain economic activities
applies not only to voting control of the corporation, but also to the beneficial ownership of the
corporation. Thus, in our 28 June 2011 Decision we stated:

Mere legal title is insufficient to meet the 60 percent Filipinoowned "capital" required in the
Constitution. Full beneficial ownership of 60 percent of the outstanding capital stock,
coupled with 60 percent of the voting rights, is required. The legal and beneficial ownership of
60 percent of the outstanding capital stock must rest in the hands of Filipino nationals in accordance
with the constitutional mandate. Otherwise, the corporation is "considered as non-Philippine
national[s]." (Emphasis supplied)

Both the Voting Control Test and the Beneficial Ownership Test must be applied to determine
whether a corporation is a "Philippine national."

The interpretation by legal officers of the SEC of the term "capital," embodied in various opinions
which respondents relied upon, is merely preliminary and an opinion only of such officers. To repeat,
any such opinion does not constitute an SEC rule or regulation. In fact, many of these opinions
contain a disclaimer which expressly states: "x x x the foregoing opinion is based solely on facts
disclosed in your query and relevant only to the particular issue raised therein and shall not be
used in the nature of a standing rule binding upon the Commission in other cases
whether of similar or dissimilar circumstances."16 Thus, the opinions clearly make
a caveat that they do not constitute binding precedents on any one, not even on the SEC itself.

Likewise, the opinions of the SEC en banc, as well as of the DOJ, interpreting the law are neither
conclusive nor controlling and thus, do not bind the Court. It is hornbook doctrine that any
interpretation of the law that administrative or quasi-judicial agencies make is only preliminary,
never conclusive on the Court. The power to make a final interpretation of the law, in this case the
term "capital" in Section 11, Article XII of the 1987 Constitution, lies with this Court, not with any
other government entity.

In his motion for reconsideration, the PSE President cites the cases of National Telecommunications
Commission v. Court of Appeals17 and Philippine Long Distance Telephone Company v. National
Telecommunications Commission18 in arguing that the Court has already defined the term "capital"
in Section 11, Article XII of the 1987 Constitution.19

The PSE President is grossly mistaken. In both cases of National Telecommunications v. Court of
Appeals20 and Philippine Long Distance Telephone Company v. National Telecommunications
Commission,21 the Court did not define the term "capital" as found in Section 11, Article XII of the
1987 Constitution. In fact, these two cases never mentioned, discussed or cited Section 11,
Article XII of the Constitution or any of its economic provisions, and thus cannot serve as
precedent in the interpretation of Section 11, Article XII of the Constitution. These two
cases dealt solely with the determination of the correct regulatory fees under Section 40(e) and (f) of
the Public Service Act, to wit:

(e) For annual reimbursement of the expenses incurred by the Commission in the supervision of
other public services and/or in the regulation or fixing of their rates, twenty centavos for each one
hundred pesos or fraction thereof, of the capital stock subscribed or paid, or if no shares have
been issued, of the capital invested, or of the property and equipment whichever is higher.

(f) For the issue or increase of capital stock, twenty centavos for each one hundred pesos or fraction
thereof, of the increased capital. (Emphasis supplied)

The Court’s interpretation in these two cases of the terms "capital stock subscribed or paid," "capital
stock" and "capital" does not pertain to, and cannot control, the definition of the term "capital" as
used in Section 11, Article XII of the Constitution, or any of the economic provisions of the
Constitution where the term "capital" is found. The definition of the term "capital" found in the
Constitution must not be taken out of context. A careful reading of these two cases reveals that the
terms "capital stock subscribed or paid," "capital stock" and "capital" were defined solely to
determine the basis for computing the supervision and regulation fees under Section 40(e) and (f) of
the Public Service Act.

III. Filipinization of Public Utilities

The Preamble of the 1987 Constitution, as the prologue of the supreme law of the land, embodies the
ideals that the Constitution intends to achieve.22 The Preamble reads:

We, the sovereign Filipino people, imploring the aid of Almighty God, in order to build a just and
humane society, and establish a Government that shall embody our ideals and aspirations, promote
the common good, conserve and develop our patrimony, and secure to ourselves and our
posterity, the blessings of independence and democracy under the rule of law and a regime of truth,
justice, freedom, love, equality, and peace, do ordain and promulgate this Constitution. (Emphasis
supplied)

Consistent with these ideals, Section 19, Article II of the 1987 Constitution declares as State policy
the development of a national economy "effectively controlled" by Filipinos:

Section 19. The State shall develop a self-reliant and independent national economy effectively
controlled by Filipinos.

Fortifying the State policy of a Filipino-controlled economy, the Constitution decrees:

Section 10. The Congress shall, upon recommendation of the economic and planning agency, when
the national interest dictates, reserve to citizens of the Philippines or to corporations or associations
at least sixty per centum of whose capital is owned by such citizens, or such higher percentage as
Congress may prescribe, certain areas of investments. The Congress shall enact measures that will
encourage the formation and operation of enterprises whose capital is wholly owned by Filipinos.

In the grant of rights, privileges, and concessions covering the national economy and patrimony, the
State shall give preference to qualified Filipinos.

The State shall regulate and exercise authority over foreign investments within its national
jurisdiction and in accordance with its national goals and priorities. 23

Under Section 10, Article XII of the 1987 Constitution, Congress may "reserve to citizens of the
Philippines or to corporations or associations at least sixty per centum of whose capital is owned by
such citizens, or such higher percentage as Congress may prescribe, certain areas of investments."
Thus, in numerous laws Congress has reserved certain areas of investments to Filipino citizens or to
corporations at least sixty percent of the "capital" of which is owned by Filipino citizens. Some of
these laws are: (1) Regulation of Award of Government Contracts or R.A. No. 5183; (2) Philippine
Inventors Incentives Act or R.A. No. 3850; (3) Magna Carta for Micro, Small and Medium
Enterprises or R.A. No. 6977; (4) Philippine Overseas Shipping Development Act or R.A. No. 7471;
(5) Domestic Shipping Development Act of 2004 or R.A. No. 9295; (6) Philippine Technology Transfer
Act of 2009 or R.A. No. 10055; and (7) Ship Mortgage Decree or P.D. No. 1521.

With respect to public utilities, the 1987 Constitution specifically ordains:

Section 11. No franchise, certificate, or any other form of authorization for the operation of
a public utility shall be granted except to citizens of the Philippines or to corporations or
associations organized under the laws of the Philippines, at least sixty per centum of
whose capital is owned by such citizens; nor shall such franchise, certificate, or authorization be
exclusive in character or for a longer period than fifty years. Neither shall any such franchise or
right be granted except under the condition that it shall be subject to amendment, alteration, or
repeal by the Congress when the common good so requires. The State shall encourage equity
participation in public utilities by the general public. The participation of foreign investors in the
governing body of any public utility enterprise shall be limited to their proportionate share in its
capital, and all the executive and managing officers of such corporation or association must be
citizens of the Philippines. (Emphasis supplied)

This provision, which mandates the Filipinization of public utilities, requires that any form of
authorization for the operation of public utilities shall be granted only to "citizens of the Philippines
or to corporations or associations organized under the laws of the Philippines at least sixty per
centum of whose capital is owned by such citizens." "The provision is [an express] recognition
of the sensitive and vital position of public utilities both in the national economy and for
national security."24

The 1987 Constitution reserves the ownership and operation of public utilities exclusively to (1)
Filipino citizens, or (2) corporations or associations at least 60 percent of whose "capital" is owned by
Filipino citizens. Hence, in the case of individuals, only Filipino citizens can validly own and operate
a public utility. In the case of corporations or associations, at least 60 percent of their "capital" must
be owned by Filipino citizens. In other words, under Section 11, Article XII of the 1987
Constitution, to own and operate a public utility a corporation’s capital must at least be
60 percent owned by Philippine nationals.

IV.
Definition of "Philippine National"

Pursuant to the express mandate of Section 11, Article XII of the 1987 Constitution, Congress
enacted Republic Act No. 7042 or the Foreign Investments Act of 1991 (FIA), as amended, which
defined a "Philippine national" as follows:

SEC. 3. Definitions. - As used in this Act:

a. The term "Philippine national" shall mean a citizen of the Philippines; or a domestic partnership
or association wholly owned by citizens of the Philippines; or a corporation organized under the
laws of the Philippines of which at least sixty percent (60%) of the capital stock
outstanding and entitled to vote is owned and held by citizens of the Philippines; or a
corporation organized abroad and registered as doing business in the Philippines under the
Corporation Code of which one hundred percent (100%) of the capital stock outstanding and entitled
to vote is wholly owned by Filipinos or a trustee of funds for pension or other employee retirement or
separation benefits, where the trustee is a Philippine national and at least sixty percent (60%) of the
fund will accrue to the benefit of Philippine nationals: Provided, That where a corporation and its
non-Filipino stockholders own stocks in a Securities and Exchange Commission (SEC) registered
enterprise, at least sixty percent (60%) of the capital stock outstanding and entitled to vote of each of
both corporations must be owned and held by citizens of the Philippines and at least sixty percent
(60%) of the members of the Board of Directors of each of both corporations must be citizens of the
Philippines, in order that the corporation, shall be considered a "Philippine national." (Boldfacing,
italicization and underscoring supplied)

Thus, the FIA clearly and unequivocally defines a "Philippine national" as a Philippine citizen, or
a domestic corporation at least "60% of the capital stock outstanding and entitled to vote" is
owned by Philippine citizens.

The definition of a "Philippine national" in the FIA reiterated the meaning of such term as provided
in its predecessor statute, Executive Order No. 226 or the Omnibus Investments Code of
1987,25 which was issued by then President Corazon C. Aquino. Article 15 of this Code states:

Article 15. "Philippine national" shall mean a citizen of the Philippines or a diplomatic partnership
or association wholly-owned by citizens of the Philippines; or a corporation organized under the
laws of the Philippines of which at least sixty per cent (60%) of the capital stock
outstanding and entitled to vote is owned and held by citizens of the Philippines; or a
trustee of funds for pension or other employee retirement or separation benefits, where the trustee is
a Philippine national and at least sixty per cent (60%) of the fund will accrue to the benefit of
Philippine nationals: Provided, That where a corporation and its non-Filipino stockholders own stock
in a registered enterprise, at least sixty per cent (60%) of the capital stock outstanding and entitled
to vote of both corporations must be owned and held by the citizens of the Philippines and at least
sixty per cent (60%) of the members of the Board of Directors of both corporations must be citizens of
the Philippines in order that the corporation shall be considered a Philippine national. (Boldfacing,
italicization and underscoring supplied)

Under Article 48(3)26 of the Omnibus Investments Code of 1987, "no corporation x x x which is not a
‘Philippine national’ x x x shall do business

x x x in the Philippines x x x without first securing from the Board of Investments a written
certificate to the effect that such business or economic activity x x x would not conflict with the
Constitution or laws of the Philippines."27Thus, a "non-Philippine national" cannot own and operate
a reserved economic activity like a public utility. This means, of course, that only a "Philippine
national" can own and operate a public utility.

In turn, the definition of a "Philippine national" under Article 15 of the Omnibus Investments Code
of 1987 was a reiteration of the meaning of such term as provided in Article 14 of the Omnibus
Investments Code of 1981,28 to wit:

Article 14. "Philippine national" shall mean a citizen of the Philippines; or a domestic partnership or
association wholly owned by citizens of the Philippines; or a corporation organized under the
laws of the Philippines of which at least sixty per cent (60%) of the capital stock
outstanding and entitled to vote is owned and held by citizens of the Philippines; or a
trustee of funds for pension or other employee retirement or separation benefits, where the trustee is
a Philippine national and at least sixty per cent (60%) of the fund will accrue to the benefit of
Philippine nationals: Provided, That where a corporation and its non-Filipino stockholders own stock
in a registered enterprise, at least sixty per cent (60%) of the capital stock outstanding and entitled
to vote of both corporations must be owned and held by the citizens of the Philippines and at least
sixty per cent (60%) of the members of the Board of Directors of both corporations must be citizens of
the Philippines in order that the corporation shall be considered a Philippine national. (Boldfacing,
italicization and underscoring supplied)

Under Article 69(3) of the Omnibus Investments Code of 1981, "no corporation x x x which is not a
‘Philippine national’ x x x shall do business x x x in the Philippines x x x without first securing a
written certificate from the Board of Investments to the effect that such business or economic
activity x x x would not conflict with the Constitution or laws of the Philippines." 29 Thus, a "non-
Philippine national" cannot own and operate a reserved economic activity like a public utility. Again,
this means that only a "Philippine national" can own and operate a public utility.

Prior to the Omnibus Investments Code of 1981, Republic Act No. 518630 or the Investment Incentives
Act, which took effect on 16 September 1967, contained a similar definition of a "Philippine
national," to wit:

(f) "Philippine National" shall mean a citizen of the Philippines; or a partnership or association
wholly owned by citizens of the Philippines; or a corporation organized under the laws of the
Philippines of which at least sixty per cent of the capital stock outstanding and entitled
to vote is owned and held by citizens of the Philippines; or a trustee of funds for pension or
other employee retirement or separation benefits, where the trustee is a Philippine National and at
least sixty per cent of the fund will accrue to the benefit of Philippine Nationals: Provided, That
where a corporation and its non-Filipino stockholders own stock in a registered enterprise, at least
sixty per cent of the capital stock outstanding and entitled to vote of both corporations must be
owned and held by the citizens of the Philippines and at least sixty per cent of the members of the
Board of Directors of both corporations must be citizens of the Philippines in order that the
corporation shall be considered a Philippine National. (Boldfacing, italicization and underscoring
supplied)

Under Section 3 of Republic Act No. 5455 or the Foreign Business Regulations Act, which took effect
on 30 September 1968, if the investment in a domestic enterprise by non-Philippine nationals
exceeds 30% of its outstanding capital stock, such enterprise must obtain prior approval from the
Board of Investments before accepting such investment. Such approval shall not be granted if the
investment "would conflict with existing constitutional provisions and laws regulating the degree of
required ownership by Philippine nationals in the enterprise."31 A "non-Philippine national" cannot
own and operate a reserved economic activity like a public utility. Again, this means that only a
"Philippine national" can own and operate a public utility.

The FIA, like all its predecessor statutes, clearly defines a "Philippine national" as a Filipino
citizen, or a domestic corporation "at least sixty percent (60%) of the capital stock
outstanding and entitled to vote"is owned by Filipino citizens. A domestic corporation is a
"Philippine national" only if at least 60% of its voting stock is owned by Filipino citizens. This
definition of a "Philippine national" is crucial in the present case because the FIA reiterates and
clarifies Section 11, Article XII of the 1987 Constitution, which limits the ownership and operation of
public utilities to Filipino citizens or to corporations or associations at least 60% Filipino-owned.

The FIA is the basic law governing foreign investments in the Philippines, irrespective of the nature
of business and area of investment. The FIA spells out the procedures by which non-Philippine
nationals can invest in the Philippines. Among the key features of this law is the concept of a
negative list or the Foreign Investments Negative List. 32 Section 8 of the law states:

SEC. 8. List of Investment Areas Reserved to Philippine Nationals [Foreign Investment

Negative List]. - The Foreign Investment Negative List shall have two 2 component lists: A and B:
a. List A shall enumerate the areas of activities reserved to Philippine nationals by
mandate of the Constitution and specific laws.

b. List B shall contain the areas of activities and enterprises regulated pursuant to law:

1. which are defense-related activities, requiring prior clearance and authorization from the
Department of National Defense [DND] to engage in such activity, such as the manufacture, repair,
storage and/or distribution of firearms, ammunition, lethal weapons, military ordinance, explosives,
pyrotechnics and similar materials; unless such manufacturing or repair activity is specifically
authorized, with a substantial export component, to a non-Philippine national by the Secretary of
National Defense; or

2. which have implications on public health and morals, such as the manufacture and distribution of
dangerous drugs; all forms of gambling; nightclubs, bars, beer houses, dance halls, sauna and steam
bathhouses and massage clinics. (Boldfacing, underscoring and italicization supplied)

Section 8 of the FIA enumerates the investment areas "reserved to Philippine nationals." Foreign
Investment Negative List A consists of "areas of activities reserved to Philippine nationals
by mandate of the Constitution and specific laws," where foreign equity participation in
any enterprise shall be limited to the maximum percentage expressly prescribed by the
Constitution and other specific laws. In short, to own and operate a public utility in the
Philippines one must be a "Philippine national" as defined in the FIA. The FIA is
abundant notice to foreign investors to what extent they can invest in public utilities in
the Philippines.

To repeat, among the areas of investment covered by the Foreign Investment Negative List A is the
ownership and operation of public utilities, which the Constitution expressly reserves to Filipino
citizens and to corporations at least 60% owned by Filipino citizens. In other words, Negative List
A of the FIA reserves the ownership and operation of public utilities only to "Philippine
nationals," defined in Section 3(a) of the FIA as "(1) a citizen of the Philippines; x x x or (3) a
corporation organized under the laws of the Philippines of which at least sixty percent
(60%) of the capital stock outstanding and entitled to vote is owned and held by citizens of
the Philippines; or (4) a corporation organized abroad and registered as doing business in the
Philippines under the Corporation Code of which one hundred percent (100%) of the capital stock
outstanding and entitled to vote is wholly owned by Filipinos or a trustee of funds for pension or
other employee retirement or separation benefits, where the trustee is a Philippine national and at
least sixty percent (60%) of the fund will accrue to the benefit of Philippine nationals."

Clearly, from the effectivity of the Investment Incentives Act of 1967 to the adoption of the Omnibus
Investments Code of 1981, to the enactment of the Omnibus Investments Code of 1987, and to the
passage of the present Foreign Investments Act of 1991, or for more than four decades, the
statutory definition of the term "Philippine national" has been uniform and consistent: it
means a Filipino citizen, or a domestic corporation at least 60% of the voting stock is
owned by Filipinos. Likewise, these same statutes have uniformly and consistently
required that only "Philippine nationals" could own and operate public utilities in the
Philippines. The following exchange during the Oral Arguments is revealing:

JUSTICE CARPIO:

Counsel, I have some questions. You are aware of the Foreign Investments Act of 1991, x x x?
And the FIA of 1991 took effect in 1991, correct? That’s over twenty (20) years ago, correct?
COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

And Section 8 of the Foreign Investments Act of 1991 states that []only Philippine nationals
can own and operate public utilities[], correct?

COMMISSIONER GAITE:

Yes, Your Honor.

JUSTICE CARPIO:

And the same Foreign Investments Act of 1991 defines a "Philippine national" either as a
citizen of the Philippines, or if it is a corporation at least sixty percent (60%) of the voting
stock is owned by citizens of the Philippines, correct?

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

And, you are also aware that under the predecessor law of the Foreign Investments Act of
1991, the Omnibus Investments Act of 1987, the same provisions apply: x x x only Philippine
nationals can own and operate a public utility and the Philippine national, if it is a
corporation, x x x sixty percent (60%) of the capital stock of that corporation must be owned
by citizens of the Philippines, correct?

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

And even prior to the Omnibus Investments Act of 1987, under the Omnibus Investments
Act of 1981, the same rules apply: x x x only a Philippine national can own and operate a
public utility and a Philippine national, if it is a corporation, sixty percent (60%) of its x x x
voting stock, must be owned by citizens of the Philippines, correct?

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

And even prior to that, under [the]1967 Investments Incentives Act and the Foreign
Company Act of 1968, the same rules applied, correct?
COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

So, for the last four (4) decades, x x x, the law has been very consistent – only a
Philippine national can own and operate a public utility, and a Philippine
national, if it is a corporation, x x x at least sixty percent (60%) of the voting stock
must be owned by citizens of the Philippines, correct?

COMMISSIONER GAITE:

Correct, Your Honor.33 (Emphasis supplied)

Government agencies like the SEC cannot simply ignore Sections 3(a) and 8 of the FIA which
categorically prescribe that certain economic activities, like the ownership and operation of public
utilities, are reserved to corporations "at least sixty percent (60%) of the capital stock
outstanding and entitled to vote is owned and held by citizens of the Philippines." Foreign
Investment Negative List A refers to "activities reserved to Philippine nationals by mandate of the
Constitution and specific laws." The FIA is the basic statute regulating foreign investments in
the Philippines. Government agencies tasked with regulating or monitoring foreign investments,
as well as counsels of foreign investors, should start with the FIA in determining to what extent a
particular foreign investment is allowed in the Philippines. Foreign investors and their counsels who
ignore the FIA do so at their own peril. Foreign investors and their counsels who rely on opinions of
SEC legal officers that obviously contradict the FIA do so also at their own peril.

Occasional opinions of SEC legal officers that obviously contradict the FIA should immediately raise
a red flag. There are already numerous opinions of SEC legal officers that cite the definition of a
"Philippine national" in Section 3(a) of the FIA in determining whether a particular corporation is
qualified to own and operate a nationalized or partially nationalized business in the Philippines.
This shows that SEC legal officers are not only aware of, but also rely on and invoke, the provisions
of the FIA in ascertaining the eligibility of a corporation to engage in partially nationalized
industries. The following are some of such opinions:

1. Opinion of 23 March 1993, addressed to Mr. Francis F. How;

2. Opinion of 14 April 1993, addressed to Director Angeles T. Wong of the Philippine

Overseas Employment Administration;

3. Opinion of 23 November 1993, addressed to Messrs. Dominador Almeda and Renato S.

Calma;

4. Opinion of 7 December 1993, addressed to Roco Bunag Kapunan Migallos & Jardeleza;

5. SEC Opinion No. 49-04, addressed to Romulo Mabanta Buenaventura Sayoc & De Los
Angeles;

6. SEC-OGC Opinion No. 17-07, addressed to Mr. Reynaldo G. David; and

 7. SEC-OGC Opinion No. 03-08, addressed to Attys. Ruby Rose J. Yusi and Rudyard S.
Arbolado.

The SEC legal officers’ occasional but blatant disregard of the definition of the term "Philippine
national" in the FIA signifies their lack of integrity and competence in resolving issues on the 60-40
ownership requirement in favor of Filipino citizens in Section 11, Article XII of the Constitution.

The PSE President argues that the term "Philippine national" defined in the FIA should be limited
and interpreted to refer to corporations seeking to avail of tax and fiscal incentives under investment
incentives laws and cannot be equated with the term "capital" in Section 11, Article XII of the 1987
Constitution. Pangilinan similarly contends that the FIA and its predecessor statutes do not apply to
"companies which have not registered and obtained special incentives under the schemes established
by those laws."

Both are desperately grasping at straws. The FIA does not grant tax or fiscal incentives to any
enterprise. Tax and fiscal incentives to investments are granted separately under the Omnibus
Investments Code of 1987, not under the FIA. In fact, the FIA expressly repealed Articles 44 to 56 of
Book II of the Omnibus Investments Code of 1987, which articles previously regulated foreign
investments in nationalized or partially nationalized industries.

The FIA is the applicable law regulating foreign investments in nationalized or partially
nationalized industries. There is nothing in the FIA, or even in the Omnibus Investments Code of
1987 or its predecessor statutes, that states, expressly or impliedly, that the FIA or its predecessor
statutes do not apply to enterprises not availing of tax and fiscal incentives under the Code. The FIA
and its predecessor statutes apply to investments in all domestic enterprises, whether or not such
enterprises enjoy tax and fiscal incentives under the Omnibus Investments Code of 1987 or its
predecessor statutes. The reason is quite obvious – mere non-availment of tax and fiscal
incentives by a non-Philippine national cannot exempt it from Section 11, Article XII of
the Constitution regulating foreign investments in public utilities. In fact, the Board of
Investments’ Primer on Investment Policies in the Philippines,34 which is given out to foreign
investors, provides:

PART III. FOREIGN INVESTMENTS WITHOUT INCENTIVES

Investors who do not seek incentives and/or whose chosen activities do not qualify for incentives,
(i.e., the activity is not listed in the IPP, and they are not exporting at least 70% of their production)
may go ahead and make the investments without seeking incentives. They only have to be guided
by the Foreign Investments Negative List (FINL).

The FINL clearly defines investment areas requiring at least 60% Filipino ownership. All other areas
outside of this list are fully open to foreign investors. (Emphasis supplied)

V. Right to elect directors, coupled with beneficial ownership, translates to effective

control.

The 28 June 2011 Decision declares that the 60 percent Filipino ownership required by the
Constitution to engage in certain economic activities applies not only to voting control of the
corporation, but also to the beneficial ownership of the corporation. To repeat, we held:

Mere legal title is insufficient to meet the 60 percent Filipino-owned "capital" required in the
Constitution. Full beneficial ownership of 60 percent of the outstanding capital stock,
coupled with 60 percent of the voting rights, is required. The legal and beneficial ownership of
60 percent of the outstanding capital stock must rest in the hands of Filipino nationals in accordance
with the constitutional mandate. Otherwise, the corporation is "considered as non-Philippine
national[s]." (Emphasis supplied)

This is consistent with Section 3 of the FIA which provides that where 100% of the capital stock is
held by "a trustee of funds for pension or other employee retirement or separation benefits," the
trustee is a Philippine national if "at least sixty percent (60%) of the fund will accrue to the benefit of
Philippine nationals." Likewise, Section 1(b) of the Implementing Rules of the FIA provides that "for
stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is
not enough to meet the required Filipino equity. Full beneficial ownership of the stocks,
coupled with appropriate voting rights, is essential."

Since the constitutional requirement of at least 60 percent Filipino ownership applies not only to
voting control of the corporation but also to the beneficial ownership of the corporation, it is therefore
imperative that such requirement apply uniformly and across the board to all classes of shares,
regardless of nomenclature and category, comprising the capital of a corporation. Under the
Corporation Code, capital stock35 consists of all classes of shares issued to stockholders, that is,
common shares as well as preferred shares, which may have different rights, privileges or
restrictions as stated in the articles of incorporation. 36

The Corporation Code allows denial of the right to vote to preferred and redeemable shares, but
disallows denial of the right to vote in specific corporate matters. Thus, common shares have the
right to vote in the election of directors, while preferred shares may be denied such right.
Nonetheless, preferred shares, even if denied the right to vote in the election of directors, are entitled
to vote on the following corporate matters: (1) amendment of articles of incorporation; (2) increase
and decrease of capital stock; (3) incurring, creating or increasing bonded indebtedness; (4) sale,
lease, mortgage or other disposition of substantially all corporate assets; (5) investment of funds in
another business or corporation or for a purpose other than the primary purpose for which the
corporation was organized; (6) adoption, amendment and repeal of by-laws; (7) merger and
consolidation; and (8) dissolution of corporation.37

Since a specific class of shares may have rights and privileges or restrictions different from the rest
of the shares in a corporation, the 60-40 ownership requirement in favor of Filipino citizens in
Section 11, Article XII of the Constitution must apply not only to shares with voting rights but also
to shares without voting rights. Preferred shares, denied the right to vote in the election of directors,
are anyway still entitled to vote on the eight specific corporate matters mentioned above. Thus, if a
corporation, engaged in a partially nationalized industry, issues a mixture of common
and preferred non-voting shares, at least 60 percent of the common shares and at least 60
percent of the preferred non-voting shares must be owned by Filipinos. Of course, if a
corporation issues only a single class of shares, at least 60 percent of such shares must necessarily be
owned by Filipinos. In short, the 60-40 ownership requirement in favor of Filipino citizens
must apply separately to each class of shares, whether common, preferred non-voting,
preferred voting or any other class of shares. This uniform application of the 60-40 ownership
requirement in favor of Filipino citizens clearly breathes life to the constitutional command that the
ownership and operation of public utilities shall be reserved exclusively to corporations at least 60
percent of whose capital is Filipino-owned. Applying uniformly the 60-40 ownership requirement in
favor of Filipino citizens to each class of shares, regardless of differences in voting rights, privileges
and restrictions, guarantees effective Filipino control of public utilities, as mandated by the
Constitution.

Moreover, such uniform application to each class of shares insures that the "controlling interest" in
public utilities always lies in the hands of Filipino citizens. This addresses and extinguishes
Pangilinan’s worry that foreigners, owning most of the non-voting shares, will exercise greater
control over fundamental corporate matters requiring two-thirds or majority vote of all shareholders.

VI. Intent of the framers of the Constitution

While Justice Velasco quoted in his Dissenting Opinion 38 a portion of the deliberations of the
Constitutional Commission to support his claim that the term "capital" refers to the total
outstanding shares of stock, whether voting or non-voting, the following excerpts of the deliberations
reveal otherwise. It is clear from the following exchange that the term "capital" refers to controlling
interest of a corporation, thus:

MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or Filipino equity and foreign
equity; namely, 60-40 in Section 3, 60-40 in Section 9 and 2/3-1/3 in Section 15.

MR. VILLEGAS. That is right.

MR. NOLLEDO. In teaching law, we are always faced with this question: "Where do we base the
equity requirement, is it on the authorized capital stock, on the subscribed capital stock, or on the
paid-up capital stock of a corporation"? Will the Committee please enlighten me on this?

MR. VILLEGAS. We have just had a long discussion with the members of the team from the UP Law
Center who provided us a draft. The phrase that is contained here which we adopted from
the UP draft is "60 percent of voting stock."

MR. NOLLEDO. That must be based on the subscribed capital stock, because unless declared
delinquent, unpaid capital stock shall be entitled to vote.

MR. VILLEGAS. That is right.

MR. NOLLEDO. Thank you.

With respect to an investment by one corporation in another corporation, say, a corporation with 60-
40 percent equity invests in another corporation which is permitted by the Corporation Code, does
the Committee adopt the grandfather rule?

MR. VILLEGAS. Yes, that is the understanding of the Committee.

MR. NOLLEDO. Therefore, we need additional Filipino capital?

MR. VILLEGAS. Yes.39

xxxx

MR. AZCUNA. May I be clarified as to that portion that was accepted by the Committee.

MR. VILLEGAS. The portion accepted by the Committee is the deletion of the phrase "voting stock
or controlling interest."

MR. AZCUNA. Hence, without the Davide amendment, the committee report would read:
"corporations or associations at least sixty percent of whose CAPITAL is owned by such citizens."
MR. VILLEGAS. Yes.

MR. AZCUNA. So if the Davide amendment is lost, we are stuck with 60 percent of the capital to be
owned by citizens.

MR. VILLEGAS. That is right.

MR. AZCUNA. But the control can be with the foreigners even if they are the minority.
Let us say 40 percent of the capital is owned by them, but it is the voting capital, whereas,
the Filipinos own the nonvoting shares. So we can have a situation where the corporation
is controlled by foreigners despite being the minority because they have the voting
capital. That is the anomaly that would result here.

MR. BENGZON. No, the reason we eliminated the word "stock" as stated in the 1973 and
1935 Constitutions is that according to Commissioner Rodrigo, there are associations that
do not have stocks. That is why we say "CAPITAL."

MR. AZCUNA. We should not eliminate the phrase "controlling interest."

MR. BENGZON. In the case of stock corporations, it is assumed. 40 (Boldfacing and

underscoring supplied)

Thus, 60 percent of the "capital" assumes, or should result in, a "controlling interest" in the
corporation.

The use of the term "capital" was intended to replace the word "stock" because associations without
stocks can operate public utilities as long as they meet the 60-40 ownership requirement in favor of
Filipino citizens prescribed in Section 11, Article XII of the Constitution. However, this did not
change the intent of the framers of the Constitution to reserve exclusively to Philippine nationals the
"controlling interest" in public utilities.

During the drafting of the 1935 Constitution, economic protectionism was "the battle-cry of the
nationalists in the Convention."41 The same battle-cry resulted in the nationalization of the public
utilities.42 This is also the same intent of the framers of the 1987 Constitution who adopted the exact
formulation embodied in the 1935 and 1973 Constitutions on foreign equity limitations in partially
nationalized industries.

The OSG, in its own behalf and as counsel for the State, 43 agrees fully with the Court’s
interpretation of the term "capital." In its Consolidated Comment, the OSG explains that the
deletion of the phrase "controlling interest" and replacement of the word "stock" with the term
"capital" were intended specifically to extend the scope of the entities qualified to operate public
utilities to include associations without stocks. The framers’ omission of the phrase "controlling
interest" did not mean the inclusion of all shares of stock, whether voting or non-voting. The OSG
reiterated essentially the Court’s declaration that the Constitution reserved exclusively to Philippine
nationals the ownership and operation of public utilities consistent with the State’s policy to "develop
a self-reliant and independent national economy effectively controlled by Filipinos."

As we held in our 28 June 2011 Decision, to construe broadly the term "capital" as the total
outstanding capital stock, treated as a single class regardless of the actual classification of shares,
grossly contravenes the intent and letter of the Constitution that the "State shall develop a self-
reliant and independent national economy effectively controlled by Filipinos." We illustrated the
glaring anomaly which would result in defining the term "capital" as the total outstanding capital
stock of a corporation, treated as a single class of shares regardless of the actual classification of
shares, to wit:

Let us assume that a corporation has 100 common shares owned by foreigners and 1,000,000 non-
voting preferred shares owned by Filipinos, with both classes of share having a par value of one peso
(P 1.00) per share. Under the broad definition of the term "capital," such corporation would be
considered compliant with the 40 percent constitutional limit on foreign equity of public utilities
since the overwhelming majority, or more than 99.999 percent, of the total outstanding capital stock
is Filipino owned. This is obviously absurd.

In the example given, only the foreigners holding the common shares have voting rights in the
election of directors, even if they hold only 100 shares. The foreigners, with a minuscule equity of
less than 0.001 percent, exercise control over the public utility. On the other hand, the Filipinos,
holding more than 99.999 percent of the equity, cannot vote in the election of directors and hence,
have no control over the public utility. This starkly circumvents the intent of the framers of the
Constitution, as well as the clear language of the Constitution, to place the control of public utilities
in the hands of Filipinos. x x x

Further, even if foreigners who own more than forty percent of the voting shares elect an all-Filipino
board of directors, this situation does not guarantee Filipino control and does not in any way cure the
violation of the Constitution. The independence of the Filipino board members so elected by such
foreign shareholders is highly doubtful. As the OSG pointed out, quoting Justice George Sutherland’s
words in Humphrey’s Executor v. US,44 "x x x it is quite evident that one who holds his office only
during the pleasure of another cannot be depended upon to maintain an attitude of independence
against the latter’s will." Allowing foreign shareholders to elect a controlling majority of the board,
even if all the directors are Filipinos, grossly circumvents the letter and intent of the Constitution
and defeats the very purpose of our nationalization laws.

VII. Last sentence of Section 11, Article XII of the Constitution

The last sentence of Section 11, Article XII of the 1987 Constitution reads:

The participation of foreign investors in the governing body of any public utility enterprise shall be
limited to their proportionate share in its capital, and all the executive and managing officers of such
corporation or association must be citizens of the Philippines.

During the Oral Arguments, the OSG emphasized that there was never a question on the intent of
the framers of the Constitution to limit foreign ownership, and assure majority Filipino ownership
and control of public utilities. The OSG argued, "while the delegates disagreed as to the percentage
threshold to adopt, x x x the records show they clearly understood that Filipino control of the public
utility corporation can only be and is obtained only through the election of a majority of the members
of the board."

Indeed, the only point of contention during the deliberations of the Constitutional Commission on 23
August 1986 was the extent of majority Filipino control of public utilities. This is evident from the
following exchange:

THE PRESIDENT. Commissioner Jamir is recognized.

MR. JAMIR. Madam President, my proposed amendment on lines 20 and 21 is to delete the phrase
"two thirds of whose voting stock or controlling interest," and instead substitute the words "SIXTY
PERCENT OF WHOSE CAPITAL" so that the sentence will read: "No franchise, certificate, or any
other form of authorization for the operation of a public utility shall be granted except to citizens of
the Philippines or to corporations or associations organized under the laws of the Philippines at least
SIXTY PERCENT OF WHOSE CAPITAL is owned by such citizens."

xxxx

THE PRESIDENT: Will Commissioner Jamir first explain?

MR. JAMIR. Yes, in this Article on National Economy and Patrimony, there were two previous
sections in which we fixed the Filipino equity to 60 percent as against 40 percent for foreigners. It is
only in this Section 15 with respect to public utilities that the committee proposal was increased to
two-thirds. I think it would be better to harmonize this provision by providing that even in the case
of public utilities, the minimum equity for Filipino citizens should be 60 percent.

MR. ROMULO. Madam President.

THE PRESIDENT. Commissioner Romulo is recognized.

MR. ROMULO. My reason for supporting the amendment is based on the discussions I have had
with representatives of the Filipino majority owners of the international record carriers, and the
subsequent memoranda they submitted to me. x x x

Their second point is that under the Corporation Code, the management and control of a corporation
is vested in the board of directors, not in the officers but in the board of directors. The officers are
only agents of the board. And they believe that with 60 percent of the equity, the Filipino majority
stockholders undeniably control the board. Only on important corporate acts can the 40-percent
foreign equity exercise a veto, x x x.

x x x x45

MS. ROSARIO BRAID. Madam President.

THE PRESIDENT. Commissioner Rosario Braid is recognized.

MS. ROSARIO BRAID. Yes, in the interest of equal time, may I also read from a memorandum by
the spokesman of the Philippine Chamber of Communications on why they would like to maintain
the present equity, I am referring to the 66 2/3. They would prefer to have a 75-25 ratio but would
settle for 66 2/3. x x x

xxxx

THE PRESIDENT. Just to clarify, would Commissioner Rosario Braid support the proposal of two-
thirds rather than the 60 percent?

MS. ROSARIO BRAID. I have added a clause that will put management in the hands of Filipino
citizens.

x x x x46

While they had differing views on the percentage of Filipino ownership of capital, it is clear that the
framers of the Constitution intended public utilities to be majority Filipino-owned and controlled.
To ensure that Filipinos control public utilities, the framers of the Constitution approved, as
additional safeguard, the inclusion of the last sentence of Section 11, Article XII of the Constitution
commanding that "[t]he participation of foreign investors in the governing body of any public utility
enterprise shall be limited to their proportionate share in its capital, and all the executive and
managing officers of such corporation or association must be citizens of the Philippines." In other
words, the last sentence of Section 11, Article XII of the Constitution mandates that (1) the
participation of foreign investors in the governing body of the corporation or association shall be
limited to their proportionate share in the capital of such entity; and (2) all officers of the corporation
or association must be Filipino citizens.

Commissioner Rosario Braid proposed the inclusion of the phrase requiring the managing officers of
the corporation or association to be Filipino citizens specifically to prevent management contracts,
which were designed primarily to circumvent the Filipinization of public utilities, and to assure
Filipino control of public utilities, thus:

MS. ROSARIO BRAID. x x x They also like to suggest that we amend this provision by adding a
phrase which states: "THE MANAGEMENT BODY OF EVERY CORPORATION OR ASSOCIATION
SHALL IN ALL CASES BE CONTROLLED BY CITIZENS OF THE PHILIPPINES." I have with me
their position paper.

THE PRESIDENT. The Commissioner may proceed.

MS. ROSARIO BRAID. The three major international record carriers in the Philippines, which
Commissioner Romulo mentioned – Philippine Global Communications, Eastern
Telecommunications, Globe Mackay Cable – are 40-percent owned by foreign multinational
companies and 60-percent owned by their respective Filipino partners. All three, however, also have
management contracts with these foreign companies – Philcom with RCA, ETPI with Cable and
Wireless PLC, and GMCR with ITT. Up to the present time, the general managers of these carriers
are foreigners. While the foreigners in these common carriers are only minority owners, the foreign
multinationals are the ones managing and controlling their operations by virtue of their
management contracts and by virtue of their strength in the governing bodies of these carriers. 47

xxxx

MR. OPLE. I think a number of us have agreed to ask Commissioner Rosario Braid to propose an
amendment with respect to the operating management of public utilities, and in this amendment, we
are associated with Fr. Bernas, Commissioners Nieva and Rodrigo. Commissioner Rosario Braid will
state this amendment now.

Thank you.

MS. ROSARIO BRAID. Madam President.

THE PRESIDENT. This is still on Section 15.

MS. ROSARIO BRAID. Yes.

MR. VILLEGAS. Yes, Madam President.

xxxx
MS. ROSARIO BRAID. Madam President, I propose a new section to read: ‘THE MANAGEMENT
BODY OF EVERY CORPORATION OR ASSOCIATION SHALL IN ALL CASES BE CONTROLLED
BY CITIZENS OF THE PHILIPPINES."

This will prevent management contracts and assure control by Filipino citizens. Will the
committee assure us that this amendment will insure that past activities such as management
contracts will no longer be possible under this amendment?

xxxx

FR. BERNAS. Madam President.

THE PRESIDENT. Commissioner Bernas is recognized.

FR. BERNAS. Will the committee accept a reformulation of the first part?

MR. BENGZON. Let us hear it.

FR. BERNAS. The reformulation will be essentially the formula of the 1973 Constitution which
reads: "THE PARTICIPATION OF FOREIGN INVESTORS IN THE GOVERNING BODY OF ANY
PUBLIC UTILITY ENTERPRISE SHALL BE LIMITED TO THEIR PROPORTIONATE SHARE IN
THE CAPITAL THEREOF AND..."

MR. VILLEGAS. "ALL THE EXECUTIVE AND MANAGING OFFICERS OF SUCH

CORPORATIONS AND ASSOCIATIONS MUST BE CITIZENS OF THE PHILIPPINES."

MR. BENGZON. Will Commissioner Bernas read the whole thing again?

FR. BERNAS. "THE PARTICIPATION OF FOREIGN INVESTORS IN THE GOVERNING BODY

OF ANY PUBLIC UTILITY ENTERPRISE SHALL BE LIMITED TO THEIR PROPORTIONATE
SHARE IN THE CAPITAL THEREOF..." I do not have the rest of the copy.

MR. BENGZON. "AND ALL THE EXECUTIVE AND MANAGING OFFICERS OF SUCH
CORPORATIONS OR ASSOCIATIONS MUST BE CITIZENS OF THE PHILIPPINES." Is that
correct?

MR. VILLEGAS. Yes.

MR. BENGZON. Madam President, I think that was said in a more elegant language. We accept the
amendment. Is that all right with Commissioner Rosario Braid?

MS. ROSARIO BRAID. Yes.

xxxx

MR. DE LOS REYES. The governing body refers to the board of directors and trustees.

MR. VILLEGAS. That is right.

MR. BENGZON. Yes, the governing body refers to the board of directors.
MR. REGALADO. It is accepted.

MR. RAMA. The body is now ready to vote, Madam President.

VOTING

xxxx

The results show 29 votes in favor and none against; so the proposed amendment is approved.

xxxx

THE PRESIDENT. All right. Can we proceed now to vote on Section 15?

MR. RAMA. Yes, Madam President.

THE PRESIDENT. Will the chairman of the committee please read Section 15?

MR. VILLEGAS. The entire Section 15, as amended, reads: "No franchise, certificate, or any other
form of authorization for the operation of a public utility shall be granted except to citizens of the
Philippines or to corporations or associations organized under the laws of the Philippines at least 60
PERCENT OF WHOSE CAPITAL is owned by such citizens." May I request Commissioner Bengzon
to please continue reading.

MR. BENGZON. "THE PARTICIPATION OF FOREIGN INVESTORS IN THE GOVERNING BODY

OF ANY PUBLIC UTILITY ENTERPRISE SHALL BE LIMITED TO THEIR PROPORTIONATE
SHARE IN THE CAPITAL THEREOF AND ALL THE EXECUTIVE AND MANAGING OFFICERS
OF SUCH CORPORATIONS OR ASSOCIATIONS MUST BE CITIZENS OF THE PHILIPPINES."

MR. VILLEGAS. "NOR SHALL SUCH FRANCHISE, CERTIFICATE OR AUTHORIZATION BE

EXCLUSIVE IN CHARACTER OR FOR A PERIOD LONGER THAN TWENTY-FIVE YEARS
RENEWABLE FOR NOT MORE THAN TWENTY-FIVE YEARS. Neither shall any such franchise
or right be granted except under the condition that it shall be subject to amendment, alteration, or
repeal by Congress when the common good so requires. The State shall encourage equity
participation in public utilities by the general public."

VOTING

xxxx

The results show 29 votes in favor and 4 against; Section 15, as amended, is approved. 48 (Emphasis
supplied)

The last sentence of Section 11, Article XII of the 1987 Constitution, particularly the provision on the
limited participation of foreign investors in the governing body of public utilities, is a reiteration of
the last sentence of Section 5, Article XIV of the 1973 Constitution, 49 signifying its importance in
reserving ownership and control of public utilities to Filipino citizens.

VIII. The undisputed facts

There is no dispute, and respondents do not claim the contrary, that (1) foreigners own 64.27% of the
common shares of PLDT, which class of shares exercises the sole right to vote in the election of
directors, and thus foreigners control PLDT; (2) Filipinos own only 35.73% of PLDT’s common
shares, constituting a minority of the voting stock, and thus Filipinos do not control PLDT; (3)
preferred shares, 99.44% owned by Filipinos, have no voting rights; (4) preferred shares earn only
1/70 of the dividends that common shares earn;50 (5) preferred shares have twice the par value of
common shares; and (6) preferred shares constitute 77.85% of the authorized capital stock of PLDT
and common shares only 22.15%.

Despite the foregoing facts, the Court did not decide, and in fact refrained from ruling on the
question of whether PLDT violated the 60-40 ownership requirement in favor of Filipino citizens in
Section 11, Article XII of the 1987 Constitution. Such question indisputably calls for a presentation
and determination of evidence through a hearing, which is generally outside the province of the
Court’s jurisdiction, but well within the SEC’s statutory powers. Thus, for obvious reasons, the Court
limited its decision on the purely legal and threshold issue on the definition of the term "capital" in
Section 11, Article XII of the Constitution and directed the SEC to apply such definition in
determining the exact percentage of foreign ownership in PLDT.

IX. PLDT is not an indispensable party; SEC is impleaded in this case.

In his petition, Gamboa prays, among others:

xxxx

5. For the Honorable Court to issue a declaratory relief that ownership of common or voting shares is
the sole basis in determining foreign equity in a public utility and that any other government
rulings, opinions, and regulations inconsistent with this declaratory relief be declared
unconstitutional and a violation of the intent and spirit of the 1987 Constitution;

6. For the Honorable Court to declare null and void all sales of common stocks to foreigners in excess
of 40 percent of the total subscribed common shareholdings; and

7. For the Honorable Court to direct the Securities and Exchange Commission and Philippine
Stock Exchange to require PLDT to make a public disclosure of all of its foreign
shareholdings and their actual and real beneficial owners.

Other relief(s) just and equitable are likewise prayed for. (Emphasis supplied)

As can be gleaned from his prayer, Gamboa clearly asks this Court to compel the SEC to perform its
statutory duty to investigate whether "the required percentage of ownership of the capital stock to be
owned by citizens of the Philippines has been complied with [by PLDT] as required by x x x the
Constitution."51 Such plea clearly negates SEC’s argument that it was not impleaded.

Granting that only the SEC Chairman was impleaded in this case, the Court has ample powers to
order the SEC’s compliance with its directive contained in the 28 June 2011 Decision in view of the
far-reaching implications of this case. In Domingo v. Scheer,52 the Court dispensed with the
amendment of the pleadings to implead the Bureau of Customs considering (1) the unique backdrop
of the case; (2) the utmost need to avoid further delays; and (3) the issue of public interest involved.
The Court held:

The Court may be curing the defect in this case by adding the BOC as party-petitioner. The petition
should not be dismissed because the second action would only be a repetition of the first.
In Salvador, et al., v. Court of Appeals, et al., we held that this Court has full powers, apart from
that power and authority which is inherent, to amend the processes, pleadings, proceedings and
decisions by substituting as party-plaintiff the real party-in-interest. The Court has the power to
avoid delay in the disposition of this case, to order its amendment as to implead the BOC
as party-respondent. Indeed, it may no longer be necessary to do so taking into account
the unique backdrop in this case, involving as it does an issue of public interest. After all,
the Office of the Solicitor General has represented the petitioner in the instant proceedings, as well
as in the appellate court, and maintained the validity of the deportation order and of the BOC’s
Omnibus Resolution. It cannot, thus, be claimed by the State that the BOC was not afforded its day
in court, simply because only the petitioner, the Chairperson of the BOC, was the respondent in the
CA, and the petitioner in the instant recourse. In Alonso v. Villamor, we had the occasion to state:

There is nothing sacred about processes or pleadings, their forms or contents. Their sole
purpose is to facilitate the application of justice to the rival claims of contending
parties. They were created, not to hinder and delay, but to facilitate and promote, the
administration of justice. They do not constitute the thing itself, which courts are always striving to
secure to litigants. They are designed as the means best adapted to obtain that thing. In other
words, they are a means to an end. When they lose the character of the one and become the other,
the administration of justice is at fault and courts are correspondingly remiss in the performance of
their obvious duty.53(Emphasis supplied)

In any event, the SEC has expressly manifested 54 that it will abide by the Court’s decision
and defer to the Court’s definition of the term "capital" in Section 11, Article XII of the
Constitution. Further, the SEC entered its special appearance in this case and argued
during the Oral Arguments, indicating its submission to the Court’s jurisdiction. It is
clear, therefore, that there exists no legal impediment against the proper and immediate
implementation of the Court’s directive to the SEC.

PLDT is an indispensable party only insofar as the other issues, particularly the factual questions,
are concerned. In other words, PLDT must be impleaded in order to fully resolve the issues on (1)
whether the sale of 111,415 PTIC shares to First Pacific violates the constitutional limit on foreign
ownership of PLDT; (2) whether the sale of common shares to foreigners exceeded the 40 percent
limit on foreign equity in PLDT; and (3) whether the total percentage of the PLDT common shares
with voting rights complies with the 60-40 ownership requirement in favor of Filipino citizens under
the Constitution for the ownership and operation of PLDT. These issues indisputably call for an
examination of the parties’ respective evidence, and thus are clearly within the jurisdiction of the
SEC. In short, PLDT must be impleaded, and must necessarily be heard, in the proceedings before
the SEC where the factual issues will be thoroughly threshed out and resolved.

Notably, the foregoing issues were left untouched by the Court. The Court did not rule on the
factual issues raised by Gamboa, except the single and purely legal issue on the definition of the
term "capital" in Section 11, Article XII of the Constitution. The Court confined the resolution of the
instant case to this threshold legal issue in deference to the fact-finding power of the SEC.

Needless to state, the Court can validly, properly, and fully dispose of the fundamental legal issue in
this case even without the participation of PLDT since defining the term "capital" in Section 11,
Article XII of the Constitution does not, in any way, depend on whether PLDT was impleaded.
Simply put, PLDT is not indispensable for a complete resolution of the purely legal question in this
case.55 In fact, the Court, by treating the petition as one for mandamus, 56 merely directed the SEC to
apply the Court’s definition of the term "capital" in Section 11, Article XII of the Constitution in
determining whether PLDT committed any violation of the said constitutional provision. The
dispositive portion of the Court’s ruling is addressed not to PLDT but solely to the SEC,
which is the administrative agency tasked to enforce the 60-40 ownership requirement in
favor of Filipino citizens in Section 11, Article XII of the Constitution.

Since the Court limited its resolution on the purely legal issue on the definition of the term "capital"
in Section 11, Article XII of the 1987 Constitution, and directed the SEC to investigate any violation
by PLDT of the 60-40 ownership requirement in favor of Filipino citizens under the
Constitution,57 there is no deprivation of PLDT’s property or denial of PLDT’s right to due process,
contrary to Pangilinan and Nazareno’s misimpression. Due process will be afforded to PLDT when it
presents proof to the SEC that it complies, as it claims here, with Section 11, Article XII of the
Constitution.

X. Foreign Investments in the Philippines

Movants fear that the 28 June 2011 Decision would spell disaster to our economy, as it may result in
a sudden flight of existing foreign investors to "friendlier" countries and simultaneously deterring
new foreign investors to our country. In particular, the PSE claims that the 28 June 2011 Decision
may result in the following: (1) loss of more than P 630 billion in foreign investments in PSE-listed
shares; (2) massive decrease in foreign trading transactions; (3) lower PSE Composite Index; and (4)
local investors not investing in PSE-listed shares.58

Dr. Bernardo M. Villegas, one of the amici curiae in the Oral Arguments, shared movants’
apprehension. Without providing specific details, he pointed out the depressing state of the
Philippine economy compared to our neighboring countries which boast of growing economies.
Further, Dr. Villegas explained that the solution to our economic woes is for the government to
"take-over" strategic industries, such as the public utilities sector, thus:

JUSTICE CARPIO:

I would like also to get from you Dr. Villegas if you have additional information on whether this high
FDI59 countries in East Asia have allowed foreigners x x x control [of] their public utilities, so that
we can compare apples with apples.

DR. VILLEGAS:

Correct, but let me just make a comment. When these neighbors of ours find an industry strategic,
their solution is not to "Filipinize" or "Vietnamize" or "Singaporize." Their solution is to make
sure that those industries are in the hands of state enterprises. So, in these countries,
nationalization means the government takes over. And because their governments are
competent and honest enough to the public, that is the solution. x x x 60 (Emphasis supplied)

If government ownership of public utilities is the solution, then foreign investments in our public
utilities serve no purpose. Obviously, there can never be foreign investments in public utilities if, as
Dr. Villegas claims, the "solution is to make sure that those industries are in the hands of state
enterprises." Dr. Villegas’s argument that foreign investments in telecommunication companies like
PLDT are badly needed to save our ailing economy contradicts his own theory that the solution is for
government to take over these companies. Dr. Villegas is barking up the wrong tree since State
ownership of public utilities and foreign investments in such industries are diametrically opposed
concepts, which cannot possibly be reconciled.

In any event, the experience of our neighboring countries cannot be used as argument to decide the
present case differently for two reasons. First, the governments of our neighboring countries have, as
claimed by Dr. Villegas, taken over ownership and control of their strategic public utilities like the
telecommunications industry. Second, our Constitution has specific provisions limiting foreign
ownership in public utilities which the Court is sworn to uphold regardless of the experience of our
neighboring countries.

In our jurisdiction, the Constitution expressly reserves the ownership and operation of public
utilities to Filipino citizens, or corporations or associations at least 60 percent of whose capital
belongs to Filipinos. Following Dr. Villegas’s claim, the Philippines appears to be more liberal in
allowing foreign investors to own 40 percent of public utilities, unlike in other Asian countries whose
governments own and operate such industries.

XI. Prospective Application of Sanctions

In its Motion for Partial Reconsideration, the SEC sought to clarify the reckoning period of the
application and imposition of appropriate sanctions against PLDT if found violating Section 11,
Article XII of the Constitution.1avvphi1

As discussed, the Court has directed the SEC to investigate and determine whether PLDT violated
Section 11, Article XII of the Constitution. Thus, there is no dispute that it is only after the SEC has
determined PLDT’s violation, if any exists at the time of the commencement of the administrative
case or investigation, that the SEC may impose the statutory sanctions against PLDT. In other
words, once the 28 June 2011 Decision becomes final, the SEC shall impose the appropriate
sanctions only if it finds after due hearing that, at the start of the administrative case or
investigation, there is an existing violation of Section 11, Article XII of the Constitution. Under
prevailing jurisprudence, public utilities that fail to comply with the nationality requirement under
Section 11, Article XII and the FIA can cure their deficiencies prior to the start of the administrative
case or investigation.61

XII. Final Word

The Constitution expressly declares as State policy the development of an economy "effectively
controlled" by Filipinos. Consistent with such State policy, the Constitution explicitly reserves the
ownership and operation of public utilities to Philippine nationals, who are defined in the Foreign
Investments Act of 1991 as Filipino citizens, or corporations or associations at least 60 percent of
whose capital with voting rights belongs to Filipinos. The FIA’s implementing rules explain that
"[f]or stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal
title is not enough to meet the required Filipino equity. Full beneficial ownership of the stocks,
coupled with appropriate voting rights is essential." In effect, the FIA clarifies, reiterates and
confirms the interpretation that the term "capital" in Section 11, Article XII of the 1987 Constitution
refers to shares with voting rights, as well as with full beneficial ownership. This is precisely
because the right to vote in the election of directors, coupled with full beneficial ownership of stocks,
translates to effective control of a corporation.

Any other construction of the term "capital" in Section 11, Article XII of the Constitution contravenes
the letter and intent of the Constitution. Any other meaning of the term "capital" openly invites alien
domination of economic activities reserved exclusively to Philippine nationals. Therefore,
respondents’ interpretation will ultimately result in handing over effective control of our national
economy to foreigners in patent violation of the Constitution, making Filipinos second-class citizens
in their own country.

Filipinos have only to remind themselves of how this country was exploited under the Parity
Amendment, which gave Americans the same rights as Filipinos in the exploitation of natural
resources, and in the ownership and control of public utilities, in the Philippines. To do this the 1935
Constitution, which contained the same 60 percent Filipino ownership and control requirement as
the present 1987 Constitution, had to be amended to give Americans parity rights with Filipinos.
There was bitter opposition to the Parity Amendment 62 and many Filipinos eagerly awaited its
expiration. In late 1968, PLDT was one of the American-controlled public utilities that became
Filipino-controlled when the controlling American stockholders divested in anticipation of the
expiration of the Parity Amendment on 3 July 1974.63 No economic suicide happened when control of
public utilities and mining corporations passed to Filipinos’ hands upon expiration of the Parity
Amendment.

Movants’ interpretation of the term "capital" would bring us back to the same evils spawned by the
Parity Amendment, effectively giving foreigners parity rights with Filipinos, but this time
even without any amendment to the present Constitution. Worse, movants’ interpretation
opens up our national economy to effective control not only by Americans but also by all
foreigners, be they Indonesians, Malaysians or Chinese, even in the absence of reciprocal
treaty arrangements. At least the Parity Amendment, as implemented by the Laurel-Langley
Agreement, gave the capital-starved Filipinos theoretical parity – the same rights as Americans to
exploit natural resources, and to own and control public utilities, in the United States of America.
Here, movants’ interpretation would effectively mean a unilateral opening up of our national
economy to all foreigners, without any reciprocal arrangements. That would mean that
Indonesians, Malaysians and Chinese nationals could effectively control our mining companies and
public utilities while Filipinos, even if they have the capital, could not control similar corporations in
these countries.

The 1935, 1973 and 1987 Constitutions have the same 60 percent Filipino ownership and control
requirement for public utilities like PLOT. Any deviation from this requirement necessitates an
amendment to the Constitution as exemplified by the Parity Amendment. This Court has no power
to amend the Constitution for its power and duty is only to faithfully apply and interpret the
Constitution.

WHEREFORE, we DENY the motions for reconsideration WITH FINALITY. No further pleadings
shall be entertained.

SO ORDERED.

Narra Nickel Mining and Dev. Corp. v. Redmont Consolidated Mines (1)

Before this Court is a Petition for Review on Certiorari under Rule 45 filed by Narra Nickel and
Mining Development Corp. (Narra), Tesoro Mining and Development, Inc. (Tesoro), and McArthur
Mining Inc. (McArthur), which seeks to reverse the October 1, 2010 Decision 1 and the February 15,
2011 Resolution of the Court of Appeals (CA).

The Facts

Sometime in December 2006, respondent Redmont Consolidated Mines Corp. (Redmont), a domestic
corporation organized and existing under Philippine laws, took interest in mining and exploring
certain areas of the province of Palawan. After inquiring with the Department of Environment and
Natural Resources (DENR), it learned that the areas where it wanted to undertake exploration and
mining activities where already covered by Mineral Production Sharing Agreement (MPSA)
applications of petitioners Narra, Tesoro and McArthur.
Petitioner McArthur, through its predecessor-in-interest Sara Marie Mining, Inc. (SMMI), filed an
application for an MPSA and Exploration Permit (EP) with the Mines and Geo-Sciences Bureau
(MGB), Region IV-B, Office of the Department of Environment and Natural Resources (DENR).

Subsequently, SMMI was issued MPSA-AMA-IVB-153 covering an area of over 1,782 hectares in
Barangay Sumbiling, Municipality of Bataraza, Province of Palawan and EPA-IVB-44 which
includes an area of 3,720 hectares in Barangay Malatagao, Bataraza, Palawan. The MPSA and EP
were then transferred to Madridejos Mining Corporation (MMC) and, on November 6, 2006, assigned
to petitioner McArthur.2

Petitioner Narra acquired its MPSA from Alpha Resources and Development Corporation and
Patricia Louise Mining & Development Corporation (PLMDC) which previously filed an application
for an MPSA with the MGB, Region IV-B, DENR on January 6, 1992. Through the said application,
the DENR issued MPSA-IV-1-12 covering an area of 3.277 hectares in barangays Calategas and San
Isidro, Municipality of Narra, Palawan. Subsequently, PLMDC conveyed, transferred and/or
assigned its rights and interests over the MPSA application in favor of Narra.

Another MPSA application of SMMI was filed with the DENR Region IV-B, labeled as MPSA-AMA-
IVB-154 (formerly EPA-IVB-47) over 3,402 hectares in Barangays Malinao and Princesa Urduja,
Municipality of Narra, Province of Palawan. SMMI subsequently conveyed, transferred and assigned
its rights and interest over the said MPSA application to Tesoro.

On January 2, 2007, Redmont filed before the Panel of Arbitrators (POA) of the DENR three (3)
separate petitions for the denial of petitioners’ applications for MPSA designated as AMA-IVB-153,
AMA-IVB-154 and MPSA IV-1-12.

In the petitions, Redmont alleged that at least 60% of the capital stock of McArthur, Tesoro and
Narra are owned and controlled by MBMI Resources, Inc. (MBMI), a 100% Canadian corporation.
Redmont reasoned that since MBMI is a considerable stockholder of petitioners, it was the driving
force behind petitioners’ filing of the MPSAs over the areas covered by applications since it knows
that it can only participate in mining activities through corporations which are deemed Filipino
citizens. Redmont argued that given that petitioners’ capital stocks were mostly owned by MBMI,
they were likewise disqualified from engaging in mining activities through MPSAs, which are
reserved only for Filipino citizens.

In their Answers, petitioners averred that they were qualified persons under Section 3(aq) of
Republic Act No. (RA) 7942 or the Philippine Mining Act of 1995 which provided:

Sec. 3 Definition of Terms. As used in and for purposes of this Act, the following terms, whether in
singular or plural, shall mean:

xxxx

(aq) "Qualified person" means any citizen of the Philippines with capacity to contract, or a
corporation, partnership, association, or cooperative organized or authorized for the purpose of
engaging in mining, with technical and financial capability to undertake mineral resources
development and duly registered in accordance with law at least sixty per cent (60%) of the capital of
which is owned by citizens of the Philippines: Provided, That a legally organized foreign-owned
corporation shall be deemed a qualified person for purposes of granting an exploration permit,
financial or technical assistance agreement or mineral processing permit.
Additionally, they stated that their nationality as applicants is immaterial because they also applied
for Financial or Technical Assistance Agreements (FTAA) denominated as AFTA-IVB-09 for
McArthur, AFTA-IVB-08 for Tesoro and AFTA-IVB-07 for Narra, which are granted to foreign-owned
corporations. Nevertheless, they claimed that the issue on nationality should not be raised since
McArthur, Tesoro and Narra are in fact Philippine Nationals as 60% of their capital is owned by
citizens of the Philippines. They asserted that though MBMI owns 40% of the shares of PLMC
(which owns 5,997 shares of Narra),3 40% of the shares of MMC (which owns 5,997 shares of
McArthur)4and 40% of the shares of SLMC (which, in turn, owns 5,997 shares of Tesoro), 5 the shares
of MBMI will not make it the owner of at least 60% of the capital stock of each of petitioners. They
added that the best tool used in determining the nationality of a corporation is the "control test,"
embodied in Sec. 3 of RA 7042 or the Foreign Investments Act of 1991. They also claimed that the
POA of DENR did not have jurisdiction over the issues in Redmont’s petition since they are not
enumerated in Sec. 77 of RA 7942. Finally, they stressed that Redmont has no personality to sue
them because it has no pending claim or application over the areas applied for by petitioners.

On December 14, 2007, the POA issued a Resolution disqualifying petitioners from gaining MPSAs.
It held:

[I]t is clearly established that respondents are not qualified applicants to engage in mining activities.
On the other hand, [Redmont] having filed its own applications for an EPA over the areas earlier
covered by the MPSA application of respondents may be considered if and when they are qualified
under the law. The violation of the requirements for the issuance and/or grant of permits over
mining areas is clearly established thus, there is reason to believe that the cancellation and/or
revocation of permits already issued under the premises is in order and open the areas covered to
other qualified applicants.

xxxx

WHEREFORE, the Panel of Arbitrators finds the Respondents, McArthur Mining Inc., Tesoro
Mining and Development, Inc., and Narra Nickel Mining and Development Corp. as,
DISQUALIFIED for being considered as Foreign Corporations. Their Mineral Production Sharing
Agreement (MPSA) are hereby x x x DECLARED NULL AND VOID.6

The POA considered petitioners as foreign corporations being "effectively controlled" by MBMI, a
100% Canadian company and declared their MPSAs null and void. In the same Resolution, it gave
due course to Redmont’s EPAs. Thereafter, on February 7, 2008, the POA issued an Order 7 denying
the Motion for Reconsideration filed by petitioners.

Aggrieved by the Resolution and Order of the POA, McArthur and Tesoro filed a joint Notice of
Appeal8 and Memorandum of Appeal9 with the Mines Adjudication Board (MAB) while Narra
separately filed its Notice of Appeal10 and Memorandum of Appeal.11

In their respective memorandum, petitioners emphasized that they are qualified persons under the
law. Also, through a letter, they informed the MAB that they had their individual MPSA
applications converted to FTAAs. McArthur’s FTAA was denominated as AFTA-IVB-0912 on May
2007, while Tesoro’s MPSA application was converted to AFTA-IVB-0813 on May 28, 2007, and
Narra’s FTAA was converted to AFTA-IVB-0714 on March 30, 2006.

Pending the resolution of the appeal filed by petitioners with the MAB, Redmont filed a
Complaint15 with the Securities and Exchange Commission (SEC), seeking the revocation of the
certificates for registration of petitioners on the ground that they are foreign-owned or controlled
corporations engaged in mining in violation of Philippine laws. Thereafter, Redmont filed on
September 1, 2008 a Manifestation and Motion to Suspend Proceeding before the MAB praying for
the suspension of the proceedings on the appeals filed by McArthur, Tesoro and Narra.

Subsequently, on September 8, 2008, Redmont filed before the Regional Trial Court of Quezon City,
Branch 92 (RTC) a Complaint16 for injunction with application for issuance of a temporary
restraining order (TRO) and/or writ of preliminary injunction, docketed as Civil Case No. 08-63379.
Redmont prayed for the deferral of the MAB proceedings pending the resolution of the Complaint
before the SEC.

But before the RTC can resolve Redmont’s Complaint and applications for injunctive reliefs, the
MAB issued an Order on September 10, 2008, finding the appeal meritorious. It held:

WHEREFORE, in view of the foregoing, the Mines Adjudication Board hereby REVERSES and
SETS ASIDE the Resolution dated 14 December 2007 of the Panel of Arbitrators of Region IV-B
(MIMAROPA) in POA-DENR Case Nos. 2001-01, 2007-02 and 2007-03, and its Order dated 07
February 2008 denying the Motions for Reconsideration of the Appellants. The Petition filed by
Redmont Consolidated Mines Corporation on 02 January 2007 is hereby ordered DISMISSED. 17

Belatedly, on September 16, 2008, the RTC issued an Order 18 granting Redmont’s application for a
TRO and setting the case for hearing the prayer for the issuance of a writ of preliminary injunction
on September 19, 2008.

Meanwhile, on September 22, 2008, Redmont filed a Motion for Reconsideration 19 of the September
10, 2008 Order of the MAB. Subsequently, it filed a Supplemental Motion for Reconsideration 20 on
September 29, 2008.

Before the MAB could resolve Redmont’s Motion for Reconsideration and Supplemental Motion for
Reconsideration, Redmont filed before the RTC a Supplemental Complaint 21 in Civil Case No. 08-
63379.

On October 6, 2008, the RTC issued an Order22 granting the issuance of a writ of preliminary
injunction enjoining the MAB from finally disposing of the appeals of petitioners and from resolving
Redmont’s Motion for Reconsideration and Supplement Motion for Reconsideration of the MAB’s
September 10, 2008 Resolution.

On July 1, 2009, however, the MAB issued a second Order denying Redmont’s Motion for
Reconsideration and Supplemental Motion for Reconsideration and resolving the appeals filed by
petitioners.

Hence, the petition for review filed by Redmont before the CA, assailing the Orders issued by the
MAB. On October 1, 2010, the CA rendered a Decision, the dispositive of which reads:

WHEREFORE, the Petition is PARTIALLY GRANTED. The assailed Orders, dated September 10,
2008 and July 1, 2009 of the Mining Adjudication Board are reversed and set aside. The findings of
the Panel of Arbitrators of the Department of Environment and Natural Resources that respondents
McArthur, Tesoro and Narra are foreign corporations is upheld and, therefore, the rejection of their
applications for Mineral Product Sharing Agreement should be recommended to the Secretary of the
DENR.

With respect to the applications of respondents McArthur, Tesoro and Narra for Financial or
Technical Assistance Agreement (FTAA) or conversion of their MPSA applications to FTAA, the
matter for its rejection or approval is left for determination by the Secretary of the DENR and the
President of the Republic of the Philippines.

SO ORDERED.23

In a Resolution dated February 15, 2011, the CA denied the Motion for Reconsideration filed by
petitioners.

After a careful review of the records, the CA found that there was doubt as to the nationality of
petitioners when it realized that petitioners had a common major investor, MBMI, a corporation
composed of 100% Canadians. Pursuant to the first sentence of paragraph 7 of Department of Justice
(DOJ) Opinion No. 020, Series of 2005, adopting the 1967 SEC Rules which implemented the
requirement of the Constitution and other laws pertaining to the exploitation of natural resources,
the CA used the "grandfather rule" to determine the nationality of petitioners. It provided:

Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by
Filipino citizens shall be considered as of Philippine nationality, but if the percentage of Filipino
ownership in the corporation or partnership is less than 60%, only the number of shares
corresponding to such percentage shall be counted as of Philippine nationality. Thus, if 100,000
shares are registered in the name of a corporation or partnership at least 60% of the capital stock or
capital, respectively, of which belong to Filipino citizens, all of the shares shall be recorded as owned
by Filipinos. But if less than 60%, or say, 50% of the capital stock or capital of the corporation or
partnership, respectively, belongs to Filipino citizens, only 50,000 shares shall be recorded as
belonging to aliens.24 (emphasis supplied)

In determining the nationality of petitioners, the CA looked into their corporate structures and their
corresponding common shareholders. Using the grandfather rule, the CA discovered that MBMI in
effect owned majority of the common stocks of the petitioners as well as at least 60% equity interest
of other majority shareholders of petitioners through joint venture agreements. The CA found that
through a "web of corporate layering, it is clear that one common controlling investor in all mining
corporations involved x x x is MBMI."25 Thus, it concluded that petitioners McArthur, Tesoro and
Narra are also in partnership with, or privies-in-interest of, MBMI.

Furthermore, the CA viewed the conversion of the MPSA applications of petitioners into FTAA
applications suspicious in nature and, as a consequence, it recommended the rejection of petitioners’
MPSA applications by the Secretary of the DENR.

With regard to the settlement of disputes over rights to mining areas, the CA pointed out that the
POA has jurisdiction over them and that it also has the power to determine the of nationality of
petitioners as a prerequisite of the Constitution prior the conferring of rights to "co-production, joint
venture or production-sharing agreements" of the state to mining rights. However, it also stated that
the POA’s jurisdiction is limited only to the resolution of the dispute and not on the approval or
rejection of the MPSAs. It stipulated that only the Secretary of the DENR is vested with the power to
approve or reject applications for MPSA.

Finally, the CA upheld the findings of the POA in its December 14, 2007 Resolution which
considered petitioners McArthur, Tesoro and Narra as foreign corporations. Nevertheless, the CA
determined that the POA’s declaration that the MPSAs of McArthur, Tesoro and Narra are void is
highly improper.

While the petition was pending with the CA, Redmont filed with the Office of the President (OP) a
petition dated May 7, 2010 seeking the cancellation of petitioners’ FTAAs. The OP rendered a
Decision26 on April 6, 2011, wherein it canceled and revoked petitioners’ FTAAs for violating and
circumventing the "Constitution x x x[,] the Small Scale Mining Law and Environmental Compliance
Certificate as well as Sections 3 and 8 of the Foreign Investment Act and E.O. 584." 27 The OP, in
affirming the cancellation of the issued FTAAs, agreed with Redmont stating that petitioners
committed violations against the abovementioned laws and failed to submit evidence to negate them.
The Decision further quoted the December 14, 2007 Order of the POA focusing on the alleged
misrepresentation and claims made by petitioners of being domestic or Filipino corporations and the
admitted continued mining operation of PMDC using their locally secured Small Scale Mining
Permit inside the area earlier applied for an MPSA application which was eventually transferred to
Narra. It also agreed with the POA’s estimation that the filing of the FTAA applications by
petitioners is a clear admission that they are "not capable of conducting a large scale mining
operation and that they need the financial and technical assistance of a foreign entity in their
operation, that is why they sought the participation of MBMI Resources, Inc." 28 The Decision further
quoted:

The filing of the FTAA application on June 15, 2007, during the pendency of the case only
demonstrate the violations and lack of qualification of the respondent corporations to engage in
mining. The filing of the FTAA application conversion which is allowed foreign corporation of the
earlier MPSA is an admission that indeed the respondent is not Filipino but rather of foreign
nationality who is disqualified under the laws. Corporate documents of MBMI Resources, Inc.
furnished its stockholders in their head office in Canada suggest that they are conducting operation
only through their local counterparts.29

The Motion for Reconsideration of the Decision was further denied by the OP in a Resolution 30 dated
July 6, 2011. Petitioners then filed a Petition for Review on Certiorari of the OP’s Decision and
Resolution with the CA, docketed as CA-G.R. SP No. 120409. In the CA Decision dated February 29,
2012, the CA affirmed the Decision and Resolution of the OP. Thereafter, petitioners appealed the
same CA decision to this Court which is now pending with a different division.

Thus, the instant petition for review against the October 1, 2010 Decision of the CA. Petitioners put
forth the following errors of the CA:

I.

The Court of Appeals erred when it did not dismiss the case for mootness despite the fact
that the subject matter of the controversy, the MPSA Applications, have already been
converted into FTAA applications and that the same have already been granted.

II.

The Court of Appeals erred when it did not dismiss the case for lack of jurisdiction
considering that the Panel of Arbitrators has no jurisdiction to determine the nationality of
Narra, Tesoro and McArthur.

III.

The Court of Appeals erred when it did not dismiss the case on account of Redmont’s willful
forum shopping.

IV.
 The Court of Appeals’ ruling that Narra, Tesoro and McArthur are foreign corporations
based on the "Grandfather Rule" is contrary to law, particularly the express mandate of the
Foreign Investments Act of 1991, as amended, and the FIA Rules.

V.

The Court of Appeals erred when it applied the exceptions to the res inter alios acta rule.

VI.

The Court of Appeals erred when it concluded that the conversion of the MPSA Applications
into FTAA Applications were of "suspicious nature" as the same is based on mere conjectures
and surmises without any shred of evidence to show the same. 31

We find the petition to be without merit.

This case not moot and academic

The claim of petitioners that the CA erred in not rendering the instant case as moot is without merit.

Basically, a case is said to be moot and/or academic when it "ceases to present a justiciable
controversy by virtue of supervening events, so that a declaration thereon would be of no practical
use or value."32 Thus, the courts "generally decline jurisdiction over the case or dismiss it on the
ground of mootness."33

The "mootness" principle, however, does accept certain exceptions and the mere raising of an issue of
"mootness" will not deter the courts from trying a case when there is a valid reason to do so. In David
v. Macapagal-Arroyo (David), the Court provided four instances where courts can decide an
otherwise moot case, thus:

1.) There is a grave violation of the Constitution;

2.) The exceptional character of the situation and paramount public interest is involved;

3.) When constitutional issue raised requires formulation of controlling principles to guide
the bench, the bar, and the public; and

4.) The case is capable of repetition yet evading review.34

All of the exceptions stated above are present in the instant case. We of this Court note that a grave
violation of the Constitution, specifically Section 2 of Article XII, is being committed by a foreign
corporation right under our country’s nose through a myriad of corporate layering under different,
allegedly, Filipino corporations. The intricate corporate layering utilized by the Canadian company,
MBMI, is of exceptional character and involves paramount public interest since it undeniably affects
the exploitation of our Country’s natural resources. The corresponding actions of petitioners during
the lifetime and existence of the instant case raise questions as what principle is to be applied to
cases with similar issues. No definite ruling on such principle has been pronounced by the Court;
hence, the disposition of the issues or errors in the instant case will serve as a guide "to the bench,
the bar and the public."35 Finally, the instant case is capable of repetition yet evading review, since
the Canadian company, MBMI, can keep on utilizing dummy Filipino corporations through various
schemes of corporate layering and conversion of applications to skirt the constitutional prohibition
against foreign mining in Philippine soil.

Conversion of MPSA applications to FTAA applications

We shall discuss the first error in conjunction with the sixth error presented by petitioners since
both involve the conversion of MPSA applications to FTAA applications. Petitioners propound that
the CA erred in ruling against them since the questioned MPSA applications were already converted
into FTAA applications; thus, the issue on the prohibition relating to MPSA applications of foreign
mining corporations is academic. Also, petitioners would want us to correct the CA’s finding which
deemed the aforementioned conversions of applications as suspicious in nature, since it is based on
mere conjectures and surmises and not supported with evidence.

We disagree.

The CA’s analysis of the actions of petitioners after the case was filed against them by respondent is
on point. The changing of applications by petitioners from one type to another just because a case
was filed against them, in truth, would raise not a few sceptics’ eyebrows. What is the reason for
such conversion? Did the said conversion not stem from the case challenging their citizenship and to
have the case dismissed against them for being "moot"? It is quite obvious that it is petitioners’
strategy to have the case dismissed against them for being "moot."

Consider the history of this case and how petitioners responded to every action done by the court or
appropriate government agency: on January 2, 2007, Redmont filed three separate petitions for
denial of the MPSA applications of petitioners before the POA. On June 15, 2007, petitioners filed a
conversion of their MPSA applications to FTAAs. The POA, in its December 14, 2007 Resolution,
observed this suspect change of applications while the case was pending before it and held:

The filing of the Financial or Technical Assistance Agreement application is a clear admission that
the respondents are not capable of conducting a large scale mining operation and that they need the
financial and technical assistance of a foreign entity in their operation that is why they sought the
participation of MBMI Resources, Inc. The participation of MBMI in the corporation only proves the
fact that it is the Canadian company that will provide the finances and the resources to operate the
mining areas for the greater benefit and interest of the same and not the Filipino stockholders who
only have a less substantial financial stake in the corporation.

xxxx

x x x The filing of the FTAA application on June 15, 2007, during the pendency of the case only
demonstrate the violations and lack of qualification of the respondent corporations to engage in
mining. The filing of the FTAA application conversion which is allowed foreign corporation of the
earlier MPSA is an admission that indeed the respondent is not Filipino but rather of foreign
nationality who is disqualified under the laws. Corporate documents of MBMI Resources, Inc.
furnished its stockholders in their head office in Canada suggest that they are conducting operation
only through their local counterparts.36

On October 1, 2010, the CA rendered a Decision which partially granted the petition, reversing and
setting aside the September 10, 2008 and July 1, 2009 Orders of the MAB. In the said Decision, the
CA upheld the findings of the POA of the DENR that the herein petitioners are in fact foreign
corporations thus a recommendation of the rejection of their MPSA applications were recommended
to the Secretary of the DENR. With respect to the FTAA applications or conversion of the MPSA
applications to FTAAs, the CA deferred the matter for the determination of the Secretary of the
DENR and the President of the Republic of the Philippines.37

In their Motion for Reconsideration dated October 26, 2010, petitioners prayed for the dismissal of
the petition asserting that on April 5, 2010, then President Gloria Macapagal-Arroyo signed and
issued in their favor FTAA No. 05-2010-IVB, which rendered the petition moot and academic.
However, the CA, in a Resolution dated February 15, 2011 denied their motion for being a mere
"rehash of their claims and defenses."38 Standing firm on its Decision, the CA affirmed the ruling
that petitioners are, in fact, foreign corporations. On April 5, 2011, petitioners elevated the case to us
via a Petition for Review on Certiorari under Rule 45, questioning the Decision of the CA.
Interestingly, the OP rendered a Decision dated April 6, 2011, a day after this petition for review
was filed, cancelling and revoking the FTAAs, quoting the Order of the POA and stating that
petitioners are foreign corporations since they needed the financial strength of MBMI, Inc. in order
to conduct large scale mining operations. The OP Decision also based the cancellation on the
misrepresentation of facts and the violation of the "Small Scale Mining Law and Environmental
Compliance Certificate as well as Sections 3 and 8 of the Foreign Investment Act and E.O. 584."39 On
July 6, 2011, the OP issued a Resolution, denying the Motion for Reconsideration filed by the
petitioners.

Respondent Redmont, in its Comment dated October 10, 2011, made known to the Court the fact of
the OP’s Decision and Resolution. In their Reply, petitioners chose to ignore the OP Decision and
continued to reuse their old arguments claiming that they were granted FTAAs and, thus, the case
was moot. Petitioners filed a Manifestation and Submission dated October 19, 2012, 40 wherein they
asserted that the present petition is moot since, in a remarkable turn of events, MBMI was able to
sell/assign all its shares/interest in the "holding companies" to DMCI Mining Corporation (DMCI), a
Filipino corporation and, in effect, making their respective corporations fully-Filipino owned.

Again, it is quite evident that petitioners have been trying to have this case dismissed for being
"moot." Their final act, wherein MBMI was able to allegedly sell/assign all its shares and interest in
the petitioner "holding companies" to DMCI, only proves that they were in fact not Filipino
corporations from the start. The recent divesting of interest by MBMI will not change the stand of
this Court with respect to the nationality of petitioners prior the suspicious change in their corporate
structures. The new documents filed by petitioners are factual evidence that this Court has no power
to verify.

The only thing clear and proved in this Court is the fact that the OP declared that petitioner
corporations have violated several mining laws and made misrepresentations and falsehood in their
applications for FTAA which lead to the revocation of the said FTAAs, demonstrating that
petitioners are not beyond going against or around the law using shifty actions and strategies. Thus,
in this instance, we can say that their claim of mootness is moot in itself because their defense of
conversion of MPSAs to FTAAs has been discredited by the OP Decision.

Grandfather test

The main issue in this case is centered on the issue of petitioners’ nationality, whether Filipino or
foreign. In their previous petitions, they had been adamant in insisting that they were Filipino
corporations, until they submitted their Manifestation and Submission dated October 19, 2012
where they stated the alleged change of corporate ownership to reflect their Filipino ownership.
Thus, there is a need to determine the nationality of petitioner corporations.

Basically, there are two acknowledged tests in determining the nationality of a corporation: the
control test and the grandfather rule. Paragraph 7 of DOJ Opinion No. 020, Series of 2005, adopting
the 1967 SEC Rules which implemented the requirement of the Constitution and other laws
pertaining to the controlling interests in enterprises engaged in the exploitation of natural resources
owned by Filipino citizens, provides:

Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by
Filipino citizens shall be considered as of Philippine nationality, but if the percentage of Filipino
ownership in the corporation or partnership is less than 60%, only the number of shares
corresponding to such percentage shall be counted as of Philippine nationality. Thus, if 100,000
shares are registered in the name of a corporation or partnership at least 60% of the capital stock or
capital, respectively, of which belong to Filipino citizens, all of the shares shall be recorded as owned
by Filipinos. But if less than 60%, or say, 50% of the capital stock or capital of the corporation or
partnership, respectively, belongs to Filipino citizens, only 50,000 shares shall be counted as owned
by Filipinos and the other 50,000 shall be recorded as belonging to aliens.

The first part of paragraph 7, DOJ Opinion No. 020, stating "shares belonging to corporations or
partnerships at least 60% of the capital of which is owned by Filipino citizens shall be considered as
of Philippine nationality," pertains to the control test or the liberal rule. On the other hand, the
second part of the DOJ Opinion which provides, "if the percentage of the Filipino ownership in the
corporation or partnership is less than 60%, only the number of shares corresponding to such
percentage shall be counted as Philippine nationality," pertains to the stricter, more stringent
grandfather rule.

Prior to this recent change of events, petitioners were constant in advocating the application of the
"control test" under RA 7042, as amended by RA 8179, otherwise known as the Foreign Investments
Act (FIA), rather than using the stricter grandfather rule. The pertinent provision under Sec. 3 of
the FIA provides:

SECTION 3. Definitions. - As used in this Act:

a.) The term Philippine national shall mean a citizen of the Philippines; or a domestic partnership or
association wholly owned by the citizens of the Philippines; a corporation organized under the laws
of the Philippines of which at least sixty percent (60%) of the capital stock outstanding and entitled
to vote is wholly owned by Filipinos or a trustee of funds for pension or other employee retirement or
separation benefits, where the trustee is a Philippine national and at least sixty percent (60%) of the
fund will accrue to the benefit of Philippine nationals: Provided, That were a corporation and its non-
Filipino stockholders own stocks in a Securities and Exchange Commission (SEC) registered
enterprise, at least sixty percent (60%) of the capital stock outstanding and entitled to vote of each of
both corporations must be owned and held by citizens of the Philippines and at least sixty percent
(60%) of the members of the Board of Directors, in order that the corporation shall be considered a
Philippine national. (emphasis supplied)

The grandfather rule, petitioners reasoned, has no leg to stand on in the instant case since the
definition of a "Philippine National" under Sec. 3 of the FIA does not provide for it. They further
claim that the grandfather rule "has been abandoned and is no longer the applicable rule." 41 They
also opined that the last portion of Sec. 3 of the FIA admits the application of a "corporate layering"
scheme of corporations. Petitioners claim that the clear and unambiguous wordings of the statute
preclude the court from construing it and prevent the court’s use of discretion in applying the law.
They said that the plain, literal meaning of the statute meant the application of the control test is
obligatory.

We disagree. "Corporate layering" is admittedly allowed by the FIA; but if it is used to circumvent
the Constitution and pertinent laws, then it becomes illegal. Further, the pronouncement of
petitioners that the grandfather rule has already been abandoned must be discredited for lack of
basis.

Art. XII, Sec. 2 of the Constitution provides:

Sec. 2. All lands of the public domain, waters, minerals, coal, petroleum and other mineral oils, all
forces of potential energy, fisheries, forests or timber, wildlife, flora and fauna, and other natural
resources are owned by the State. With the exception of agricultural lands, all other natural
resources shall not be alienated. The exploration, development, and utilization of natural resources
shall be under the full control and supervision of the State. The State may directly undertake such
activities, or it may enter into co-production, joint venture or production-sharing agreements with
Filipino citizens, or corporations or associations at least sixty per centum of whose capital is owned
by such citizens. Such agreements may be for a period not exceeding twenty-five years, renewable for
not more than twenty-five years, and under such terms and conditions as may be provided by law.

xxxx

The President may enter into agreements with Foreign-owned corporations involving either
technical or financial assistance for large-scale exploration, development, and utilization of minerals,
petroleum, and other mineral oils according to the general terms and conditions provided by law,
based on real contributions to the economic growth and general welfare of the country. In such
agreements, the State shall promote the development and use of local scientific and technical
resources. (emphasis supplied)

The emphasized portion of Sec. 2 which focuses on the State entering into different types of
agreements for the exploration, development, and utilization of natural resources with entities who
are deemed Filipino due to 60 percent ownership of capital is pertinent to this case, since the issues
are centered on the utilization of our country’s natural resources or specifically, mining. Thus, there
is a need to ascertain the nationality of petitioners since, as the Constitution so provides, such
agreements are only allowed corporations or associations "at least 60 percent of such capital is owned
by such citizens." The deliberations in the Records of the 1986 Constitutional Commission shed light
on how a citizenship of a corporation will be determined:

Mr. BENNAGEN: Did I hear right that the Chairman’s interpretation of an independent national
economy is freedom from undue foreign control? What is the meaning of undue foreign control?

MR. VILLEGAS: Undue foreign control is foreign control which sacrifices national sovereignty and
the welfare of the Filipino in the economic sphere.

MR. BENNAGEN: Why does it have to be qualified still with the word "undue"? Why not simply
freedom from foreign control? I think that is the meaning of independence, because as phrased, it
still allows for foreign control.

MR. VILLEGAS: It will now depend on the interpretation because if, for example, we retain the
60/40 possibility in the cultivation of natural resources, 40 percent involves some control; not total
control, but some control.

MR. BENNAGEN: In any case, I think in due time we will propose some amendments.

MR. VILLEGAS: Yes. But we will be open to improvement of the phraseology.

Mr. BENNAGEN: Yes.

Thank you, Mr. Vice-President.

xxxx

MR. NOLLEDO: In Sections 3, 9 and 15, the Committee stated local or Filipino equity and foreign
equity; namely, 60-40 in Section 3, 60-40 in Section 9, and 2/3-1/3 in Section 15.

MR. VILLEGAS: That is right.

MR. NOLLEDO: In teaching law, we are always faced with the question: ‘Where do we base the
equity requirement, is it on the authorized capital stock, on the subscribed capital stock, or on the
paid-up capital stock of a corporation’? Will the Committee please enlighten me on this?

MR. VILLEGAS: We have just had a long discussion with the members of the team from the UP Law
Center who provided us with a draft. The phrase that is contained here which we adopted from the
UP draft is ‘60 percent of the voting stock.’

MR. NOLLEDO: That must be based on the subscribed capital stock, because unless declared
delinquent, unpaid capital stock shall be entitled to vote.

MR. VILLEGAS: That is right.

MR. NOLLEDO: Thank you.

With respect to an investment by one corporation in another corporation, say, a corporation with 60-
40 percent equity invests in another corporation which is permitted by the Corporation Code, does
the Committee adopt the grandfather rule?

MR. VILLEGAS: Yes, that is the understanding of the Committee.

MR. NOLLEDO: Therefore, we need additional Filipino capital?

MR. VILLEGAS: Yes.42 (emphasis supplied)

It is apparent that it is the intention of the framers of the Constitution to apply the grandfather rule
in cases where corporate layering is present.

Elementary in statutory construction is when there is conflict between the Constitution and a
statute, the Constitution will prevail. In this instance, specifically pertaining to the provisions under
Art. XII of the Constitution on National Economy and Patrimony, Sec. 3 of the FIA will have no place
of application. As decreed by the honorable framers of our Constitution, the grandfather rule prevails
and must be applied.

Likewise, paragraph 7, DOJ Opinion No. 020, Series of 2005 provides:

The above-quoted SEC Rules provide for the manner of calculating the Filipino interest in a
corporation for purposes, among others, of determining compliance with nationality requirements
(the ‘Investee Corporation’). Such manner of computation is necessary since the shares in the
Investee Corporation may be owned both by individual stockholders (‘Investing Individuals’) and by
corporations and partnerships (‘Investing Corporation’). The said rules thus provide for the
determination of nationality depending on the ownership of the Investee Corporation and, in certain
instances, the Investing Corporation.

Under the above-quoted SEC Rules, there are two cases in determining the nationality of the
Investee Corporation. The first case is the ‘liberal rule’, later coined by the SEC as the Control Test
in its 30 May 1990 Opinion, and pertains to the portion in said Paragraph 7 of the 1967 SEC Rules
which states, ‘(s)hares belonging to corporations or partnerships at least 60% of the capital of which
is owned by Filipino citizens shall be considered as of Philippine nationality.’ Under the liberal
Control Test, there is no need to further trace the ownership of the 60% (or more) Filipino
stockholdings of the Investing Corporation since a corporation which is at least 60% Filipino-owned
is considered as Filipino.

The second case is the Strict Rule or the Grandfather Rule Proper and pertains to the portion in said
Paragraph 7 of the 1967 SEC Rules which states, "but if the percentage of Filipino ownership in the
corporation or partnership is less than 60%, only the number of shares corresponding to such
percentage shall be counted as of Philippine nationality." Under the Strict Rule or Grandfather Rule
Proper, the combined totals in the Investing Corporation and the Investee Corporation must be
traced (i.e., "grandfathered") to determine the total percentage of Filipino ownership.

Moreover, the ultimate Filipino ownership of the shares must first be traced to the level of the
Investing Corporation and added to the shares directly owned in the Investee Corporation x x x.

xxxx

In other words, based on the said SEC Rule and DOJ Opinion, the Grandfather Rule or the second
part of the SEC Rule applies only when the 60-40 Filipino-foreign equity ownership is in doubt (i.e.,
in cases where the joint venture corporation with Filipino and foreign stockholders with less than
60% Filipino stockholdings [or 59%] invests in other joint venture corporation which is either 60-40%
Filipino-alien or the 59% less Filipino). Stated differently, where the 60-40 Filipino- foreign equity
ownership is not in doubt, the Grandfather Rule will not apply. (emphasis supplied)

After a scrutiny of the evidence extant on record, the Court finds that this case calls for the
application of the grandfather rule since, as ruled by the POA and affirmed by the OP, doubt prevails
and persists in the corporate ownership of petitioners. Also, as found by the CA, doubt is present in
the 60-40 Filipino equity ownership of petitioners Narra, McArthur and Tesoro, since their common
investor, the 100% Canadian corporation––MBMI, funded them. However, petitioners also claim
that there is "doubt" only when the stockholdings of Filipinos are less than 60%. 43

The assertion of petitioners that "doubt" only exists when the stockholdings are less than 60% fails
to convince this Court. DOJ Opinion No. 20, which petitioners quoted in their petition, only made an
example of an instance where "doubt" as to the ownership of the corporation exists. It would be
ludicrous to limit the application of the said word only to the instances where the stockholdings of
non-Filipino stockholders are more than 40% of the total stockholdings in a corporation. The
corporations interested in circumventing our laws would clearly strive to have "60% Filipino
Ownership" at face value. It would be senseless for these applying corporations to state in their
respective articles of incorporation that they have less than 60% Filipino stockholders since the
applications will be denied instantly. Thus, various corporate schemes and layerings are utilized to
circumvent the application of the Constitution.
Obviously, the instant case presents a situation which exhibits a scheme employed by stockholders to
circumvent the law, creating a cloud of doubt in the Court’s mind. To determine, therefore, the actual
participation, direct or indirect, of MBMI, the grandfather rule must be used.

McArthur Mining, Inc.

To establish the actual ownership, interest or participation of MBMI in each of petitioners’ corporate
structure, they have to be "grandfathered."

As previously discussed, McArthur acquired its MPSA application from MMC, which acquired its
application from SMMI. McArthur has a capital stock of ten million pesos (PhP 10,000,000) divided
into 10,000 common shares at one thousand pesos (PhP 1,000) per share, subscribed to by the
following:44

Name Nationality Number of Amount Amount Paid

Shares Subscribed
Madridejos Mining Filipino 5,997 PhP 5,997,000.00 PhP 825,000.00
Corporation
MBMI Resources, Canadian 3,998 PhP 3,998,000.0 PhP 1,878,174.60
Inc.
Lauro L. Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00
Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00
Esguerra
Manuel A. Agcaoili Filipino 1 PhP 1,000.00 PhP 1,000.00
Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00
Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00
Total 10,000 PhP 10,000,000.00 PhP 2,708,174.60
(emphasis supplied)

Interestingly, looking at the corporate structure of MMC, we take note that it has a similar structure
and composition as McArthur. In fact, it would seem that MBMI is also a major investor and
"controls"45 MBMI and also, similar nominal shareholders were present, i.e. Fernando B. Esguerra
(Esguerra), Lauro L. Salazar (Salazar), Michael T. Mason (Mason) and Kenneth Cawkell (Cawkell):

Madridejos Mining Corporation

Name Nationality Number of Amount Amount Paid

Shares Subscribed
Olympic Mines Filipino 6,663 PhP 6,663,000.00 PhP 0
&

Development

Corp.
 MBMI Canadian 3,331 PhP 3,331,000.00 PhP 2,803,900.00
Resources,

Inc.
Amanti Limson Filipino 1 PhP 1,000.00 PhP 1,000.00
Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00

Esguerra
Lauro Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00
Emmanuel G. Filipino 1 PhP 1,000.00 PhP 1,000.00

Hernando
Michael T. American 1 PhP 1,000.00 PhP 1,000.00
Mason
Kenneth Canadian 1 PhP 1,000.00 PhP 1,000.00
Cawkell
Total 10,000 PhP 10,000,000.00 PhP 2,809,900.00

(emphasis supplied)

Noticeably, Olympic Mines & Development Corporation (Olympic) did not pay any amount with
respect to the number of shares they subscribed to in the corporation, which is quite absurd since
Olympic is the major stockholder in MMC. MBMI’s 2006 Annual Report sheds light on why Olympic
failed to pay any amount with respect to the number of shares it subscribed to. It states that
Olympic entered into joint venture agreements with several Philippine companies, wherein it holds
directly and indirectly a 60% effective equity interest in the Olympic Properties. 46 Quoting the said
Annual report:

On September 9, 2004, the Company and Olympic Mines & Development Corporation ("Olympic")
entered into a series of agreements including a Property Purchase and Development Agreement (the
Transaction Documents) with respect to three nickel laterite properties in Palawan, Philippines (the
"Olympic Properties"). The Transaction Documents effectively establish a joint venture between the
Company and Olympic for purposes of developing the Olympic Properties. The Company holds
directly and indirectly an initial 60% interest in the joint venture. Under certain circumstances and
upon achieving certain milestones, the Company may earn up to a 100% interest, subject to a 2.5%
net revenue royalty.47 (emphasis supplied)

Thus, as demonstrated in this first corporation, McArthur, when it is "grandfathered," company

layering was utilized by MBMI to gain control over McArthur. It is apparent that MBMI has more
than 60% or more equity interest in McArthur, making the latter a foreign corporation.

Tesoro Mining and Development, Inc.

Tesoro, which acquired its MPSA application from SMMI, has a capital stock of ten million pesos
(PhP 10,000,000) divided into ten thousand (10,000) common shares at PhP 1,000 per share, as
demonstrated below:
[[reference
= http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/april2014/195580.pdf]]

Name Nationality Number of Amount Amount Paid

Shares Subscribed

Sara Marie Filipino 5,997 PhP 5,997,000.00 PhP 825,000.00

Mining, Inc.

MBMI Canadian 3,998 PhP 3,998,000.00 PhP 1,878,174.60

Resources, Inc.

Lauro L. Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00

Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00

Esguerra

Manuel A. Filipino 1 PhP 1,000.00 PhP 1,000.00

Agcaoili

Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00

Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00

Total 10,000 PhP PhP 2,708,174.60

10,000,000.00
(emphasis supplied)

Except for the name "Sara Marie Mining, Inc.," the table above shows exactly the same figures as the
corporate structure of petitioner McArthur, down to the last centavo. All the other shareholders are
the same: MBMI, Salazar, Esguerra, Agcaoili, Mason and Cawkell. The figures under "Nationality,"
"Number of Shares," "Amount Subscribed," and "Amount Paid" are exactly the same. Delving deeper,
we scrutinize SMMI’s corporate structure:

Sara Marie Mining, Inc.

[[reference
= http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/april2014/195580.pdf]]

Name Nationality Number of Amount Amount Paid

Shares Subscribed

Olympic Mines & Filipino 6,663 PhP 6,663,000.00 PhP 0

Development

Corp.

MBMI Resources, Canadian 3,331 PhP 3,331,000.00 PhP 2,794,000.00

Inc.

Amanti Limson Filipino 1 PhP 1,000.00 PhP 1,000.00

Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00

Esguerra

Lauro Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00

Emmanuel G. Filipino 1 PhP 1,000.00 PhP 1,000.00

Hernando

Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00

Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00

Total 10,000 PhP PhP 2,809,900.00

10,000,000.00
(emphasis supplied)

After subsequently studying SMMI’s corporate structure, it is not farfetched for us to spot the
glaring similarity between SMMI and MMC’s corporate structure. Again, the presence of identical
stockholders, namely: Olympic, MBMI, Amanti Limson (Limson), Esguerra, Salazar, Hernando,
Mason and Cawkell. The figures under the headings "Nationality," "Number of Shares," "Amount
Subscribed," and "Amount Paid" are exactly the same except for the amount paid by MBMI which
now reflects the amount of two million seven hundred ninety four thousand pesos (PhP 2,794,000).
Oddly, the total value of the amount paid is two million eight hundred nine thousand nine hundred
pesos (PhP 2,809,900).

Accordingly, after "grandfathering" petitioner Tesoro and factoring in Olympic’s participation in

SMMI’s corporate structure, it is clear that MBMI is in control of Tesoro and owns 60% or more
equity interest in Tesoro. This makes petitioner Tesoro a non-Filipino corporation and, thus,
disqualifies it to participate in the exploitation, utilization and development of our natural resources.

Narra Nickel Mining and Development Corporation

Moving on to the last petitioner, Narra, which is the transferee and assignee of PLMDC’s MPSA
application, whose corporate structure’s arrangement is similar to that of the first two petitioners
discussed. The capital stock of Narra is ten million pesos (PhP 10,000,000), which is divided into ten
thousand common shares (10,000) at one thousand pesos (PhP 1,000) per share, shown as follows:
[[reference
= http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/april2014/195580.pdf]]

Name Nationality Number of Amount Amount Paid

Shares Subscribed

Patricia Louise Filipino 5,997 PhP 5,997,000.00 PhP 1,677,000.00

Mining &

Development

Corp.

MBMI Canadian 3,998 PhP 3,996,000.00 PhP 1,116,000.00

Resources, Inc.

Higinio C. Filipino 1 PhP 1,000.00 PhP 1,000.00

Mendoza, Jr.

Henry E. Filipino 1 PhP 1,000.00 PhP 1,000.00

Fernandez

Manuel A. Filipino 1 PhP 1,000.00 PhP 1,000.00

Agcaoili

Ma. Elena A. Filipino 1 PhP 1,000.00 PhP 1,000.00

Bocalan

Bayani H. Agabin Filipino 1 PhP 1,000.00 PhP 1,000.00

Robert L. American 1 PhP 1,000.00 PhP 1,000.00

McCurdy

Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00

Total 10,000 PhP PhP 2,800,000.00

10,000,000.00 (emphasis supplied)

Again, MBMI, along with other nominal stockholders, i.e., Mason, Agcaoili and Esguerra, is present
in this corporate structure.

Patricia Louise Mining & Development Corporation

Using the grandfather method, we further look and examine PLMDC’s corporate structure:

Name Nationality Number of Amount Amount Paid

Shares Subscribed
Palawan Alpha South Filipino 6,596 PhP PhP 0
Resources Development 6,596,000.00
Corporation
MBMI Resources, Canadian 3,396 PhP PhP
3,396,000.00 2,796,000.00
Inc.
Higinio C. Mendoza, Jr. Filipino 1 PhP 1,000.00 PhP 1,000.00
Fernando B. Esguerra Filipino 1 PhP 1,000.00 PhP 1,000.00
Henry E. Fernandez Filipino 1 PhP 1,000.00 PhP 1,000.00
Lauro L. Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00
Manuel A. Agcaoili Filipino 1 PhP 1,000.00 PhP 1,000.00
Bayani H. Agabin Filipino 1 PhP 1,000.00 PhP 1,000.00
Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00
Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00
Total 10,000 PhP PhP
10,000,000.00 2,708,174.60
(emphasis
supplied)

Yet again, the usual players in petitioners’ corporate structures are present. Similarly, the amount of
money paid by the 2nd tier majority stock holder, in this case, Palawan Alpha South Resources and
Development Corp. (PASRDC), is zero.

Studying MBMI’s Summary of Significant Accounting Policies dated October 31, 2005 explains the
reason behind the intricate corporate layering that MBMI immersed itself in:

JOINT VENTURES The Company’s ownership interests in various mining ventures engaged in the
acquisition, exploration and development of mineral properties in the Philippines is described as
follows:

(a) Olympic Group

The Philippine companies holding the Olympic Property, and the ownership and interests therein,
are as follows:

Olympic- Philippines (the "Olympic Group")

Sara Marie Mining Properties Ltd. ("Sara Marie") 33.3%

Tesoro Mining & Development, Inc. (Tesoro) 60.0%

Pursuant to the Olympic joint venture agreement the Company holds directly and indirectly an
effective equity interest in the Olympic Property of 60.0%. Pursuant to a shareholders’ agreement,
the Company exercises joint control over the companies in the Olympic Group.

(b) Alpha Group

The Philippine companies holding the Alpha Property, and the ownership interests therein, are as
follows:

Alpha- Philippines (the "Alpha Group")

Patricia Louise Mining Development Inc. ("Patricia") 34.0%

Narra Nickel Mining & Development Corporation (Narra) 60.4%

Under a joint venture agreement the Company holds directly and indirectly an effective equity
interest in the Alpha Property of 60.4%. Pursuant to a shareholders’ agreement, the Company
exercises joint control over the companies in the Alpha Group. 48 (emphasis supplied)

Concluding from the above-stated facts, it is quite safe to say that petitioners McArthur, Tesoro and
Narra are not Filipino since MBMI, a 100% Canadian corporation, owns 60% or more of their equity
interests. Such conclusion is derived from grandfathering petitioners’ corporate owners, namely:
MMI, SMMI and PLMDC. Going further and adding to the picture, MBMI’s Summary of Significant
Accounting Policies statement– –regarding the "joint venture" agreements that it entered into with
the "Olympic" and "Alpha" groups––involves SMMI, Tesoro, PLMDC and Narra. Noticeably, the
ownership of the "layered" corporations boils down to MBMI, Olympic or corporations under the
"Alpha" group wherein MBMI has joint venture agreements with, practically exercising majority
control over the corporations mentioned. In effect, whether looking at the capital structure or the
underlying relationships between and among the corporations, petitioners are NOT Filipino
nationals and must be considered foreign since 60% or more of their capital stocks or equity interests
are owned by MBMI.

Application of the res inter alios acta rule

Petitioners question the CA’s use of the exception of the res inter alios acta or the "admission by co-
partner or agent" rule and "admission by privies" under the Rules of Court in the instant case, by
pointing out that statements made by MBMI should not be admitted in this case since it is not a
party to the case and that it is not a "partner" of petitioners.

Secs. 29 and 31, Rule 130 of the Revised Rules of Court provide:

Sec. 29. Admission by co-partner or agent.- The act or declaration of a partner or agent of the party
within the scope of his authority and during the existence of the partnership or agency, may be given
in evidence against such party after the partnership or agency is shown by evidence other than such
act or declaration itself. The same rule applies to the act or declaration of a joint owner, joint debtor,
or other person jointly interested with the party.

Sec. 31. Admission by privies.- Where one derives title to property from another, the act, declaration,
or omission of the latter, while holding the title, in relation to the property, is evidence against the
former.
Petitioners claim that before the above-mentioned Rule can be applied to a case, "the partnership
relation must be shown, and that proof of the fact must be made by evidence other than the
admission itself."49 Thus, petitioners assert that the CA erred in finding that a partnership
relationship exists between them and MBMI because, in fact, no such partnership exists.

Partnerships vs. joint venture agreements

Petitioners claim that the CA erred in applying Sec. 29, Rule 130 of the Rules by stating that "by
entering into a joint venture, MBMI have a joint interest" with Narra, Tesoro and McArthur. They
challenged the conclusion of the CA which pertains to the close characteristics of

"partnerships" and "joint venture agreements." Further, they asserted that before this particular
partnership can be formed, it should have been formally reduced into writing since the capital
involved is more than three thousand pesos (PhP 3,000). Being that there is no evidence of written
agreement to form a partnership between petitioners and MBMI, no partnership was created.

We disagree.

A partnership is defined as two or more persons who bind themselves to contribute money, property,
or industry to a common fund with the intention of dividing the profits among themselves.50 On the
other hand, joint ventures have been deemed to be "akin" to partnerships since it is difficult to
distinguish between joint ventures and partnerships. Thus:

[T]he relations of the parties to a joint venture and the nature of their association are so similar and
closely akin to a partnership that it is ordinarily held that their rights, duties, and liabilities are to
be tested by rules which are closely analogous to and substantially the same, if not exactly the same,
as those which govern partnership. In fact, it has been said that the trend in the law has been to blur
the distinctions between a partnership and a joint venture, very little law being found applicable to
one that does not apply to the other.51

Though some claim that partnerships and joint ventures are totally different animals, there are very
few rules that differentiate one from the other; thus, joint ventures are deemed "akin" or similar to a
partnership. In fact, in joint venture agreements, rules and legal incidents governing partnerships
are applied.52

Accordingly, culled from the incidents and records of this case, it can be assumed that the
relationships entered between and among petitioners and MBMI are no simple "joint venture
agreements." As a rule, corporations are prohibited from entering into partnership agreements;
consequently, corporations enter into joint venture agreements with other corporations or
partnerships for certain transactions in order to form "pseudo partnerships."

Obviously, as the intricate web of "ventures" entered into by and among petitioners and MBMI was
executed to circumvent the legal prohibition against corporations entering into partnerships, then
the relationship created should be deemed as "partnerships," and the laws on partnership should be
applied. Thus, a joint venture agreement between and among corporations may be seen as similar to
partnerships since the elements of partnership are present.

Considering that the relationships found between petitioners and MBMI are considered to be
partnerships, then the CA is justified in applying Sec. 29, Rule 130 of the Rules by stating that "by
entering into a joint venture, MBMI have a joint interest" with Narra, Tesoro and McArthur.

Panel of Arbitrators’ jurisdiction

We affirm the ruling of the CA in declaring that the POA has jurisdiction over the instant case. The
POA has jurisdiction to settle disputes over rights to mining areas which definitely involve the
petitions filed by Redmont against petitioners Narra, McArthur and Tesoro. Redmont, by filing its
petition against petitioners, is asserting the right of Filipinos over mining areas in the Philippines
against alleged foreign-owned mining corporations. Such claim constitutes a "dispute" found in Sec.
77 of RA 7942:

Within thirty (30) days, after the submission of the case by the parties for the decision, the panel
shall have exclusive and original jurisdiction to hear and decide the following:

(a) Disputes involving rights to mining areas

(b) Disputes involving mineral agreements or permits

We held in Celestial Nickel Mining Exploration Corporation v. Macroasia Corp.: 53

The phrase "disputes involving rights to mining areas" refers to any adverse claim, protest, or
opposition to an application for mineral agreement. The POA therefore has the jurisdiction to resolve
any adverse claim, protest, or opposition to a pending application for a mineral agreement filed with
the concerned Regional Office of the MGB. This is clear from Secs. 38 and 41 of the DENR AO 96-40,
which provide:

Sec. 38.

xxxx

Within thirty (30) calendar days from the last date of publication/posting/radio announcements, the
authorized officer(s) of the concerned office(s) shall issue a certification(s) that the
publication/posting/radio announcement have been complied with. Any adverse claim, protest,
opposition shall be filed directly, within thirty (30) calendar days from the last date of
publication/posting/radio announcement, with the concerned Regional Office or through any
concerned PENRO or CENRO for filing in the concerned Regional Office for purposes of its resolution
by the Panel of Arbitrators pursuant to the provisions of this Act and these implementing rules and
regulations. Upon final resolution of any adverse claim, protest or opposition, the Panel of
Arbitrators shall likewise issue a certification to that effect within five (5) working days from the
date of finality of resolution thereof. Where there is no adverse claim, protest or opposition, the
Panel of Arbitrators shall likewise issue a Certification to that effect within five working days
therefrom.

xxxx

No Mineral Agreement shall be approved unless the requirements under this Section are fully
complied with and any adverse claim/protest/opposition is finally resolved by the Panel of
Arbitrators.

Sec. 41.

xxxx

Within fifteen (15) working days form the receipt of the Certification issued by the Panel of
Arbitrators as provided in Section 38 hereof, the concerned Regional Director shall initially evaluate
the Mineral Agreement applications in areas outside Mineral reservations. He/She shall thereafter
endorse his/her findings to the Bureau for further evaluation by the Director within fifteen (15)
working days from receipt of forwarded documents. Thereafter, the Director shall endorse the same
to the secretary for consideration/approval within fifteen working days from receipt of such
endorsement.

In case of Mineral Agreement applications in areas with Mineral Reservations, within fifteen (15)
working days from receipt of the Certification issued by the Panel of Arbitrators as provided for in
Section 38 hereof, the same shall be evaluated and endorsed by the Director to the Secretary for
consideration/approval within fifteen days from receipt of such endorsement. (emphasis supplied)

It has been made clear from the aforecited provisions that the "disputes involving rights to mining
areas" under Sec. 77(a) specifically refer only to those disputes relative to the applications for a
mineral agreement or conferment of mining rights.

The jurisdiction of the POA over adverse claims, protest, or oppositions to a mining right application
is further elucidated by Secs. 219 and 43 of DENR AO 95-936, which read:

Sec. 219. Filing of Adverse Claims/Conflicts/Oppositions.- Notwithstanding the provisions of Sections

28, 43 and 57 above, any adverse claim, protest or opposition specified in said sections may also be
filed directly with the Panel of Arbitrators within the concerned periods for filing such claim, protest
or opposition as specified in said Sections.

Sec. 43. Publication/Posting of Mineral Agreement.-

xxxx

The Regional Director or concerned Regional Director shall also cause the posting of the application
on the bulletin boards of the Bureau, concerned Regional office(s) and in the concerned province(s)
and municipality(ies), copy furnished the barangays where the proposed contract area is located once
a week for two (2) consecutive weeks in a language generally understood in the locality. After forty-
five (45) days from the last date of publication/posting has been made and no adverse claim, protest
or opposition was filed within the said forty-five (45) days, the concerned offices shall issue a
certification that publication/posting has been made and that no adverse claim, protest or opposition
of whatever nature has been filed. On the other hand, if there be any adverse claim, protest or
opposition, the same shall be filed within forty-five (45) days from the last date of
publication/posting, with the Regional Offices concerned, or through the Department’s Community
Environment and Natural Resources Officers (CENRO) or Provincial Environment and Natural
Resources Officers (PENRO), to be filed at the Regional Office for resolution of the Panel of
Arbitrators. However previously published valid and subsisting mining claims are exempted from
posted/posting required under this Section.

No mineral agreement shall be approved unless the requirements under this section are fully
complied with and any opposition/adverse claim is dealt with in writing by the Director and resolved
by the Panel of Arbitrators. (Emphasis supplied.)

It has been made clear from the aforecited provisions that the "disputes involving rights to mining
areas" under Sec. 77(a) specifically refer only to those disputes relative to the applications for a
mineral agreement or conferment of mining rights.

The jurisdiction of the POA over adverse claims, protest, or oppositions to a mining right application
is further elucidated by Secs. 219 and 43 of DENRO AO 95-936, which reads:
Sec. 219. Filing of Adverse Claims/Conflicts/Oppositions.- Notwithstanding the provisions of Sections
28, 43 and 57 above, any adverse claim, protest or opposition specified in said sections may also be
filed directly with the Panel of Arbitrators within the concerned periods for filing such claim, protest
or opposition as specified in said Sections.

Sec. 43. Publication/Posting of Mineral Agreement Application.-

xxxx

The Regional Director or concerned Regional Director shall also cause the posting of the application
on the bulletin boards of the Bureau, concerned Regional office(s) and in the concerned province(s)
and municipality(ies), copy furnished the barangays where the proposed contract area is located once
a week for two (2) consecutive weeks in a language generally understood in the locality. After forty-
five (45) days from the last date of publication/posting has been made and no adverse claim, protest
or opposition was filed within the said forty-five (45) days, the concerned offices shall issue a
certification that publication/posting has been made and that no adverse claim, protest or opposition
of whatever nature has been filed. On the other hand, if there be any adverse claim, protest or
opposition, the same shall be filed within forty-five (45) days from the last date of
publication/posting, with the Regional offices concerned, or through the Department’s Community
Environment and Natural Resources Officers (CENRO) or Provincial Environment and Natural
Resources Officers (PENRO), to be filed at the Regional Office for resolution of the Panel of
Arbitrators. However, previously published valid and subsisting mining claims are exempted from
posted/posting required under this Section.

No mineral agreement shall be approved unless the requirements under this section are fully
complied with and any opposition/adverse claim is dealt with in writing by the Director and resolved
by the Panel of Arbitrators. (Emphasis supplied.)

These provisions lead us to conclude that the power of the POA to resolve any adverse claim,
opposition, or protest relative to mining rights under Sec. 77(a) of RA 7942 is confined only to
adverse claims, conflicts and oppositions relating to applications for the grant of mineral rights.

POA’s jurisdiction is confined only to resolutions of such adverse claims, conflicts and oppositions
and it has no authority to approve or reject said applications. Such power is vested in the DENR
Secretary upon recommendation of the MGB Director. Clearly, POA’s jurisdiction over "disputes
involving rights to mining areas" has nothing to do with the cancellation of existing mineral
agreements. (emphasis ours)

Accordingly, as we enunciated in Celestial, the POA unquestionably has jurisdiction to resolve

disputes over MPSA applications subject of Redmont’s petitions. However, said jurisdiction does not
include either the approval or rejection of the MPSA applications, which is vested only upon the
Secretary of the DENR. Thus, the finding of the POA, with respect to the rejection of petitioners’
MPSA applications being that they are foreign corporation, is valid.

Justice Marvic Mario Victor F. Leonen, in his Dissent, asserts that it is the regular courts, not the
POA, that has jurisdiction over the MPSA applications of petitioners.

This postulation is incorrect.

It is basic that the jurisdiction of the court is determined by the statute in force at the time of the
commencement of the action.54
Sec. 19, Batas Pambansa Blg. 129 or "The Judiciary Reorganization

Act of 1980" reads:

Sec. 19. Jurisdiction in Civil Cases.—Regional Trial Courts shall exercise exclusive original
jurisdiction:

1. In all civil actions in which the subject of the litigation is incapable of pecuniary estimation.

On the other hand, the jurisdiction of POA is unequivocal from Sec. 77 of RA 7942:

Section 77. Panel of Arbitrators.—

x x x Within thirty (30) days, after the submission of the case by the parties for the decision,
the panel shall have exclusive and original jurisdiction to hear and decide the following:

(c) Disputes involving rights to mining areas

(d) Disputes involving mineral agreements or permits

It is clear that POA has exclusive and original jurisdiction over any and all disputes involving rights
to mining areas. One such dispute is an MPSA application to which an adverse claim, protest or
opposition is filed by another interested applicant.1âwphi1 In the case at bar, the dispute arose or
originated from MPSA applications where petitioners are asserting their rights to mining areas
subject of their respective MPSA applications. Since respondent filed 3 separate petitions for the
denial of said applications, then a controversy has developed between the parties and it is POA’s
jurisdiction to resolve said disputes.

Moreover, the jurisdiction of the RTC involves civil actions while what petitioners filed with the
DENR Regional Office or any concerned DENRE or CENRO are MPSA applications. Thus POA has
jurisdiction.

Furthermore, the POA has jurisdiction over the MPSA applications under the doctrine of primary
jurisdiction. Euro-med Laboratories v. Province of Batangas55 elucidates:

The doctrine of primary jurisdiction holds that if a case is such that its determination requires the
expertise, specialized training and knowledge of an administrative body, relief must first be obtained
in an administrative proceeding before resort to the courts is had even if the matter may well be
within their proper jurisdiction.

Whatever may be the decision of the POA will eventually reach the court system via a resort to the
CA and to this Court as a last recourse.

Selling of MBMI’s shares to DMCI

As stated before, petitioners’ Manifestation and Submission dated October 19, 2012 would want us to
declare the instant petition moot and academic due to the transfer and conveyance of all the
shareholdings and interests of MBMI to DMCI, a corporation duly organized and existing under
Philippine laws and is at least 60% Philippine-owned.56 Petitioners reasoned that they now cannot
be considered as foreign-owned; the transfer of their shares supposedly cured the "defect" of their
previous nationality. They claimed that their current FTAA contract with the State should stand
since "even wholly-owned foreign corporations can enter into an FTAA with the State." 57Petitioners
stress that there should no longer be any issue left as regards their qualification to enter into FTAA
contracts since they are qualified to engage in mining activities in the Philippines. Thus, whether
the "grandfather rule" or the "control test" is used, the nationalities of petitioners cannot be doubted
since it would pass both tests.

The sale of the MBMI shareholdings to DMCI does not have any bearing in the instant case and said
fact should be disregarded. The manifestation can no longer be considered by us since it is being
tackled in G.R. No. 202877 pending before this Court.1âwphi1 Thus, the question of whether
petitioners, allegedly a Philippine-owned corporation due to the sale of MBMI's shareholdings to
DMCI, are allowed to enter into FTAAs with the State is a non-issue in this case.

In ending, the "control test" is still the prevailing mode of determining whether or not a corporation
is a Filipino corporation, within the ambit of Sec. 2, Art. II of the 1987 Constitution, entitled to
undertake the exploration, development and utilization of the natural resources of the Philippines.
When in the mind of the Court there is doubt, based on the attendant facts and circumstances of the
case, in the 60-40 Filipino-equity ownership in the corporation, then it may apply the "grandfather
rule."

WHEREFORE, premises considered, the instant petition is DENIED. The assailed Court of Appeals
Decision dated October 1, 2010 and Resolution dated February 15, 2011 are hereby AFFIRMED.

SO ORDERED.

Narra Nickel Mining and Dev. Corp. v. Redmont Consolidated Mines (2)

Before the Court is the Motion for Reconsideration of its April 21, 2014 Decision, which denied the
Petition for Review on Certiorari under Rule 45 jointly interposed by petitioners Narra Nickel and
Mining Development Corp. (Narra), Tesoro Mining and Development, Inc. (Tesoro), and McArthur
Mining Inc. (McArthur), and affirmed the October 1, 2010 Decision and February 15, 2011
Resolution of the Court of Appeals (CA) in CA-G.R. SP No. 109703.

Very simply, the challenged Decision sustained the appellate court's ruling that petitioners, being
foreign corporations, are not entitled to Mineral Production Sharing Agreements (MPSAs). In
reaching its conclusion, this Court upheld with approval the appellate court's finding that there was
doubt as to petitioners' nationality since a 100% Canadian-owned firm, MBMI Resources, Inc.
(MBMI), effectively owns 60% of the common stocks of the petitioners by owning equity interest of
petitioners' other majority corporate shareholders.

In a strongly worded Motion for Reconsideration dated June 5, 2014, petitioners-movants argued, in
the main, that the Court's Decision was not in accord with law and logic. In its September 2, 2014
Comment, on the other hand, respondent Redmont Consolidated Mines Corp. (Redmont) countered
that petitioners’ motion for reconsideration is nothing but a rehash of their arguments and should,
thus, be denied outright for being pro-forma. Petitioners have interposed on September 30, 2014
their Reply to the respondent’s Comment.

After considering the parties’ positions, as articulated in their respective submissions, We resolve to
deny the motion for reconsideration.

I.
The case has not been rendered moot and academic

Petitioners have first off criticized the Court for resolving in its Decision a substantive issue,
which,as argued, has supposedly been rendered moot by the fact that petitioners’ applications for
MPSAs had already been converted to an application for a Financial Technical Assistance
Agreement (FTAA), as petitioners have in fact been granted an FTAA. Further, the nationality issue,
so petitioners presently claim, had been rendered moribund by the fact that MBMI had already
divested itself and sold all its shareholdings in the petitioners, as well as in their corporate
stockholders, to a Filipino corporation—DMCI Mining Corporation (DMCI).

As a counterpoint, respondent Redmontavers that the present case has not been rendered moot by
the supposed issuance of an FTAA in petitioners’ favor as this FTAA was subsequently revoked by
the Office of the President (OP) and is currently a subject of a petition pending in the Court’s First
Division. Redmont likewise contends that the supposed sale of MBMI’s interest in the petitioners
and in their "holding companies" is a question of fact that is outside the Court’s province to verify in
a Rule 45 certiorari proceedings. In any case, assuming that the controversy has been rendered moot,
Redmont claims that its resolution on the merits is still justified by the fact that petitioners have
violated a constitutional provision, the violation is capable of repetition yet evading review, and the
present case involves a matter of public concern.

Indeed, as the Court clarified in its Decision, the conversion of the MPSA application to one for
FTAAs and the issuance by the OP of an FTAA in petitioners’ favor are irrelevant. The OP itself has
already cancelled and revoked the FTAA thusissued to petitioners. Petitioners curiously have
omitted this critical factin their motion for reconsideration. Furthermore, the supposed sale by
MBMI of its shares in the petition ercorporations and in their holding companies is not only a
question of fact that this Court is without authority toverify, it also does not negate any violation of
the Constitutional provisions previously committed before any such sale.

We can assume for the nonce that the controversy had indeed been rendered moot by these two
events. Asthis Court has time and again declared, the "moot and academic" principle is not a magical
formula that automatically dissuades courts in resolving a case.1 The Court may still take cognizance
of an otherwise moot and academic case, if it finds that (a) there is a grave violation of the
Constitution;(b) the situation is of exceptional character and paramount public interest is involved;
(c) the constitutional issue raised requires formulation of controlling principles to guide the bench,
the bar, and the public; and (d) the case is capable of repetition yet evading review.2 The Court’s
April 21, 2014 Decision explained in some detail that all four (4) of the foregoing circumstances are
present in the case. If only to stress a point, we will do so again. First, allowing the issuance of
MPSAs to applicants that are owned and controlled by a 100% foreign-owned corporation, albeit
through an intricate web of corporate layering involving alleged Filipino corporations, is tantamount
to permitting a blatant violation of Section 2, Article XII of the Constitution. The Court simply
cannot allow this breach and inhibit itself from resolving the controversy on the facile pretext that
the case had already been rendered academic.

Second, the elaborate corporate layering resorted to by petitioners so as to make it appear that there
is compliance with the minimum Filipino ownership in the Constitution is deftly exceptional in
character. More importantly, the case is of paramount public interest, as the corporate layering
employed by petitioners was evidently designed to circumvent the constitutional caveat allowing
only Filipino citizens and corporations 60%-owned by Filipino citizens to explore, develop, and use
the country’s natural resources.

Third, the facts of the case, involving as they do a web of corporate layering intended to go around
the Filipino ownership requirement in the Constitution and pertinent laws, requirethe
establishment of a definite principle that will ensure that the Constitutional provision reserving to
Filipino citizens or "corporations at least sixty per centum of whose capital is owned by such citizens"
be effectively enforced and complied with. The case, therefore, is an opportunity to establish a
controlling principle that will "guide the bench, the bar, and the public."

Lastly, the petitioners’ actions during the lifetime and existence of the instant case that gave rise to
the present controversy are capable of repetition yet evading review because, as shown by
petitioners’ actions, foreign corporations can easily utilize dummy Filipino corporations through
various schemes and stratagems to skirt the constitutional prohibition against foreign mining in
Philippine soil.

II.

The application of the Grandfather Ruleis justified by the circumstances of the case to determine the
nationality of petitioners.

To petitioners, the Court’s application of the Grandfather Rule to determine their nationality is
erroneous and allegedly without basis in the Constitution, the Foreign Investments Act of 1991
(FIA), the Philippine Mining Act of 1995,3 and the Rules issued by the Securities and Exchange
Commission (SEC). These laws and rules supposedly espouse the application of the Control Test in
verifying the Philippine nationality of corporate entities for purposes of determining compliance
withSec. 2, Art. XII of the Constitution that only "corporations or associations at least sixty per
centum of whose capital is owned by such [Filipino] citizens" may enjoy certain rights and privileges,
like the exploration and development of natural resources.

The application of the Grandfather Rule in the present case does not eschew the Control Test.

Clearly, petitioners have misread, and failed to appreciate the clear import of, the Court’s April 21,
2014 Decision. Nowhere in that disposition did the Court foreclose the application of the Control Test
in determining which corporations may be considered as Philippine nationals. Instead, to borrow
Justice Leonen’s term, the Court used the Grandfather Rule as a "supplement" to the Control Test so
that the intent underlying the averted Sec. 2, Art. XII of the Constitution be given effect. The
following excerpts of the April 21, 2014 Decision cannot be clearer:

In ending, the "control test" is still the prevailing mode of determining whether or not a corporation
is a Filipino corporation, within the ambit of Sec. 2, Art. XII of the 1987 Constitution, entitled to
undertake the exploration, development and utilization of the natural resources of the Philippines.
When in the mind of the Court, there is doubt, based on the attendant facts and circumstances of the
case, in the 60-40 Filipino equity ownership in the corporation, then it may apply the "grandfather
rule." (emphasis supplied)

With that, the use of the Grandfather Rule as a "supplement" to the Control Test is not proscribed by
the Constitution or the Philippine Mining Act of 1995.

The Grandfather Rule implements the intent of the Filipinization provisions of the Constitution.

To reiterate, Sec. 2, Art. XII of the Constitution reserves the exploration, development, and
utilization of natural resources to Filipino citizens and "corporations or associations at least sixty per
centum of whose capital is owned by such citizens." Similarly, Section 3(aq) of the Philippine Mining
Act of 1995 considers a "corporation x x x registered in accordance with law at least sixty per cent of
the capital of which is owned by citizens of the Philippines" as a person qualified to undertake a
mining operation. Consistent with this objective, the Grandfather Rulewas originally conceived to
look into the citizenshipof the individuals who ultimately own and control the shares of stock of a
corporation for purposes of determining compliance with the constitutional requirement of Filipino
ownership. It cannot, therefore, be denied that the framers of the Constitution have not foreclosed
the Grandfather Rule as a tool in verifying the nationality of corporations for purposes of
ascertaining their right to participate in nationalized or partly nationalized activities. The following
excerpts from the Record of the 1986 Constitutional Commission suggest as much:

MR. NOLLEDO: In Sections 3, 9 and 15, the Committee stated local or Filipino equity and foreign
equity; namely, 60-40 in Section 3, 60-40 in Section 9, and 2/3-1/3 in Section 15.

MR. VILLEGAS: That is right.

xxxx

MR. NOLLEDO: Thank you.

With respect to an investment by one corporation in another corporation, say, a corporation with 60-
40 percent equity invests in another corporation which is permitted by the Corporation Code, does
the Committee adopt the grandfather rule?

MR. VILLEGAS: Yes, that is the understanding of the Committee.

As further defined by Dean Cesar Villanueva, the Grandfather Rule is "the method by which the
percentage of Filipino equity in a corporation engaged in nationalized and/or partly nationalized
areas of activities, provided for under the Constitution and other nationalization laws, is computed,
in cases where corporate shareholders are present, by attributing the nationality of the second or
even subsequent tier of ownership to determine the nationality of the corporate shareholder." 4 Thus,
to arrive at the actual Filipino ownership and control in a corporation, both the direct and indirect
shareholdings in the corporation are determined.

This concept of stock attribution inherent in the Grandfather Rule to determine the ultimate
ownership in a corporation is observed by the Bureau of Internal Revenue (BIR) in applying Section
127 (B)5 of the National Internal Revenue Code on taxes imposed on closely held corporations, in
relation to Section 96 of the Corporation Code 6 on close corporations. Thus, in BIR Ruling No. 148-
10, Commissioner Kim Henares held:

In the case of a multi-tiered corporation, the stock attribution rule must be allowed to run
continuously along the chain of ownership until it finally reaches the individual stockholders. This is
in consonance with the "grandfather rule" adopted in the Philippines under Section 96 of the
Corporation Code(Batas Pambansa Blg. 68) which provides that notwithstanding the fact that all the
issued stock of a corporation are held by not more than twenty persons, among others, a corporation
is nonetheless not to be deemed a close corporation when at least two thirds of its voting stock or
voting rights is owned or controlled by another corporation which is not a close corporation. 7

In SEC-OGC Opinion No. 10-31 dated December 9, 2010 (SEC Opinion 10-31), the SEC applied the
Grandfather Rule even if the corporation engaged in mining operation passes the 60-40 requirement
of the Control Test, viz:

You allege that the structure of MML’s ownership in PHILSAGA is as follows: (1) MML owns 40%
equity in MEDC, while the 60% is ostensibly owned by Philippine individual citizens who are
actually MML’s controlled nominees; (2) MEDC, in turn, owns 60% equity in MOHC, while MML
owns the remaining 40%; (3) Lastly, MOHC owns 60% of PHILSAGA, while MML owns the
remaining 40%. You provide the following figure to illustrate this structure:

xxxx

We note that the Constitution and the statute use the concept "Philippine citizens." Article III,
Section 1 of the Constitution provides who are Philippine citizens: x x x This enumeration is
exhaustive. In other words, there can be no other Philippine citizens other than those falling within
the enumeration provided by the Constitution. Obviously, only natural persons are susceptible of
citizenship. Thus, for purposes of the Constitutional and statutory restrictions on foreign
participation in the exploitation of mineral resources, a corporation investing in a mining joint
venture can never be considered as a Philippine citizen.

The Supreme Court En Banc confirms this [in]… Pedro R. Palting, vs. San Jose Petroleum [Inc.]. The
Court held that a corporation investing in another corporation engaged ina nationalized activity
cannot be considered as a citizen for purposes of the Constitutional provision restricting foreign
exploitation of natural resources:

xxxx

Accordingly, we opine that we must look into the citizenship of the individual stockholders, i.e.
natural persons, of that investor-corporation in order to determine if the Constitutional and
statutory restrictions are complied with. If the shares of stock of the immediate investor corporation
is in turn held and controlled by another corporation, then we must look into the citizenship of the
individual stockholders of the latter corporation. In other words, if there are layers of intervening
corporations investing in a mining joint venture, we must delve into the citizenship of the individual
stockholders of each corporation. This is the strict application of the grandfather rule, which the
Commission has been consistently applying prior to the 1990s. Indeed, the framers of the
Constitution intended for the "grandfather rule" to apply in case a 60%-40% Filipino-Foreign equity
corporation invests in another corporation engaging in an activity where the Constitution restricts
foreign participation.

xxxx

Accordingly, under the structure you represented, the joint mining venture is 87.04 % foreign owned,
while it is only 12.96% owned by Philippine citizens. Thus, the constitutional requirement of 60%
ownership by Philippine citizens isviolated. (emphasis supplied)

Similarly, in the eponymous Redmont Consolidated Mines Corporation v. McArthur Mining Inc., et
al.,8 the SEC en bancapplied the Grandfather Rule despite the fact that the subject corporations
ostensibly have satisfied the 60-40 Filipino equity requirement. The SEC en bancheld that to attain
the Constitutional objective of reserving to Filipinos the utilization of natural resources, one should
not stop where the percentage of the capital stock is 60%.Thus:

[D]oubt, we believe, exists in the instant case because the foreign investor, MBMI, provided
practically all the funds of the remaining appellee-corporations. The records disclose that: (1)
Olympic Mines and Development Corporation ("OMDC"), a domestic corporation, and MBMI
subscribed to 6,663 and 3,331 shares, respectively, out of the authorized capital stock of Madridejos;
however, OMDC paid nothing for this subscription while MBMI paid P2,803,900.00 out of its total
subscription cost of P3,331,000.00; (2) Palawan Alpha South Resource Development Corp. ("Palawan
Alpha"), also a domestic corporation, and MBMI subscribed to 6,596 and 3,996 shares, respectively,
out of the authorized capital stock of PatriciaLouise; however, Palawan Alpha paid nothing for this
subscription while MBMI paid P2,796,000.00 out of its total subscription cost of P3,996,000.00; (3)
OMDC and MBMI subscribed to 6,663 and 3,331 shares, respectively, out of the authorized capital
stock of Sara Marie; however, OMDC paid nothing for this subscription while MBMI
paid P2,794,000.00 out of its total subscription cost of P3,331,000.00; and (4) Falcon Ridge Resources
Management Corp. ("Falcon Ridge"), another domestic corporation, and MBMI subscribed to 5,997
and 3,998 shares, respectively, out of the authorized capital stock of San Juanico; however, Falcon
Ridge paid nothing for this subscription while MBMI paid P2,500,000.00 out of its total subscription
cost of P3,998,000.00. Thus, pursuant to the afore-quoted DOJ Opinion, the Grandfather Rule must
be used.

xxxx

The avowed purpose of the Constitution is to place in the hands of Filipinos the exploitation of our
natural resources. Necessarily, therefore, the Rule interpreting the constitutional provision should
not diminish that right through the legal fiction of corporate ownership and control. But the
constitutional provision, as interpreted and practicedvia the 1967 SEC Rules, has favored foreigners
contrary to the command of the Constitution. Hence, the Grandfather Rule must be applied to
accurately determine the actual participation, both direct and indirect, of foreigners in a corporation
engaged in a nationalized activity or business.

The method employed in the Grandfather Rule of attributing the shareholdings of a given corporate
shareholder to the second or even the subsequent tier of ownership hews with the rule that the
"beneficial ownership" of corporations engaged in nationalized activities must reside in the hands of
Filipino citizens. Thus, even if the 60-40 Filipino equity requirement appears to have been satisfied,
the Department of Justice (DOJ), in its Opinion No. 144, S. of 1977, stated that an agreement that
may distort the actual economic or beneficial ownership of a mining corporation may be struck down
as violative of the constitutional requirement, viz:

In this connection, you raise the following specific questions:

1. Can a Philippine corporation with 30% equity owned by foreigners enter into a mining service
contract with a foreign company granting the latter a share of not morethan 40% from the proceeds
of the operations?

xxxx

By law, a mining lease may be granted only to a Filipino citizen, or to a corporation or partnership
registered with the [SEC] at least 60% of the capital of which is owned by Filipino citizens and
possessing x x x.The sixty percent Philippine equity requirement in mineral resource exploitation x x
xis intended to insure, among other purposes, the conservation of indigenous natural resources, for
Filipino posterityx x x. I think it is implicit in this provision, even if it refers merely to ownership of
stock in the corporation holding the mining concession, that beneficial ownership of the right to
dispose, exploit, utilize, and develop natural resources shall pertain to Filipino citizens, and that the
nationality requirementis not satisfied unless Filipinos are the principal beneficiaries in the
exploitation of the country’s natural resources. This criterion of beneficial ownership is tacitly
adopted in Section 44 of P.D. No. 463, above-quoted, which limits the service fee in service contracts
to 40% of the proceeds of the operation, thereby implying that the 60-40 benefit-sharing ration is
derived from the 60-40 equity requirement in the Constitution.

xxxx
It is obvious that while payments to a service contractor may be justified as a service fee, and
therefore, properly deductible from gross proceeds, the service contract could be employed as a
means of going about or circumventing the constitutional limit on foreign equity participation and
the obvious constitutional policy to insure that Filipinos retain beneficial ownership of our mineral
resources. Thus, every service contract scheme has to be evaluated in its entirety, on a case to case
basis, to determine reasonableness of the total "service fee" x x x like the options available tothe
contractor to become equity participant in the Philippine entity holding the concession, or to acquire
rights in the processing and marketing stages. x x x (emphasis supplied)

The "beneficial ownership" requirement was subsequently used in tandem with the "situs of control"
todetermine the nationality of a corporation in DOJ Opinion No. 84, S.of 1988, through the
Grandfather Rule, despite the fact that both the investee and investor corporations purportedly
satisfy the 60-40 Filipino equity requirement:9

This refers to your request for opinion on whether or not there may be an investment in real estate
by a domestic corporation (the investing corporation) seventy percent (70%) of the capital stock of
which is owned by another domestic corporation withat least 60%-40% Filipino-Foreign Equity,
while the remaining thirty percent (30%) of the capital stock is owned by a foreign corporation.

xxxx

This Department has had the occasion to rule in several opinions that it is implicit in the
constitutional provisions, even if it refers merely to ownership of stock in the corporation holding the
land or natural resource concession, that the nationality requirement is not satisfied unless it meets
the criterion of beneficial ownership, i.e. Filipinos are the principal beneficiaries in the exploration of
natural resources(Op. No. 144, s. 1977; Op. No. 130, s. 1985), and that in applying the same "the
primordial consideration is situs of control, whether in a stock or nonstock corporation"(Op. No. 178,
s. 1974). As stated in the Register of Deeds vs. Ung Sui Si Temple (97 Phil. 58), obviously toinsure
that corporations and associations allowed to acquire agricultural land or to exploit natural
resources "shall be controlled by Filipinos." Accordingly, any arrangement which attempts to defeat
the constitutional purpose should be eschewed (Op. No 130, s. 1985).

We are informed that in the registration of corporations with the [SEC], compliance with the sixty
per centum requirement is being monitored by SEC under the "Grandfather Rule" a method by
which the percentage of Filipino equity in corporations engaged in nationalized and/or partly
nationalized areas of activities provided for under the Constitution and other national laws is
accurately computed, and the diminution if said equity prevented (SEC Memo, S. 1976). The
"Grandfather Rule" is applied specifically in cases where the corporation has corporate stockholders
with alien stockholdings, otherwise, if the rule is not applied, the presence of such corporate
stockholders could diminish the effective control of Filipinos.

Applying the "Grandfather Rule" in the instant case, the result is as follows: x x x the total foreign
equity in the investing corporation is 58% while the Filipino equity is only 42%, in the investing
corporation, subject of your query, is disqualified from investing in real estate, which is a
nationalized activity, as it does not meet the 60%-40% Filipino-Foreign equity requirement under the
Constitution.

This pairing of the concepts "beneficial ownership" and the "situs of control" in determining what
constitutes"capital" has been adopted by this Court in Heirs of Gamboa v. Teves. 10 In its October 9,
2012 Resolution, the Court clarified, thus:
This is consistent with Section 3 of the FIA which provides that where 100% of the capital stock is
heldby "a trustee of funds for pension or other employee retirement or separation benefits," the
trustee is a Philippine national if "at least sixty percent (60%) of the fund will accrue to the benefit of
Philippine nationals." Likewise, Section 1(b) of the Implementing Rules of the FIA provides that "for
stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is
not enough to meet the required Filipino equity. Full beneficial ownership of the stocks, coupled with
appropriate voting rights, is essential." (emphasis supplied)

In emphasizing the twin requirements of "beneficial ownership" and "control" in determining

compliance with the required Filipino equity in Gamboa, the en bancCourt explicitly cited with
approval the SEC en banc’s application in Redmont Consolidated Mines, Corp. v. McArthur Mining,
Inc., et al. of the Grandfather Rule, to wit:

Significantly, the SEC en banc, which is the collegial body statutorily empowered to issue rules and
opinions on behalf of SEC, has adopted the Grandfather Rulein determining compliance with the 60-
40 ownership requirement in favor of Filipino citizens mandated by the Constitution for certain
economic activities. This prevailing SEC ruling, which the SEC correctly adopted to thwart any
circumvention of the required Filipino "ownership and control," is laid down in the 25 March 2010
SEC en banc ruling in Redmont Consolidated Mines, Corp. v. McArthur Mining, Inc., et al. x x x
(emphasis supplied)

Applying Gamboa, the Court, in Express Investments III Private Ltd. v. Bayantel Communications,
Inc.,11 denied the foreign creditors’ proposal to convert part of Bayantel’s debts to common shares of
the company at a rate of 77.7%. Supposedly, the conversion of the debts to common shares by the
foreign creditors would be done, both directly and indirectly, in order to meet the control test
principle under the FIA.Under the proposed structure, the foreign creditors would own 40% of the
outstanding capital stock of the telecommunications company on a direct basis, while the remaining
40% of shares would be registered to a holding company that shall retain, on a direct basis, the other
60% equity reserved for Filipino citizens. Nonetheless, the Court found the proposal non-compliant
with the Constitutional requirement of Filipino ownership as the proposed structure would give
more than 60% of the ownership of the common shares of Bayantel to the foreign corporations, viz:

In its Rehabilitation Plan, among the material financial commitments made by respondent
Bayantelis that its shareholders shall relinquish the agreed-upon amount of common stock[s] as
payment to Unsecured Creditors as per the Term Sheet. Evidently, the parties intend to convert the
unsustainable portion of respondent’s debt into common stocks, which have voting rights. If we
indulge petitioners on their proposal, the Omnibus Creditors which are foreign corporations, shall
have control over 77.7% of Bayantel, a public utility company. This is precisely the scenario
proscribed by the Filipinization provision of the Constitution.Therefore, the Court of Appeals acted
correctly in sustaining the 40% debt-to-equity ceiling on conversion. (emphasis supplied) As shown
by the quoted legislative enactments, administrative rulings, opinions, and this Court’s decisions,
the Grandfather Rule not only finds basis, but more importantly, it implements the Filipino equity
requirement, in the Constitution.

Application of the Grandfather

Rule with the Control Test.

Admittedly, an ongoing quandary obtains as to the role of the Grandfather Rule in determining
compliance with the minimum Filipino equity requirement vis-à-vis the Control Test. This confusion
springs from the erroneous assumption that the use of one method forecloses the use of the other.
As exemplified by the above rulings, opinions, decisions and this Court’s April 21, 2014 Decision, the
Control Test can be, as it has been, applied jointly withthe Grandfather Rule to determine the
observance of foreign ownership restriction in nationalized economic activities. The Control Test and
the Grandfather Rule are not, as it were, incompatible ownership-determinant methods that canonly
be applied alternative to each other. Rather, these methodscan, if appropriate, be used cumulatively
in the determination of the ownership and control of corporations engaged in fully or partly
nationalized activities, as the mining operation involved in this case or the operation of public
utilities as in Gamboa or Bayantel.

The Grandfather Rule, standing alone, should not be used to determine the Filipino ownership and
control in a corporation, as it could result in an otherwise foreign corporation rendered qualified to
perform nationalized or partly nationalized activities. Hence, it is only when the Control Test is first
complied with that the Grandfather Rule may be applied. Put in another manner, if the subject
corporation’s Filipino equity falls below the threshold 60%, the corporation is immediately
considered foreign-owned, in which case, the needto resort to the Grandfather Rule disappears.

On the other hand, a corporation that complies with the 60-40 Filipino to foreign equity requirement
can be considered a Filipino corporation if there is no doubtas to who has the "beneficial ownership"
and "control" of the corporation. In that instance, there is no need fora dissection or further inquiry
on the ownership of the corporate shareholders in both the investing and investee corporation or the
application of the Grandfather Rule.12 As a corollary rule, even if the 60-40 Filipino to foreign equity
ratio is apparently met by the subject or investee corporation, a resort to the Grandfather Rule is
necessary if doubt existsas to the locusof the "beneficial ownership" and "control." In this case, a
further investigation as to the nationality of the personalities with the beneficial ownership and
control of the corporate shareholders in both the investing and investee corporations is necessary.

As explained in the April 21,2012 Decision, the "doubt" that demands the application of the
Grandfather Rule in addition to or in tandem with the Control Test is not confined to, or more
bluntly, does not refer to the fact that the apparent Filipino ownership of the corporation’s equity
falls below the 60% threshold. Rather, "doubt" refers to various indicia that the "beneficial
ownership" and "control" of the corporation do not in fact reside in Filipino shareholders but in
foreign stakeholders. As provided in DOJ Opinion No. 165, Series of 1984, which applied the
pertinent provisions of the Anti-DummyLaw in relation to the minimum Filipino equity requirement
in the Constitution, "significant indicators of the dummy status" have been recognized in view of
reports "that some Filipino investors or businessmen are being utilized or [are] allowing themselves
to be used as dummies by foreign investors" specifically in joint ventures for national resource
exploitation. These indicators are:

1. That the foreign investors provide practically all the funds for the joint investment
undertaken by these Filipino businessmen and their foreign partner;

2. That the foreign investors undertake to provide practically all the technological support for
the joint venture;

3. That the foreign investors, while being minority stockholders, manage the company and
prepare all economic viability studies.

Thus, In the Matter of the Petition for Revocation of the Certificate of Registration of Linear Works
Realty Development Corporation,13 the SEC held that when foreigners contribute more capital to an
enterprise, doubt exists as to the actual control and ownership of the subject corporation even if the
60% Filipino equity threshold is met. Hence, the SEC in that one ordered a further investigation, viz:
x x x The [SEC Enforcement and Prosecution Department (EPD)] maintained that the basis for
determining the level of foreign participation is the number of shares subscribed, regardless of the
par value. Applying such an interpretation, the EPD rules that the foreign equity participation in
Linear works Realty Development Corporation amounts to 26.41% of the corporation’s capital stock
since the amount of shares subscribed by foreign nationals is 1,795 only out of the 6,795 shares.
Thus, the subject corporation is compliant with the 40% limit on foreign equity participation.
Accordingly, the EPD dismissed the complaint, and did not pursue any investigation against the
subject corporation.

xxxx

x x x [I]n this respect we find no error in the assailed order made by the EPD. The EPD did not err
when it did not take into account the par value of shares in determining compliance with the
constitutional and statutory restrictionson foreign equity.

However, we are aware that some unscrupulous individuals employ schemes to circumvent the
constitutional and statutory restrictions on foreign equity. In the present case, the fact that the
shares of the Japanese nationals have a greater par value but only have similar rights to those held
by Philippine citizens having much lower par value, is highly suspicious. This is because a
reasonable investor would expect to have greater control and economic rights than other investors
who invested less capital than him. Thus, it is reasonable to suspectthat there may be secret
arrangements between the corporation and the stockholders wherein the Japanese nationals who
subscribed to the shares with greater par value actually have greater control and economic rights
contrary to the equality of shares based on the articles of incorporation.

With this in mind, we find it proper for the EPD to investigate the subject corporation. The EPD is
advised to avail of the Commission’s subpoena powers in order to gather sufficient evidence, and file
the necessary complaint.

As will be discussed, even if atfirst glance the petitioners comply with the 60-40 Filipino to foreign
equity ratio, doubt exists in the present case that gives rise to a reasonable suspicion that the
Filipino shareholders do not actually have the requisite number of control and beneficial ownership
in petitioners Narra, Tesoro, and McArthur. Hence, a further investigation and dissection of the
extent of the ownership of the corporate shareholders through the Grandfather Rule is justified.

Parenthetically, it is advanced that the application of the Grandfather Rule is impractical as tracing
the shareholdings to the point when natural persons hold rights to the stocks may very well lead to
an investigation ad infinitum. Suffice it to say in this regard that, while the Grandfather Rule was
originally intended to trace the shareholdings to the point where natural persons hold the shares,
the SEC had already set up a limit as to the number of corporate layers the attribution of the
nationality of the corporate shareholders may be applied.

In a 1977 internal memorandum, the SEC suggested applying the Grandfather Rule on two (2) levels
of corporate relations for publicly-held corporations or where the shares are traded in the stock
exchanges, and to three (3) levels for closely held corporations or the shares of which are not traded
in the stock exchanges.14 These limits comply with the requirement in Palting v. San Jose
Petroleum, Inc.15 that the application of the Grandfather Rule cannot go beyond the level of what is
reasonable.

A doubt exists as to the extent of control and beneficial ownership of MBMI over the petitioners and
their investing corporate stockholders.
In the Decision subject of this recourse, the Court applied the Grandfather Rule to determine the
matter of true ownership and control over the petitioners as doubt exists as to the actual extent of
the participation of MBMI in the equity of the petitioners and their investing corporations.

We considered the following membership and control structures and like nuances:

Tesoro

Supposedly Filipino corporation Sara Marie Mining, Inc. (Sara Marie) holds 59.97% of the 10,000
commonshares of petitioner Tesoro while the Canadian-owned company, MBMI, holds 39.98% of its
shares.

Name Nationality Number of Amount Amount Paid

Shares Subscribed
Sara Marie Filipino 5,997 P5,997,000.00 P825,000.00
Mining, Inc.
MBMI Resources, Canadian 3,998 P3,998,000.00 P1,878,174.60
Inc.16
Lauro L. Salazar Filipino 1 P1,000.00 P1,000.00
Fernando B. Filipino 1 P1,000.00 P1,000.00
Esguerra
Manuel A. Filipino 1 P1,000.00 P1,000.00
Agcaoili
Michael T. American 1 P1,000.00 P1,000.00
Mason
Kenneth Cawkel Canadian 1 P1,000.00 P1,000.00
Total 10,000 P10,000,000.00 P2,708,174.60

In turn, the Filipino corporation Olympic Mines & Development Corp. (Olympic) holds 66.63% of
Sara Marie’s shares while the same Canadian company MBMI holds 33.31% of Sara Marie’s shares.
Nonetheless, it is admitted that Olympic did not pay a single peso for its shares. On the contrary,
MBMI paid for 99% of the paid-up capital of Sara Marie.

Name Nationality Number of Amount Amount Paid

Shares Subscribed
Olympic Mines & Filipino 6,663 P6,663,000.00 P0.00
Development
Corp.17
MBMI Resources, Canadian 3,331 P3,331,000.00 P2,794,000.00
Inc.
Amanti Limson Filipino 1 P1,000.00 P1,000.00
Fernando B. Filipino 1 P1,000.00 P1,000.00
Esguerra
 Lauro Salazar Filipino 1 P1,000.00 P1,000.00
Emmanuel G. Filipino 1 P1,000.00 P1,000.00

Hernando
Michael T. American 1 P1,000.00 P1,000.00
Mason
Kenneth Cawkel Canadian 1 P1,000.00 P1,000.00
Total 10,000 P10,000,000.00 P2,800,000.00

The fact that MBMI had practically provided all the funds in Sara Marie and Tesoro
creates serious doubt as to the true extent of its (MBMI) control and ownership over both
Sara Marie and Tesoro since, as observed by the SEC, "a reasonable investor would expect to have
greater control and economic rights than other investors who invested less capital than him." The
application of the Grandfather Rule is clearly called for, and as shown below, the Filipinos’ control
and economic benefits in petitioner Tesoro (through Sara Marie) fallbelow the threshold 60%, viz:

Filipino participation in petitioner Tesoro: 40.01%

66.67
(Filipino equity in Sara Marie) x 59.97 (Sara Marie’s share in Tesoro) = 39.98%
100

39.98% + .03% (shares of individual Filipino shareholders [SHs] in Tesoro)

=40.01%

Foreign participation in petitioner Tesoro: 59.99%

33.33
(Foreign equity in Sara Marie) x 59.97 (Sara Marie’s share in Tesoro) = 19.99%
100

19.99% + 39.98% (MBMI’s direct participation in Tesoro) + .02% (shares of foreign individual
SHs in Tesoro)
= 59.99%

With only 40.01% Filipino ownership in petitioner Tesoro, as compared to 59.99% foreign ownership
of its shares, it is clear that petitioner Tesoro does not comply with the minimum Filipino equity
requirement imposed in Sec. 2, Art. XII of the Constitution. Hence, the appellate court’s observation
that Tesoro is a foreign corporation not entitled to an MPSA is apt.

McArthur

Petitioner McArthur follows the corporate layering structure of Tesoro, as 59.97% of its 10, 000
common shares is owned by supposedly Filipino Madridejos Mining Corporation (Madridejos), while
39.98% belonged to the Canadian MBMI.

Name Nationality Number of Amount Amount Paid

 Shares Subscribed
Madridejos Filipino 5,997 P5,997,000.00 P825,000.00
Mining
Corporation
MBMI Resources, Canadian 3,998 P3,998,000.0 P1,878,174.60
Inc.18
Lauro L. Salazar Filipino 1 P1,000.00 P1,000.00
Fernando B. Filipino 1 P1,000.00 P1,000.00
Manuel A. Filipino 1 P1,000.00 P1,000.00
Agcaoili
Michael T. American 1 P1,000.00 P1,000.00
Mason
Kenneth Cawkel Canadian 1 P1,000.00 P1,000.00
Total 10,000 P10,000,000.00 P2,708,174.60

In turn, 66.63% of Madridejos’ shares were held by Olympic while 33.31% of its shares belonged to
MBMI. Yet again, Olympic did not contribute to the paid-up capital of Madridejos and it was MBMI
that provided 99.79% of the paid-up capital of Madridejos.

Name Nationality Number of Amount Amount Paid

Shares Subscribed
Olympic Mines & Filipino 6,663 P6,663,000.00 P0.00
Development
Corp.19
MBMI Resources, Canadian 3,331 P3,331,000.00 P2,803,900.00
Inc.
Amanti Limson Filipino 1 P1,000.00 P1,000.00
Fernando B. Filipino 1 P1,000.00 P1,000.00
Esguerra
Lauro Salazar Filipino 1 P1,000.00 P1,000.00
Emmanuel G. Filipino 1 P1,000.00 P1,000.00
Hernando
Michael T. American 1 P1,000.00 P1,000.00
Mason
Kenneth Cawkel Canadian 1 P1,000.00 P1,000.00
Total 10,000 P10,000,000.00 P2,809,900.00

Again, the fact that MBMI had practically provided all the funds in Madridejos and McArthur
creates serious doubt as to the true extent of its control and ownership of MBMI over both
Madridejos and McArthur. The application of the Grandfather Rule is clearly called for, and as will
be shown below, MBMI, along with the other foreign shareholders, breached the maximum limit of
40% ownership in petitioner McArthur, rendering the petitioner disqualified to an MPSA:

Filipino participation in petitioner McArthur: 40.01%

66.67
(Filipino equity in Madridejos) x 59.97 (Madridejos’ share in McArthur) = 39.98%
100

39.98% + .03% (shares of individual Filipino SHs in McArthur)

=40.01%

Foreign participation in petitioner McArthur: 59.99%

33.33
(Foreign equity in Madridejos) x 59.97 (Madridejos’ share in McArthur) = 19.99%

19.99% + 39.98% (MBMI’s direct participation inMcArthur) + .02% (shares of foreign

individual SHs in McArthur)
= 59.99%

As with petitioner Tesoro, with only 40.01% Filipino ownership in petitioner McArthur, as compared
to 59.99% foreign ownership of its shares, it is clear that petitioner McArthur does not comply with
the minimum Filipino equity requirement imposed in Sec. 2, Art. XII of the Constitution. Thus, the
appellate court did not err in holding that petitioner McArthur is a foreign corporation not entitled to
an MPSA.

Narra

As for petitioner Narra, 59.97% of its shares belonged to Patricia Louise Mining & Development
Corporation (PLMDC), while Canadian MBMI held 39.98% of its shares.

Name Nationality Number of Amount Amount Paid

Shares Subscribed
Patricia Lousie Filipino 5,997 P5,997,000.00 P1,677,000.00
Mining and
Development
Corp.
MBMI Resources, Canadian 3,996 P3,996,000.00 P1,116,000.00
Inc.20
Higinio C. Filipino 1 P1,000.00 P1,000.00
Mendoza,
Henry E. Filipino 1 P1,000.00 P1,000.00
Fernandez
Ma. Elena A. Filipino 1 P1,000.00 P1,000.00
Bocalan
 Michael T. American 1 P1,000.00 P1,000.00
Mason
Robert L. Canadian 1 P1,000.00 P1,000.00
McCurdy
Manuel A. Filipino 1 P1,000.00 P1,000.00
Agcaoili
Bayani H. Filipino 1 P1,000.00 P1,000.00
Agabin
Total 10,000 P10,000,000.00 P2,800,000.00

PLMDC’s shares, in turn, were held by Palawan Alpha South Resources Development Corporation
(PASRDC), which subscribed to 65.96% of PLMDC’s shares, and the Canadian MBMI, which
subscribed to 33.96% of PLMDC’s shares.

Name Nationality Number of Amount Amount Paid

Shares Subscribed
Palawan Alpha Filipino 6,596 P6,596,000.00 P0
South Resource
Development
Corp.
MBMI Resources, Canadian 3,396 P3,396,000.00 P2,796,000.00
Inc.21
Higinio C. Filipino 1 P1,000.00 P1,000.00
Mendoza, Jr.
Fernando B. Filipino 1 P1,000.00 P1,000.00
Esguerra
Henry E. Filipino 1 P1,000.00 P1,000.00
Fernandez
Ma. Elena A. Filipino 1 P1,000.00 P1,000.00
Bocalan
Michael T. American 1 P1,000.00 P1,000.00
Mason
Robert L. Canadian 1 P1,000.00 P1,000.00
McCurdy
Manuel A. Filipino 1 P1,000.00 P1,000.00
Agcaoili
Bayani H, Filipino 1 P1,000.00 P1,000.00
Agabin
Total 10,000 P10,000,000.00 P2,804,000.00

Yet again, PASRDC did not pay for any of its subscribed shares, while MBMI contributed 99.75% of
PLMDC’s paid-up capital. This fact creates serious doubt as to the true extent of MBMI’s control and
ownership over both PLMDC and Narra since "a reasonable investor would expect to have greater
control and economic rights than other investors who invested less capital than him." Thus, the
application of the Grandfather Rule is justified. And as will be shown, it is clear that the Filipino
ownership in petitioner Narra falls below the limit prescribed in both the Constitution and the
Philippine Mining Act of 1995.

Filipino participation in petitioner Narra: 39.64%

66.02
(Filipino equity in PLMDC) x 59.97 (PLMDC’s share in Narra) = 39.59%
100

39.59% + .05% (shares of individual Filipino SHs in McArthur)

=39.64%

Foreign participation in petitioner Narra: 60.36%

33.98
(Foreign equity in PLMDC) x 59.97 (PLMDC’s share in Narra) = 20.38%
100

20.38% + 39.96% (MBMI’s direct participation in Narra) + .02% (shares of foreign individual
SHs in McArthur)
= 60.36%

With 60.36% foreign ownership in petitioner Narra, as compared to only 39.64% Filipino ownership
of its shares, it is clear that petitioner Narra does not comply with the minimum Filipino equity
requirement imposed in Section 2, Article XII of the Constitution. Hence, the appellate court did not
err in holding that petitioner McArthur is a foreign corporation not entitled to an MPSA.

It must be noted that the foregoing determination and computation of petitioners’ Filipino equity
composition was based on their common shareholdings, not preferred or redeemable shares. Section
6 of the Corporation Code of the Philippines explicitly provides that "no share may be deprived of
voting rights except those classified as ‘preferred’ or ‘redeemable’ shares." Further, as Justice Leonen
puts it, there is "no indication that any of the shares x x x do not have voting rights, [thus] it must be
assumed that all such shares have voting rights."22 It cannot therefore be gain said that the
foregoing computation hewed with the pronouncements of Gamboa, as implemented by SEC
Memorandum Circular No. 8, Series of 2013, (SEC Memo No. 8)23 Section 2 of which states:

Section 2. All covered corporations shall, at all times, observe the constitutional or statutory
requirement.1âwphi1 For purposes of determining compliance therewith, the required percentage of
Filipino ownership shall be applied to BOTH (a) the total outstanding shares of stock entitled to vote
in the election of directors; AND (b) the total number of outstanding shares of stock, whether or not
entitled to vote in the election of directors.

In fact, there is no indication that herein petitioners issued any other class of shares besides the
10,000 common shares. Neither is it suggested that the common shares were further divided into
voting or non-voting common shares. Hence, for purposes of this case, items a) and b) in SEC Memo
No. 8 both refer to the 10,000 common shares of each of the petitioners, and there is no need to
separately apply the 60-40 ratio to any segment or part of the said common shares.
III.

In mining disputes, the POA has jurisdiction to pass upon the nationality of applications for MPSAs

Petitioners also scoffed at this Court’s decision to uphold the jurisdiction of the Panel of Arbitrators
(POA) of the Department of Environment and Natural Resources (DENR) since the POA’s
determination of petitioners’ nationalities is supposedly beyond its limited jurisdiction, as defined in
Gonzales v. Climax Mining Ltd.24 and Philex Mining Corp. v. Zaldivia.25

The April 21, 2014 Decision did not dilute, much less overturn, this Court’s pronouncements in
either Gonzales or Philex Mining that POA’s jurisdiction "is limited only to mining disputes which
raise questions of fact," and not judicial questions cognizable by regular courts of justice. However, to
properly recognize and give effect to the jurisdiction vested in the POA by Section 77 of the
Philippine Mining Act of 1995,26 and in parallel with this Court’s ruling in Celestial Nickel Mining
Exploration Corporation v. Macroasia Corp.,27 the Court has recognized in its Decision that in
resolving disputes "involving rights to mining areas" and "involving mineral agreements or permits,"
the POA has jurisdiction to make a preliminary finding of the required nationality of the corporate
applicant in order to determine its right to a mining area or a mineral agreement.

There is certainly nothing novel or aberrant in this approach. In ejectment and unlawful detainer
cases, where the subject of inquiry is possession de facto, the jurisdiction of the municipal trial courts
to make a preliminary adjudication regarding ownership of the real property involved is allowed, but
only for purposes of ruling on the determinative issue of material possession.

The present case arose from petitioners' MPSA applications, in which they asserted their respective
rights to the mining areas each applied for. Since respondent Redmont, itself an applicant for
exploration permits over the same mining areas, filed petitions for the denial of petitioners'
applications, it should be clear that there exists a controversy between the parties and it is POA's
jurisdiction to resolve the said dispute. POA's ruling on Redmont's assertion that petitioners are
foreign corporations not entitled to MPSA is but a necessary incident of its disposition of the mining
dispute presented before it, which is whether the petitioners are entitled to MPSAs.

Indeed, as the POA has jurisdiction to entertain "disputes involving rights to mining areas," it
necessarily follows that the POA likewise wields the authority to pass upon the nationality issue
involving petitioners, since the resolution of this issue is essential and indispensable in the
resolution of the main issue, i.e., the determination of the petitioners' right to the mining areas
through MPSAs.

WHEREFORE, We DENY the motion for reconsideration WITH FINALITY. No further pleadings
shall be entertained. Let entry of judgment be made in due course.

SO ORDERED.