FIRST DIVISION
PAL went to this Court via a petition for review on certiorari under Rule 45 of the Rules
[G.R. No. 146698. September 24, 2002]
PHILIPPINE AIRLINES, petitioner, vs. SPOUSES SADIC AND AISHA
KURANGKING and SPOUSES ABDUL SAMAD T. DIANALAN AND MORSHIDA
L. DIANALAN, respondents.
DECISION
VITUG, J.:
In April 1997, respondents, all Muslim Filipinos, returned to Manila from their
pilgrimage to the Holy City of Mecca, Saudi Arabia, on board a Philippines Airlines
(PAL) flight. Respondents claimed that they were unable to retrieve their checked-in
luggages. On 05 January 1998, respondents filed a complaint with the Regional Trial
Court (RTC) of Marawi City against PAL for breach of contract resulting in damages due
to negligence in the custody of the missing luggages.
On 02 March 1998, PAL filed its answer invoking, among its defenses, the limitations
under the Warsaw Convention. On 19 June 1998, before the case could be heard on pre-
trial, PAL, claiming to have suffered serious business losses due to the Asian economic
crisis, followed by a massive strike by its employees, filed a petition for the approval of a
rehabilitation plan and the appointment of a rehabilitation receiver before the Securities
and Exchange Commission (SEC). On 23 June 1998, the SEC issued an order granting
the prayer for an appointment of a rehabilitation receiver, and it constituted a three-man
panel to oversee PALs rehabilitation. On 25 September 1998, the SEC created a
management committee conformably with Section 6(d) of Presidential Decree (P.D.) 902,
as amended, declaring the suspension of all actions for money claims against PAL
pending before any court, tribunal, board or body. Thereupon, PAL moved for the
suspension of the proceedings before the Marawi City RTC. On 11 January 1999, the trial
court issued an order denying the motion for suspension of the proceedings on the ground
that the claim of respondents was only yet to be established. PALs motion for
reconsideration was denied by the trial court.
PAL went to the Court of Appeals via a petition for certiorari. On 16 April 1999, the
appellate court dismissed the petition for the failure of PAL to serve a copy of the petition
on respondents. PAL moved for a reconsideration. In its resolution, dated 08 October
1999, the appellate court denied the motion but added that a second motion for
reconsideration before the trial court could still be feasible inasmuch as the assailed
orders of the trial court were merely interlocutory in nature. Consonantly, PAL filed
before the trial court a motion for leave to file a second motion for reconsideration. The
trial court, however, denied leave of court to admit the second motion for reconsideration.
Again, PAL filed a motion for reconsideration which sought reconsideration of the denial
of the prayed leave to file a second motion for reconsideration. In an order, dated 28
December 2000, the trial court denied the motion.
1
On the thesis that there was no other plain, speedy and adequate remedy available to it,
of Court, raising the question of -
"Whether or not the proceedings before the trial court should have been suspended after
the court was informed that a rehabilitation receiver was appointed over the petitioner by
the Securities and Exchange Commission under Section 6(c) of Presidential Decree No.
902-A.[1]
In their comment to the petition, private respondents posited (a) that the instant petition
under Rule 45 would not lie, the assailed orders of the court a quo being merely
interlocutory; (b) that PAL was already operational and thus claims and actions against it
should no longer be suspended; (c) that the SEC, not the RTC, should have the
prerogative to determine the necessity of suspending the proceedings; and (d) that the
only claims or actions that could be suspended under P.D. 902-A were those pending
with the SEC.
While a petition for review on certiorari under Rule 45 would ordinarily be inappropriate
to assail an interlocutory order, in the interest, however, of arresting the perpetuation of
an apparent error committed below that could only serve to unnecessarily burden the
parties, the Court has resolved to ignore the technical flaw and, also, to treat the petition,
there being no other plain, speedy and adequate remedy, as a special civil action for
certiorari. Not much, after all, can be gained if the Court were to refrain from now
making a pronouncement on an issue so basic as that submitted by the parties.
On 15 December 2000, the Supreme Court, in A.M. No. 00-8-10-SC, adopted the Interim
Rules of Procedure on Corporate Rehabilitation and directed to be transferred from the
SEC to Regional Trial Courts,[2] all petitions for rehabilitation filed by corporations,
partnerships, and associations under P.D. 902-A in accordance with the amendatory
provisions of Republic Act No. 8799. The rules require trial courts to issue, among other
things, a stay order in the enforcement of all claims, whether for money or otherwise, and
whether such enforcement is by court action or otherwise, against the corporation under
rehabilitation, its guarantors and sureties not solidarily liable with it. Specifically, Section
6, Rule 4, of the Interim Rules of Procedure On Corporate Rehabilitation, provides:
SEC. 6. Stay Order. - If the court finds the petition to be sufficient in form and substance,
it shall, not later than five (5) days from the filing of the petition, issue an Order (a)
appointing a Rehabilitation Receiver and fixing his bond; (b) staying enforcement of all
claims, whether for money or otherwise and whether such enforcement is by court action
or otherwise, against the debtor, its guarantors and sureties not solidarily liable with the
debtor; (c) prohibiting the debtor from selling, encumbering, transferring, or disposing in
any manner any of its properties except in the ordinary course of business; (d) prohibiting
the debtor from making any payment of its liabilities outstanding as at the date of filing
of the petition; (e) prohibiting the debtors suppliers of goods or services from
withholding supply of goods and services in the ordinary course of business for as long as
the debtor makes payments for the services and goods supplied after the issuance of the
stay order; (f) directing the payment in full of all administrative expenses incurred after
the issuance of the stay order; (g) fixing the initial hearing on the petition not earlier than
forty-five (45) days but not later than sixty (60) days from the filing thereof; (h) directing
the petitioner to publish the Order in a newspaper of general circulation in the Philippines
once a week for two (2) consecutive weeks; (I) directing all creditors and all interested
parties (including the Securities and Exchange Commission) to file and serve on the
debtor a verified comment on or opposition to the petition, with supporting affidavits and
documents, not later than ten (10) days before the date of the initial hearing and putting
them on notice that their failure to do so will bar them from participating in the
proceedings; and (j) directing the creditors and interested parties to secure from the court
copies of the petition and its annexes within such time as to enable themselves to file
their comment on or opposition to the petition and to prepare for the initial hearing of the
petition.
any court, tribunal, board or body. Obviously, the real justification is to enable the
management committee or rehabilitation receiver to effectively exercise its/his powers
free from any judicial or extra-judicial interference that might unduly hinder or prevent
the rescue of the debtor company. To allow such other action to continue would only add
to the burden of the management committee or rehabilitation receiver, whose time, effort
and resources would be wasted in defending claims against the corporation instead of
being directed toward its restructuring and rehabilitation.[8]
WHEREFORE, the petition is GRANTED. The assailed orders of the Regional Trial
Court, Branch 9, of Marawi City, are SET ASIDE. No costs.

The stay order is effective from the date of its issuance until the dismissal of the petition SO ORDERED.
or the termination of the rehabilitation proceedings.[3]

The interim rules must likewise be read and applied along with Section 6(c) of P.D. 902-
A, as so amended, directing that upon the appointment of a management committee,
rehabilitation receiver, board or body pursuant to the decree, all actions for claims against
the distressed corporation pending before any court, tribunal, board or body shall be
suspended accordingly. Paragraph (c) of Section 6 of the law reads:

Section 6. In order to effectively exercise such jurisdiction, the Commission shall possess
the following powers:

xxx xxx xxx.

c) To appoint one or more receivers of the property, real or personal, which is the subject
of the action pending before the Commission in accordance with the pertinent provisions
of the Rules of Court in such other cases whenever necessary in order to preserve the
rights of the parties-litigants and/or protect the interest of the investing public and
creditors: x x x Provided, finally, That upon appointment of a management committee,
the rehabilitation receiver, board or body, pursuant to this Decree, all actions for claims
against corporations, partnerships, or associations under management or receivership
pending before any court, tribunal, board or body shall be suspended accordingly.

A claim is said to be a right to payment, whether or not It is reduced to judgment,

liquidated or unliquidated, fixed or contingent, matured or unmatured, disputed or
undisputed, legal or equitable, and secured or unsecured.[4] In Finasia Investments and
Finance Corporation[5] this Court has defined the word claim, contemplated in Section
6(c) of P.D. 902-A, as referring to debts or demands of a pecuniary nature and the
assertion of a right to have money paid as well.

Verily, the claim of private respondents against petitioner PAL is a money claim for the
missing luggages, a financial demand, that the law requires to be suspended pending the
rehabilitation proceedings.[6] In B.F. Homes, Inc. vs. Court of Appeals,[7] the Court has
ratiocinated:

x x x (T)he reason for suspending actions for claims against the corporation should not be
difficult to discover. it is not really to enable the management committee or the
rehabilitation receiver to substitute the defendant in any pending action against it before

2
THIRD DIVISION
[G.R. No. 126773. April 14, 1999]
RUBBERWORLD (PHILS.), INC., or JULIE YAP ONG, petitioner, vs. NATIONAL
LABOR RELATIONS COMMISSION, MARILYN F. ARELLANO, EMILY S.
LEGASPI, MYRNA S. GALGANA, MERCEDITA R. SONGCO, WILFREDO V.
SANTOS, JOSEPHINE S. RAMOS, REDENTOR G. HONA, LUZ B. HONA,
ROLANDO B. CRUZ, GUILLERMA R. MUZONES, CARMELITA V. HALILI,
SUSAN A. REYES, EMILY A. ROBILLOS, PLACIDO REYES, MANOLITO
DELA CRUZ, VICTORINO C. FRANCISCO, ROGER B. MARIAS, VIOLETA
ALEJO, RICARDO T. TORRES, EMMA DELA TORRE, PERLA N.
MANZANERO, FRANCISCO D. SERDONCILLO, LUISITO P. HERNANDEZ,
RAYMOND PEREA, EDITHA A. SERDONCILLO, FRANCISCO GENER,
MARIO B. REYES, VALERIANO A. HERRERA, JORGE S. SEERES, ELENA S.
IGNACIO, EMERITA S. CACHERO, NERIZA G. ENRIQUEZ, LOLITA M.
FABULAR, NORMITA M. HERNANDEZ, DOMINADOR P.
ENRIQUEZ, respondents.
DECISION
PANGANIBAN, J.:
Presidential Decree 902-A, as amended, provides that "upon the appointment of a
management committee, rehabilitation receiver board or body pursuant to this Decree, all
actions for claims against corporations, partnerships, or associations under management
or receivership pending, before any court, tribunal, board or body shall be suspended
accordingly."[1] Such suspension is intended to give enough breathing space for the
management committee or rehabilitation receiver to make the business viable again,
without having to divert attention and resources to litigations in various fora. Among, the
actions suspended are those for money claims before labor tribunals, like the National
Labor Relation Commission (NLRC) and the Labor arbiters.
Statement of the Case
The foregoing Summarizes this Court's grant of the Petition for Certiorari under Rule 65
of the Rules of Court, assailing the April 26, 1996 Resolution[2] promulgate by the
NLRC[3]which upheld the labor arbiter's refusal to suspend proceedings involving,
monetary claims of the petitioner's employees.
Petitioner likewise assails the June 20, 1996 NLRC Resolution[4] which denied its
Motion for Reconsideration.
On November 20, 1996, this Court issued a temporary restraining order signed by then
Chief Justice Andres R. Narvasa, "restraining the public respondents from further
conducting proceedings in the aforesaid cases effective immediately xxx."
The Facts
The facts are undisputed. They are narrated by the Office of the Solicitor General as
follows:
"Petitioner xxx is a domestic corporation which used to be in the business of
manufacturing footwear, bags and garments. It filed with the Securities and Exchange
Commission on November 24, 1994 a petition for suspension of payments praying that it
be declared in a state of suspension of payments and that the SEC accordingly issue an
order restraining its creditors from enforcing their claims against petitioner corporation. It
further prayed for the creation of a management committee as well as for the approval of
the proposed rehabilitation plan and memorandum of agreement between petitioner
corporation and its creditors.
3
"In an order dated December 28, 1994, the SEC favorably ruled on the petition for
suspension of payments thusly:
'Accordingly, with the creation of the Management Committee, all actions for claims
against Rubberworld Philippines, Inc. pending before any court, tribunal, office, board,
body Commission of Sheriff are hereby deemed SUSPENDED.
'Consequently, all pending incidents for preliminary injunctions, writ of attachments
(sic), foreclosures' and the like are hereby rendered moot and academic.'
"Private respondents, who claim to be employees of petitioner corporation, filed against
petitioners [from] April to July 1995 their respective complaints for illegal dismissal,
unfair labor practice, damages and payment of separation pay, retirement benefits, 13th
month pay and service incentive pay.
"Petitioners moved to suspend the proceedings in the above labor cases on the strength of
the SEC Order dated December 28, 1994. Likewise, petitioners cited the rulings of BF
Homes vs.Court of Appeals (190 SCRA 262), Alemar's Sibal & Sons, Inc. vs. Elbinias
(186 SCRA 94) and Bank of Philippine Islands vs. Court of Appeals (229 SCRA 223) to
support their motion to suspend the proceedings in the labor cases.
"In an Order dated September 25, 1995, the Labor Arbiter denied the aforesaid motion
holding that the injunction contained in the SEC Order applied only to the enforcement of
established rights and did not include the suspension of proceedings involving claims
against petitioner which have yet to be ascertained. The Labor Arbiter further held that
the order of the SEC suspending all actions for claims against petitioners does not cover
the claims of private respondents in the labor cases because said claims and the
concomitant liability of petitioners still had to be determined, thus carrying no dissipation
of the assets of petitioners.
"Petitioners appealed the adverse order of the Labor Arbiter to public respondent which,
in a Resolution dated April 26, 1996, dismissed the appeal for lack of merit and, instead,
sustained the rulings of the Labor Arbiter.
"The motion for reconsideration of petitioners fared no better and was denied by public
respondent in a Resolution dated June 20, 1996."[5]
Hence, this petition.[6]
The Issue
Petitioner raises only one issue:
"Whether or not the Respondent NLRC acted without or in excess of Jurisdiction or with
grave abuse of discretion amounting to lack of jurisdiction in affirming the order of Labor
Arbiter Voltaire A. Balitaan denying petitioners' motion to suspend proceedings despite
the Order of the Securities and Exchange Commission under Sec. 6 (c) of P.D. 902-A
directing the suspension of all actions against a company under the first stages of
insolvency proceedings."[7]
This Court's Ruling
The petition is meritorious.
Sole Issue:
Suspension Proceedings
Jurisprudence teaches us:
"xxx where the petition filed is one for declaration of a state of suspension of payments
due to a recognition of the inability to pay one's debts and liabilities, and where the
petitioning corporation either: (a) has sufficient property to cover all its debts but foresees
the impossibility of meeting them when they fall due (solvent but illiquid) or (b) has no
sufficient property (insolvent) but is under the management of a rehabilitation receiver or
a management committee, the applicable law is P.D. 902-A pursuant to Sec. 5 par. (d)
thereof. However, if the petitioning corporation has no sufficient assets to cover its
liabilities and is not under a rehabilitation receiver or a management committee created
under P.D. 902-A and does not seek merely to have the payments of its debts
suspended, but seeks a declaration of insolvency xxx the applicable law is Act 1956 [The
Insolvency Law] on voluntary insolvency, xxx."[8]
In the case at bar, Petitioner Rubberworld filed before the SEC a Petition for Declaration
of Suspension of Payments, as well as a propose rehabilitation plan. On December 28,
1994, the SEC ordered the creation of a management committee and the suspension of all
actions for claim against Rubberworld. Clearly, the applicable law is PD 902-A, as
amended, the relevant provision of which read:
"SECTION 5. In addition to the regulatory adjudicative functions of the Securities and
Exchange Commission over corporations, partnerships and other forms of associations
registered with it as expressly granted under existing laws and decrees, it shall have
original and exclusive jurisdiction to hear and decide cases involving:
xxxxxxxxx
d) Petitions of corporations, partnerships or associations to be declared in the state of
suspension of payments in cases where the corporation, partnership or association
possesses sufficient property to cover all its debts but foresees the impossibility of
meeting them when they respectively fall due or in cases where the corporation,
partnership or association has no sufficient assets to cover its liabilities, but is under the
management of a rehabilitation receiver or management committee created pursuant to
this Decree.
SECTION 6. In order to effectively exercise such jurisdiction, the Commission shall
possess the following powers:
xxxxxxxxx
c) To appoint one or more receivers of the property, real or personal, which is the subject
of the action pending before the Commission in accordance with the pertinent provisions
of the Rules of Court in such other cases whenever necessary in order to preserve the
rights of the parties-litigants and/or protect the interest of the investing public and
creditors: x x x Provided finally, That upon appointment of a management committee, the
rehabilitation receiver, board or body, pursuant to this Decree, all actions for claims
against corporations, partnerships, or associations under management or receivership
pending before any court, tribunal, board or body shall be suspended accordingly."
It is plain from the foregoing provisions of law that "upon the appointment [by, the SEC]
of a management committee or a rehabilitation receiver," all actions for claims against
the corporation pending before any court, tribunal or board shall ipso jure be
suspended.[9] The justification for the automatic stay of all pending actions for claims "is
to enable the management committee or the rehabilitation receiver to effectively exercise
its/his powers free from any judicial or extra-judicial interference that might unduly
hinder or prevent the 'rescue' of the debtor company. To allow such other actions to
continue would only add to the burden of the management committee or rehabilitation
receiver, whose time, effort and resources would be wasted in defending claims against
the corporation instead of being directed toward its restructuring and rehabilitation."[10]
Parenthetically, the rehabilitation of a financially distressed corporation benefits its
employees, creditors, stockholders and, in a larger sense, the general public. And in
considering whether to rehabilitate or not, the SEC gives preference to the interest of
creditors, including employees. The reason that shareholders can recover their
investments only upon liquidation of' the corporation, and only if there are assets
remaining after all corporate creditors ire paid.[11]
4
Labor Claims Included in Suspension Order
The solicitor general, representing Public Respondent NLRC, argues that the rationale for
an automatic stay will not be frustrated even if the NLRC proceeds with the disposition
of these labor cases, because any favorable judgment obtained by the private respondents
would only establish their rights as creditors. The solicitor general also contends that the
assailed Resolutions of the NLRC will not result in an undue preference for the assets of
Rubberworld, as the private respondents will still present their claims before the
management committee.[12]
We disagree. The law is clear: upon the creation of a management committee or the
appointment of rehabilitation receiver, all claims for actions "shall be suspended
accordingly." No exception in favor of labor claims is mentioned in the law. Since the
law makes no distinction or exemptions, neither should this Court. Ubi lex non distinguit
nec nos distinguere debemos.[13] Allowing labor cases to proceed clearly defeats the
purpose of the automatic stay and severely encumbers the management committee's time
and resources. The said committee would need to defend against these suits, to the
detriment of its primary and urgent duty to work towards rehabilitating the corporation
and making it viable again. To rule otherwise would open the floodgates to other
similarly situated claimants and forestall if not defeat the rescue efforts. Besides, even if
the NLRC awards the claims of private respondents, as it did, its ruling could not be
enforced as long as the petitioner is under the management committee.[14]
In Chua v. National Labor Relation Commission,[15] we ruled that labor claims cannot
proceed independently of a bankruptcy liquidation proceeding, since these claims "would
spawn needless controversy, delays, and confusion."[16] With more reason, allowing
labor claims to continue in spite of a SEC suspension order in rehabilitation case would
merely lead to such results.
The solicitor general insists that since Article 217 of the Labor Code[17] vested public
respondent with jurisdiction to hear and decide these labor cases, the NLRC did not
exceed its jurisdiction when it refused to suspend the proceedings therein.[18] The Court
is not persuaded.
Article 217 of the Labor Code should be construed not in isolation but in harmony with
PD 902-A, according to the basic rule in statutory construction that implied repeals are
not favored.[19] Indeed, it is axiomatic that each and every statute must be construed in a
way that would avoid conflict with existing laws.[20] True, the NLRC has the power to
hear and decide labor disputes, but such authority is deemed suspended when PD 902-A
is put into effect by the Securities and Exchange Commission.
Preference in Favor of Workers in Case of Bankruptcy or Liquidation
The private respondents contend that automatic stay under PD 902-A is not applicable to
the instant case; otherwise, the preference granted to workers by Article 110 of the Labor
Code would be rendered ineffective.[21] This contention is misleading.
The preferential right of workers and employees under Article 110 of the Labor Code
may be invoked only upon the institution of insolvency or judicial liquidation
proceeding.[22] Indeed, it is well-settled that "a declaration of bankruptcy or a judicial
liquidation must be present before preferences over various money claims may be
enforced."[23] But debtors resort to preference of credit -- giving preferred creditors the
right to have their claims paid ahead of those of other claimants -- only when their assets
are insufficient to pay their debts fully.[24] The purpose of rehabilitation proceedings is
precisely to enable the company to gain a new lease on life and thereby allow creditors to
be paid their claims from its earnings. In insolvency proceedings, on the other hand, the
company stops operating, and the claims of creditors are satisfied from the assets of the
insolvent corporation. The present case involves the rehabilitation, not the liquidation, of
petitioner-corporation. Hence, the preference of credit granted to workers or
employees under Article 110 of the Labor Code is not applicable.
Duration of Automatic Stay Under PD 902-A
Finally, private respondents posit that under Section 6 of the Insolvency Law, the
December 28, 1994 Order of the SEC suspending all actions for claims against
Rubberworld should have expired after three months, in the absence of an agreement
between the company and the corporate creditors.[25] Private respondents also accuse the
SEC of abusing its power by "allowing said suspension order to remain pending for many
years without resolving and approving any rehabilitation plan."[26] They contend that
"[t]his is fatal to the instant petition for it had been a party to the abuse by the SEC of its
suspension order."[27]
This Court notes that PD 902-A itself does not provide for the duration of the automatic
stay. Neither does the Order[28] of the SEC. Hence, the suspensive effect has no time
limit and remains in force as long as reasonably necessary to accomplish the purpose of
the Order.[29] On the other hand, the attack against the SEC's alleged "abuse of power" is
misplaced. Under review in this Petition for Certiorari are Resolutions of the NLRC, not
of the SEC. The scope of this review is thus limited to whether the NLRC gravely abused
or exceeded its jurisdiction in refusing to heed the SEC Order of Suspension and in
issuing its challenged Resolutions. In any event, the bare allegation of inaction is
insufficient to condemn the Securities and Exchange Commission and the management
committee where, it should be noted, all affected parties, including, the labor union in the
company, are represented.
WHEREFORE, the petition is hereby GRANTED. The assailed Resolutions of the
NLRC dated April 26, 1996, and June 20, 1996, are REVERSED and SET ASIDE. No
costs.
SO ORDERED.

5
FIRST DIVISION except the P50,000.00 which should be paid upon completion of the construction; and
that rescission of the contract with damages is proper.

SPOUSES EDUARDO G.R. No. 165675 The dispositive portion of the Decision reads:
SOBREJUANITE and
FIDELA SOBREJUANITE, Present: WHEREFORE, in view of the foregoing judgment is rendered ordering the rescission of
Petitioners, the contracts to sell between the parties, and further ordering the respondent [ASBDC] to
Davide, Jr., C.J. (Chairman), pay the complainants [Sobrejuanite] the following:
Quisumbing,
- versus - Ynares-Santiago, a) all amortization payments by the complainants amounting to P2,674,637.10 plus 12%
Carpio, and interest from the date of actual payment of each amortization;
Azcuna, JJ. b) moral damages amounting to P200,000.00;
ASB DEVELOPMENT c) exemplary damages amounting to P100,000.00;
CORPORATION, Promulgated: d) attorneys fees amounting to P100,000.00;
Respondent. e) litigation expenses amounting to P50,000.00.
September 30, 2005
x ---------------------------------------------------------------------------------------- x All other claims and all counter-claims are hereby dismissed.

DECISION
YNARES-SANTIAGO, J.:
This petition for review on certiorari assails the June 29, 2004 Decision of the Court of
Appeals in CA-G.R. SP No. 79420 which reversed and set aside the Decision of the
Office of the President; and its October 18, 2004 Resolution denying reconsideration
thereof.
The antecedent facts show that on March 7, 2001, spouses Eduardo and Fidela
Sobrejuanite (Sobrejuanite) filed a Complaint[1] for rescission of contract, refund of
payments and damages, against ASB Development Corporation (ASBDC) before the
Housing and Land Use Regulatory Board (HLURB).
Sobrejuanite alleged that they entered into a Contract to Sell with ASBDC over a
condominium unit and a parking space in the BSA Twin Tower-B Condominum located
at Bank Drive, Ortigas Center, Mandaluyong City. They averred that despite full payment
and demands, ASBDC failed to deliver the property on or before December 1999 as
agreed. They prayed for the rescission of the contract; refund of payments amounting to
P2,674,637.10; payment of moral and exemplary damages, attorneys fees, litigation
expenses, appearance fee and costs of the suit.
ASBDC filed a motion to dismiss or suspend proceedings in view of the approval by the
Securities and Exchange Commission (SEC) on April 26, 2001 of the rehabilitation plan
of ASB Group of Companies, which includes ASBDC, and the appointment of a
rehabilitation receiver. The HLURB arbiter however denied the motion and ordered the
continuation of the proceedings.
The arbiter found that under the Contract to Sell, ASBDC should have delivered the
property to Sobrejuanite in December 1999; that the latter had fully paid their obligations
IT IS SO ORDERED.[2]
The HLURB Board of Commissioners[3] affirmed the ruling of the arbiter that the
approval of the rehabilitation plan and the appointment of a rehabilitation receiver by the
SEC did not have the effect of suspending the proceedings before the HLURB. The board
held that the HLURB could properly take cognizance of the case since whatever
monetary award that may be granted by it will be ultimately filed as a claim before the
rehabilitation receiver. The board also found that ASBDC failed to deliver the property to
Sobrejuanite within the prescribed period. The dispositive portion of the Decision reads:
Wherefore the petition for review is denied and the decision of the office below is
affirmed. It shall be understood that all monetary awards shall still be filed as claims
before the rehabilitation receiver.[4]
ASBDC filed an appeal[5] before the Office of the President which was dismissed[6] for
lack of merit. Hence, ASBDC filed a petition[7] under Section 1, Rule 43 of the Rules of
Court before the Court of Appeals, docketed as CA-G.R. SP No. 79420.
On June 29, 2004, the Court of Appeals rendered its assailed Decision,[8] the dispositive
portion of which reads:
WHEREFORE, premises considered, the instant petition is GRANTED. The impugned
decision dated June 27, 2003 of the Office of the President is hereby REVERSED AND
SET ASIDE. No pronouncement as to costs.
SO ORDERED.[9]
The Court of Appeals held that the approval by the SEC of the rehabilitation plan and the
appointment of the receiver caused the suspension of the HLURB proceedings. The
appellate court noted that Sobrejuanites complaint for rescission and damages is
a claim under the contemplation of Presidential Decree (PD) No. 902-A or the SEC
Reorganization Act and A.M. No. 00-8-10-SC or the Interim Rules of Procedure on
Corporate Rehabilitation, because it sought to enforce a pecuniary demand. Therefore,
jurisdiction lies with the SEC and not HLURB. It also ruled that ASBDC was obliged to
deliver the property in December 1999 but its financial reverses warranted the extension
of the period.

6
 Sobrejuanites motion for reconsideration was denied[10] hence the instant petition which
raises the following issues:
1. THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR AND
GRAVELY ABUSED ITS DISCRETION IN RULING THAT THE SEC, NOT THE
HLURB, HAS JURISDICTION OVER PETITIONERS COMPLAINT, IN
CONTRAVENTION TO LAW AND THE RULING OF THIS HONORABLE COURT
IN THE ARRANZA CASE.
2. THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR AND
GRAVELY ABUSED ITS DISCRETION WHEN IT RULED THAT THE APPROVAL
OF THE CORPORATE REHABILITATION PLAN AND THE APPOINTMENT OF A
RECEIVER HAD THE EFFECT OF SUSPENDING THE PROCEEDING IN THE
HLURB, AND THAT THE MONETARY AWARD GIVEN BY THE HLURB COULD
NOT [BE] FILED IN THE SEC FOR PROPER DISPOSITION, NOT BEING IN
ACCORDANCE WITH LAW AND JURISPRUDENCE.
3. THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR AND
GRAVELY ABUSED ITS DISCRETION IN RULING THAT RESPONDENT IS
JUSTIFIED IN EXTENDING THE AGREED DATE OF DELIVERY BY INVOKING
AS GROUND THE FINANCIAL CONSTRAINTS IT EXPERIENCED, BEING
CONTRARY TO LAW AND IN EEFECT AN UNLAWFUL NOVATION OF THE
AGREEMENT OF THE DATE OF DELIVERY ENTERED INTO BY PETITIONERS
AND RESPONDENT.[11]
The petition lacks merit.
Section 6(c) of PD No. 902-A empowers the SEC:
c) To appoint one or more receivers of the property, real and personal, which is the
subject of the action pending before the Commission whenever necessary in order to
preserve the rights of the parties-litigants and/or protect the interest of the investing
public and creditors: Provided, finally, That upon appointment of a management
committee, rehabilitation receiver, board or body, pursuant to this Decree, all actions for
claims against corporations, partnerships or associations under management or
receivership pending before any court, tribunal, board or body shall be suspended
accordingly. [Emphasis added]
The purpose for the suspension of the proceedings is to prevent a creditor from obtaining
an advantage or preference over another and to protect and preserve the rights of party
litigants as well as the interest of the investing public or creditors.[12] Such suspension is
intended to give enough breathing space for the management committee or rehabilitation
receiver to make the business viable again, without having to divert attention and
resources to litigations in various fora.[13] The suspension would enable the management
committee or rehabilitation receiver to effectively exercise its/his powers free from any
judicial or extra-judicial interference that might unduly hinder or prevent the rescue of
the debtor company. To allow such other action to continue would only add to the burden
of the management committee or rehabilitation receiver, whose time, effort and resources
would be wasted in defending claims against the corporation instead of being directed
toward its restructuring and rehabilitation.[14]
Thus, in order to resolve whether the proceedings before the HLURB should be
suspended, it is necessary to determine whether the complaint for rescission of contract
with damages is a claim within the contemplation of PD No. 902-A.
In Finasia Investments and Finance Corp. v. Court of Appeals,[15] we
construed claim to refer only to debts or demands pecuniary in nature. Thus:
7
[T]he word claim as used in Sec. 6(c) of P.D. 902-A refers to debts or demands of a
pecuniary nature. It means the assertion of a right to have money paid. It is used in
special proceedings like those before administrative court, on insolvency.
The word claim is also defined as:
Right to payment, whether or not such right is reduced to judgment, liquidated,
unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal,
equitable, secured, or unsecured; or right to an equitable remedy for breach of
performance if such breach gives rise to a right to payment, whether or not such right to
an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured,
disputed, undisputed, secured, unsecured.
In conflicts of law, a receiver may be appointed in any state which has jurisdiction over
the defendant who owes a claim.
As used in statutes requiring the presentation of claims against a decedents estate, claim
is generally construed to mean debts or demands of a pecuniary nature which could have
been enforced against the deceased in his lifetime and could have been reduced to simple
money judgments; and among these are those founded upon contract.
In Arranza v. B.F. Homes, Inc.,[16] claim is defined as referring to actions involving
monetary considerations.
Finasia Investments and Finance Corp. v. Court of Appeals and Arranza v. B.F. Homes,
Inc. were promulgated prior to the effectivity of the Interim Rules of Procedure on
Corporate Rehabilitation on December 15, 2000. The interim rules define a claim as
referring to all claims or demands, of whatever nature or character against a debtor or its
property, whether for money or otherwise. The definition is all-encompassing as it refers
to all actions whether for money or otherwise. There are no distinctions or exemptions.
Incidentally, although the petition for rehabilitation with prayer for suspension of actions
and proceedings was filed before the SEC on May 2, 2000,[17] or prior to the effectivity
of the interim rules, the same would still apply pursuant to Section 1, Rule 1 thereof
which provides:
Section 1. Scope These Rules shall apply to petitions for rehabilitation filed by
corporations, partnerships, and associations pursuant to Presidential Decree No. 902-A,
as amended.
Clearly then, the complaint filed by Sobrejuanite is a claim as defined under the Interim
Rules of Procedure on Corporate Rehabilitation. Even under our rulings in Finasia
Investments and Finance Corp. v. Court of Appeals and Arranza v. B.F. Homes, Inc., the
complaint for rescission with damages would fall under the category of claim considering
that it is for pecuniary considerations.
In their complaint, Sobrejuanite pray for the rescission of the contract and the refund of
P2,674,637.10 representing their total payments to ASBDC; P200,000.00 as moral
damages; P100,000.00 as exemplary damages; P100,000.00 as attorneys fees; P50,000.00
as litigation expenses; P1,500.00 per hearing as appearance fees; and costs of the suit.
In the decision of the HLURB arbiter, ASBDC was ordered to pay P2,674,637.10 plus
12% interest from the date of actual payment of each amortization, representing the In this case, under the complaint for specific performance before the HLURB, petitioners
refund of all the amortization payments made by Sobrejuanite; P200,000.00 as moral do not aim to enforce a pecuniary demand. Their claim for reimbursement should be
damages; P100,000.00 as exemplary damages; P100,000.00 as attorneys fees; and viewed in the light of respondents alleged failure to observe its statutory and contractual
P50,000.00 as litigation expenses. obligations to provide petitioners a decent human settlement and ample opportunities for
improving their quality of life. The HLURB, not the SEC, is equipped with the expertise
As such, the HLURB arbiter should have suspended the proceedings upon the approval to deal with that matter.[21]
by the SEC of the ASB Group of Companies rehabilitation plan and the appointment of
its rehabilitation receiver. By the suspension of the proceedings, the receiver is allowed to Finally, we agree with the Court of Appeals that under the Contract to Sell, ASBDC was
fully devote his time and efforts to the rehabilitation and restructuring of the distressed obliged to deliver the property to Sobrejuanite on or before December 1999. Nonetheless,
corporation. the same was deemed extended due to the financial reverses experienced by the company.
It is well to note that even the execution of final judgments may be held in abeyance Section 7 of the Contract to Sell allows the developer to extend the period of delivery on
when a corporation is under rehabilitation.[18] Hence, there is more reason in the instant account of causes beyond its control, such as financial reverses.
case for the HLURB arbiter to order the suspension of the proceedings as the motion to
suspend was filed soon after the institution of the complaint. By allowing the proceedings WHEREFORE, the petition is DENIED. The assailed Decision of the Court of Appeals
to proceed, the HLURB arbiter unwittingly gave undue preference to Sobrejuanite over dated June 29, 2004 in CA-G.R. SP No. 79420 and its Resolution dated October 18,
the other creditors and claimants of ASBDC, which is precisely the vice sought to be 2004, are AFFIRMED.
prevented by Section 6(c) of PD 902-A. Thus:
SO ORDERED.
As between creditors, the key phrase is equality is equity. When a corporation threatened
by bankruptcy is taken over by a receiver, all the creditors should stand on equal footing.
Not anyone of them should be given any preference by paying one or some of them ahead
of the others. This is precisely the reason for the suspension of all pending claims against
the corporation under receivership. Instead of creditors vexing the courts with suits
against the distressed firm, they are directed to file their claims with the receiver who is a
duly appointed officer of the SEC.[19]

Petitioners reliance on Arranza v. B.F. Homes, Inc.[20] is misplaced. In that case, we

held that the HLURB retained its jurisdiction despite the rehabilitation proceedings since
the claim filed by the homeowners did not involve pecuniary considerations. The claim
therein was for specific performance to enforce the homeowners rights as regards right of
way, open spaces, road and perimeter wall repairs, and security. However, it can also be
deduced therefrom that if the claim was for monetary awards, the proceedings before the
HLURB should be suspended during the rehabilitation. Thus:

No violation of the SEC order suspending payments to creditors would result as far as
petitioners complaint before the HLURB is concerned. To reiterate, what petitioners seek
to enforce are respondents obligations as a subdivision developer. Such claims
are basically not pecuniary in nature although it could incidentally involve monetary
considerations. All that petitioners claims entail is the exercise of proper subdivision
management on the part of the SEC-appointed Board of Receivers towards the end that
homeowners shall enjoy the ideal community living that respondent portrayed they would
have when they bought real estate from it.

Neither may petitioners be considered as having claims against respondent within the
context of the following proviso of Section 6 (c) of P.D. No. 902-A, to warrant
suspension of the HLURB proceedings.

8
EN BANC
G.R. No. 74851 December 9, 1999
RIZAL COMMERCIAL BANKING CORPORATION, petitioner,
vs.
INTERMEDIATE APPELLATE COURT AND BF HOMES, INC., respondents.
RESOLUTION
MELO, J.:
On September 14, 1992, the Court passed upon the case at bar and rendered its decision,
dismissing the petition of Rizal Commercial Banking Corporation (RCBC), thereby
affirming the decision of the Court of Appeals which canceled the transfer certificate of
title issued in favor of RCBC, and reinstating that of respondent BF Homes.
This will now resolve petitioner's motion for reconsideration which, although filed in
1992 was not deemed submitted for resolution until in late 1998. The delay was
occasioned by exchange of pleadings, the submission of supplemental papers, withdrawal
and change of lawyers, not to speak of the case having been passed from one departing to
another retiring justice. It was not until May 3, 1999, when the case was re-raffled to
herein ponente, but the record was given to him only sometime in the late October 1999.
By way of review, the pertinent facts as stated in our decision are reproduced herein, to
wit:
On September 28, 1984, BF Homes filed a "Petition for Rehabilitation and for
Declaration of Suspension of Payments" (SEC Case No. 002693) with the Securities and
Exchange Commission (SEC).
One of the creditors listed in its inventory of creditors and liabilities was RCBC.
On October 26, 1984, RCBC requested the Provincial Sheriff of Rizal to extra-judicially
foreclose its real estate mortgage on some properties of BF Homes. A notice of extra-
judicial foreclosure sale was issued by the Sheriff on October 29, 1984, scheduled on
November 29, 1984, copies furnished both BF Homes (mortgagor) and RCBC
(mortgagee).
On motion of BF Homes, the SEC issued on November 28, 1984 in SEC Case No.
002693 a temporary restraining order (TRO), effective for 20 days, enjoining RCBC and
the sheriff from proceeding with the public auction sale. The sale was rescheduled to
January 29, 1985.
On January 25, 1985, the SEC ordered the issuance of a writ of preliminary injunction
upon petitioner's filing of a bond. However, petitioner did not file a bond until January
29, 1985, the very day of the auction sale, so no writ of preliminary injunction was issued
by the SEC. Presumably, unaware of the filing of the bond, the sheriffs proceeded with
the public auction sale on January 29, 1985, in which RCBC was the highest bidder for
the properties auctioned.
On February 5, 1985, BF Homes filed in the SEC a consolidated motion to annul the
auction sale and to cite RCBC and the sheriff for contempt. RCBC opposed the motion
Because of the proceedings in the SEC, the sheriff withheld the delivery to RCBC of a
certificate of sale covering the auctioned properties.
On February 13, 1985, the SEC in Case No. 002693 belatedly issued a writ of
preliminary injunction stopping the auction sale which had been conducted by the sheriff
two weeks earlier.
On March 13, 1985, despite SEC Case No. 002693, RCBC filed with the Regional Trial
Court, Br. 140, Rizal (CC 10042) an action for mandamus against the provincial sheriff
9
of Rizal and his deputy to compel them to execute in its favor a certificate of sale of the
auctioned properties.
In answer, the sheriffs alleged that they proceeded with the auction sale on January 29,
1985 because no writ of preliminary injunction had been issued by SEC as of that date,
but they informed the SEC that they would suspend the issuance of a certificate of sale to
RCBC.
On March 18, 1985, the SEC appointed a Management Committee for BF Homes.
On RCBC's motion in the mandamus case, the trial court issued on May 8, 1985 a
judgment on the pleadings, the dispositive portion of which states:
WHEREFORE, petitioner's Motion for Judgment on the pleadings is granted and
judgment is hereby rendered ordering respondents to execute and deliver to petitioner the
Certificate of the Auction Sale of January 29, 1985, involving the properties sold therein,
more particularly those described in Annex "C" of their Answer." (p. 87, Rollo.)
On June 4, 1985, B.F. Homes filed an original complaint with the IAC pursuant to
Section 9 of B.P. 129 praying for the annulment of the judgment, premised on the
following:
. . .: (1) even before RCBC asked the sheriff to extra-judicially foreclose its mortgage on
petitioner's properties, the SEC had already assumed exclusive jurisdiction over those
assets, and (2) that there was extrinsic fraud in procuring the judgment because the
petitioner was not impleaded as a party in the mandamus case, respondent court did not
acquire jurisdiction over it, and it was deprived of its right to be heard. (CA Decision, p.
88, Rollo).
On April 8, 1986, the IAC rendered a decision, setting aside the decision of the trial
court, dismissing the mandamus case and suspending issuance to RCBC of new land
titles, "until the resolution of case by SEC in Case No. 002693," disposing as follows:
WHEREFORE, the judgment dated May 8, 1985 in Civil Case No. 10042 is hereby
annulled and set aside and the case is hereby dismissed. In view of the admission of
respondent Rizal Commercial Banking Corporation that the sheriff's certificate of sale
has been registered on BF Homes' TCT's . . . (here the TCTs were enumerated) the
Register of Deeds for Pasay City is hereby ordered to suspend the issuance to the
mortgagee-purchaser, Rizal Commercial Banking Corporation, of the owner's copies of
the new land titles replacing them until the matter shall have been resolved by the
Securities and Exchange Commission in SEC Case No. 002693.
(p. 257-260, Rollo; also pp. 832-834, 213 SCRA 830 [1992]; Emphasis in the original.)
On June 18, 1986, RCBC appealed the decision of the then Intermediate Appellate Court
(now, back to its old revered name, the Court of Appeals) to this Court, arguing that:
1. Petitioner did not commit extrinsic fraud in excluding private respondent as party
defendant in Special Civil Case No. 10042 as private respondent was not indispensable
party thereto, its participation not being necessary for the full resolution of the issues
raised in said case.
2. SEC Case No. 2693 cannot be invoked to suspend Special Civil Case No. 10042, and
for that matter, the extra-judicial foreclosure of the real estate mortgage in petitioner's
favor, as these do not constitute actions against private respondent contemplated under
Section 6(c) of Presidential Decree No. 902-A.
3. Even assuming arguendo that the extra-judicial sale constitute an action that may be
suspended under Section 6(c) of Presidential Decree No. 902-A, the basis for the
suspension thereof did not exist so as to adversely affect the validity and regularity
thereof.
4. The Regional Trial court had jurisdiction to take cognizable of Special Civil Case No.
10042.
5. The Regional Trial court had jurisdiction over Special Civil Case No. 10042.
(p. 5, Rollo.)
On November 12, 1986, the Court gave due course to the petition. During the pendency
of the case, RCBC brought to the attention of the Court an order issued by the SEC on
October 16, 1986 in Case No. 002693, denying the consolidated Motion to Annul the
Auction Sale and to cite RCBC and the Sheriff for Contempt, and ruling as follows:
WHEREFORE, the petitioner's "Consolidated Motion to Cite Sheriff and Rizal
Commercial Banking Corporation for Contempt and to Annul Proceedings and Sale,"
dated February 5, 1985, should be as is, hereby DENIED.
While we cannot direct the Register of Deeds to allow the consolidation of the titles
subject of the Omnibus Motion dated September 18, 1986 filed by the Rizal Commercial
Banking Corporation, and therefore, denies said Motion, neither can this Commission
restrain the said bank and the Register of Deeds from effecting the said consolidation.
SO ORDERED.
(p. 143, Rollo.)
By virtue of the aforesaid order, the Register of Deeds of Pasay City effected the transfer
of title over subject pieces of property to petitioner RCBC, and the issuance of new titles
in its name. Thereafter, RCBC presented a motion for the dismissal of the petition,
theorizing that the issuance of said new transfer certificates of title in its name rendered
the petition moot and academic.
In the decision sought to be reconsidered, a greatly divided Court (Justices Gutierrez,
Nocon, and Melo concurred with the ponente, Justice Medialdea; Chief Justice Narvasa,
Justices Bidin, Regalado, and Bellosillo concurred only in the result; while Justice
Feliciano dissented and was joined by Justice Padilla, then Justice, now Chief Justice
Davide, and Justice Romero; Justices Griño-Aquino and Campos took no part) denied
petitioner's motion to dismiss, finding basis for nullifying and setting aside the TCTs in
the name of RCBC. Ruling on the merits, the Court upheld the decision of the
Intermediate Appellate Court which dismissed the mandamus case filed by RCBC and
suspended the issuance of new titles to RCBC. Setting aside RCBC's acquisition of title
and nullifying the TCTs issued to it, the Court held that:
. . . whenever a distressed corporation asks the SEC for rehabilitation and suspension of
payments, preferred creditors may no longer assert such preference, but . . . stand on
equal footing with other creditors. Foreclosure shall be disallowed so as not to prejudice
other creditors, or cause discrimination among them. If foreclosure is undertaken despite
the fact that a petition, for rehabilitation has been filed, the certificate of sale shall not be
delivered pending rehabilitation. Likewise, if this has also been done, no transfer of title
shall be effected also, within the period of rehabilitation. The rationale behind PD 902-A,
as amended to effect a feasible and viable rehabilitation. This cannot be achieved if one
creditor is preferred over the others.
In this connection, the prohibition against foreclosure attaches as soon as a petition for
rehabilitation is filed. Were it otherwise, what is to prevent the petitioner from delaying
the creation of a Management Committee and in the meantime dissipate all its assets. The
sooner the SEC takes over and imposes a freeze on all the assets, the better for all
concerned.
(pp. 265-266, Rollo; also p. 838, 213 SCRA 830 [1992].)
Then Justice Feliciano (joined by three other Justices), dissented and voted to grant the
petition. He opined that the SEC acted prematurely and without jurisdiction or legal
10
authority in enjoining RCBC and the sheriff from proceeding with the public auction sale.
The dissent maintain that Section 6 (c) of Presidential Decree 902-A is clear and
unequivocal that, claims against the corporations, partnerships, or associations shall be
suspended only upon the appointment of a management committee, rehabilitation
receiver, board or body. Thus, in the case under consideration, only upon the appointment
of the Management Committee for BF Homes on March 18, 1985, should the suspension
of actions for claims against BF Homes have taken effect and not earlier.
In support of its motion for reconsideration, RCBC contends:
The restraining order and the writ of preliminary injunction issued by the Securities and
Exchange Commission enjoining the foreclosure sale of the properties of respondent BF
Homes were issued without or in excess of its jurisdiction because it was violative of the
clear provision of Presidential Decree No. 902-A, and are therefore null and void; and
Petitioner, being a mortgage creditor, is entitled to rely solely on its security and to
refrain from joining the unsecured creditors in SEC Case No. 002693, the petition for
rehabilitation filed by private respondent.
We find the motion for reconsideration meritorious.
The issue of whether or not preferred creditors of distressed corporations stand on equal
footing with all other creditors gains relevance and materiality only upon the appointment
of a management committee, rehabilitation receiver, board, or body. Insofar as petitioner
RCBC is concerned, the provisions of Presidential Decree No. 902-A are not yet
applicable and it may still be allowed to assert its preferred status because it foreclosed
on the mortgage prior to the appointment of the management committee on March 18,
1985. The Court, therefore, grants the motion for reconsideration on this score.
The law on the matter, Paragraph (c), Section 6 of Presidential Decree 902-A, provides:
Sec. 6. In order to effectively exercise such jurisdiction, the Commission shall posses the
following powers:
c) To appoint one or more receivers of the property, real and personal, which is the
subject of the action pending before the Commission in accordance with the pertinent
provisions of the Rules of Court in such other cases whenever necessary to preserve the
rights of the parties litigants to and/or protect the interest of the investing public and
creditors; Provided, however, that the Commission may, in appropriate cases, appoint a
rehabilitation receiver of corporations, partnerships or other associations not supervised
or regulated by other government agencies who shall have, in addition to the powers of a
regular receiver under the provisions of the Rules of Court, such functions and powers as
are provided for in the succeeding paragraph (d) hereof: Provided, finally, That upon
appointment of a management committee rehabilitation receiver, board or body,
pursuant to this Decree, all actions for claims against corporations, partnerships or
associations under management or receivership, pending before any court, tribunal, board
or body shall be suspended accordingly. (As amended by PDs No. 1673, 1758 and by PD
No. 1799. Emphasis supplied.)
It is thus adequately clear that suspension of claims against a corporation under
rehabilitation is counted or figured up only upon the appointment of a management
committee or a rehabilitation receiver. The holding that suspension of actions for claims
against a corporation under rehabilitation takes effect as soon as the application or a
petition for rehabilitation is filed with the SEC — may, to some, be more logical and wise
but unfortunately, such is incongruent with the clear language of the law. To insist on
such ruling, no matter how practical and noble, would be to encroach upon legislative
prerogative to define the wisdom of the law — plainly judicial legislation.
It bears stressing that the first and fundamental duty of the Court is to apply the law.
When the law is clear and free from any doubt or ambiguity, there is no room for
construction or interpretation. As has been our consistent ruling, where the law speaks in
clear and categorical language, there is no occasion for interpretation; there is only room
for application (Cebu Portland Cement Co. vs. Municipality of Naga, 24 SCRA-708
[1968]).
Where the law is clear and unambiguous, it must be taken to mean exactly what it says
and the court has no choice but to see to it that its mandate is obeyed (Chartered Bank
Employees Association vs. Ople, 138 SCRA 273 [1985]; Luzon Surety Co., Inc. vs. De
Garcia, 30 SCRA 111 [1969]; Quijano vs. Development Bank of the Philippines, 35
SCRA 270 [1970]).
Only when the law is ambiguous or of doubtful meaning may the court interpret or
construe its true intent. Ambiguity is a condition of admitting two or more meanings, of
being understood in more than one way, or of referring to two or more things at the same
time. A statute is ambiguous if it is admissible of two or more possible meanings, in
which case, the Court is called upon to exercise one of its judicial functions, which is to
interpret the law according to its true intent.
Furthermore, as relevantly pointed out in the dissenting opinion, a petition for
rehabilitation does nor always result in the appointment of a receiver or the creation of a
management committee. The SEC has to initially determine whether such appointment is
appropriate and necessary under the circumstances. Under Paragraph (d), Section 6 of
Presidential Decree No. 902-A, certain situations must be shown to exist before a
management committee may be created or appointed, such as;
1. when there is imminent danger of dissipation, loss, wastage or destruction of assets or
other properties; or
2. when there is paralization of business operations of such corporations or entities which
may be prejudicial to the interest of minority stockholders, parties-litigants or to the
general public.
On the other hand, receivers may be appointed whenever:
1. necessary in order to preserve the rights of the parties-litigants; and/or
2. protect the interest of the investing public and creditors. (Section 6 (c), P.D. 902-A.)
These situations are rather serious in nature, requiring the appointment of a management
committee or a receiver to preserve the existing assets and property of the corporation in
order to protect the interests of its investors and creditors. Thus, in such situations,
suspension of actions for claims against a corporation as provided in Paragraph (c) of
Section 6, of Presidential Decree No. 902-A is necessary, and here we borrow the words
of the late Justice Medialdea, "so as not to render the SEC management Committee
irrelevant and inutile and to give it unhampered "rescue efforts" over the distressed firm"
(Rollo, p. 265).
Otherwise, when such circumstances are not obtaining or when the SEC finds no such
imminent danger of losing the corporate assets, a management committee or
rehabilitation receiver need not be appointed and suspension of actions for claims may
not be ordered by the SEC. When the SEC does not deem it necessary to appoint a
receiver or to create a management committee, it may be assumed, that there are
sufficient assets to sustain the rehabilitation plan and, that the creditors and investors are
amply protected.
Petitioner additionally argues in its motion for reconsideration that, being a mortgage
creditor, it is entitled to rely on its security and that it need not join the unsecured
creditors in filing their claims before the SEC appointed receiver. To support its position,
11
petitioner cites the Court's ruling in the case of Philippine Commercial International
Bank vs. Court of Appeals, (172 SCRA 436 [1989]) that an order of suspension of
payments as well as actions for claims applies only to claims of unsecured creditors and
cannot extend to creditors holding a mortgage, pledge, or any lien on the property.
Ordinarily, the Court would refrain from discussing additional matters such as that
presented in RCBC's second ground, and would rather limit itself only to the relevant
issues by which the controversy may be settled with finality.
In view, however, of the significance of such issue, and the conflicting decisions of this
Court on the matter, coupled with the fact that our decision of September 14, 1992, if not
clarified, might mislead the Bench and the Bar, the Court resolved to discuss further.
It may be recalled that in the herein en banc majority opinion (pp. 256-275, Rollo, also
published as RCBC vs. IAC, 213 SCRA 830 [1992]), we held that:
. . . whenever a distressed corporation asks the SEC for rehabilitation and suspension of
payments, preferred creditors may no longer assert such preference, but . . . stand on
equal footing with other creditors. Foreclosure shall be disallowed so as not to prejudice
other creditors, or cause discrimination among them. If foreclosure is undertaken despite
the fact that a petition for rehabilitation has been filed, the certificate of sale shall not be
delivered pending rehabilitation. Likewise, if this has also, been done, no transfer of title
shall be effected also, within the period of rehabilitation. The rationale behind PD 902-A,
as amended, is to effect a feasible and viable rehabilitation. This cannot be achieved if
one creditor is preferred over the others.
In this connection, the prohibition against foreclosure attaches as soon as a petition for
rehabilitation is filed. Were it otherwise, what is to prevent the petitioner from delaying
the creation of a Management Committee and in the meantime dissipate all its assets. The
sooner the SEC takes over and imposes a freeze on all the assets, the better for all
concerned.
(pp. 265-266, Rollo; also p. 838, 213 SCRA 830 [1992] Emphasis supplied)
The foregoing majority opinion relied upon BF Homes, Inc. vs. Court of Appeals (190
SCRA 262 [1990] — per Cruz, J.: First Division) where it held that "when a corporation
threatened by bankruptcy is taken over by a receiver, all the creditors should stand on an
equal footing. Not anyone of them should be given preference by paying one or some of
them ahead of the others. This is precisely the reason for the suspension of all pending
claims against the corporation under receivership. Instead of creditors vexing the courts
with suits against the distressed firm, they are directed to file their claims with the
receiver who is a duly appointed officer of the SEC (pp. 269-270; emphasis in the
original). This ruling is a reiteration of Alemar's Sibal & Sons, Inc. vs. Hon. Jesus M.
Elbinias (pp. 99-100; 186 SCRA 94 [1991] — per Fernan, C.J.: Third Division).
Taking the lead from Alemar's Sibal & Sons, the Court also applied this same ruling
in Araneta vs. Court of Appeals(211 SCRA 390 [1992] — per Nocon, J.: Second
Division).
All the foregoing cases departed from the ruling of the Court in the much earlier case
of PCIB vs. Court of Appeals(172 SCRA 436 [1989] — per Medialdea, J.: First Division)
where the Court categorically ruled that:
SEC's order for suspension of payments of Philfinance as well as for all actions of claims
against Philfinance could only be applied to claims of unsecured creditors. Such
order can not extend to creditors holding a mortgage, pledge or any lien on the
property unless they give up the property, security or lien in favor of all the creditors of
Philfinance . . .
(p. 440. Emphasis supplied)
Thus, in BPI vs. Court of Appeals (229 SCRA 223 [1994] — per Bellosilio, J.: First In fine, the Court grants the motion for reconsideration for the cogent reason that
Division) the Court explicitly stared that ". . . the doctrine in the PCIB Case has since suspension of actions for claims commences only from the time a management
been abrogated. In Alemar's Sibal & Sons v. Elbinias, BF Homes, Inc. v. Court of committee or receiver is appointed by the SEC. Petitioner RCBC, therefore, could have
Appeals, Araneta v. Court of Appeals and RCBC v. Court of Appeals, we already ruled rightfully, as it did, move for the extrajudicial foreclosure of its mortgage on October 26,
that whenever a distressed corporation asks SEC for rehabilitation and suspension of 1984 because a management committee was not appointed by the SEC until March 18,
payments, preferred creditors may no longer assert such preference, but shall stand on 1985.
equal footing with other creditors . . ." (pp. 227-228). WHEREFORE, petitioner's motion for reconsideration is hereby GRANTED. The
It may be stressed, however, that of all the cases cited by Justice Bellosillo in BPI, which decision, dated September 14, 1992 is vacated, the decision of Intermediate Appellate
abandoned the Court's ruling in PCIB, only the present case satisfies the constitutional Court in AC-G.R. No. SP-06313 REVERSED and SET ASIDE, and the judgment of the
requirement that "no doctrine or principle of law laid down by the court in a decision Regional Trial Court National Capital Judicial Region, Branch 140, in Civil Case No.
rendered en banc or in division may be modified or reversed except by the court 10042 REINSTATED.
sitting en banc" (Sec 4, Article VIII, 1987 Constitution). The rest were division decisions. SO ORDERED.
It behooves the Court, therefore, to settle the issue in this present resolution once and for
all, and for the guidance of the Bench and the Bar, the following rules of thumb shall are
laid down:
1. All claims against corporations, partnerships, or associations that are pending before
any court, tribunal, or board, without distinction as to whether or not a creditor is secured
or unsecured, shall be suspended effective upon the appointment of a management
committee, rehabilitation receiver, board, or body in accordance which the provisions of
Presidential Decree No. 902-A.
2. Secured creditors retain their preference over unsecured creditors, but enforcement of
such preference is equally suspended upon the appointment of a management committee,
rehabilitation receiver, board, or body. In the event that the assets of the corporation,
partnership, or association are finally liquidated, however, secured and preferred credits
under the applicable provisions of the Civil Code will definitely have preference over
unsecured ones.
In other words, once a management committee, rehabilitation receiver, board or body is
appointed pursuant to P.D. 902-A, all actions for claims against a distressed corporation
pending before any court, tribunal, board or body shall be suspended accordingly.
This suspension shall not prejudice or render ineffective the status of a secured creditor as
compared totally unsecured creditor P.D. 902-A does not state anything to this effect.
What it merely provides is that all actions for claims against the corporation, partnership
or association shall be suspended. This should give the receiver a chance to rehabilitate
the corporation if there should still be a possibility of doing so. (This will be in
consonance with Alemar's BF Homes, Araneta, and RCBC insofar as enforcing liens by
preferred creditors are concerned.)
However, in the event that rehabilitation is no longer feasible and claims against the
distressed corporation would eventually have to be settled, the secured creditors shall
enjoy preference over the unsecured creditors (still maintaining PCIB ruling), subject
only to the provisions of the Civil Code on Concurrence and Preferences of Credit (our
ruling in State Investment House, Inc. vs. Court of Appeals, 277 SCRA 209 [1997]).
The Majority ruling in our 1992 decision that preferred creditors of distressed
corporations shall, in a way, stand an equal footing with all other creditors, must be read
and understood in the light of the foregoing rulings. All claims of both a secured or
unsecured creditors, without distinction on this score, are suspended once a management
committee is appointed. Secured creditors, in the meantime, shall not be allowed to assert
such preference before the Securities and Exchange Commission. It may be stressed,
however, that this shall only take effect upon the appointment of a management
committee, rehabilitation receiver, board, or body, as opined in the dissent.

12
EN BANC
[G.R. No. L-20583. January 23, 1967.]
REPUBLIC OF THE PHILIPPINES, Petitioner, v. SECURITY CREDIT AND
ACCEPTANCE CORPORATION, ROSENDO T. RESUELLO, PABLO
TANJUTCO, ARTURO SORIANO, RUBEN BELTRAN, BIENVENIDO V. ZAPA,
PILAR G. RESUELLO, RICARDO D. BALATBAT, JOSE R. SEBASTIAN and
VITO TANJUTCO, JR., Respondents.
Solicitor General Arturo A. Alafriz and Solicitor E. M. Salva for Petitioner.
Sycip, Salazar, Luna, Manalo & Feliciano for Respondents.
Natalio M. Balboa and F. E. Evangelista for the receiver.
SYLLABUS
1. CORPORATION LAW; BANKING; TRANSACTIONS DEEMED TO BE IN THE
NATURE OF BANKING. — Although, admittedly, defendant corporation has not
secured the requisite authority to engage in banking, defendants deny that its transactions
partake of the nature of banking operations. It is conceded, however, that in consequence
of a propaganda campaign therefor, a total of 59,643 savings account deposits have been
made by the public with the corporation and its 74 branches, with an aggregate deposit of
P1,689,136.74, which has been lent out to such persons as the corporation deemed
suitable therefor. It is clear that those transactions partake of the nature of banking, as the
term is used in See. 2 of the General Banking Acts.
2. WORDS AND PHRASES; "BANK" DEFINED. — A bank has been defined as "a
moneyed institute [Talmage v. Pell, 7 N.Y. (3 Seld.) 328, 347, 248] founded to facilitate
the borrowing, lending, and safe-keeping of money (Smith v. Kansas City Title & Trust
Co., 41 S. Ct. 243, 255 U.S. 180, 210, 65 L. Ed. 577) and to deal in notes, bills of
exchange, and credits (State v. Cornings Sav. Bank, 115 N.W. 937, 139 Iowa, 388)."
(Banks & Banking, by Zellmann, Vol. 1, p. 46.)
3. ID.; ID.; WHEN INVESTMENT COMPANY IS CONSIDERED A BANK. — "An
investment company which loans out the money of its customers, collects the interests
and charges a commission to both borrower and lender is a bank."cralaw virtua1aw
library
4. ID.; ILLEGAL TRANSACTIONS BY CORPORATION WARRANT ITS
DISSOLUTION. — That the illegal transactions thus undertaken by defendant
corporation warrant its dissolution is apparent from the fact that the foregoing misuser of
the corporate funds and franchise affects the essence of its business, that it is willful and
has been repeated 59,643 times, and that its continuances inflicts injury upon the public,
owing to the number of persons affected thereby.
13
5. JURISDICTION; IN QUO WARRANTO PROCEEDING, THE SUPREME COURT
IS VESTED WITH CONCURRENT ORIGINAL JURISDICTION WITH THE CFI. —
The Supreme Court is vested with original jurisdiction, concurrently with courts of first
instance, to hear and decide quo warranto cases and, consequently, it is discretionary for
the Court either to entertain the present case or to require that the issues therein be taken
up in the lower court . . . In the case at bar, there is, however, no dispute as to the
principal facts or acts performed by the corporation in the conduct of its business. The
main issue here is one of law, namely, the legal nature of said facts or of the
aforementioned acts of the corporation. For this reason, and because public interest
demands an early disposition of the case, we have deemed it best to determine the merits
therefor.
6. ID.; ID.; WHEN ISSUES OF FACT REQUIRE PRESENTATION OF EVIDENCE,
CFI, IS APPROPRIATE FORUM. - Where there are issues of fact which require the
presentation of evidence, the courts of first instance are, in general, better equipped than
appellate courts for the taking of testimony and the determination of questions of fact.
DECISION
CONCEPCION, C.J.:
This is an original quo warranto proceeding, initiated by the Solicitor General, to dissolve
the Security Credit and Acceptance Corporation for allegedly engaging in banking
operations without the authority required therefore by the General Banking Act (Republic
Act No. 337). Named as respondents in the petition are, in addition to said corporation,
the following, as alleged members of its Board of Directors and/or Executive Officers,
namely:jgc:chanrobles.com.ph
"NAME POSITION
Rosendo T. Resuello President & Chairman of
the Board
Pablo Tanjutco Director
Arturo Soriano Director
Ruben Beltran Director
Bienvenido V. Zapa Director & Vice-President
Pilar G. Resuello Director & Secretary-Treasurer
Ricardo D. Balatbat Director & Auditor
Jose R. Sebastian Director & Legal Counsel
Vito Tanjutco, Jr Director & Personnel Manager"
The record shows that the Articles of Incorporation of defendant corporation 1 were
registered with the Securities and Exchange Commission on March 27, 1961 that the next
day, the Board of Directors of the corporation adopted a set of by laws, 2 which were
filed with said Commission on April 5, 1961; that on September 19, 1961, the
Superintendent of Banks of the Central Bank of the Philippines asked its legal counsel an
opinion on whether or not said corporation is a banking institution, within the purview of
Republic Act No. 337; that, acting upon this request, on October 11, 1961, said legal
counsel rendered an opinion resolving the query in the affirmative; that in a letter, dated
January 15, 1962, addressed to said Superintendent of Banks, the corporation through its
president, Rosendo T. Resuello, one of defendants herein, sought a reconsideration of the
aforementioned opinion, which reconsideration was denied on March 16, 1962; that, prior
thereto, or on March 9, 1961, the corporation had applied with the Securities and
Exchange Commission for the registration and licensing of its securities under the
Securities Act; that, before acting on this application, the Commission referred it to the
Central Bank, which, in turn, gave the former a copy of the above-mentioned opinion, in
line with which, the Commission advised the corporation on December 5, 1961, to
comply with the requirements of the General Banking Act; that, upon application of
members of the Manila Police Department and an agent of the Central Bank, on May 18,
1962, the Municipal Court of Manila issued Search Warrant No. A-1019; that, pursuant
thereto, members of the intelligence division of the Central Bank and of the Manila
Police Department searched the premises of the corporation and seized documents and
records thereof relative to its business operations; that, upon the return of said warrant,
the seized documents and records were, with the authority of the court, placed under the
custody of the Central Bank of the Philippines; that, upon examination and evaluation of
said documents and records, the intelligence division of the Central Bank submitted, to
the Acting Deputy Governor thereof, a memorandum dated September 10, 1962, finding
that the corporation is:jgc:chanrobles.com.ph
"1. Performing banking functions, without requisite certificate of authority from the
Monetary Board of the Central Bank, in violation of Secs. 2 and 6 of Republic Act 337,
in that it is soliciting and accepting deposit from the public and lending out the funds so
received;
"2. Soliciting and accepting savings deposits from the general public when the company’s
articles of incorporation authorize it only to engage primarily in financing agricultural,
commercial and industrial projects, and secondarily, in buying and selling stocks and
bonds of any corporation, thereby exceeding the scope of its powers and authority as
granted under its charter; consequently such acts are ultra-vires;
"3. Soliciting subscriptions to the corporate shares of stock and accepting deposits on
account thereof, without prior registration and/or licensing of such shares or recurring
exemption therefore, in violation of the Securities Act; and
"4. That being a private credit and financial institution, it should come under the
supervision of the Monetary Board of the Central Bank, by virtue of the transfer of the
14
authority, power, duties and functions of the Secretary of Finance, Bank Commissioner
and the defunct Bureau of Banking, to the said Board, pursuant to Secs. 139 and 140 of
Republic Act 265 and Secs. 88 and 89 of Republic Act 337." (Italics supplied.)
that upon examination and evaluation of the same records of the corporation, as well as of
other documents and pertinent papers obtained elsewhere, the Superintendent of Banks,
submitted to the Monetary Board of the Central Bank a memorandum dated August 28,
1962, stating inter alia:jgc:chanrobles.com.ph
"11. Pursuant to the request for assistance by the Chief, Intelligence Division, contained
in his Memorandum to the Governor dated May 23, 1962 and in accordance with the
written instructions of Governor Castillo dated May 31, 1962, an examination of the
books and records of the Security Credit and Loans Organizations, Inc. seized by the
combined MPD-CB team was conducted by this Department. The examination disclosed
the following findings:chanrob1es virtual 1aw library
a. Considering the extent of its operations, the Security Credit and Acceptance
Corporation, Inc. receives deposits from the public regularly. Such deposits are treated in
the Corporation’s financial statements as conditional subscriptions to capital stock.
Accumulated deposits of P5,000 of an individual depositor may be converted into stock
subscription to the capital stock of the Security Credit and Acceptance Corporation at the
option of the depositor. Sale of its shares of stock or subscriptions to its capital stock are
offered to the public as part of its regular operations.
b. That out of the funds obtained from the public through the receipt of deposits and/or
the sale of securities, loans are made regularly to any person by the Security Credit and
Acceptance Corporation.
A copy of the Memorandum Report dated July 30, 1962 of the examination made by
Examiners of this Department of the seized books and records of the Corporation is
attached hereto.
"12. Section 2 of Republic Act No. 337, otherwise known as the General Banking Act,
defines the term ‘banking institution’ as follows:chanrob1es virtual 1aw library
‘Sec. 2. Only duly authorized persons and entities may engage in the lending of funds
obtained from the public through the receipt of deposits or the sale of bonds, securities, or
obligations of any kind and all entities regularly conducting operations shall be
considered as banking institutions and shall be subject to the provisions of this Act, of the
Central Bank Act, and of other pertinent laws . . .
"13. Premises considered, the examination disclosed that the Security Credit and
Acceptance Corporation is regularly lending funds obtained from the receipt of deposits
and/or the sale of securities. The Corporation therefore is performing ‘banking functions’
as contemplated in Republic Act No. 337, without having first complied with the
provisions of said Act.
Recommendations:jgc:chanrobles.com.ph
"In view of all the foregoing, it is recommended that the Monetary Board decide and
declare:chanrob1es virtual 1aw library
‘1. That the Security Credit and Acceptance Corporation is performing banking functions
without having first complied with the provisions of Republic Act No. 337, otherwise
known as the General Banking Act, in violation of Sections 2 and 6 thereof; and
‘2. That this case be referred to the Special Assistant to the Governor (Legal Counsel) for
whatever legal actions are warranted, including, if warranted criminal action against the
persons criminally liable and/or quo warranto proceedings with preliminary injunction
against the Corporation for its dissolution’." (Italics supplied.)
that, acting upon said memorandum of the Superintendent of Banks, on September 14,
1962, the Monetary Board promulgated its Resolution No. 1095, declaring that the
corporation is performing banking operations, without having first complied with the
provisions of Sections 2 and 6 of Republic Act No. 337; 3 that on September 25, 1962,
the corporation was advised of the aforementioned resolution, but, this notwithstanding,
the corporation, as well as the members of its Board of Directors and the officers of the
corporation, have been and still are performing the functions and activities which had
been declared to constitute illegal banking operations; that during the period from March
27, 1961 to May 18, 1962, the corporation had established 74 branches in principal cities
and towns throughout the Philippines; that through a systematic and vigorous campaign
undertaken by the corporation, the same had managed to induce the public to open 59,463
savings deposit accounts with an aggregate deposit of P1,689,136.74; that, in
consequence of the foregoing deposits with the corporation, its original capital stock of
P500,000, divided into 20,000 founders’ shares of stock and 80,000 preferred shares of
stock, both of which had a par value of P5.00 each, was increased, in less than one (1)
year, to P3,000,000 divided into 130,000 founders’ shares and 470,000 preferred shares,
both with a par value of P5.00 each; and that, according to its statement of assets and
liabilities, as of December 31, 1961, the corporation had a capital stock aggregating
P1,273,265.98 and suffered, during the year 1961, a loss of P96,685.29. Accordingly, on
December 6, 1962, the Solicitor General commenced this quo warranto proceedings for
the dissolution of the corporation, with a prayer that, meanwhile, a writ of preliminary
injunction be issued ex parte, enjoining the corporation and its branches, as well as its
officers and agents, from performing the banking operations complained of, and that a
receiver be appointed pendente lite.
Upon joint motion of both parties, on August 20, 1963, the Superintendent of Banks of
the Central Bank of the Philippines was appointed by this Court receiver pendente lite of
defendant corporation, and upon the filing of the requisite bond, said officer assumed his
functions as such receiver on September 16, 1963.
In their answer, defendants admitted practically all of the allegations of fact made in the
petition. They, however, denied that defendants Tanjutco (Pablo and Vito, Jr.) Soriano,
Beltran, Zapa, Balatbat and Sebastian, are directors of the corporation, as well as the
validity of the opinion, ruling, evaluation and conclusions rendered, made and/or reached
by the legal counsel and the intelligence division of the Central Bank, the Securities and
Exchange Commission, and the Superintendent of Banks of the Philippines, or in
Resolution No. 1095 of the Monetary Board, or of Search Warrant No. A- 1019 of the
15
Municipal Court of Manila, and of the search and seizure made thereunder. By way of
affirmative allegations, defendants averred that, as of July 7, 1961, the Board of Directors
of the corporation was composed of defendants Rosendo T. Resuello, Aquilino L. Illera
and Pilar G. Resuello; that on July 11, 1962, the corporation had filed with the
Superintendent of Banks an application for conversion into a Security Savings and
Mortgage Bank, with defendants Zapa, Balatbat, Tanjutco (Pablo and Vito, Jr.), Soriano,
Beltran and Sebastian as proposed directors, in addition to the defendants first named
above, with defendants Rosendo T. Resuello, Zapa, Pilar G. Resuello, Balatbat and
Sebastian as proposed president, vice-president, secretary-treasurer, auditor and legal
counsel, respectively; that said additional officers had never assumed their respective
offices because of the pendency of the approval of said application for conversion; that
defendants Soriano, Beltran, Sebastian, Vito Tanjutco Jr. and Pablo Tanjutco had
subsequently withdrawn from the proposed mortgage and savings bank; that on
November 29, 1962 — or before the commencement of the present proceedings — the
corporation and defendants Rosendo T. Resuello and Pilar G. Resuello had instituted
Civil Case No. 52342 of the Court of First Instance of Manila against Purification Santos
and other members of the savings plan of the corporation and the City Fiscal, for a
declaratory relief and an injunction; that on December 3, 1962, Judge Gaudencio Cloribel
of said court issued a writ directing the defendants in said case No. 52342 and their
representatives or agents to refrain from prosecuting the plaintiff spouses and other
officers of the corporation by reason of or in connection with the acceptance by the same
of deposits under its savings plan; that acting upon a petition filed by plaintiffs in said
case No. 52342, on December 6, 1962, the Court of First Instance of Manila had
appointed Jose Ma. Ramirez as receiver of the corporation; that, on December 12, 1962,
said Ramirez qualified as such receiver, after filing the requisite bond; that, except as to
one of the defendants in said case No. 52342, the issues therein have already been joined;
that the failure of the corporation to honor the demands for withdrawal of its depositors
or members of its savings plan and its former employees was due, not to mismanagement
or misappropriation of corporate funds, but to an abnormal situation created by the mass
demand for withdrawal of deposits, by the attachment of property of the corporation by
its creditors, by the suspension by debtors of the corporation of the payment of their debts
thereto and by an order of the Securities and Exchange Commission dated September 26
1962, to the corporation to stop soliciting and receiving deposits; and that the withdrawal
of deposits of members of the savings plan of the corporation was understood to be
subject, as to time and amounts, to the financial condition of the corporation as an
investment firm.
In its reply, plaintiff alleged that a photostat copy, attached to said pleading, of the
anniversary publication of defendant corporation showed that defendants Pablo Tanjutco,
Arturo Soriano, Ruben Beltran, Bienvenido V. Zapa, Ricardo D. Balatbat, Jose R.
Sebastian and Vito Tanjutco, Jr. are officers and/or directors thereof; that this is
confirmed by the minutes of a meeting of stockholders of the corporation, held on
September 27, 1962, showing that said defendants had been elected officers thereof; that
the views of the legal counsel of the Central Bank, of the Securities and Exchange
Commission, the Intelligence Division, the Superintendent of Banks and the Monetary
Board above referred to have been expressed in the lawful performance of their
respective duties and have not been assailed or impugned in accordance with law; that
neither has the validity of Search Warrant No. A-1019 been contested as provided by
law; that the only assets of the corporation now consist of accounts receivable amounting
approximately to P500,000, and its office equipment and appliances, despite its increased
capitalization of P3,000,000 and its deposits amounting to not less than P1,689,136.74;
and that the aforementioned petition of the corporation, in Civil Case No. 52342 of the
Court of First Instance of Manila, for a declaratory relief is now highly improper, the
defendants having already committed infractions and violations of the law justifying the
dissolution of the corporation.
Although, admittedly, defendant corporation has not secured the requisite authority to
engage in banking, defendants deny that its transactions partake of the nature of banking
operations. It is conceded, however, that, in consequence of a propaganda campaign
therefor, a total of 59,463 savings account deposits have been made by the public with
the corporation and its 74 branches, with an aggregate deposit of P1,689,136.74, which
has been lent out to such persons as the corporation deemed suitable therefor. It is clear
that these transactions partake of the nature of banking, as the term is used in Section 2 of
the General Banking Act. Indeed, a bank has been defined as:jgc:chanrobles.com.ph
case there were issues of fact which required the presentation of evidence, and courts of
first instance are, in general, better equipped than appellate courts for the taking of
testimony and the determination of questions of fact. In the case at bar, there is, however,
no dispute as to the principal facts or acts performed by the corporation in the conduct of
its business. The main issue here is one of law, namely, the legal nature of said facts or of
the aforementioned acts of the corporation. For this reason, and because public interest
demands an early disposition of the case, we have deemed it best to determine the merits
thereof.
Wherefore, the writ prayed for should be, as it is hereby granted and defendant
corporation is, accordingly, ordered dissolved. The appointment of receiver herein issued
pendente lite is hereby made permanent, and the receiver is, accordingly, directed to
administer the properties, deposits, and other assets of defendant corporation and wind up
the affairs thereof conformably to Rules 59 and 66 of the Rules of Court. It is so ordered.

". . . a moneyed institute [Talmage v. Pell, 7 N.Y. (2 Seld.) 328, 347, 348] founded to
facilitate the borrowing, lending, and safe- keeping of money (Smith v. Kansas City Title
& Trust Co., 41 S. Ct. 243, 255 U.S. 180, 210, 65 L. Ed. 577) and to deal in notes, bills of
exchange, and credits (state v. Cornings Sav. Bank, 115 N.W. 937, 139 Iowa, 338)."
(Banks & Banking, by Zellmann Vol. I, p. 46.)

Moreover, it has been held that:jgc:chanrobles.com.ph

"An investment company which loans out the money of its customers, collects the
interests, and charges a commission to both lender and borrower is a bank." (Western
Investment Banking Co. v. Murray, 56 P. 728, 730, 731; 6 Ariz. 215.)

". . . any person engaged in the business carried on by banks of deposit, of discount, or of
circulation is doing a banking business, although but one of these functions is exercised."
(MacLaren v. State, 124 N.W. 667, 141 Wis. 577, 135 Am. S.R. 55, 18 Ann. Cas. 826; 9
C.J.S. 30.)

Accordingly, defendant corporation has violated the law by engaging in banking without
securing the administrative authority required in Republic Act No. 337.

That the illegal transactions thus undertaken by defendant corporation warrant its
dissolution is apparent from the fact that the foregoing misuser of the corporate funds and
franchise affects the essence of its business, that it is willful and has been repeated 59,643
times, and that its continuance inflicts injury upon the public, owing to the number of
persons affected thereby.

It is urged, however, that this case should be remanded to the Court of First Instance of
Manila upon the authority of Veraguth v. Isabela Sugar Co. (57 Phil. 266). In this
connection, it should be noted that this Court is vested with original jurisdiction,
concurrently with courts of first instance, to hear and decide quo warranto cases and, that,
consequently, it is discretionary for us to entertain the present case or to require that the
issues therein be taken up in said Civil Case No. 52342. The Veraguth case cited by
herein defendants, in support of the second alternative, is not in point, because in said

16
EN BANC
G.R. No. 88353 May 8, 1992
CENTRAL BANK OF THE PHILIPPINES and HON. JOSE B.
FERNANDEZ, petitioners,
vs.
HON. COURT OF APPEALS, RTC JUDGE TEOFILO GUADIZ, JR.,
PRODUCERS BANK OF THE PHILIPPINES and PRODUCERS PROPERTIES,
INC., respondents.
G.R. No. 92943 May 8, 1992
ATTY. LEONIDA G. TANSINSIN-ENCARNACION, as the Acting Conservator of
Producers Bank of the Philippines, and PRODUCERS BANK OF THE
PHILIPPINES, petitioners,
vs.
PRODUCERS BANK OF THE PHILIPPINES, allegedly represented by HENRY L.
CO, HON. COURT OF APPEALS, HON. TEOFILO GUADIZ, JR., and the "LAW
FIRM OF QUISUMBING, TORRES AND EVANGELISTA" (RAMON J.
QUISUMBING, VICENTE TORRES,RAFAEL E. EVANGELISTA, JR. and
CHRISTOFER L. LIM), respondents.
Agapito S. Fajardo, Jerry P. Rebutoc & Antonio M. Tan for petitioners in G.R. No.
88353.
Leonida G.T. Encarnacion for petitioners in G.R. No. 92943.
Quiason, Makalintal, Barot, Torres, Ibarra Law Office for the respondents in G.R. Nos.
88353 & 92943.
DAVIDE, JR., J.:
The common origin of these cases is Civil Case No. 17692 filed before Branch 147
(Makati) of the Regional trail Court, National Capital Judicial Region and entitled
Producers Bank of the Philippines and Producers Properties, Inc. versus Central Bank of
the Philippines, Jose B. Fernandez. Jr. and the Monetary Board. On 21 January 1991, this
Court ordered the consolidation of G.R. No. 92943 with G.R. No. 88353. 1
The first case, G.R. No. 88353, is a petition for review on certiorari of the decision of 6
October 19882 and the resolution of 17 May 19893 of the respondent Court of Appeals in
C.A.-G.R. No. SP-13624. The impugned decision upheld the 21 September 1987 Order
of respondent Judge Teofilo Guadiz, Jr. in Civil Case No. 17692 granting the motion for
issuance of a writ of preliminary injunction –– enjoining petitioners Central Bank of the
Philippines (CB), Mr. Jose B. Fernandez, Jr. and the Monetary Board, or any of their
agencies from implementing Monetary Board (MB) Resolutions No. 649 and No. 751, or
from taking the threatened appropriate alternative action –– and the 27 October 1987
Order in the same case denying petitioners' motion to dismiss and vacate said injunction.
The challenged resolution, on the other hand, denied petitioners' motion for
reconsideration of the 6 October 1988 decision.
The second case, G.R. No. 92943, is a petition for review directed principally against the
17 January 1990 decision of the respondent Court of Appeals in C.A.-G.R. SP No. 16972.
The said decision dismissed the petition therein filed and sustained the various Orders of
the respondent Judge in Civil Case No. 17692, but directed the plaintiffs therein to amend
the amended complaint by stating in its prayer the specific amount of damages which
Producers Bank of the Philippines (PBP) claims to have sustained as a result of losses of
operation and the conservator's bank frauds and abuses; the Clerk of Court was also
17
ordered to determine the amount of filing fees which should be paid by the plaintiffs
within the applicable prescriptive or reglementary period. 4
The records of both cases reveal the following factual and procedural antecedents:
Petitioners claim that on 29 April 1983, during the regular examination of the PBP, CB
examiners stumbled upon some highly questionable loans which had been extended by
the PBP management to several entities. Upon further examination, it was discovered that
these loans, totalling approximately P300 million, were "fictitious" as they were
extended, without collateral, to certain interests related to PBP owners themselves. Said
loans were deemed to be anomalous particularly because the total paid-in capital of PBP
at that time was only P 140.544 million. This means that the entire paid-in capital of the
bank, together with some P160 million of depositors' money, was utilized by PBP
management to fund these unsecured loans.
Sometime in August of the same year, at the height of the controversy surrounding the
discovery of the anomalous loans, several blind items about a family-owned bank in
Binondo which granted fictitious loans to its stockholders appeared in major newspapers.
These news items triggered a bank-run in PBP which resulted in continuous over-
drawings on the bank's demand deposit account with the Central Bank; the over-drawings
reached P74.109 million by 29 August 1983. By 17 January 1984, PBP's overdraft with
the CB increased to P143.955 million, an indication of PBP's continuing inability to
maintain that condition of solvency and liquidity necessary to protect the interests of its
depositors and creditors. Hence, on 20 January 1984, on the basis of the report submitted
by the Supervision and Examination Sector, Department I of the CB, the Monetary Board
(MB), pursuant to its authority under Section 28-A of R.A. No. 265 and by virtue of MB
Board Resolution No. 164, placed PBP under conservatorship. 5
While PBP admits that it had no choice but to submit to the conservatorship, 6 it
nonetheless requested that the same be lifted by the CB. Consequently, the MB issued on
3 February 1984 Resolution No. 169 directing the principal stockholders of PBP to
increase its capital accounts by such an amount that would be necessary for the
elimination of PBP's negative net worth of P424 million. On 10 April 1984, CB senior
deputy Governor Gabriel Singson informed PBP that pursuant to MB Resolution No. 490
of 30 March 1984, the CB would be willing to lift the conservatorship under the
following conditions:
(a) PBP's unsecured overdraft with the Central Bank will be converted into an emergency
loan, to be secured by sufficient collateral, including but not limited to the Following
properties offered by PBP's principal stockholders:
i. 6 floors and other areas of the Producers Bank Bldg., at Paseo de Roxas, owned by
PBP;
ii. 15 floors of the Producers Bank Bldg., at Paseo de Roxas, Makati, owned by the
Producers Properties, Inc.;
iii. Manhattan Bldg. on Nueva Street, Binondo, Manila; and
iv. Producers Bank, Makati Branch Bldg. at Buendia Avenue, Makati;
(b) A comptroller for PBP and any number of bank examiners deemed necessary to
oversee PBP's operations shall be designated by the Central Bank, under terms of
reference to be determined by the Governor;
(c) A letter from the Management of PBP authorizing the Central Bank to automatically
return clearing items that would result in an overdraft in its Central Bank account shall be
submitted to the Central Bank.
On 27 April 1984, the MB adopted Resolution No. 584 approving the consolidation of
PBP's other unsecured obligations to the CB with its overdraft and authorizing the
conversion thereof into an emergency loan. The same resolution authorized the CB
Governor to lift the conservatorship and return PBP's management to its principal
stockholders upon completion of the documentation and full collateralization of the
emergency loan, but directed PBP to pay the emergency loan in five (5) equal annual
installments, with interest and penalty rates at MRR 180 days plus 48% per annum, and
liquidated damages of 5% for delayed payments.
On 4 June 1984, PBP submitted a rehabilitation plan to the CB which proposed the
transfer to PBP of three (3) buildings owned by Producers Properties, Inc. (PPI), its
principal stockholder and the subsequent mortgage of said properties to the CB as
collateral for the bank's overdraft obligation. 7 Although said proposal was explored and
discussed, no program acceptable to both the CB and PPI was arrived at because of
disagreements on certain matters such as interest rates, penalties and liquidated damages.
No other rehabilitation program was submitted by PBP for almost three (3) years; as a
result thereof, its overdrafts with the CB continued to accumulate. By the end of June
1987, the figure swelled to a staggering P1.023 billion.Consequently, per Resolution No.
649 dated 3 July 1987, the CB Monetary Board decided to approve in principle what it
considered a viable rehabilitation program for PBP. The program had these principal
features:
Al. The Central Bank will assign in favor of the Philippine Deposit Insurance
Corporation (PDIC) its claim over the overdraft of PBP net of net peso differential arising
from swap transactions and interest thereon, up to the amount of the par value of the
Producers Properties, Inc. (PPI) shares of stock in PBP presently pledged to the Central
Bank, and PDIC will enter into a contract of dacion en pago with PBP and PPI whereby
PDIC will acquire 4,116,100 preferred shares of stock of PBP with a par value of P100
per share in consideration for which PDIC will convey its rights over the overdraft
assigned to it by the Central Bank, in favor of PPI;
2. The balance of the overdraft of PBP, after the assignment to PDIC of a portion of such
overdraft referred to in Item I above, will also be assigned to PDIC and converted into
preferred shares of stock of PBP;
3. The interest on the overdraft of PBP will be reduced to 11.75% p.a. retroactively to the
date when the overdraft of PBP was incurred;
4. The accrued interest on the overdraft of PBP, at the reduced rate approved in Item 3
above, as well as the unbooked penalties on legal reserve deficiencies of PBP will be
assigned in favor of PDIC and such amounts will be allowed to be converted into
preferred shares of stock of PBP; and
5. The booking of valuation reserves will be allowed as follows:
3rd year — P31 million
4th year — 48 million
5th year — 67 million
6th year — 85 million
7th year — 105 million
8th year — 124.61 million
subject to the following conditions:
a. Fresh capital of P200.0 million shall be put up, provided that a new group of
stockholders shall hold at least 40% of the total outstanding voting shares of stock of
PBP;
b. PBP shall submit additional collaterals to fully collateralize its overdraft with the
Central Bank;
18
c. PPI shall convey to PBP the remaining floors of the Producers Bank Centre for a value
of P143.54 million partly in payment of DOSRI loans of P27.6 million, principal plus
interest, and the balance of P115.94 million for shares of stock of PBP, P15.12 million
common and P100.89 million preferred, with features as presently provided under PBP's
Articles of Incorporation and By-Laws;
d. PBP's Articles of Incorporation and By-Laws shall be amended so as to create a
special class of preferred, non-voting, cumulative, non-participating shares of stock with
a dividend rate of 12% which shall be issued (i) in exchange for the PPI shares that will
be conveyed to PDIC under the dacion en pago mentioned in Item 1 above, (ii) in
consideration of the balance of PBP's overdraft assigned to PDIC under Item 2 above,
(iii) in consideration of the accrued interest on PBP's overdraft assigned to PDIC and the
unbooked penalties on legal reserve deficiencies of PBP also assigned to PDIC. The said
preferred shares of stock shall be convertible into common voting shares of stock upon
the sale of such preferred shares to private parties at the option of such parties. Proceeds
from the sale of these shares of stock shall be used to liquidate the advances made by the
Central Bank to PDIC by virtue of the various assignments under Items 1, 2, and 4 above.
The said shares of stock shall not share in losses and other capital adjustments
representing reduction of capital accounts as recommended by SES Department I
incurred up to the date of the issuance of such shares of stock;
e. PBP shall execute in favor of a trustee to be approved by the Central Bank of mortgage
trust indenture covering the assets presently mortgaged/pledged to Central Bank as
collateral for the overdraft of PBP as well as additional collaterals to be submitted to fully
collateralize the overdraft of PBP, under which indenture PDIC as holder of preferred
shares of stocks, shall have the first lien and preference over the assets subject of the
indenture in case of insolvency, to the extent of the overdraft converted into preferred
shares of stock, provided that PBP shall submit an opinion from the Securities and
Exchange Commission that such indenture is legal and valid; and
f. The principal stockholders of both PBP and PPI shall submit in writing their
conformity to the above conditions, with the effect that any previous agreements to the
contrary shall be set aside; and
B. To require PBP to submit to the Monetary Board for approval the identities of the new
stockholders and the new management which shall not be changed without the prior
approval of the Central Bank, it being understood that final approval of the above
rehabilitation plan shall depend entirely upon the acceptance by the Board of the new
stockholders and the new management; and to give PBP a period of two weeks after such
final approval within which to implement the above rehabilitation plan 8 (Emphasis
supplied).
There being no response from both PBP and PPI on the proposed rehabilitation plan, the
MB issued Resolution No. 751 on 7 August 1987 instructing Central Bank management
to advise the bank, through Mr. Henry Co, as follows:
a. The Central Bank conservatorship over PBP may be lifted only after PBP shall have
identified the new group of stockholders who will put in new capital in PBP and after the
Monetary Board shall have considered such new stockholders as acceptable; and
b. The stockholders of PBP have to decide whether or not to accept the terms of the
rehabilitation plan as provided under Resolution
No. 649 dated July 3, 1987 within one week from receipt of notice hereof and if such
terms are not acceptable to them, the Central Bank will take appropriate alternative action
on the matter; . . .9
Additionally, in a letter dated 14 August 1987, the CB called the attention of the PBP
directors and officers to Section 107 of R.A. No. 265, as amended by Executive Order
No. 289 dated 23 July 1987, which provides, inter alia, that:
. . . any bank which incurs an overdrawing in its deposit account with the Central Bank
shall fully cover said overdraft not later than the next clearing day: Provided, further,
That settlement of clearing balances shall not be effected for any account which continue
(sic) to be overdrawn for five consecutive banking days until such time as the
overdrawing is fully covered or otherwise converted into an emergency loan or
advance pursuant to the provisions of Sec. 90 of this Act. Provided, Finally, That the
appropriate clearing office shall be officially notified of banks with overdrawn
balances. Banks with existing overdrafts with the Central Bank as of the effectivity of this
amended section shall within such period as may be prescribed by the Monetary Board,
either convert the overdraft into an emergency loan or advance with a plan of payment,
or settle such overdrafts, and that upon failure to so comply herewith, the Central Bank
shall take such action against the bank as may be warranted under this Act.(Emphasis
provided).
A. few days later, or on 27 August 1987, the PBP, without responding to the
communications of the CB, filed a complaint verified by its former board chairman,
Henry Co, with the Regional Trial Court of Makati against the CB, the MB and CB
Governor Jose B. Fernandez, Jr. The complaint, docketed as Civil Case No.
17692, 10 devoted several pages to specific allegations in support of PBP's assertions that
the conservatorship was unwarranted, ill-motivated, illegal, utterly unnecessary and
unjustified; that the appointment of the conservator was arbitrary; that herein petitioners
acted in bad faith; that the CB-designated conservators committed bank frauds and
abuses; that the CB is guilty of promissory estoppel; and that by reason of the
conservatorship, it suffered losses enumerated in paragraph 27 thereof, the total
quantifiable extent of which is P108,479,771.00, exclusive of loss of profits and loss of
goodwill. 11 It concluded with a prayer for:
. . . judicial review of Monetary Board Resolutions No. 649 dated July 3, 1987 and No.
751 dated 14 August, 1987 and that judgment be rendered nullifying the same and
ordering defendant Central Bank's conservator to restore the viability of PBP as
mandated by section 28-A of R.A. 265 and to fully repair the damages inflicted on PBP
consisting of losses of operation and the conservators' bank frauds and abuses, with costs
against defendants. (emphasis supplied).
and for:
. . . the issue of a temporary restraining order/preliminary injunction enjoining
defendants' coercion on PBP to accept the rehabilitation plan within one week or their
taking "appropriate alternative action" including exclusion of PBP from settlement of
clearing balances at the Central
Bank clearing house, pending judicial review of Monetary Board Resolutions No. 649
dated July 3, 1987 and No. 751 dated August 14,
1987 –– defendants not being above the law. 12
Only P102.00 was paid as docket fee.
The case was raffled to Branch 147 of said court which was then presided over by
respondent Judge.
On 31 August 1987, respondent Judge issued a temporary restraining order and set the
hearing of the application for preliminary injunction on 9 September 1987. 13 On 11
September 1987, petitioner filed an Opposition to the application for preliminary
injunction. 14
19
Subsequently, on 21 September 1987, respondent Judge issued an Order granting the
writ 15 and enjoining defendant-petitioners or any of their agents from:
. . . implementing Monetary Board Resolutions Nos. 649 and 751 or from taking the
threatened "appropriate alternative action" including exclusion of plaintiff bank from
settlement of clearing balances at the Central Bank clearing house or any other action that
will disturb the status quo or the viability of plaintiff bank during the pendency of this
case conditioned upon the posting of a bond in the amount of P2,000,000.00.
On 25 October 1987, PBP filed the Amended Complaint 16 impleading PPI as an
additional plaintiff. No new allegations or causes of action for said plaintiff were made.
On 5 November 1987, petitioners filed a Motion to Dismiss the Amended Complaint.
The motion contained a prayer to vacate the injunction and raised the following grounds:
1) the amended complaint states no cause of action; MB Resolution Nos. 649 and 751 are
merely advisory, thus, neither effect impairment of plaintiffs' rights nor cause it
prejudice, loss or damage; furthermore, there is no basis for the averments on the legality
or illegality of the conservatorship since the amended complaint does not seek its
annulment;
2) the amended complaint is not authorized by the management of PBP; and
3) the lower court did not acquire jurisdiction over the case except to order the amended
complaint expunged from the records because the proper filing fee was not paid. 17
On 27 November 1987, the trial court, through the respondent Judge, handed down an
Order denying the motion to dismiss on the following grounds: (a) the amended
complaint alleges ultimate facts showing that plaintiff has a right and that such a right has
been violated by defendant; the questioned MB Resolutions were issued arbitrarily and
with bad faith, "being a part of a scheme to divest plaintiff's present stockholders of their
control of PBP and to award the same to the PDIC or its unknown transferees"; and the
averments of legality or illegality of the conservatorship are relevant to the cause of
action since the complaint seeks the lifting of the conservatorship; (b) While it is true that
under Section 28-A of the Central Bank Act the conservator takes over the management
of a bank, the Board of Directors of such bank is not prohibited from filing a suit to lift
the conservatorship and from questioning the validity of both the conservator's fraudulent
acts and abuses and its principal's (MB) arbitrary action; besides, PPI is now a party-
plaintiff in the action; and (c) plaintiffs have paid the correct filing fees since "the value
of the case cannot be estimated." 18
G.R. No. 88353
Unable to accept the above Order, herein petitioners CB and Jose B. Fernandez, Jr. filed
with respondent Court of Appeals on 11 January 1988 a petition for certiorari with
preliminary injunction 19 to annul the 21 September and 27 November 1987 Orders of
the respondent Judge, restrain the implementation of the same and nullify the writ of
preliminary injunction. They contend therein that:
1. The trial court's injunctive order and writ are anomalous and illegal because they are
directed against CB acts and measures which constitute no invasion of plaintiff's rights;
and
2. The complaint filed was, on its face, dismissible: (a) for failure to state a cause of
action, (b) for being unauthorized by the party in whose name it purports to have been
filed, and (c) for failure of the purported plaintiff to pay the required filing fees.
Confronted with the "threshold and decisive issue of whether the respondent Judge
gravely abused his discretion when he issued the Writ of Preliminary Injunction to enjoin
petitioner from implementing Monetary Board Resolutions Nos. 649 and 751 for having
been issued arbitrarily and with bad faith," the respondent Court promulgated the
challenged decision dismissing the petition for lack of merit. 20 Respondent Court ruled
that the CB's sudden and untimely announcement of the conservatorship over PBP eroded
the confidence which the banking public had hitherto reposed on the bank and resulted in
the bank-run; it then concluded that when the CB "peremptorily and illtimely (sic)
announced" the conservatorship, PBP was not given an opportunity to be heard since the
CB arbitrarily brushed aside administrative due process notwithstanding PBP's having
sufficiently established its inherent corporate right to autonomously perform its banking
activities without undue governmental interference that would in effect divest its
stockholders of their control over the operations of the bank." It further held that the
challenged resolutions of the MB are not just advisory in character "because the same
sought to impose upon the respondent bank petitioners' governmental acts that were
specifically designed and executed to devise a scheme that would irreparably divest from
the stockholders of the respondent bank control of the same."
The motion filed by petitioners for the reconsideration of the above decision was denied
by the respondent Court in its Resolution of 17 May
1989. 21 On the issue of the non-payment of the correct docket fees, the said court, in
ruling that the correct amount was paid, said that "the instant case is incapable of
pecuniary estimation because the value of the losses incurred by the respondent bank
cannot be calibrated nor pinned down to a specific amount in view of the damage that
may be caused by the appointment of a conservator to its goodwill and standing in the
community."
Undaunted by the adverse decision of the Court of Appeals, petitioners filed with this
Court on 30 July 1989 the instant petition for review under Rule 45 of the Rules of
Court. 22 It is alleged therein that the respondent Court committed grave abuse of
discretion in:
(1) Ignoring petitioners' contention that since PBP did not pay the correct filing fees, the
trial court did not acquire jurisdiction over the case; hence, pursuant to Manchester
Development Corp., et al. vs.Court of Appeals, et al., G.R. No. 75919, 7 May
1987, 23 the complaint should have been dismissed for lack of jurisdiction on the part of
the court;
(2) . . . ruling on the propriety or impropriety of the conservatorship as a basis for
determining the existence of a cause of action since the amended complaint does not seek
the annulment or lifting of the conservatorship;
(3) . . . not holding that the amended complaint should have been dismissed because it
was filed in the name of PBP without the authority of its conservator; and
(4) . . . not setting aside the Order of the trial court granting the issuance of a writ of
preliminary injunction which unlawfully restrained the CB from exercising its mandated
responsibilities and effectively compelled it to allow the PBP to continue incurring
overdrafts with it.
This petition was docketed as G.R. No. 88353.
On 19 July 1989, this Court required the respondents to comment on the petition. 24
In the Comment 25 filed on 9 October 1989, private respondents maintain that: (a) the
issue of whether or not they paid the correct filing fees involves a question of correctness
of judgment, not grave abuse of discretion; errors of judgment cannot be the subject of
the present petition for certiorari; (b) the complaint and the amended complaint state
sufficient causes of action because they both contain specific allegations of an illegal,
unnecessary, disastrous and repressive conservatorship conducted contrary to its
mandated purpose, and breach of promissory estoppel; furthermore, the trial court
committed no grave abuse of discretion when it found that the questioned MB
20
Resolutions were arbitrarily issued in contravention of the due process clause of the
Constitution; (c) the "Filing of the complaint without authority from the conservator is an
issue involving an error of judgment; besides, it would be ridiculous and absurd to
require such prior authorization from the conservator for no one expects him to sanction
the filing of a suit against his principal –– the CB; moreover, Rule 3 of the Rules of Court
requires that every action must be prosecuted and defended in the name of the real party
in interest; besides, no administrative authority, even the CB, can nullify judicial review
of administrative action by requiring that only said administrative authority or its
designated conservator can file suit for judicial review of its actuation; and (d) the writ of
preliminary injunction was properly issued.
Petitioners filed a Reply 26 to the Comment on 3 November 1989.
In their Supplemental Comment, private respondents argue that the Manchester rule is
not applicable in the case at bar because what is primarily sought for herein is a writ of
injunction and not an award for damages; it is further alleged that an order denying a
motion to dismiss is neither appealable nor be made the proper subject of a petition
for certiorari absent a clear showing of lack of jurisdiction or grave abuse of discretion.
On 15 February 1990, this Court resolved to give due course to the instant petition and
require the parties to simultaneously file their respective Memoranda, 27 which they
complied with.
On 1 March 1990, petitioners filed an Urgent Motion 28 informing this Court of the fact
that on 6 June 1989, PBP, through Henry Co, proposed another rehabilitation plan which
involved the infusion of fresh capital into PBP by Banque Indosuez (Bangue) and the
AFP-Retirement and Separation Benefits Systems (ARSBS). Under said proposal, all
existing law suits of PBP against the Central Bank and the PBP Conservator, and vice-
versa, shall be withdrawn upon approval and implementation of the plan. The plan was
approved by the Monetary Board in its Resolution No. 497 dated 23 June 1989. However,
before the mechanics of the rehabilitation plan could be threshed out among the parties, a
"quarrel" developed between Henry and Luis Co, who both have controlling interests in
PBP. Luis accused Henry of "serious manipulations" in PBP and both steadfastly refused
to settle their differences notwithstanding efforts of mediators, including prospective
investors. Eventually, the prospective investors, in a letter dated 20 November 1989,
advised the Central Bank that they are withdrawing their offer to infuse capital in PBP
and that they have terminated all discussions with the Co family.
Petitioner further allege that with the withdrawal of Banque Indosuez and RSBS, the
rehabilitation plan for PBP is no longer feasible. Meanwhile, the bank's overdraft with the
Central Bank continues to rise. As of 13 February 1990, PBP's overdraft with the CB
increased to P1.233 billion. If the injunction is not lifted, PBP will continually bleed the
CB because of the former's liability to discharge its responsibilities under the law.
G.R. No. 92943
Pursuant to the powers and authority conferred upon her by the Central Bank, Atty.
Leonida Tansinsin-Encarnacion, in her capacity as conservator, instituted reforms aimed
at making PBP more viable. With this purpose in mind, she started reorganizing the
bank's personnel and committees.
In order to prevent her from continuing with the reorganization, PBP filed on 24 October
1987, or after it obtained a writ of preliminary injunction in Civil Case No. 17692, an
Omnibus Motion asking the trial court for an order:
(a) reinstating PBP officers to their original positions and restoring the bank's standing
committees to their respective compositions prior to said reorganization; (b) enjoining the
lease of any portion of the bank's space in Producers Bank Centre building to third parties
and the relocation of departments/offices of PBP as was contemplated; and (c) to hold,
after an opportunity to be heard is given her, said conservator in contempt of court for
disobedience of and resistance to the writ of injunction. An opposition to the contempt
charge was later filed by said petitioner.
Subsequently, upon its inclusion as party-plaintiff via the amended complaint, PPI filed
on 4 November 1987 a motion asking the lower court to order the Central Bank and its
agents to restore to PPI the administration of the three (3) buildings earlier assigned to
PBP pending the lifting of the conservatorship. PPI claimed that such transfer was
necessary to prevent the rental income of said buildings being dissipated by the
conservator.
On 17 November 1987, both PBP and PPI filed a motion praying:
(1) that the CB Conservator be ordered to publish PBP's financial statement for the last
quarter of 1987 and every quarterly statement thereafter during the pendency of this case,
with the following claims of plaintiff PBP against the Central Bank, to wit:
(a) Interest in unconscionable rates of CB overdrawing illegally paid by the CB
conservators to CB –– now totaling P56,002,000.00,
(b) Penalties on reserve deficiencies illegally paid by the CB conservators to CB –– now
totaling P20,657,000.00,
(c) Penalties on reserve deficiencies not yet paid but which the conservator has booked as
liabilities –– now totaling P31,717,000.00,
(d) Losses of operation by the CB conservators from January 31, 1984 to October 31,
1987 –– now totaling P461,092,000.00
as "suspense" accounts; and (2) that the CB conservator be ordered to carry those
"suspense" accounts in the books of PBP.
The following day, respondent Judge issued an Order (a) requiring conservator
Tansinsin-Encarnacion to reinstate PBP officers to their original positions prior to the
reorganization of the bank's personnel and restore PBP's standing committees to their
original compositions, and (b) restraining her from leasing out to third parties any portion
of PBP's space in the Producers Bank Centre building. However, respondent Judge held
in abeyance the contempt proceedings against the conservator pending her immediate
compliance with the Order.
On 22 December 1987, respondent Judge granted PPI's motion for an order transferring
to it the administration of the three (3) buildings assigned to PBP. A motion for
reconsideration of this order was filed by petitioners but was subsequently denied by
respondent Judge in the Order of 4 October 1988.
A second Order, issued by respondent Judge on the same day, 22 December 1987,
directed conservator Tansinsin-Encarnacion to publish the financial statement of PBP in
the manner prayed for in the aforesaid 17 November 1987 motion. The motion to
reconsider this Order was denied by respondent Judge on 3 October 1988.
On several occasions thereafter, conservator Tansinsin-Encarnacion caused the
publication of PBP's financial statement as required by regulations, without, however,
carrying the items enumerated by the trial court as "suspense accounts." Consequently,
two (2) contempt charges were filed against her, one for the 3 February 1988 publication
in the Manila Standard of PBP's statement of condition as of 29 December 1987 and the
other for the 29 July 1988 publication in the Daily Globe of the bank's statement as of 30
June 1988. Oppositions to both charges of contempt were filed.
On 9 November 1988, respondent Judge declared said conservator guilty of contempt of
court on three (3) counts and imposed upon her a fine of P1,000.00 for each count of
21
contempt. The latter asked for reconsideration of the order but the respondent Judge
denied the same.
Another contempt charge against her was filed for publishing the statement of condition
of PBP (as of 13 September 1988) in the 9 November 1988 issue of the Daily
Globe without carrying the alleged "suspense accounts." She was again found guilty as
charged and her motion for reconsideration was denied. Finding no other adequate relief,
Tansinsin-Encarnacion filed with this Court on 11 January 1989 a petition
for certiorari against respondent Judge, Henry L. Co and the law firm of Quisumbing,
Torres and Evangelista. This case was docketed as G.R. No. 86526. She prays therein for
judgment declaring respondent judge to be without jurisdiction to entertain both the
complaint and amended complaint in Civil Case No. 17692; declaring null and void all
his orders, specially the contempt orders; and finding respondent Judge and respondent
lawyers guilty of violating their respective oaths of office. 29
On 8 February 1989, this Court resolved to refer said petition to the Court of Appeals
which docketed it as C.A.-G.R.-SP No. 16972.
In her Memorandum submitted to the Court of Appeals, Tansinsin-Encarnacion alleged
that: (1) respondent Judge has no jurisdiction over Civil Case No. 17692 because its
filing was not authorized by the petitioner or the conservator in violation of Section 28-A
of R.A. No. 265, as amended, it was filed after the ten (10) day period prescribed by
Section 29 of R.A. No. 265, as amended, and the correct docket fees were not paid; (2)
respondent Judge illegally ordered her to return to PPI the administration of the bank's
three (3) properties, contrary to his own writ of preliminary injunction and earlier order
to make the bank viable, and to publish the alleged "suspense accounts" contrary to
Section 28-A of R.A. No. 265, as amended, the writ of preliminary injunction and her
constitutional right to silence; (3) respondent Judge erred in declaring her in contempt of
court notwithstanding his lack of jurisdiction over the case and failure to set any date for
the hearing and reception of evidence, in violation of her right to due process of law; and
(4) respondents Judge and lawyers are administratively liable for their grossly illegal
actuations and for depriving the Government of at least P13.2 million in filing fees. 30
In its decision dated 17 January 1990, the Court of Appeals (Twelfth
Division) 31 dismissed the petition; while finding the claim of lack of jurisdiction to be
without merit, the said court nonetheless gave the following exception:
. . . except that plaintiffs in Civil Case No. 17692, within 15 days from receipt of a copy
of this Decision, shall file the corresponding amendment to their amended complaint in
said case, stating a specific amount "to fully repair the damages inflicted on PBP
consisting of losses of operation and the conservator's bank frauds and abuses", in the
prayer of their amended complaint. Thereafter, the Clerk of Court of the lower court
and/or his duly authorized Docket Clerk of Court in charge, should determine the amount
found due, which should be paid by complainants within the applicable prescriptive or
reglementary period, failure of which said claims for damages shall be dismissed.
In disposing of the issues raised, respondent Court merely adopted with approval the
ruling of the respondent Judge on the question of jurisdiction and cited the decision of the
Court of Appeals in C.A.-G.R. SP No. 13624 (subject of G.R. No. 88353), sustaining the
respondent Judge's ruling. As to the filing of the complaint after the lapse of the 10-day
period provided for in Section 29 of R.A. No. 265, it ruled that the Section does not apply
because the complaint essentially seeks to compel the conservator to perform his duties
and refers to circumstances and incidents which transpired after said 10-day period.
On the issue of lack of jurisdiction for non-payment of correct filing fees, to which an
exception was made in the dispositive portion, the respondent Court found the same to be
"partly" meritorious. It agreed with petitioner that while the other losses and damages
sought to be recovered are incapable of pecuniary estimation, the damages inflicted on
PBP due to losses of operation and the conservator's bank frauds and abuses were in fact
pegged at P108,479,771.00 in paragraph 26 of the amended complaint. This specific
amount, however, should have been stated in the prayer of the complaint. It also held that
the Manchester case "has been legally construed in the subsequent case of Sun Insurance
Office Ltd. 32 and the case of Filipinas Shell Petroleum Corp. 33 to the effect that
applying the doctrine initiated in the case of Manchester, together with said subsequent
thereto (sic), plaintiffs in Civil Case No. 17692 should be given a reasonable time to
amend their complaint, more particularly, to state in their prayer in the amended
complaint the specific amount of damages . . ."
On the orders of contempt and the reasons therefor, respondent Court merely stated:
. . . Generally, when the court has jurisdiction over the subject matter and of the person,
decisions upon or questions pertinent to the cause are decisions within its jurisdiction,
and however, irregular or erroneous they may be, they cannot be corrected by certiorari
Whether the court's conclusions was based merely on speculations and conjecture, or on
a misapprehension of facts contrary to the documents and exhibits of the case, is not for
us to determine in a petition for certiorari wherein only issues of jurisdiction may be
raised. . . . Thus, the instant petition cannot prosper.
and opined that under the Rules of Court, a judgment of contempt may be questioned on
appeal and not on certiorari.
Finally, on the administrative liability of the respondent Judge and the lawyers, the
respondent Court declared the claim to be without merit.
Petitioner's motion to reconsider the decision having been denied in the 2 April 1990
Resolution of the respondent Court, 34 she filed with this Court a petition under Rule 45
of the Rules of Court, which was docketed as G.R. No. 92943. Petitioner Claims that
respondent Court grossly erred in confirming/affirming the allegedly void Orders of
respondent Judge which denied the motion to dismiss the complaint and granted the writ
of preliminary injunction, restating in this regard the issues raised by the CB in G.R.
No. 88353, and in holding her in contempt of court on four occasions. As to the last
ground, she asserts that the Orders were issued in violation of the Rules of Court and
infringed her right to due process since there was no hearing on the motions for contempt,
except for the third motion wherein respondent Judge immediately ordered the movant to
present evidence.
In their Comment, 35 filed in compliance with Our Resolution 21 May 1990, private
respondents practically reiterated the arguments in their Comment to the petition in G.R.
No. 88353; in addition, more specifically on the issue of contempt, they assert that while
the motions for contempt were set for hearing, there is no showing that the scheduled
hearings actually took place. Besides, the remedy to question a contempt order is an
appeal; 36 since petitioner did not appeal the questioned orders, the same became final
and executory. 37
After petitioner filed a Reply and private respondents submitted their Rejoinder thereto,
this Court gave due course to the petition.
THE ISSUES
The basic issue in these cases is whether or not the respondent Court committed
reversible error in affirming the challenged Orders of the respondent Judge. This
necessarily calls for a determination of whether or not the respondent Judge committed
grave abuse of discretion amounting to lack of jurisdiction:
22
(1) In not dismissing Civil Case No. 17692 on the following grounds: (a) lack of legal.
personality to bring the action as the same was filed in the name of the PBP without the
authority of the conservator;
(b) failure of the complaint and amended complaint to state a cause of action; and (c)
non-payment of the correct amount of docket fee in violation of the rule enunciated
in Manchester Development Corp.vs. Court of Appeals, et al.;
(2) In granting the writ of preliminary injunction; and
(3) In issuing the assailed Orders in G.R. No. 92943.
DISCUSSION
We shall take up the issues sequentially.
1. PBP has been under conservatorship since 20 January 1984. Pursuant to Section 28-A
of the Central Bank Act, 38 a conservator, once appointed, takes over the management of
the bank and assumes exclusive powers to oversee every aspect of the bank's operations
and affairs. Petitioners now maintain that this power includes the authority to determine
"whether or not to maintain suit in the bank's name." 39 The trial court overruled this
contention stating that the section alluded to "does not prohibit the Board of Directors of
a bank to file suit to lift the conservatorship over it, to question the validity of the
conservator's fraudulent acts and abuses and the arbitrary action of the conservator's
principal –– the Monetary Board of the Central Bank. The conservator cannot be
expected to question his own continued existence and acts. He cannot be expected to file
suit to annul the action of his principal . . . or a suit that would point out the ill-
motivation, the disastrous effects of the conservatorship and the conservator's bank frauds
and abuses as alleged in the complaint." 40
Obviously, the trial court was of the impression that what was sought for in Civil Case
No. 17692 is the lifting of the conservatorship because it was arbitrarily and illegally
imposed. While it may be true that the PBP devoted the first 38 pages of its 47-page
complaint and amended complaint to what it considers an unwarranted, ill-motivated,
illegal, unnecessary, and unjustified conservatorship, it, nevertheless, submitted to the
same. There is nothing in the amended complaint to reflect an unequivocal intention to
ask for its lifting. Of course, as subsequent maneuvers would show, PBP sought to
accomplish the lifting thereof through surreptitious means. That such action was not, on
its face, filed to have the conservatorship lifted, is best evidenced by PBP's prayer for a
judgment "ordering defendant Central Bank's conservator to restore the viability of PBP
as mandated by Section 28-A of R.A. No. 265 . . ." 41 Unfortunately too, respondent
Court was easily misled into believing that the amended complaint sought the lifting of
the conservatorship. Thus, although the matter was not specifically raised in issue and
clearly unnecessary for the determination of the issues squarely raised, the respondent
Court opined:
It is Our sober assessment that the respondent bank was not given an opportunity to be
heard when the Central Bank peremptorily and illtimely (sic) announced the appointment
of a conservatorship over the latter (bank) for which reason We believe that
administrative due process was arbitrarily brushed aside to the prejudice of the said bank.
...
If it were to lift the conservatorship because it was arbitrarily imposed, then the case
should have been dismissed on the grounds of prescription and lack of personality to
bring the action. Per the fifth paragraph of Section 29 of the Central Bank Act, as
amended by Executive Order No. 289, the actions of the MB may be assailed in an
appropriate pleading filed by the stockholders of record representing the majority of the
capital stock within ten (10) days from receipt of notice by the said majority stockholders
of the order placing the bank under conservatorship. The pertinent portion of said
paragraph reads as follows:
The provisions of any law to the contrary notwithstanding, the actions of the Monetary
Board under this Section, Section 28-A, and the second paragraph of section 34 of this
Act shall be final and executory, and can be set aside by a court only if there is
convincing 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 the capital stock within ten (10) days
from the date the receiver takes 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 or liquidation. . . .
The following requisites, therefore, must be present before the order of conservatorship
may be set aside by a court:
1. The appropriate pleading must be filed by the stockholders of record representing the
majority of the capital stock of the bank in the proper court;
2. Said pleading must be filed within ten (10) days from receipt of notice by said majority
stockholders of the order placing the bank under conservatorship; and
3. There must be convincing proof, after hearing, that the action is plainly arbitrary and
made in bad faith. 42
In the instant case, PBP was placed under conservatorship on 20 January 1984. The
original complaint in Civil Case No. 17692 was filed only on 27 August 1987, or three
(3) years, seven (7) months and seven (7) days later, long after the expiration of the 10-
day period deferred to above. It is also beyond question that the complaint and the
amended complaint were not initiated by the stockholders of record representing the
majority of the capital stock. Accordingly, the order placing PBP under conservatorship
had long become final and its validity could no longer be litigated upon before the trial
court. Applying the original provision of the aforesaid Section 29 of the Central Bank
Act, this Court, in Rural Bank of Lucena, Inc. vs. Arca, et al., 43 ruled that:
Nor can the proceedings before Judge Arca be deemed a judicial review of the 1962
resolution No. 122 of the Monetary Board, if only because by law (Section 29, R.A. 265)
such review must be asked within 10 days from notice of the resolution of the Board.
Between the adoption of Resolution No. 122 and the challenged order of Judge Arca,
more than one year had elapsed. Hence, the validity of the Monetary Board's resolution
can no longer be litigated before Judge Arca, whose role under the fourth paragraph of
section 29 is confined to assisting and supervising the liquidation of the Lucena bank.
This rule is still good law notwithstanding the amendment to Section 29 which expands
its scope by including the action of the MB under Section 28-A of the Act on the
appointment of a conservator.
It was precisely an awareness of the futility of any action to set aside the conservatorship
which prompted PBP to limit its action to a claim for damages and a prayer for an
injunction against the implementation of MB Resolution Nos. 649 and 751. However, to
make it appear that it had a meritorious case and a valid grievance against the Central
Bank, it wandered long into the past and narrated a sad story of persecution, oppression
and injustice since the inception of the conservatorship –– obviously to gain the
sympathy of the court, which it eventually obtained.
The next crucial question that suggests itself for resolution is whether an action for
damages arising from the MB's act of placing the PBP under conservatorship and the acts
23
of the conservator, and to enjoin the MB from implementing resolutions related or
incident to, or in connection with the conservatorship, may be brought only for and in
behalf of the PBP by the stockholders on record representing the majority of the capital
stock thereof or simply upon authority of its Board of Directors, or by its Chairman. We
hereby rule that as to the first kind of damages, the same may be claimed only if the MB's
action is plainly arbitrary and made in bad faith, and that the action therefor is inseparable
from an action to set aside the conservatorship. In other words, the same must be filed
within ten (10) days from receipt of notice of the order placing the bank under
conservatorship. Otherwise, the provision of the fifth paragraph of Section 29 of the
Central. Bank Act could be rendered meaningless and illusory by the bank's filing,
beyond the prescribed ten-day period, of an action ostensibly claiming damages but in
reality questioning the conservatorship. As to actions for the second kind of damages and
for injunction to restrain the enforcement of the CB's implementing resolutions, said fifth
paragraph of Section 29 of the Central Bank Act, as amended, equally applies because the
questioned acts are but incidental to the conservatorship. 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.
The original complaint in Civil Case No. 17692 was not initiated by the majority of the
stockholders, hence it should have been dismissed. However, confronted with this fatal
flaw, counsel for PBP, through shrewd maneuvering, attempted to save the day by
impleading as co-plaintiff a corporation, the PPI, which was not under conservatorship.
Unfortunately, the maneuver was crudely and imperfectly executed. Except for the
inclusion of its name, nothing new was actually added to the original complaint in terms
of causes of action and reliefs for PPI. The amendment then was an exercise in futility.
We cannot, however, subscribe to the petitioner's view that: (a) once a bank is placed
under conservatorship, no action may be filed on behalf of the bank without prior
approval of the conservator, and (b) since in this case such approval was not secured prior
to the filing of Civil Case No. 17692, the latter must also be dismissed on that ground. No
such approval is necessary where the action was instituted by the majority of the bank's
stockholders. To contend otherwise would be to defeat the rights of such stockholders
under the fifth paragraph of Section 29 of the Central Bank Act. It must be stressed here
that a bank retains its juridical personality even if placed under conservatorship; 44 it is
neither replaced nor substituted by the conservator who, per Section 28-A of the Central
Bank Act, as amended by P.D. No. 1932, shall only:
. . . 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 . . ., any provision of law to the contrary notwithstanding, and such
other powers as the Monetary Board shall deem necessary.
Even assuming for the sake of argument that the action was properly brought by an
authorized party, the same must nevertheless be dismissed for failure of the plaintiffs
therein to pay the correct docket fees, pursuant to Manchester Development
Corp. vs. Court of Appeals, et al.; 45 the said case was decided by this Court on 7 May
1987, exactly three (3) months and twenty (20) days before the filing of the original
complaint and five (5) months and eighteen (18) days before the filing of the Amended
Complaint in Civil Case No. 17692. We ruled therein that:
The Court acquires jurisdiction over any case only upon the payment of the prescribed
docket fee. An amendment of the complaint or similar pleading will not thereby vest
jurisdiction in the Court, much less the payment of the docket fee based on the amounts
sought in the amended pleading. The ruling in the Magaspi case [115 SCRA 193], in so
far as it is inconsistent with this pronouncement is overturned and reversed.
The respondent Judge, in ruling that PBP and PPI had paid the correct docket fee of
P102.00, said that "the value of the case cannot be estimated" since what is sought is an
injunction against the enforcement of the challenged resolutions of the MB; in short, the
claim for damages is merely incidental. Upon the other hand, respondent Court, in its
Resolution of 17 May 1989 in C.A.-G.R. SP No. 13624, ruled that the case is "incapable
of pecuniary estimation" because the value of the losses incurred by the PBP "cannot be
calibrated nor pinned down to a specific amount in view of the damage that may be
caused by the appointment of a conservator to its goodwill and standing in the
community." 46
Both conclusions are unfounded and are the result of a misapprehension of the allegations
and causes of action in both the complaint and amended complaint.
While PBP cleverly worded its complaint in Civil Case No. 17692 to make it appear as
one principally for injunction, deliberately omitting the claim for damages as a specific
cause of action, a careful examination thereof bears that the same is in reality an action
for damages arising out of the alleged "unwarranted, ill-motivated and illegal
conservatorship," or a conservatorship which "was utterly unnecessary and unjustified,"
and the "arbitrary" appointment of a conservator. 47 Thus, as stated earlier, it devoted the
bulk of its petition to detailed events, occurrences and transactions in support thereof and
patiently enumerated the losses it sustained and suffered. The pertinent portions of
paragraph 27 of both the original and amended complaints read as follows:
27. The record of the Central Bank –– conservatorship of PBP clearly shows that it was
responsible for the losses.
xxx xxx xxx
[Then follows an enumeration, from (a) to (u), of particular acts causing or resulting in
losses, most of which are specifically stated]
xxx xxx xxx
(v) Total of only the foregoing mentioned and only of those that can be quantified is
P108,479,771.00.
And that excludes loss of profits that PBP could have realized if that disastrous
conservatorship had not been imposed on it and loss of goodwill.
The causes for these abuses of the conservators are course graft and corruption of the
conservators aside from fault in the system which denies private enterprise. (emphasis
supplied)
xxx xxx xxx
These are the very damages referred to in the prayer:
24
. . . to fully repair the damages inflicted on PBP consisting of losses of operation and the
conservators' bank frauds and abuses, . . .
but not specified therein. To this Court's mind, this was done to evade the payment of the
corresponding filing fees which, as computed by petitioner on the basis alone of the
specified losses of P108,479,771.00, would amount to about P 437,000.00. 48 The PBP
then clearly acted with manifest bad faith in resorting to the foregoing clever strategy to
avoid paying the correct filing fees. We are thus constrained to reiterate Our
pronouncements in the Manchester case:
The Court cannot close this case without making the observation that it frowns at the
practice of counsel who filed the original complaint in this case of omitting any
specification of the amount of damages in the prayer although the amount of over P78
million is alleged in the body of the complaint. This is clearly intended for no other
purpose than to evade the payment of the correct filing fees if not to mislead the docket
clerk in the assessment of the filing fee. . . .
The respondent Court itself, in its decision of 17 January 1990 in C.A-G.R. SP No.
16972, 49 confronted by the same issue, but perhaps unaware of its Resolution of 17 May
1989 in C.A.-G.R. SP No. 13624 aforementioned, ruled that PBP and PPI are liable for
the filing fees on the claim for damages. It even directed PBP and PPI to file "the
corresponding amendment to their amended complaint in said case stating a specific
amount 'to fully repair the damages inflicted on PBP consisting of losses of operation and
the conservator's bank frauds and abuses' . . .," after which the Clerk of Court of the
lower court or his duly authorized docket clerk should determine the amount found due,
which said plaintiffs shall pay "within the applicable prescriptive or reglementary period,
. . ." 50 The 17 January 1990 ruling, clearly reversing the earlier one, is of doubtful
propriety in view of the petition for review of the decision in C.A.-G.R. SP No. 13624
filed by the petitioner.
In granting PBP and PPI an opportunity to amend their amended complaint to reflect the
specific amount of damages in the prayer of their Amended Complaint, respondent Court
took refuge under the rule laid down in Sun Insurance Office, Ltd., et al. vs. Asuncion, et
al. 51 and Filipinas Shell Petroleum Corp. vs. Court of Appeals, et al. 52Of course, it was
erroneous for respondent Court to apply these last two (2) cases which were decided by
this Court three (3) months short of two (2) years after the promulgation of
the Manchester decision on 7 May 1987. Accordingly, since the original complaint in
Civil Case No. 17692 was filed on 27 August 1987, the Manchester doctrine was the
controlling and applicable law. The lower court had no choice but to apply it when its
attention was called by the petitioner.
Moreover, even granting for the sake of argument that Sun Insurance and Pilipinas
Shell 53 may apply in this case, We should not lose sight of the fact that in the former,
this Court categorically stated:
1. It is not simply the filing of the complaint or appropriate initiatory pleading, but the
payment of the prescribed docket fee, that vests a trial court with jurisdiction over the
subject-matter or nature of the action. Where the filling of the initiatory pleading is not
accompanied by payment of the docket fee, the court may allow the payment of the fee
within a reasonable time but in no case beyond the applicable prescriptive or
reglementary period.
The prescriptive period therein mentioned refers to the period within which a specific
action must be filed. It means that in every case, the docket fee must be paid before the
lapse of the prescriptive period. Chapter 3, Title V, Book III of the Civil Code is the
principal law governing prescription of actions.
There can be no question that in the instant case, PBP's claims for damages arise out of
an injury to its rights. Pursuant to Article 1146 of the Civil Code, the action therefor must
be initiated within four (4) years from the time the cause of action accrued. Since the
damages arose out of the alleged unwarranted, ill-motivated, illegal, unnecessary and
unjustified conservatorship, the cause of action, if any, first accrued in 1984 and
continued until 27 August 1987, when the original complaint was filed. Even if We are to
assume that the four-year period should start running on 27 August 1987, that period
lapsed on 27 August 1991. There is no showing that PBP paid the correct filing fee for
the claim within the prescribed period. Hence, nothing can save Civil Case No. 17692
from being dismissed.
2. And now on the issue of the writ of preliminary injunction.
The challenged Orders of the trial court granting the application for a writ of preliminary
injunction and the assailed decision of the respondent Court in C.A. G.R. No. 13624
clearly betray a prejudgment of the case. In both instances, not only did said courts
declare MB Resolutions Nos. 649 and 751 to be arbitrary, both also declared the
conservatorship to have been issued in violation of PBP's right to administrative due
process, which the CB "arbitrarily brushed aside to the prejudice" of the latter. The said
courts further concluded that "the sudden and untimely announcement by the Central
Bank that respondent Producers Bank will be under a conservatorship that will oversee its
operations worked havoc over the confidence that the public had hitherto reposed on
respondent bank so that the majority of its depositors over-reacted and rashly withdrew
their accounts from said bank, thus it incurred a loss of P593.707 million or 59.5% of its
deposits."
Thus, save only for the determination of the full extent of PBP's claim for damages, said
courts have, at the most, decided or, at the very least, prejudged the case. Courts,
notwithstanding the discretion given to them, should avoid issuing writs of preliminary
injunction which in effect dispose of the main case without a trial. 54 We do not then
hesitate to rule that there was grave abuse of discretion in the issuance of the writ of
preliminary injunction.
Besides, there was neither arbitrariness nor bad faith in the issuance of MB Resolutions
Nos. 649 and 751. It must be stressed in this connection 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. 55 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. 56
It is then Government's responsibility to see to it that the financial interests of those who
deal with 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, 57 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. 58 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.
25
This power has been expressly recognized by this Court. In Philippine Veterans Bank
Employees Union-NUBE vs. Philippine Veterans Bank, 59 this Court held that:
. . . Unless 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.
One important measure adopted by the government to protect the public against
unscrupulous practices of some bankers is to require banking institutions to set up
reserves against their deposit liabilities. These reserves, pegged at a certain percentage of
the volume of deposit liability, is that portion of the deposit received by a banking
institution which it cannot use for loans and investments. The reserve requirement, which
ordinarily takes the form of a deposit with the Central Bank, is one means by which the
government ensures the liquidity of banking institutions. 60
These reserve accounts maintained by banking institutions with the Central Bank also
serve as a basis for the clearing of checks and the settlement of interbank balances. 61
The need to maintain these required reserves cannot be over-emphasized. Thus, where
over-drawings on deposit accounts (regardless of amount) are incurred, R.A. No. 265
requires the delinquent bank to:
. . . fully cover said overdraft not later than the next clearing day: Provided, Further, That
settlement of clearing balances shall not be effected for any account which continue to,
be overdrawn for five consecutive banking days until such time as the overdrawing is
fully covered or otherwise converted into an emergency loan or advance pursuant to the
provisions of Sec. 90 of this Act. Provided, Finally, That the appropriate clearing office
shall be officially notified of banks with overdrawn balances. Banks with existing
overdrafts with the Central Bank as of the effectivity of this amended section shall,
within such period as may be prescribed by the Monetary Board, either convert the
overdraft into an emergency loan or advance with a plan of payment, or settle such
overdrafts, and that, upon failure to comply herewith, the Central Bank shall take such
action against the bank as may be warranted under this Act. 62 [Emphasis supplied.]
The fact that PBP is grossly overdrawn on its reserve account with the CB (up to P1.233
billion as of 13 February 1990) is not disputed by PBP. This enormous overdraft
evidences the patent inability of the bank's management to keep PBP liquid. This fact
alone sufficiently justifies the remedial measures taken by the Monetary Board.
MB Resolutions Nos. 649 and 751 were not promulgated to arbitrarily divest the present
stockholders of control over PBP, as is claimed by the latter. The same contemplates an
effective and viable plan to revive and restore PBP. It is to be noted that before issuing
these resolutions, the MB gave the management of PBP ample opportunity (from 30
March 1984 to June of 1987) to submit a viable rehabilitation plan for the bank.
MB Resolution Nos. 751 merely reiterated the requirement set forth in Resolution No.
649 for PBP to identify and submit the list of new stockholders who will infuse new
capital into the bank for CB approval. In this Resolution, the MB gave PBP's
stockholders one (1) week from notice within which to signify their acceptance or
rejection of the proposed rehabilitation plan.
The foregoing resolutions refer to a recommended rehabilitation plan. What was
conveyed to PBP was a mere proposal. There was nothing in the resolutions to indicate
that the plan was mandatory. On the contrary, PBP was given a specific period within
which to accept or reject the plan. And, as petitioners correctly pointed out, the plan was
not self-implementing. The warning given by the MB that should said proposal be
rejected, the CB "will take appropriate alternative actions on the matter," does not make
the proposed rehabilitation plan compulsory. Whether or not there is a rehabilitation plan
agreed upon between PBP and the MB, the CB is authorized under R.A. No. 265 to take
appropriate measures to protect the interest of the bank's depositors as well as of the
general public.
Furthermore, the assignment of claims to PDIC and the subsequent dacion en
pago (payment of credit through shares) do not divest the present stockholders of control
over PBP. As may be readily observed from the terms of Resolution No. 645, the shares
which shall be issued to PDIC under the dacion are preferred, non-voting and non-
participating shares. Hence, except for the instances enumerated in the Corporation Code
where holders of non-voting shares are given the right to vote, PDIC shall have no hand
in the bank's operation or business. In any event, these preferred shares will eventually be
sold to private parties or new stockholders as soon as they are identified by PBP and
approved by the CB. Prior approval by the CB of the stockholders is necessary screening
purposes.
There is nothing objectionable to the actions of the MB. We, therefore, find to be
completely without legal or evidentiary basis the contention that the impugned
resolutions are arbitrary, illegal and made in bad faith.
Moreover, respondent Judge acted in complete disregard of Section 107 of R.A. No. 265
when he enjoined the CB from taking appropriate actions against the bank, "including
exclusion of (PBP) from settlement of clearing balances at the Central Bank clearing
house" as warranted by law. By using his own standards, and without scrutinizing the
law, respondent Judge arbitrarily determined when CB may or may not initiate measures
against a bank that cannot maintain its liquidity. He also arbitrarily and capriciously
decided who can continually overdraw from the deposit account with the CB, to the
prejudice of other banking institutions, the banking public and the government.
3. As could be gleamed from the pleadings in G.R. No. 92943, the respondent Judge, per
his order of 18 November 1987, (a) directed the conservator to restore both the PBP
officers to their original positions prior to the reorganization of the bank's personnel, and
the PBP's standing committees to their original compositions, and (b) restrained her from
leasing out to a third party any portion of PBP's space in the Producers Bank Centre; per
his Order of 22 December 1987, respondent Judge granted PPI's motion for an order
transferring to the latter the administration of the three (3) buildings; and per the Order of
22 December 1987, he granted the motion directing the conservator to publish the
financial statement of the PBP in the manner prayed for by the latter.
The foregoing Orders were issued without due hearing. Moreover, these reliefs were not
prayed for in the Amended Complaint. They were not even covered by any specific
allegations therein. Except for the prohibition to lease, the rest partook of the nature of a
preliminary mandatory injunction which deprived the conservator of her rights and
powers under Section 28-A of R.A. No. 265 and, in effect, set aside the conservatorship
with PBP itself had earlier accepted. It must be remembered that PBP did not ask, in its
Amended Complaint, for the setting aside of the conservatorship. On the contrary, it even
prayed that the conservator be ordered to restore the viability of PBP as mandated by said
Section 28-A.
26
The respondent Judge should not have forgotten the settled doctrine that it is improper to
issue a writ of preliminary mandatory injunction prior to the final hearing, except in cases
of extreme urgency, where the right is very clear, where considerations of relative
inconvenience bear strongly in complainant's favor, where there is a willful and unlawful
invasion of plaintiff's right against his protest and remonstrance, the injury being a
continuing one, and where the effect of the mandatory injunction is rather to re-establish
and maintain a pre-existing continuing relation between the parties, recently and
arbitrarily interrupted by the defendant, than to establish a new relation. 63
It is plain to this Court that respondent Judge ceased to be an impartial arbitrator; he
became the godfather of PBP and PPI, granting to them practically all that they had asked
for in the motions they filed. Upon the issuance of these Orders, nothing appeared clearer
in the judicial horizon than this –– PBP and PPI had everything in the bag, so to speak,
including the reliefs not even contemplated in their Amended Complaint. The challenged
Orders then were whimsically and arbitrarily issued.
Compounding such detestable conduct is the respondent Judge's issuance, with undue
haste and unusual speed, of the orders of contempt without the proper hearing. If the
conservator could, at all, be liable for contempt, it would be for indirect contempt
punished under Section 3, Rule 71 of the Rules of Court, more specifically item (b) of the
first paragraph which reads:
Sec. 3 Indirect contempts to be punished after charge and hearing. –– After charge in
writing has been filed, and an opportunity given to the accused to be heard by himself or
counsel, a person guilty of any of the following acts may be punished for contempt:
xxx xxx xxx
(b) Disobedience of or resistance to a lawful writ, process, order, judgment, or command
of a court, or injunction granted by a court or judge, . . .;
It is clear from the said section that it is necessary that there be a charge and that the party
cited for contempt be given an opportunity to be heard. The reason for this is that
contempt partakes of the nature of a criminal offense. In the instant case, each motion for
contempt served as the charge. It is settled that a charge may be filed by a fiscal, a judge,
or even a private person. 64 Petitioner Tansinsin-Encarnacion filed oppositions thereto.
Thereafter, it was the duty of the respondent Judge to hold a hearing on the motions.
Respondent Judge deliberately did away with the hearing and this Court finds no
justifiable reason therefor.
There is, moreover, another reason why the contempt orders must be struck down. The
orders which were supposedly disobeyed and from which the motions for contempt arose
were, as earlier indicated, null and void for having been issued with grave abuse of
discretion amounting to lack of jurisdiction. Such Orders, therefore, cannot then be
characterized as lawful. Consequently, resistance thereto cannot be punished as
contempt 65
PREMISES CONSIDERED, the petitions in G.R. Nos. 88353 and 92943 are GRANTED.
The 6 October 1988 decision and 17 May 1989 resolution of the Court of Appeals in
C.A.-G.R. SP No. 13624 are REVERSED and SET ASIDE. Respondent Judge is ordered
to dismiss Civil Case No. 17692. All proceedings undertaken and all orders issued by
respondent Judge are hereby SET ASIDE for being null and void. The writ of preliminary
injunction issued by the trial court in its Order dated 21 September 1987 is hereby
LIFTED.
IT IS SO ORDERED.
FIRST DIVISION G.R. No. 88013 March 19, 1990 SIMEX INTERNATIONAL
(MANILA), INCORPORATED, petitioner, vs.
THE HONORABLE COURT OF APPEALS and TRADERS ROYAL
BANK, respondents.
CRUZ, J.:
We are concerned in this case with the question of damages, specifically moral and
exemplary damages. The negligence of the private respondent has already been
established. All we have to ascertain is whether the petitioner is entitled to the said
damages and, if so, in what amounts.
The parties agree on the basic facts. The petitioner is a private corporation engaged in the
exportation of food products. It buys these products from various local suppliers and then
sells them abroad, particularly in the United States, Canada and the Middle East. Most of
its exports are purchased by the petitioner on credit.
The petitioner was a depositor of the respondent bank and maintained a checking account
in its branch at Romulo Avenue, Cubao, Quezon City. On May 25, 1981, the petitioner
deposited to its account in the said bank the amount of P100,000.00, thus increasing its
balance as of that date to P190,380.74. 1 Subsequently, the petitioner issued several
checks against its deposit but was suprised to learn later that they had been dishonored
for insufficient funds.
The dishonored checks are the following:
1. Check No. 215391 dated May 29, 1981, in favor of California Manufacturing
Company, Inc. for P16,480.00:
2. Check No. 215426 dated May 28, 1981, in favor of the Bureau of Internal Revenue in
the amount of P3,386.73:
3. Check No. 215451 dated June 4, 1981, in favor of Mr. Greg Pedreño in the amount of
P7,080.00;
4. Check No. 215441 dated June 5, 1981, in favor of Malabon Longlife Trading
Corporation in the amount of P42,906.00:
5. Check No. 215474 dated June 10, 1981, in favor of Malabon Longlife Trading
Corporation in the amount of P12,953.00:
6. Check No. 215477 dated June 9, 1981, in favor of Sea-Land Services, Inc. in the
amount of P27,024.45:
7. Check No. 215412 dated June 10, 1981, in favor of Baguio Country Club Corporation
in the amount of P4,385.02: and
8. Check No. 215480 dated June 9, 1981, in favor of Enriqueta Bayla in the amount of
P6,275.00. 2
As a consequence, the California Manufacturing Corporation sent on June 9, 1981, a
letter of demand to the petitioner, threatening prosecution if the dishonored check issued
to it was not made good. It also withheld delivery of the order made by the petitioner.
Similar letters were sent to the petitioner by the Malabon Long Life Trading, on June 15,
1981, and by the G. and U. Enterprises, on June 10, 1981. Malabon also canceled the
petitioner's credit line and demanded that future payments be made by it in cash or
certified check. Meantime, action on the pending orders of the petitioner with the other
suppliers whose checks were dishonored was also deferred.
The petitioner complained to the respondent bank on June 10, 1981. 3 Investigation
disclosed that the sum of P100,000.00 deposited by the petitioner on May 25, 1981, had
not been credited to it. The error was rectified on June 17, 1981, and the dishonored
checks were paid after they were re-deposited. 4
27
In its letter dated June 20, 1981, the petitioner demanded reparation from the respondent
bank for its "gross and wanton negligence." This demand was not met. The petitioner
then filed a complaint in the then Court of First Instance of Rizal claiming from the
private respondent moral damages in the sum of P1,000,000.00 and exemplary damages
in the sum of P500,000.00, plus 25% attorney's fees, and costs.
After trial, Judge Johnico G. Serquinia rendered judgment holding that moral and
exemplary damages were not called for under the circumstances. However, observing
that the plaintiff's right had been violated, he ordered the defendant to pay nominal
damages in the amount of P20,000.00 plus P5,000.00 attorney's fees and costs. 5 This
decision was affirmed in toto by the respondent court. 6
The respondent court found with the trial court that the private respondent was guilty of
negligence but agreed that the petitioner was nevertheless not entitled to moral damages.
It said:
The essential ingredient of moral damages is proof of bad faith (De Aparicio vs.
Parogurga, 150 SCRA 280). Indeed, there was the omission by the defendant-appellee
bank to credit appellant's deposit of P100,000.00 on May 25, 1981. But the bank rectified
its records. It credited the said amount in favor of plaintiff-appellant in less than a month.
The dishonored checks were eventually paid. These circumstances negate any imputation
or insinuation of malicious, fraudulent, wanton and gross bad faith and negligence on the
part of the defendant-appellant.
It is this ruling that is faulted in the petition now before us.
This Court has carefully examined the facts of this case and finds that it cannot share
some of the conclusions of the lower courts. It seems to us that the negligence of the
private respondent had been brushed off rather lightly as if it were a minor infraction
requiring no more than a slap on the wrist. We feel it is not enough to say that the private
respondent rectified its records and credited the deposit in less than a month as if this
were sufficient repentance. The error should not have been committed in the first place.
The respondent bank has not even explained why it was committed at all. It is true that
the dishonored checks were, as the Court of Appeals put it, "eventually" paid. However,
this took almost a month when, properly, the checks should have been paid immediately
upon presentment.
As the Court sees it, the initial carelessness of the respondent bank, aggravated by the
lack of promptitude in repairing its error, justifies the grant of moral damages. This rather
lackadaisical attitude toward the complaining depositor constituted the gross negligence,
if not wanton bad faith, that the respondent court said had not been established by the
petitioner.
We also note that while stressing the rectification made by the respondent bank, the
decision practically ignored the prejudice suffered by the petitioner. This was simply
glossed over if not, indeed, disbelieved. The fact is that the petitioner's credit line was
canceled and its orders were not acted upon pending receipt of actual payment by the
suppliers. Its business declined. Its reputation was tarnished. Its standing was reduced in
the business community. All this was due to the fault of the respondent bank which was
undeniably remiss in its duty to the petitioner.
Article 2205 of the Civil Code provides that actual or compensatory damages may be
received "(2) for injury to the plaintiff s business standing or commercial credit." There is
no question that the petitioner did sustain actual injury as a result of the dishonored
checks and that the existence of the loss having been established "absolute certainty as to
its amount is not required." 7 Such injury should bolster all the more the demand of the
petitioner for moral damages and justifies the examination by this Court of the validity
and reasonableness of the said claim.
We agree that moral damages are not awarded to penalize the defendant but to
compensate the plaintiff for the injuries he may have suffered. 8 In the case at bar, the
petitioner is seeking such damages for the prejudice sustained by it as a result of the
private respondent's fault. The respondent court said that the claimed losses are purely
speculative and are not supported by substantial evidence, but if failed to consider that
the amount of such losses need not be established with exactitude precisely because of
their nature. Moral damages are not susceptible of pecuniary estimation. Article 2216 of
the Civil Code specifically provides that "no proof of pecuniary loss is necessary in order
that moral, nominal, temperate, liquidated or exemplary damages may be adjudicated."
That is why the determination of the amount to be awarded (except liquidated damages)
is left to the sound discretion of the court, according to "the circumstances of each case."
From every viewpoint except that of the petitioner's, its claim of moral damages in the
amount of P1,000,000.00 is nothing short of preposterous. Its business certainly is not
that big, or its name that prestigious, to sustain such an extravagant pretense. Moreover, a
corporation is not as a rule entitled to moral damages because, not being a natural person,
it cannot experience physical suffering or such sentiments as wounded feelings, serious
anxiety, mental anguish and moral shock. The only exception to this rule is where the
corporation has a good reputation that is debased, resulting in its social humiliation. 9
We shall recognize that the petitioner did suffer injury because of the private respondent's
negligence that caused the dishonor of the checks issued by it. The immediate
consequence was that its prestige was impaired because of the bouncing checks and
confidence in it as a reliable debtor was diminished. The private respondent makes much
of the one instance when the petitioner was sued in a collection case, but that did not
prove that it did not have a good reputation that could not be marred, more so since that
case was ultimately settled. 10 It does not appear that, as the private respondent would
portray it, the petitioner is an unsavory and disreputable entity that has no good name to
protect. Considering all this, we feel that the award of nominal damages in the sum of
P20,000.00 was not the proper relief to which the petitioner was entitled. Under Article
2221 of the Civil Code, "nominal damages are adjudicated in order that a right of the
plaintiff, which has been violated or invaded by the defendant, may be vindicated or
recognized, and not for the purpose of indemnifying the plaintiff for any loss suffered by
him." As we have found that the petitioner has indeed incurred loss through the fault of
the private respondent, the proper remedy is the award to it of moral damages, which we
impose, in our discretion, in the same amount of P20,000.00.
Now for the exemplary damages.
The pertinent provisions of the Civil Code are the following:
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.
Art. 2232. In contracts and quasi-contracts, the court may award exemplary damages if
the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner.
The banking system is an indispensable institution in the modern world and plays a vital
role in the economic life of every civilized nation. Whether as mere passive entities for
the safekeeping and saving of money or as active instruments of business and commerce,
banks have become an ubiquitous presence among the people, who have come to regard
them with respect and even gratitude and, most of all, confidence. Thus, even the humble
wage-earner has not hesitated to entrust his life's savings to the bank of his choice,
28
knowing that they will be safe in its custody and will even earn some interest for him.
The ordinary person, with equal faith, usually maintains a modest checking account for
security and convenience in the settling of his monthly bills and the payment of ordinary
expenses. As for business entities like the petitioner, the bank is a trusted and active
associate that can help in the running of their affairs, not only in the form of loans when
needed but more often in the conduct of their day-to-day transactions like the issuance or
encashment of checks. 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. A blunder on the part of the
bank, such as the dishonor of a check without good reason, can cause the depositor not a
little embarrassment if not also financial loss and perhaps even civil and criminal
litigation. 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. In
the case at bar, it is obvious that the respondent bank was remiss in that duty and violated
that relationship. What is especially deplorable is that, having been informed of its error
in not crediting the deposit in question to the petitioner, the respondent bank did not
immediately correct it but did so only one week later or twenty-three days after the
deposit was made. It bears repeating that the record does not contain any satisfactory
explanation of why the error was made in the first place and why it was not corrected
immediately after its discovery. Such ineptness comes under the concept of the wanton
manner contemplated in the Civil Code that calls for the imposition of exemplary
damages. After deliberating on this particular matter, the Court, in the exercise of its
discretion, hereby imposes upon the respondent bank exemplary damages in the amount
of P50,000.00, "by way of example or correction for the public good," in the words of the
law. It is expected that this ruling will serve as a warning and deterrent against the
repetition of the ineptness and indefference that has been displayed here, lest the
confidence of the public in the banking system be further impaired.
ACCORDINGLY, the appealed judgment is hereby MODIFIED and the private
respondent is ordered to pay the petitioner, in lieu of nominal damages, moral damages in
the amount of P20,000.00, and exemplary damages in the amount of P50,000.00 plus the
original award of attorney's fees in the amount of P5,000.00, and costs.
SO ORDERED.
FIRST DIVISION After said person left, San Pedro realized that she left behind an identification
card.[10] Thus, San Pedro called up Carmelitas listed address at No. 48 Ranger Street,
Moonwalk Village, Las Pinas, Metro Manila on the same day to have the card picked
Citibank, N.A., G.R. No. 146918 up.[11] Marites, the wife of Lito, received San Pedros call and was stunned by the news
Petitioner, that Carmelita preterminated her foreign currency time deposit because Carmelita was in
Present: the United States at that time.[12] The Cabamongan spouses work and reside in
California. Marites made an overseas call to Carmelita to inform her about what
- versus - PANGANIBAN, CJ., Chairperson, happened.[13] The Cabamongan spouses were shocked at the news. It seems that
YNARES-SANTIAGO, sometime between June 10 and 16, 1993, an unidentified person broke in at the couples
AUSTRIA-MARTINEZ, residence at No. 3268 Baldwin Park Boulevard, Baldwin Park, California. Initially, they
CALLEJO, SR. and reported that only Carmelitas jewelry box was missing, but later on, they discovered that
Spouses Luis and Carmelita CHICO-NAZARIO, JJ. other items, such as their passports, bank deposit certificates, including the subject
Cabamongan and their sons foreign currency deposit, and identification cards were also missing.[14] It was only then
Luis Cabamongan, Jr. and Promulgated: that the Cabamongan spouses realized that their passports and bank deposit certificates
Lito Cabamongan, were lost.[15]
Respondents. May 2, 2006
x------------------------------------------------x Through various overseas calls, the Cabamongan spouses informed Citibank, thru San
Pedro, that Carmelita was in the United States and did not preterminate their deposit and
that the person who did so was an impostor who could have also been involved in the
DECISION break-in of their California residence. San Pedro told the spouses to submit the necessary
documents to support their claim but Citibank concluded nonetheless that Carmelita
indeed preterminated her deposit. In a letter dated September 16, 1994, the Cabamongan
AUSTRIA-MARTINEZ, J.: spouses, through counsel, made a formal demand upon Citibank for payment of
their preterminated deposit in the amount of $55,216.69 with legal interests.[16] In a
letter dated November 28, 1994, Citibank, through counsel, refused the Cabamongan
Before the Court is a petition for review on certiorari of the Decision[1] dated January spouses demand for payment, asserting that the subject deposit was released to Carmelita
26, 2001 and the Resolution[2] dated July 30, 2001 of the Court of Appeals (CA) in CA- upon proper identification and verification.[17]
G.R. CV No. 59033.
On January 27, 1995, the Cabamongan spouses filed a complaint against Citibank before
The factual background of the case is as follows: the Regional Trial Court of Makati for Specific Performance with Damages, docketed as
Civil Case No 95-163 and raffled to Branch 150 (RTC).[18]
On August 16, 1993, spouses Luis and Carmelita Cabamongan opened a joint and/or
foreign currency time deposit in trust for their sons Luis, Jr. and Lito at the Citibank, In its Answer dated April 20, 1995, Citibank insists that it was not negligent of its duties
N.A., Makati branch, with Reference No. 60-22214372, in the amount of $55,216.69 for since the subject deposit was released to Carmelita only upon proper identification and
a term of 182 days or until February 14, 1994, at 2.5625 per cent interest per verification.[19]
annum.[3]Prior to maturity, or on November 10, 1993, a person claiming to be Carmelita
went to the Makati branch and pre-terminated the said foreign currency time deposit by At the pre-trial conference the parties failed to arrive at an amicable settlement.[20] Thus,
presenting a passport, a Bank of America Versatele Card, an ATM card and a Mabuhay trial on the merits ensued.
Credit Card.[4] She filled up the necessary forms for pre-termination of deposits with the
assistance of Account Officer Yeye San Pedro. While the transaction was being For the plaintiffs, the Cabamongan spouses themselves and Florenda G. Negre,
processed, she was casually interviewed by San Pedro about her personal circumstances Documents Examiner II of the Philippine National Police (PNP) Crime Laboratory in
and investment plans.[5] Since the said person failed to surrender the original Certificate Camp Crame, Quezon City, testified. The Cabamongan spouses, in essence, testified that
of Deposit, she had to execute a notarized release and waiver document in favor of Carmelita could not have preterminated the deposit account since she was in California at
Citibank, pursuant to Citibanks internal procedure, before the money was released to the time of the incident.[21] Negre testified that an examination of the questioned
her.[6] The release and waiver document[7] was not notarized on that same day but the signature and the samples of the standard signatures of Carmelita submitted in the RTC
money was nonetheless given to the person withdrawing.[8] The transaction lasted for showed a significant divergence. She concluded that they were not written by one and the
about 40 minutes.[9] same person.[22]

29
For the respondent, Citibank presented San Pedro and Cris Cabalatungan, Vice-President
and In-Charge of Security and Management Division. Both San Pedro and Cabalatungan
testified that proper bank procedure was followed and the deposit was released to
Carmelita only upon proper identification and verification.[23]
On July 1, 1997, the RTC rendered a decision in favor of the Cabamongan spouses and
against Citibank, the dispositive portion of which reads, thus:
WHEREFORE, premises considered, defendant Citibank, N.A., is hereby ordered to pay
the plaintiffs the following:
1) the principal amount of their Foreign Currency Deposit (Reference No. 6022214372)
amounting to $55,216.69 or its Phil. Currency equivalent plus interests from August 16,
1993 until fully paid;
2) Moral damages of P50,000.00;
3) Attorneys fees of P50,000.00; and
4) Cost of suit.
SO ORDERED.[24]
The RTC reasoned that:
xxx Citibank, N.A., committed negligence resulting to the undue suffering of the
plaintiffs. The forgery of the signatures of plaintiff Carmelita Cabamongan on the
questioned documents has been categorically established by the handwriting expert. xxx
Defendant bank was clearly remiss in its duty and obligations to treat plaintiffs account
with the highest degree of care, considering the nature of their relationship. Banks are
under the obligation to treat the accounts of their depositors with meticulous care. This is
the reason for their established procedure of requiring several specimen signatures and
recent picture from potential depositors. For every transaction, the depositors signature is
passed upon by personnel to check and countercheck possible irregularities and therefore
must bear the blame when they fail to detect the forgery or discrepancy.[25]
Despite the favorable decision, the Cabamongan spouses filed on October 1, 1997 a
motion to partially reconsider the decision by praying for an increase of the amount of the
damages awarded.[26] Citibank opposed the motion.[27] On November 19, 1997, the
RTC granted the motion for partial reconsideration and amended the dispositive portion
of the decision as follows:
From the foregoing, and considering all the evidence laid down by the parties,
the dispositive portion of the courts decision dated July 1, 1997 is hereby amended and/or
modified to read as follows:
30
WHEREFORE, defendant Citibank, N.A., is hereby ordered to pay the plaintiffs the
following:
1) the principal amount of their foreign currency deposit (Reference No. 6022214372)
amounting to $55,216.69 or its Philippine currency equivalent (at the time of its actual
payment or execution) plus legal interest from Aug. 16, 1993 until fully paid.
2) moral damages in the amount of P200,000.00;
3) exemplary damages in the amount of P100,000.00;
4) attorneys fees of P100,000.00;
5) litigation expenses of P200,000.00;
6) cost of suit.
SO ORDERED.[28]
Dissatisfied, Citibank filed an appeal with the CA, docketed as CA-G.R. CV No.
59033.[29] On January 26, 2001, the CA rendered a decision sustaining the finding of the
RTC that Citibank was negligent, ratiocinating in this wise:
In the instant case, it is beyond dispute that the subject foreign currency deposit was pre-
terminated on 10 November 1993. But Carmelita Cabamongan, who works as a nursing
aid (sic) at the Sierra View Care Center in Baldwin Park, California, had shown through
her Certificate of Employment and her Daily Time Record from the [sic] January to
December 1993 that she was in the United States at the time of the incident.
Defendant Citibank, N.A., however, insists that Carmelita was the one who pre-
terminated the deposit despite claims to the contrary. Its basis for saying so is the fact that
the person who made the transaction on the incident mentioned presented a valid passport
and three (3) other identification cards. The attending account officer examined these
documents and even interviewed said person. She was satisfied that the person presenting
the documents was indeed Carmelita Cabamongan. However, such conclusion is belied
by these following circumstances.
First, the said person did not present the certificate of deposit issued to Carmelita
Cabamongan. This would not have been an insurmountable obstacle as the bank, in the
absence of such certificate, allows the termination of the deposit for as long as the
depositor executes a notarized release and waiver document in favor of the
bank. However, this simple procedure was not followed by the bank, as it terminated the
deposit and actually delivered the money to the impostor without having the said
document notarized on the flimsy excuse that another department of the bank was in
charge of notarization. The said procedure was obviously for the protection of the bank
but it deliberately ignored such precaution. At the very least, the conduct of the bank
amounts to negligence.
Second, in the internal memorandum of Account Officer Yeye San Pedro regarding the
incident, she reported that upon comparing the authentic signatures of Carmelita
Cabamongan on file with the bank with the signatures made by the person claiming to be
Cabamongan on the documents required for the termination of the deposit, she noticed
that one letter in the latter [sic] signatures was different from that in the standard
signatures. She requested said person to sign again and scrutinized the identification
cards presented. Presumably, San Pedro was satisfied with the second set of signatures
made as she eventually authorized the termination of the deposit. However, upon
examination of the signatures made during the incident by the Philippine National Police
(PNP) Crime Laboratory, the said signatures turned out to be forgeries. As the
qualifications of Document Examiner Florenda Negre were established and she
satisfactorily testified on her findings during the trial, we have no reason to doubt the
validity of her findings. Again, the banks negligence is patent. San Pedro was able to
detect discrepancies in the signatures but she did not exercise additional precautions to
ascertain the identity of the person she was dealing with. In fact, the entire transaction
took only 40 minutes to complete despite the anomalous situation. Undoubtedly, the bank
could have done a better job.
Third, as the bank had on file pictures of its depositors, it is inconceivable how bank
employees could have been duped by an impostor. San Pedro admitted in her testimony
that the woman she dealt with did not resemble the pictures appearing on the
identification cards presented but San Pedro still went on with the sensitive
transaction. She did not mind such disturbing anomaly because she was convinced of the
validity of the passport. She also considered as decisive the fact that the impostor had a
mole on her face in the same way that the person in the pictures on the identification
cards had a mole. These explanations do not account for the disparity between the
pictures and the actual appearance of the impostor. That said person was allowed to
withdraw the money anyway is beyond belief.
The above circumstances point to the banks clear negligence. Bank transactions pass
through a successive [sic] of bank personnel, whose duty is to check and countercheck
transactions for possible errors. While a bank is not expected to be infallible, it must bear
the blame for failing to discover mistakes of its employees despite established bank
procedure involving a battery of personnel designed to minimize if not eliminate
errors. In the instant case, Yeye San Pedro, the employee who primarily dealt with the
impostor, did not follow bank procedure when she did not have the waiver document
notarized. She also openly courted disaster by ignoring discrepancies between the actual
appearance of the impostor and the pictures she presented, as well as the disparities
between the signatures made during the transaction and those on file with the bank. But
even if San Pedro was negligent, why must the other employees in the hierarchy of the
banks work flow allow such thing to pass unnoticed and unrectified?[30]
The CA, however, disagreed with the damages awarded by the RTC. It held that, insofar
as the date from which legal interest of 12% is to run, it should be counted from
September 16, 1994 when extrajudicial demand was made. As to moral damages, the CA
reduced it to P100,000.00 and deleted the awards of exemplary damages and litigation
expenses. Thus, the dispositive portion of the CA decision reads:
31
WHEREFORE, the decision of the trial court dated 01 July 1997, and its order dated 19
November 1997, are hereby AFFIRMED with the MODIFICATION that the legal
interest for actual damages awarded in the amount of $55,216.69 shall run from 16
September 1994; exemplary damages amounting to P100,000.00 and litigation expenses
amounting to P200,000.00 are deleted; and moral damages is reduced to P100,000.00.
Costs against defendant.
SO ORDERED.[31]
The Cabamongan spouses filed a motion for partial reconsideration on the matter of the
award of damages in the decision.[32] On July 30, 2001, the
CA granted in part said motion and modified its decision as follows:
1. The actual damages in amount of $55,216.69, representing the amount of appellees
foreign currency time deposit shall earn an interest of 2.5625% for the period 16 August
1993 to 14 February 1994, as stipulated in the contract;
2. From 16 September 1994 until full payment, the amount of $55,216.69 shall earn
interest at the legal rate of 12% per annum, and;
3. The award of moral damages is reduced to P50,000.00.[33]
Dissatisfied, both parties filed separate petitions for review on certiorari with this
Court. The Cabamongan spouses petition, docketed as G.R. No. 149234, was denied by
the Court per its Resolution dated October 17, 2001.[34] On the other hand, Citibanks
petition was given due course by the Court per Resolution dated December 10, 2001 and
the parties were required to submit their respective memoranda.[35]
Citibank poses the following errors for resolution:
1. THE HONORABLE COURT OF APPEALS GRAVELY ERRED AND GRAVELY
ABUSED ITS DISCRETION IN UPHOLDING THE LOWER COURTS DECISION
WHICH IS NOT BASED ON CLEAR EVIDENCE BUT ON GRAVE
MISAPPREHENSION OF FACTS.
2. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN UPHOLDING
THE DECISION OF THE TRIAL COURT AWARDING MORAL DAMAGES WHEN
IN FACT THERE IS NO BASIS IN LAW AND FACT FOR SAID AWARD.
3. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN RULING THAT
THE PRINCIPAL AMOUNT OF US$55,216.69 SHOULD EARN INTEREST AT THE
RATE OF 12% PER ANNUM FROM 16 SEPTEMBER 1994 UNTIL FULL
PAYMENT.[36]
Anent the first ground, Citibank contends that the CA erred in affirming the RTCs
finding that it was negligent since the said courts failed to appreciate the extra diligence
of a good father of a family exercised by Citibank thru San Pedro.
As to the second ground, Citibank argues that the Cabamongan spouses are not entitled to
moral damages since moral damages can be awarded only in cases of breach of contract
where the bank has acted willfully, fraudulently or in bad faith. It submits that it has not
been shown in this case that Citibank acted willfully, fraudulently or in bad faith and
mere negligence, even if the Cabamongan spouses suffered mental anguish or serious
anxiety on account thereof, is not a ground for awarding moral damages.
On the third ground, Citibank avers that the interest rate should not be 12% but the
stipulated rate of 2.5625% per annum. It adds that there is no basis to pay the interest rate
of 12% per annum from September 16, 1994 until full payment because as of said date
there was no legal ground yet for the Cabamongan spouses to demand payment of the
principal and it is only after a final judgment is issued declaring that Citibank is obliged
to return the principal amount of US$55,216.69 when the right to demand payment starts
and legal interest starts to run.
On the other hand, the Cabamongan spouses contend that Citibanks negligence has been
established by evidence. As to the interest rate, they submit that the stipulated interest of
2.5635% should apply for the 182-day contract period from August 16, 1993 to February
14, 1993; thereafter, 12% should apply. They further contend that the RTCs award of
exemplary damages of P100,000.00 should be maintained. They submit that the CA erred
in treating the award of litigation expenses as lawyers fees since they have shown that
they incurred actual expenses in litigating their claim against Citibank. They also contend
that the CA erred in reducing the award of moral damages in view of the degree of
mental anguish and emotional fears, anxieties and nervousness suffered by them.[37]
Subsequently, Citibank, thru a new counsel, submitted a Supplemental
Memorandum,[38] wherein it posits that, assuming that it was negligent, the
Cabamongan spouses were guilty of contributory negligence since they failed to notify
Citibank that they had migrated to the United States and were residents thereat and after
having been victims of a burglary, they should have immediately assessed their loss and
informed Citibank of the disappearance of the bank certificate, their passports and other
identification cards, then the fraud would not have been perpetuated and the losses
avoided. It further argues that since the Cabamongan spouses are guilty of contributory
negligence, the doctrine of last clear chance is inapplicable.
Citibanks assertion that the Cabamongan spouses are guilty of contributory negligence
and non-application of the doctrine of last clear chance cannot pass muster since these
contentions were raised for the first time only in their Supplemental Memorandum.
Indeed, the records show that said contention were neither pleaded in the petition for
review and the memorandum nor in Citibanks Answer to the complaint or in its
appellants brief filed with the CA. To consider the alleged facts and arguments raised
belatedly in a supplemental pleading to herein petition for review at this very late stage in
the proceedings would amount to trampling on the basic principles of fair play, justice
and due process.[39]
32
The Court has 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[40] is expected,[41] and high
standards of integrity and performance are even required, of it.[42] By the nature of its
functions, a bank is under obligation to treat the accounts of its depositors with
meticulous care,[43] always having in mind the fiduciary nature of their relationship.[44]
In this case, it has been sufficiently shown that the signatures of Carmelita in the forms
for pretermination of deposits are forgeries. Citibank, with its signature verification
procedure, failed to detect the forgery. Its negligence consisted in the omission of that
degree of diligence required of banks. The Court has held that a bank is bound to know
the signatures of its customers; and if it pays a forged check, it must be considered as
making the payment out of its own funds, and cannot ordinarily charge the amount so
paid to the account of the depositor whose name was forged.[45] Such principle equally
applies here.
Citibank cannot label its negligence as mere mistake or human error. Banks handle daily
transactions involving millions of pesos.[46] 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.[47] Banks are expected to exercise
the highest degree of diligence in the selection and supervision of their employees.[48]
The Court agrees with the observation of the CA that Citibank, thru Account Officer San
Pedro, openly courted disaster when despite noticing discrepancies in the signature and
photograph of the person claiming to be Carmelita and the failure to surrender the
original certificate of time deposit, the pretermination of the account was allowed. Even
the waiver document was not notarized, a procedure meant to protect the bank. For not
observing the degree of diligence required of banking institutions, whose business is
impressed with public interest, Citibank is liable for damages.
As to the interest rate, Citibank avers that the claim of the Cabamongan spouses does not
constitute a loan or forbearance of money and therefore, the interest rate of 6%, not 12%,
applies.
The Court does not agree.
The time deposit subject matter of herein petition is a simple loan. The provisions of the
New Civil Code on simple loan govern the contract between a bank and its
depositor. Specifically, Article 1980 thereof categorically provides that . . . savings . . .
deposits of money in banks and similar institutions shall be governed by the provisions
concerning simple loan. Thus, the relationship between a bank and its depositor is that of
a debtor-creditor, the depositor being the creditor as it lends the bank money, and the
bank is the debtor which agrees to pay the depositor on demand.
The applicable interest rate on the actual damages of $55,216.69, should be in accordance
with the guidelines set forth in Eastern Shipping Lines, Inc. v. Court of Appeals[49] to
wit:
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-
contracts, delicts or quasi-delicts is breached, the contravenor can be held liable for
damages. The provisions under Title XVIII on Damages of the Civil Code govern in
determining the measure of recoverable damages.
II. With regard particularly to an award of interest, in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as
follows:
1. When the obligation is breached, and it consists in the payment of a sum of
money, i.e., a loan or forbearance of money, the interest due should be that which
may have been stipulated in writing. Furthermore, the interest due shall itself earn
legal interest from the time it is judicially demanded. In the absence of stipulation,
the rate of interest shall be 12% per annum to be computed from default, i.e., from
judicial or extrajudicial demand under and subject to the provisions of Article 1169
of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an
interest on the amount of damages awarded may be imposed at the discretion of the court
at the rate of 6% per annum. No interest, however, shall be adjudged
on unliquidated claims or damages except when or until the demand can be established
with reasonable certainty. Accordingly, where the demand is established with reasonable
certainty, the interest shall begin to run from the time the claim is made judicially
or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so
reasonably established at the time the demand is made, the interest shall begin to run only
from the date the judgment of the court is made (at which time the quantification of
damages may be deemed to have been reasonably ascertained). The actual base for the
computation of legal interest shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final
and executory, the rate of legal interest whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this
interim period being deemed to be by then an equivalent to a forbearance of credit.[50]
Thus, in a loan or forbearance of money, the interest due should be that stipulated in
writing, and in the absence thereof, the rate shall be 12% per annum counted from the
time of demand. Accordingly, the stipulated interest rate of 2.562% per annum shall
apply for the 182-day contract period from August 16, 1993 to February 14, 1994. For the
period from the date of extra-judicial demand, September 16, 1994, until full payment,
the rate of 12% shall apply. As for the intervening period between February 15, 1994 to
September 15, 1994, the rate of interest then prevailing granted by Citibank shall apply
since the time deposit provided for roll over upon maturity of the principal and
interest.[51]
As to moral damages, in culpa contractual or breach of contract, as in the case before the
Court, moral damages are recoverable only if the defendant has acted fraudulently or in
bad faith,[52] or is found guilty of gross negligence amounting to bad faith, or in wanton
disregard of his contractual obligations.[53] The act of Citibanks employee in allowing
the pretermination of Cabamongan spouses account despite the noted discrepancies in
33
Carmelitas signature and photograph, the absence of the original certificate of time
deposit and the lack of notarized waiver dormant, constitutes gross negligence amounting
to bad faith under Article 2220 of the Civil Code.
There is no hard-and-fast rule in the determination of what would be a fair amount of
moral damages since each case must be governed by its own peculiar facts. The
yardstick should be that it is not palpably and scandalously excessive.[54] The amount
of P50,000.00 awarded by the CA is reasonable and just. Moreover, said award is deemed
final and executory insofar as respondents are concerned considering that their petition
for review had been denied by the Court in its final and executory Resolution dated
October 17, 2001 in G.R. No. 149234.
Finally, Citibank contends that the award of attorneys fees should be deleted since such
award appears only in the dispositive portion of the decision of the RTC and the latter
failed to elaborate, explain and justify the same.
Article 2208 of the New Civil Code enumerates the instances where such may be
awarded and, in all cases, it must be reasonable, just and equitable if the same were to be
granted. Attorneys fees as part of damages are not meant to enrich the winning party at
the expense of the losing litigant. They are not awarded every time a party prevails in a
suit because of the policy that no premium should be placed on the right to
litigate.[55] The award of attorneys fees is the exception rather than the general rule. As
such, it is necessary for the court to make findings of facts and law that would bring the
case within the exception and justify the grant of such award. The matter of attorneys fees
cannot be mentioned only in the dispositive portion of the decision.[56] They must be
clearly explained and justified by the trial court in the body of its decision. Consequently,
the award of attorneys fees should be deleted.
WHEREFORE, the instant petition is PARTIALLY GRANTED. The assailed
Decision and Resolution are AFFIRMED with MODIFICATIONS, as follows:
1. The interest shall be computed as follows:
a. The actual damages in principal amount of $55,216.69, representing the amount of
foreign currency time deposit shall earn interest at the stipulated rate of 2.5625% for the
period August 16, 1993 to February 14, 1994;
b. From February 15, 1994 to September 15, 1994, the principal amount of $55,216.69
and the interest earned as of February 14, 1994 shall earn interest at the rate then
prevailing granted by Citibank;
c. From September 16, 1994 until full payment, the principal amount of $55,216.69 and
the interest earned as of September 15, 1994, shall earn interest at the legal rate of 12%
per annum;
2. The award of attorneys fees is DELETED.
No pronouncement as to costs.
SO ORDERED.
EN BANC
G.R. No. L-43682 March 31, 1938
In Re Liquidation of Mercantile Bank of China.
TAN TIONG TICK, claimant-appellant,
vs.
AMERICAN APOTHECARIES CO., ET AL., claimants-appellees.
Cirilo Lim and Antonio Gonzalez for appellant.
Eusebio Orense and Carmelino G. Alvendia for appellees Chinese Grocers Asso., et al.
Marcelo Nubla for appellees Ang Cheng Lian, et al.
IMPERIAL, J.:
In the proceedings for the liquidation of the Mercantile Bank of China, the appellant
presented a written claim alleging: that when this bank ceased to operate on September
19, 1931, his current account in said bank showed a balance of P9,657.50 in his favor;
that on the same date his savings account in the said bank also showed a balance in his
favor of P20,000 plus interest then due amounting to P194.78; that on the other hand, he
owed the bank in the amount of P13,262.58, the amount of the trust receipts which he
signed because of his withdrawal from the bank of certain merchandise consigned to him
without paying the drafts drawn upon him by the remittors thereof; that the credits thus
described should be set off against each other according to law, and on such set off being
made it appeared that he was still the creditor of the bank in the sum of P16,589.70. And
he asked that the court order the Bank Commissioner to pay him the aforesaid balance
and that the same be declared as preferred credit. The claim was referred to the
commissioner appointed by the court, who at the same time acted as referee, and this
officer recommended that the balance claimed be paid without interest and as an ordinary
credit. The court approved the recommendation and entered judgment in the accordance
therewith. The claimant took an appeal.
In his report the commissioner classified the claims presented under the following six
groups: "(First) Current accounts, savings and fixed deposits. (Second) Checks or drafts
sold by the Mercantile Bank of China and not paid by the correspondents or banks
against which they were drawn. (Third) Checks or drafts issued by the Mercantile Bank
of China in payment or reimbursement of drafts or goods sent to it for collection by banks
and foreign commercial houses against merchants or commercial entities of Manila.
(Fourth) Drafts for collection received by the Mercantile Bank of China to be collected
from merchants and commercial entities in Manila and which were pending collection on
the date of the suspension of payments. (Fifth) Claims of depositors who are at the same
time debtor of the Mercantile Bank of China.(Sixth Various claims." And referring to the
claims of the appellant, he states:
Mr. Tan Tiong Tick claims from the Mercantile Bank of China the amount of P
27,597.80, the total amount of the following sums which he has in his favor in said bank
including the corresponding interest:
Balance on the current account . . . . . . . . . . . P7,390.11
Balance of savings account No. 2266 . . . . . 20,000.00
Total . . . . . . . . . . . . . . . . . . 27,390.11
34
Adding to this total the interest also claimed by Mr. Tan Tiong Tick, that is, P194.78 on
the saving account and P12.91 on the current account, the amount claimed makes a total
of P27,597.80.
Notwithstanding the fact that the Bank Commissioner found the claim in accordance with
the books of the Mercantile Bank of China, he declined to issue the corresponding
certificate of proof of claim because the said claimant has pending in the said bank
obligations for accepting draft amounting to a total of $6 631.29.
At the hearing of this claim, the claimant admitted such pending obligations, alleging at
the same time that to guarantee the payment of drafts accepted by him, he pledged his
bank book No. 2266, which also answered for the payment of any credit which the said
bank may extend to him.
In Exhibit A presented by the claimant as evidence, consisting of a letter dated November
4, 1931 addressed by Mr. H. J. Belden to the then Bank Commissioner, Mr. Leo. H.
Martin it appears that the said savings account was constituted for the sole purpose of
securing the payment of drafts against the claimants, the bill of lading of where delivered
to him upon trust-receipts and that according to the records of that bank Mr. Tan Tiong
Tick did not obtain any other accomodation from the bank except the trust-receipts.
RECOMMENDATION
Having established the existence of such deposits in the name of the bank alleged by the
Bank Commissioner, for the securities of which he constituted the savings deposit in the
amount of P20,000, it is recommended that from this amount there be deducted the
amount of the obligation of P13,778.90 which the claimant acknowledge in favor of the
Mercantile Bank of China, and that the difference, plus the other current account deposit
of P7,390.11, be considered as ordinary credits subject to the equal division of the funds
of the said bank.
As to the interest on said deposits also claimed by Mr. Tan Tiong Tick, the rejection
thereof is recommended in view of the fact that the Bank Commissioner has not credited
any interest to the current and savings account of the Merchantile Bank of China, and
would be unfair that interest, not credited to the others, be allowed to this claimant.
It will be noted that in the report of the commissioner the credit of the claimant for the
balance of his deposit on current account has been reduced to P7,390.11, instead of
P9,657.50 alleged in his claim, the total balance recommended in favor of the appellant
being P13,611.21, without including interest, instead of P16,589.70. In his brief the
appellant admits the figures appearing in the report, with the exception of the interest on
which we shall presently dwell.
1. Resolving the claims under the first group the recommendation of this official to the
effect that they declared ordinary credits only, and approved them as preferred credits.
However, in considering the other claims among them that of that of the appellant,
classified under the fifth group, the court approved the recommendation of the
commissioner that they be declared ordinary credits; in otherwords, the court considered
and declared the claim of the appellant as an ordinary credit just because the latter is at
the same time a debtor of the bank, notwithstanding the fact that his claim is of the same
kind as those classified under the first group, inasmuch as they are also current account
and savings deposits. To this part of the decision is addressed the appellant's first
assignment of error.
In truth if the current account, savings, and fixed deposits are preferred credits for the
reason states by the court in its decision, we see no reason why the preference should
disappear when the depositors are at the same time debtors of the bank less than their
credits. If the ground to declare them preferred credits is sound, the balances resulting
after the set should likewise be preferred, unless there be a law providing that a set off,
when it take place, produces such an effect, a law which does not exist as far as we know.
But we are of the opinion, for the reason presently to be stated, that current account and
savings deposits are not preferred credits in the cases, like the present, involving the
insolvency and liquidation of a bank, where there are various creditors and it becomes
necessary to ascertain the preference of various credits.
The court held that these deposits should be governed by the Civil Code, and applying
articles 1758 and 1868 of the said Code, ruled that the so-called irregular deposits being
still in vogue, as Manresa, the commentator, maintain and as held by this court in the
case Rogers vs. Smith, Bell & Co. (10 Phil., 319), the former are preferred credits because
partaking of the nature of the irregular deposits.
In our opinion, these deposits are essentially merchantile contracts and should, therefore,
be governed by the provisions of the Code of Commerce, pursuant to its article 2 reading:
ART. 2 Commercial transactions, be they performed by merchants or not, whether they
are specified in this Code or not, shall be governed by the provisions contained in the
same; in the absence of such provisions, by the commercial customs generally observed
in each place; and in the absence of such provisions, by the commercial customs
generally observed in each place; and in the absence of both, by those of the common
law.
Commercial transactions shall be considered those enumerated in this Code and any
others of a similar character.
There is cited in support of the application of the Civil Code to these deposits article 310
of the Code of Commerce providing:
ART. 310. Notwithstanding the provisions of the foregoing articles, deposits made banks,
with general warehouse, with loan or any other associations, shall be governed in the
place by the by-laws of the same in the second by the provisions of this Code, and finally
by the rules of common law, which are applicable to all deposits.
But apparently there was a failure to consider that, according to the order established by
the article, the Civil Code or the common law is mentioned after Code of Commerce,
which means that the provisions of the latter Code should first be applied before resorting
to those of the Civil Code which are supplementary in character.
The Code of Commerce contains express provisions regulating deposits of the nature
under consideration, and they are articles 303 to 310. The first and the second to the last
of the said articles are as follows:
ART. 303. In order that a deposit may be considered commercial, it is necessary —
1. That the depositary, at least, be a merchant.
2. That the things deposited be commercial objects.
3. That the deposit constitute in itself a commercial transaction, or be made by reason or
as a consequently of commercial transaction.
ART. 309. Whatever, with the consent of the depositor, the depositary disposes of the
articles on deposit either for himself or for his business, or for transactions intrusted to
him by the former, the rights and obligations of the depositary and of the depositor shall
cease, and the rules and provisions applicable to the commercial loans, commissions, or
contract which took the place of the deposit shall be observed.
In accordance with article 309, the so-called current account and savings deposits have
lost the character of deposits properly so-called, and are converted into simple
commercial loans, because the bank disposed of the funds deposited by the claimant for
its ordinary transactions and for the banking business in which it was engaged. That the
bank had the authority of the claimant to make use of the money deposited on current and
35
savings account is deducible from the fact that the bank has been paying interest on both
deposits, and the claimant himself asks that he be allowed interest up to the time when
the bank ceased its operations. Moreover, according to section 125 of the Corporation
Law and 9 of Act No. 3154, said bank is authorized to make use of the current account,
savings, and fixed deposits provided it retains in its treasury a certain percentage of the
amounts of said deposits. Said sections read:
SEC. 125. Every such commercial banking corporation shall at all times have on hand in
lawful money of the Philippines Islands or of the United States, an amount equal to at
least eighteen per centum of the aggregate amount of its deposits in current which are
payable on demand and of its fixed deposits coming due within thirty days. Such
commercial banking corporations shall also at all times maintain equal in amount to at
least five per centum of its total savings deposits. The said reserve may be maintained in
the form of lawful money of the Philippines Islands of the United States, or in bonds
issued or guaranteed by the Government of the Philippines Islands or to the United
States. . . .
The percentage of reserve to deposits in the case of the Philippine National Bank and
Bank of the Philippine Islands is hereby fixed at eighteen per centum of demand deposits
and fixed deposits payable within thirty days and five per centum of savings deposits, in
the same manner as is prescribed in this section for commercial banking corporations in
general, which reserve against savings deposit may consists of Philippine Government of
United States Government Bonds.
SEC. 9. Every bank organized under this Act shall at all times have on hand, in lawful
money of the Philippine Islands of the United States, an amount equal to at least twenty
per centum of the aggregate amount of its deposits. The Treasury certificates authorized
by Act Numbered Three thousand and fifty-eight, and the term lawful money of the
United States shall include gold and silver certificates of the United States and bank notes
issued by the Federal Reserve Bank.
Therefore, the bank, without the necessity of the claimant consent, was by law authorized
to dispose of the deposits, subject to the limitations indicated.
We, therefore, conclude that the law applicable to the appellant's claim is the Code of
Commerce and that his current and savings account have converted into simple
commercial loans.
2. The next point to decide is the applicable law, if any, to determine the preference of the
appellant's credits, considering that there happens to be other creditors. Section V of Title
I Book IV of the Code of Commerce contains provisions relative to the rights of creditors
in case of bankruptcy and their respective gradations, but these provisions have been
repealed by section 524 of the Code of Civil Procedure reading as follows:
SEC. 524. No new proceedings to be instituted. — No new bankrupt proceedings shall be
instituted until a new bankruptcy law shall come into force in the Islands. All existing
laws and other relating to bankruptcy and proceedings therein are hereby
repealed: Provided, That nothing in this section shall be deemed in any manner to affect
pending litigation in bankruptcy proceedings.
The Philippine Legislature subsequently enacted Act No. 1956, also known as the
Insolvency Law, which took effect on May 20, 1909, containing provisions regarding
preference of credits; but its section 52 provides that all the provisions of the law shall
not apply to corporations engaged principally in the banking business, and among them
should be understood included the Merchantile Bank of China. Said section provide:
SEC. 48. Merchantile, effect, and any other kind of property found among the property of
the insolvent, the ownership of which has not been conveyed to him by a legal and
irrevocable title, shall be considered to be the property of other persons shall be placed at
the disposal of its lawful owners on order of the court made at the hearing in section
forty-three or at any ordinary hearing, if the assignee or any creditor whose right in the
estate of the insolvent has been established shall petition in writing for such hearing and
the court in its discretion shall so order, the creditors, however, retaining such rights in
said property as belong to the insolvent, and subrogating him whenever they shall have
with all obligations concerning said property.
The following shall be included in this section:
1. Drowy property inestimado and such property estimado which may remain in the
possession of the husband where the receipt thereof is matter of record in a public
instrument registered under the provisions of section twenty-one and twenty-seven of the
Code of Commerce in force.
2. Paraphernal property which the wife may have acquired by inheritance, legacy, or
donation whether remaining in the form in which it was received or subrogated or
invested in other property, provided that such investment or subrogation has been
registered in the registro mercantile in accordance with the provisions of the sections of
the Code of Commerce mentioned in the next preceding paragraph.
3. Property and effects deposited with the bankrupt, or administered, least, rented, or held
in usufruct by him.
4. Merchandise in the possession of the bankrupt, on commission, for purchase, sale,
forwarding, or delivery.
5. Bills of exchange or promissory notes without indorsement or other expression
transferring ownership remitted to the insolvent for collection and all other acquired by
him for the account of another person, drawn or indorsed to the remitter direct.
6. Money remitted to the insolvent, otherwise than on current account, and which is in his
possession for delivery to a definite person in the name and for the account of the remitter
or for the settlement of claims which are to be met at the insolvent domicile.
7. Amounts due the insolvent for sales of merchandise on commission, and bills of
exchange and promissory notes delivered therefrom in his possession, even when the
same are not made payable to the owner of the merchandise sold, provided it is proven
that the obligation to the insolvent is derived therefrom and that said bills of exchange
and promissory notes were in the possession of the insolvent for account of the owner of
the merchandise to be cashed and remitted, in due time, to the said owners; all of which
shall be a legal presumption when the amount involved in any such shall not been
credited on the book of both the owner of the merchantile and of the insolvent.
8. Merchandise bought on credit by the insolvent so long as the actual thereof has not
been made to him at his store at any other place stipulated for such delivery, and
merchandise the bills of lading or shipping receipts of which have been sent him after the
same has been loaded by order of the purchaser and for his account and risk.
In all cases arising under this paragraph assignees may retain the merchandise so
purchased or claim it for the creditors by paying the price thereof to the vendor.
9. Goods or chattels wrongfully taken, converted, or withheld by the insolvent if still
existing in his possession or the amount of the value thereof.
SEC. 49. All creditors, except those whose debts are duly proved and allowed shall be
entitled to share in the property and estate pro rata, after the property belonging to other
persons referred to in the last preceding section has been deducted therefrom, without
priority or preference whatever: Provided, That any debt proved by any person liable as
bail, surety, guarantor, or otherwise, for the debtor, shall not be paid to the person so
providing the same until satisfactory evidence shall be produced of the payment of such
36
debt by such person so liable, and the share to which such debt would be entitled may be
paid into court, or otherwise held, for the benefit of the party entitled thereto, as the court
may direct.
SEC. 50. The following are preferred claims which shall be paid in the order named:
(a) Necessary funeral expenses of the debtor, or of his wife, or children who are under
their parental authority and have no property of their own, when approved by the court;
(b) Debts due for personal services rendered the insolvent by employees, laborers, or
domestic servants immediately preceding the commencement of proceedings in
insolvency;
(c) Compensation due the laborers or their dependents under the provisions of Act
Numbered Thirty-four hundred and twenty-eight, known as the Workmen's
Compensation Act, as amended by Act Numbered Thirty-eight hundred and twelve, and
under the provisions of Act Numbered Eighteen hundred and seventy-four known as the
Employers' Liability Act, and of the other laws providing for payment of indemnity for
damages in cases of labor accidents;
(d) Legal expenses, and expenses incurred in the administration of the insolvent estate for
the common interest of the creditors, when properly authorized and approved by the
court;
(e) Debts, taxes and assessments due the Insular Government;
(f ) Debts, taxes and assessments due to any province of provinces of the Philippines
Islands;
(g) Debts, taxes and assessment due to any municipality or municipalities of the
Philippine Islands;
All other creditors shall be paid pro rata. (As amended by Act No. 3962.)
ART. 52 . . . The provisions of this Act shall not apply to corporations engaged
principally in the banking business, or to any other corporation as to which there is any
special provisions of law for its liquidation in case of insolvency.
It appears that even after the enactment of the Insolvency Law there was no law in this
jurisdiction governing the order or preference of credits in case of insolvency and
liquidation of a bank. But the Philippine Legislature subsequently enacted Act No. 3519,
amended various sections of the Revised Administrative Code, which took effect on
February 20, 1929, and section 1641 of this latter Code. as amended by said Act
provides:
SEC. 1641. Distribution of assets. — In the case of the liquidation of a bank or banking
institution, after payment of the costs of the proceeding, including reasonable expenses,
commissions and fees of the Bank Commissioner, to be allowed by the court, the Bank
Commissioner shall pay the debts of the institution, under of the court in the order of
their legal priority.
From this section 1641 we deduce that the intention of the Philippine Legislature, in
providing that the Bank Commissioner shall pay the debts of the company by virtue of an
order of the court in the order of their priority, was to enforce the provisions of section
48, 49 and 50 of the Insolvency Law in the sense that they are made applicable to cases
of insolvency or bankruptcy and liquidation of banks. No other deduction can be made
from the phrase "in the order of their legal priority" employed by the law, for there being
no law establishing any priority in the order of payment of credits, the legislature could
not reasonably refer to any legislation upon the subject, unless the interpretation above
stated is accepted.
Examining now the claims of the appellant, it appears that none of them falls under any
of the cases specified by section 48, 49 and 50 of the Insolvency Law; wherefore, we
conclude that the appellant's claims, consisting of his current and savings account, are not to charge interest on said amount up to September 19, 1931, without special
preferred credits. pronouncement up to September 19, 1931, without special pronouncement as to the costs.
3. The commissioner set off the claims of the appellant against what the bank had against So ordered.
him. The court approved this set off over the objection of the appellant. The appellees
contend that the set off does not lie in this case because otherwise it would prejudice
them and the other creditors in the liquidation. We hold that the court's ruling is not error.
"It may be stated as a general rule that when a depositor is indebted to a bank, and the
debts are mutual — that is, between the same parties and in the same right — the bank
may apply the deposit, or such portion thereof as may be necessary, to the payment of the
debt due it by the depositor, provided there is no express agreement to the contrary and
the deposit is not specially applicable to some other particular purposes." (7 Am. Jur.,
par. 629, p.455; United States vs. Butterworth-Judson Corp., 267 U.S., 387; National
Bank vs. Morgan, 207 Ala.., 65; Bank of Guntersville vs. Crayter, 199 Ala., 699; Tatum
vs. Commercial Bank & T. Co., 193 Ala., 120; Desha Bank & T. Co. vs. Quilling, 118
Ark., 114; Holloway vs. First Nat. Bank, 45 Idaho, 746; Wyman vs. Ft. Dearborn Nat
Bank, 181 Ill., 279; Niblack vs. Park Nat. Bank, 169 Ill., 517; First Nat Bank vs. Stapf.,
165 Ind., 162; Bedford Bank vs. Acoam, 125 Ind., 584.) The situation referred to by the
appellees is inevitable because section 1639 of the Revised Administrative Code, as
amended by Act No. 3519, provides that the Bank Commissioner shall reduce the assets
of the bank into cash and this cannot be done without first liquidating individually the
accounts of the debtors of said bank, and in making this individual liquidation the debtors
are entitled to set off, by way of compensation, their claims against the bank.
4. The court held that the appellant is not entitled to charge interest on the amounts of his
claims, and this is the object of the second assignment of error. Upon this point a
distinction must be made between the interest which the deposits should ear from their
existence until the bank ceased to operate, and that which they may earn from the time
the bank's operations were stopped until the date of payment of the deposits. As to the
first class, we hold that it should be paid because such interest has been earned in the
ordinary course of the bank's business and before the latter has been declared in a state or
liquidation. Moreover, the bank being authorized by law to make us of the deposits, with
the limitation stated, to invest the same in its business and other operations, it may be
presumed that it bound itself to pay interest to the depositors as in fact it paid interest
prior to the date of the said claims. As to the interest which may be charged from the date
the bank ceased to do business because it was declared in a state of liquidation, we hold
that the said interest should not be paid. Under articles 1101 and 1108 of the Civil Code,
interest is allowed by way of indemnity for damages suffered, in the cases wherein the
obligation consists in the payment of money. In view of this, we hold that in the absence
of any express law or any applicable provision of the Code of Commerce, it is not proper
to pay this last kind of interest to the appellant upon his deposits in the bank, for this
would be anomalous and unjustified in a liquidation or insolvency of a bank. This rule
should be strictly observed in the instant case because it is understood that the assets
should be prorated among all the creditors as they are insufficient to pay all the
obligations of the bank.
5. The last assignment of error has to do with the denial by the court of the claimant's
motion for new trial. No new arguments have been made in its support and it appears that
the assigned error was inserted as a mere corollary of the preceding ones.
In view of all the foregoing considerations, we affirm the part of the appealed decision
for the reasons stated herein, and it is ordered that the net claim of the appellant,
amounting to P13,611.21, is an ordinary and not a preferred credit, and that he is entitled

37
222 Phil. 119
AQUINO, J.:
Respondent Clement David filed a motion for the reconsideration of this Court's decision
dated April 4, 1984, 128 SCRA 577. He contends that this Court failed to consider that
the petitioners entered in the records and books of the Nation Savings and Loan
Association only P305,821.92 out of his deposits in the amounts of P1,145,546.20,
P15,531.94 and $75,000 and that they admitted that they did not deliver the difference
when they assumed in their personal capacities the obligation to pay him. He argues that
the petitioners committed estafa through misappropriation.
On the other hand, the petitioners contend that the decision had already become final
because the Solicitor General did not file any motion for reconsideration; that David
cannot adopt a theory which is inconsistent with his original theory; that his claim is
clearly civil, not criminal; that his claim has been novated, and that prohibition is proper
to stop a void proceeding, to prevent the unlawful and oppressive exercise of lawful
authority and to provide a just and orderly administration of justice.
The petitioners filed this prohibition action because their obligation is allegedly civil in
character and because of the adverse publicity supposedly instigated by David.
The factual background may be restated as follows:
1. Clement David and his sister Denise Kuhne during the period from March 20, 1979 to
March, 1981 made placements with the Nation Savings and Loan Association, Inc. in the
total sum of P1,145,546.20 as evidenced by seven bankers acceptances and five
certificates of time deposits.
He and his sister Denise also had savings deposits in the Nation Savings in the sum of
P13,531.94 as shown in Passbooks Nos. 6-632 and 29-740.
They also invested in Nation Savings US$75,000 in 1980 as evidenced by receipts, of
which $50,000 was deposited in the account of Teofisto Guingona, Jr. with the Security
Bank and Trust Company.
Aggregate investments of David and Kuhne in Nation Savings: P1,159,078.14 in local
currency and 75,000 in U.S. dollars. Nation Savings allegedly paid David from 1979 to
the early part of 1981 interests of P240,000 a year (p. 193, Rollo).
At the time the deposits were made, Antonio I. Martin was the president of Nation
Savings, Teresita G. Santos was its general manager, and Guingona was a director.
2. On March 21, 1981, Nation Savings was placed under receivership by the Central
Bank because of serious fraud and irregularities committed by its key officers (Annex
12).
3. On June 17, 1981, Guingona and Martin executed a promissory note acknowledging a
debt of P1,336,614.02 and $75,000 to be paid in installments within 180 days from said
38
date with interest at 16% per annum from July 1, 1981 until fully paid.
4. The promissory note was novated by another note, antedated June 17, 1981, whereby
Guingona acknowledged one-half of the obligation as his debt or the sums of
P668,307.01 and $37,500 and secured the same by second mortgages on his Quezon City
properties (Annex D). Guingona paid P200,000 on that note.
5. Martin assumed the other half of the total debt. He secured it with the pledge of a
ring valued according to him at P560,000 but appraised by a jewel appraiser at
280,000. Martin is also indebted to David in the sum of P60,000 which David paid to
Monte de Piedad to redeem the ring.
6. On July 22, 1981, David received a report from the Central Bank that only
P305,821.92 of the placements made by him and his sister were entered in the NSLA
records (Annex 4, p. 218, Rollo). The director of the CB Department of Rural Banks and
Savings and Loan Associations in a report dated June 23, 1981 recommended that the
irregularities be brought to the attention of the CB consultant on criminal cases for
appropriate investigation of Nation Savings' officials (p. 240, Rollo).
7. In view of the promissory note and the mortgages, David, on July 22, 1981, executed
an affidavit wherein he bound himself to desist from any prosecution of Guingona
without prejudice to the balance of his claim against Nation Savings (Annex M, p.
46,Rollo).
8. On November 19, 1981, Guingona filed against David Civil Case No. Q-33865 in the
Quezon City Court of First Instance. He prayed for damages of P785,000 against David
for his failure to accept payment of a cashier's check for P300,000 (in addition to the
P200,000) and to release one of the mortgaged properties (Annex K, p. 37, Rollo).
9. On December 22, 1981, David filed with the City Fiscal's Office, Manila I.S. No. 81-
31938, a complaint for estafa and violation of CB Circular No. 364 and related
regulations. He claimed that the difference between his placements of P1,159,078.14 and
$75,000, on one hand, and the sum of P305,821.92, the amount entered in Nation
Savings' books, on the other hand, constitutes the defraudation against him.
10. He filed the complaint against Guingona, as board chairman, director and principal
stockholder of Nation Savings; Martin, as vice-president, director and shareholder, and
Santos, as general manager. David dealt directly with Guingona, Martin and Santos in
his transactions with Nation Savings. The three filed a counter charge of perjury against
David and his lawyers (p. 59, Rollo).
11. On January 20, 1982, David sought to foreclose extrajudicially the two mortgages (p.
58, Rollo). The foreclosure was restrained by the Quezon City Court of First Instance.
12. On March 15, 1982, the Solicitor General, in behalf of the Central Bank, filed a
petition in the Court of First Instance of Manila for assistance in the liquidation of Nation
Savings as an insolvent firm (Spec. Proc. No. 82-7552, p. 111, Rollo). The receivership
was challenged by Nation Savings stockholders in Special Proceedings No. 82-1655 (p.
125, Rollo). The Solicitor General answered that petition by alleging that Nation Savings
was plagued with irregularities (p. 225, Rollo).
With the foregoing background, the prohibition petition should be dismissed. The
petitioners have no cause of action for prohibition because the City Fiscal has jurisdiction
to conduct the preliminary investigation. It has not been finished. The filing of this
petition is premature. The case does not fall within any of the exceptions when
prohibition lies to stop the preliminary investigation (Hernandez vs. Albano, 125 Phil.
513).

"As a general rule, an injunction will not be granted to restrain a criminal prosecution"
(People vs. Mencias, 124 Phil. 1436, 1441). With more reason will injunction not lie
when the case is still at the preliminary investigation stage. This Court should not usurp
the primary function of the City Fiscal to conduct the preliminary investigation of the
estafa charge and of the petitioners' countercharge for perjury, which was consolidated
with the estafa charge (p. 59, Rollo).

The City Fiscal's office should be allowed to finish its investigation and make its factual
findings. This Court should not conduct the preliminary investigation. It is not a trier of
facts.[*]

The instant, case is primarily a litigation between David and the petitioners. The fact that
the Solicitor General, as counsel of the public respondents, did not file a motion for
reconsideration does not estop David from continuing with the prosecution of the
petitioners. In the present posture of the case, the City Fiscal occupies the analogous
position of judge. He has to maintain an attitude of neutrality, not that of partiality.

In view of the foregoing considerations, the decision is reconsidered, the petition is

dismissed and the City Fiscal of Manila is directed to finish the preliminary
investigation. No costs.

SO ORDERED.

39

[ G.R. No. 43191, November 13, 1935 ]
PAULINO GULLAS, PLAINTIFF AND APPELLANT, VS. THE PHILIPPINE
NATIONAL BANK, DEFENDANT AND APPELLANT.
DECISION
MALCOLM, J.:
Both parties to this case appealed from a judgment of the Court of First Instance of Cebu,
which sentenced the defendant to return to the account of the plaintiff the sum of P509,
with legal interest and costs, the plaintiff to secure damages in the amount of P10,000
more or less, and the defendant to be absolved totally from the amended complaint. As it
is conceded that the plaintiff has already received the sum represented by the United
States treasury warrant, which is in Question, the appeal will thus determine the amount,
if any, which should be paid, to the plaintiff by the defendant.
The parties to the case are Paulino Gullas and the Philippine National Bank. The first
named is a member of the Philippine Bar, resident in the City of Cebu. The second named
is a banking corporation with a branch in the same city. Attorney Gullas has had a current
account with the bank.
It appears from the record that on August 2, 1933, the Treasurer of the United States for
the United States Veterans Bureau issued a warrant in the amount of $361, payable to the
order of Francisco Sabectoria Bacos. Paulino Gullas and Pedro Lopez signed as indorsers
of this check. Thereupon it was cashed by the Philippine National Bank. Subsequently
the treasury warrant was dishonored by the Insular Treasurer.
At that time the outstanding balance of Attorney Gullas on the books of the bank was
P509. Against this balance he had issued certain checks which could not be paid when the
money was sequestered by the bank. On August 20, 1933, Attorney Gullas left his
residence for Manila.
The bank on learning of the dishonor of the treasury warrant sent notices by mail to Mr.
Gullas which could not be delivered to him at that time because he was in Manila. In the
bank's letter of August 21, 1933, addressed to Messrs. Paulino Gullas and Pedro Lopez,
they were informed that the United States Treasury warrant No. 20175 in the name of
Francisco Sabectoria Bacos for $361 or P722, the payment for which had been received
has been returned by our Manila office with the notation that the payment of his check
has been stopped by the Insular Treasurer. "In view of this therefore we have applied the
outstanding balances of your current accounts with us to the part payment of the
foregoing check", namely, Mr. Paulino Gullas P509. On the return of Attorney Gullas to
Cebu on August 31, 1933, notice of dishonor was received and the unpaid balance of the
United States Treasury warrant was immediately paid by him.
As a consequence of these happenings, two occurrences transpired which inconvenienced
Attorney Gullas. In the first place, as above indicated, checks including one for his
insurance were not paid because of the lack of funds standing to his credit in the bank. In
the second place, periodicals in the vicinity gave prominence to the news to the great
mortification of Gullas.
40
A variety of incidental questions have been suggested on the record which it can be taken
for granted as having been adversely disposed of in this opinion. The main issues are two,
namely, (1) as to the right of the Philippine National Bank to apply a deposit to the debt
of a depositor to the bank, and (2) as to the amount of damages, if any, which should be
awarded Gullas,
The Civil Code contains provisions regarding compensation (set off) and deposit.
(Articles 1195 et seq., 1758 et seq.) These portions of Philippine law provide that
compensation shall take place when two persons are reciprocally creditor and debtor of
each other (Civil Code, article 1195). In this connection, it has been held that the relation
existing between a depositor and a bank is that of creditor and debtor. (Fulton Iron Works
Co. vs. China Banking Corporation [1930], 55 Phil., 208; San Carlos Milling Co. vs.
Bank of the Philippine Islands and China Banking Corporation [1933], 59 Phil., 59.)
The Negotiable Instruments Law contains provisions establishing the liability of a
general indorser and giving the procedure for notice of dishonor. The general indorser of
a negotiable instrument engages that if it be dishonored and the necessary proceedings of
dishonor be duly taken, he will pay the amount thereof to the holder. (Negotiable
Instruments Law, sec. 66.) In this connection, it has been held by a long line of
authorities that notice of dishonor is necessary in order to charge an indorser and that the
right of action against him does not accrue until the notice is given. (Asia Banking
Corporation vs. Javier [1923], 44 Phil., 777; 5 Uniform Laws Annotated.)
As a general rule, a bank has a right of set off of the deposits in its hands for the payment
of any indebtedness to it on the part of a depositor. In Louisiana, however, a civil law
jurisdiction, the rule is denied, and it is held that a bank has no right, without an order
from or special assent of the depositor to retain out of his deposit an amount sufficient to
meet his indebtedness. The basis of the Louisiana doctrine is the theory of confidential
contracts arising from irregular deposits, e. g.f the deposit of money with a banker. With
freedom of selection and1 after full consideration, we have decided to adopt the general
rule in preference to the minority rule as more in harmony with modern banking practice.
(1 Morse on Banks and Banking, 5th ed., sec. 324; Garrison vs. Union Trust Company,
[1905], 111 A. S, R.,,407; Louisiana Civil Code Annotated, arts. 2207 et seq.; Gordon &
Gomila vs. Muchler [1882], 34 L. Ann., 604; 8 Manresa, Comentarios al Codigo Civil
Espanol, 4th ed., 359 et seq.; 11 Manresa, pp. 694 et seq.)
Starting, therefore, from the premise that the Philippine National Bank had with respect
to the deposit of Gullas a right of set off, we next consider if that remedy was enforced
properly. 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.) The decision cited represents the minority
doctrine, for on principle it would seem that notice is not necessary to a maker because
the right is based on the doctrine that the relationship is that of creditor and debtor.
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.

We accordingly are of the opinion that the action of the bank was prejudicial to Gullas.
But to follow up that statement with others proving exact damages is not so easy. For
instance, for alleged libelous articles the bank would not be primarily liable. The same
remark could be made relative to the loss of business which Gullas claims but which
could not be traced definitely to this occurrence. Also Gullas having eventually been
reimbursed lost little through the actual levy by the bank on his funds. On the other hand,
it was not agreeable for one to draw checks in all good faith, then, leave for Manila, and
on return find that those checks had not been cashed because of the action taken by the
bank. That caused a disturbance in Gullas' finances, especially with reference to his
insurance, which was injurious to him. All facts and circumstances considered, we are of
the opinion that Gullas should be awarded nominal damages because of the premature
action of the bank against which Gullas had no means of protection, and have finally
determined that the amount should be P250.

Agreeable to the foregoing, the errors assigned by the parties will in the main be
overruled, with the result that the judgment of the trial court will be modified by
sentencing the defendant to pay the plaintiff the sum of and the-costs of both instances.

Villa-Real, Imperial, Butte, and Goddard, JJ., doncur.

Judgment modified.

41
THIRD DIVISION
MACLARING M. LUCMAN, in his G.R. No. 159794
capacity as the Manager of the LAND
BANK OF THE PHILIPPINES, Present: R.A. No. 6679[3] and Comelec Resolution No. 2888 dated February 5, 1997.[4]
Marawi City,
Petitioner, QUISUMBING, J., Beginning with the second quarter of 1997, LBP was selected as the government
Chairperson, depository bank for the IRAs of the abovementioned barangays.[5] Being a new
CARPIO, government depositary bank for the IRA funds, the authorized public officials had to
CARPIO MORALES, open new accounts in behalf of their government units with the proper LBP branch from
- versus - TINGA, and which they could withdraw the IRAs.[6]
VELASCO, JR., JJ.
ALIMATAR MALAWI, ABDUL- Promulgated: After the failed 12 May 1997 elections, respondents attempted to open their respective
KHAYER PANGCOGA, SALIMATAR barangays IRA bank accounts but were refused by petitioner because respondents needed
SARIP, LOMALA CADAR, ALIRIBA to show their individual certifications showing their right to continue serving as Barangay
S. MACARAMBON and ABDUL December 19, 2006 Chairmen and the requisite Municipal Accountants Advice giving respondents the
USMAN, authority to withdraw IRA deposits.[7] The requirement for the Accountants Advice
Respondents. stemmed from Commission on Audit Circular No. 94-004.[8]
x----------------------------------------------------------------------------x
Respondents were eventually allowed to open accounts for their barangays except for
Lomala Cadar and Abdul Usman of barangays Mapantao-Ingud and Rangiran,
DECISION respectively, because the accounts for these barangays were previously opened by two
persons who presented themselves as the duly proclaimed Barangay Chairmen for these
TINGA, J.: same barangays.[9]

This is a petition for review challenging the decision of the trial court, affirmed by the In any event, all respondents were not allowed to withdraw the IRA funds from the
Court of Appeals, granting the petition for mandamus filed by herein respondents, opened accounts, owing to the absence of the requisite Accountants Advice.[10]
Barangay Chairmen (or Punong Barangay) of several barangays in the province of Lanao
del Sur.

The petition for mandamus filed by respondents before the trial court is rooted in their
claim that they were deprived of their Internal Revenue Allotment (IRA) for the 2ndand
3rd quarters of 1997. Respondents further alleged that these same funds were released by
petitioner as Manager of Land Bank of the Philippines (LBP), the depositary bank, to
third persons.
There were originally six (6) petitioners when the Petition for Mandamus with Prayer for
Writ of Preliminary Mandatory Injunction was filed by now respondents before the court
of origin. They were Alimatar Malawi, Abdulkhayr Pangcoga, Salimatar Sarip, Lomala
Cadar, Aliriba S. Macarambon and Abdul Usman who were the incumbent barangay
chairmen of Bubong Ngingir (Kabasaran), Ilian, Linindingan, Mapantao-Ingod, Paigoay
and Rangiran, respectively, all from the Municipality of Pagayawan, Lanao del
Sur.[1] All of them were the incumbent barangay chairmen of their respective barangays
prior to the 12 May 1997 barangay elections. The elections on 12 May 1997 in the
aforesaid barangays resulted in a failure of elections. Thereafter, the special elections
held in these barangays likewise resulted in a failure of elections.[2] Consequently,
respondents remained in office in a holdover capacity pursuant to the provisions of Sec. 1
of
Then on 4 August 1997, five (5) other persons presented themselves before petitioner as
the newly proclaimed Punong Barangays of the five barangays concerned,[11]each of
them presenting a certification of his election as Punong Barangay issued by the
provincial director of the DILG-ARMM and another Certification issued by the Local
Government Operations Officer attesting, among others, to the revocation of the
certification previously issued to respondents.[12] Without verifying the authenticity of
the certifications presented by these third persons, petitioner proceeded to release the IRA
funds for the 2nd and 3rd quarters of 1997 to them.[13]
Respondents thus filed on 11 August 1997 a special civil action for Mandamus with
Application for Preliminary Mandatory Injunction docketed as Civil Case No. 11-106,to
compel petitioner to allow them to open and maintain deposit accounts covering the IRAs
of their respective barangays and to withdraw therefrom.[14] The case was raffled to the
Regional Trial Court (RTC) of Lanao del Sur, Branch 11.[15]

42
At the trial respondents Sarip, Cadar, Pangcoga and Usman testified that they were duly
elected chairpersons of their respective barangays and continued as such in a holdover
capacity until their re-election on 30 August 1997. They testified further that despite
presenting the corresponding documents, petitioner refused to allow the withdrawal of the
funds.[16]
Respondent Macarambon testified that he was the incumbent chairperson of Barangay
Paigoay prior to the 12 May 1997 elections and that due to the failure of elections, he
continued to occupy his position in a holdover capacity until he was succeeded by his
wife upon the latters election to the same post. He testified on petitioners refusal to
release the money to him despite his submission of the Accountants Advice.[17]
For failure to appear at the scheduled hearing on 20 April 1999, petitioner was held as in
default and respondents were allowed to present evidence ex parte. Petitioners Motion for
Reconsideration of the Order declaring him as in default was granted.[18]
After failing again to appear on the given time for him to adduce evidence,
another Order was issued wherein petitioner was deemed to have waived his right to
present evidence. The Order was lifted on petitioners Motion for Reconsideration. Instead
of presenting evidence, petitioner filed on 10 November 1999 a Motion to Dispense or
Waive Presentation of Evidence wherein he represented that the prayers in the complaint
had already been complied with.[19] The RTC granted petitioners motion through
an Orderdated 24 September 1999.[20]
Thereafter, the RTC rendered a Decision[21] dated 8 October 1999 commanding
petitioner to pay respondents, except respondent Alimatar Malawi who failed to testify,
the IRAs of their respective barangays even without the Accountants Advice.[22] The
dispositive portion of the Decision reads, to wit:
WHEREFORE, premises all considered, the instant petition is hereby
granted. Accordingly, Mr. Maclaring M. Lucman, Manager of the Land Bank of
the Philippines, Marawi City branch, is hereby ordered to pay the following:[23]
1. Aliriba Macarambon, the 2nd Quarter IRA of Paigoay, Pagayawan in the sum
of P48,200.00;
2. Salimatar Sarip of Linindingan the
2nd Quarter IRA - - - P54,220.00
3rd Quarter IRA - - - P54,220.00
3. Lomala S. Cadar of Mapantao the
2nd Quarter IRA - - - P54,320.00
3rd Quarter IRA - - - P54,320.00
4. Abdulkhay Pangcoga of Ilian the
2nd Quarter IRA - - - P53, 361.00
3rd Quarter IRA - - - P53,361.00
43
5. Abdul Usman of Rangiran the
2nd Quarter IRA - - - P51,185.00
3rd Quarter IRA - - - P51,185.00
even without the Accountants Advice and the subsequent IRAs until their term of office
shall have expired.
SO ORDERED.[24]
The RTC gave no credence to petitioners assertion of payment to the rightful barangay
officers, there having been no testimonial or documentary evidence proferred in
substantiation thereof.[25] It considered petitioners refusal to present evidence as a
silence that equates to an admission of respondents allegations.[26] Furthermore, the
RTC relied on the testimonies and certifications adduced by respondents in holding that
they were occupying their positions in a holdover capacity[27]and that by virtue thereof,
they had the perfect right to continue performing the duties and functions of their
positions including the withdrawal of funds of their respective barangays.[28]
The Court of Appeals[29] affirmed the RTCs Decision in toto. Hence, this petition.
Petitioner argues that respondents have no cause of action against him since they failed to
present valid certifications showing their respective right to continue serving as Punong
Barangay as well as the requisite Municipal Accountants Advice. Petitioner also asserts
that the LBP Marawi Branch had already released the contested IRAs to the Barangay
Treasurers who were acting in conjunction with the duly recognized Punong Barangays,
thereby making the petition for mandamus moot and academic.[30] These are factual
issues that are generally beyond the review of this Court.
Petitioner adds that respondents have no legal personality to institute the petition for
mandamus in their own names since the IRAs rightfully belong to the respective
barangays and not to them and that their respective barangays already received the
claimed IRAs in this instant case.[31]
For the proper adjudication of the present petition, two related core issues have to be
resolved. First, what is the cause of action alleged in the initiatory pleading filed by
respondents before the trial court? Second, are there indispensable parties which were not
impleaded?
Although the pleading filed before the lower court was denominated as a Petition for
Mandamus With Prayer For Writ of Preliminary Injunction, the allegations thereof
indicate that it is an action for specific performance, particularly to compel petitioner to
allow withdrawal of funds from the accounts of the barangays headed by respondents
with the LBP, Marawi Branch. Thus, the Petition alleged:
12. Despite the opening of deposit accounts for the barangays mentioned in the preceding
paragraph, respondent, without any valid or lawful cause, failed and refused, and still
fails and refuses, to allow the withdrawal of the funds or IRA of the said barangays as
evidenced by the WITHDRAWAL CHECKS (attached as Annexes D to D-3 hereof) of
said barangays which were refused payment when presented to the Land Bank on August
4, 1997.[32]
From the records of the case, it appears that the shares of the barangays in the IRA had
already been remitted by the Department of Budget and Management (DBM) to the LBP
Marawi Branch where they were kept in the accounts opened in the names of the
barangays.
By virtue of the deposits, there exists between the barangays as depositors and LBP a
creditor-debtor relationship. Fixed, savings, and current deposits of money in banks and
similar institutions are governed by the provisions concerning simple loan.[33] In other
words, the barangays are the lenders while the bank is the borrower.
This Court elucidated on the matter in Guingona, Jr., et al. v. The City Fiscal of Manila,
et al.,[34] citing Serrano v. Central Bank of the Philippines,[35] thus:
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 v. Phil. National Bank, 62 Phil. 519). Current and savings deposits are loans to a
bank because it can use the same. The petitioner here in making time deposits that earn
interest with 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 depository's failure to
return the subject matter of the deposit. (Emphasis supplied.)[36]
The relationship being contractual in nature, mandamus is therefore not an available
remedy since mandamus does not lie to enforce the performance of contractual
obligations.[37]
This brings us to the second core issue.
The IRA funds for which the bank accounts were created belong to the barangays headed
by respondents. The barangays are the only lawful recipients of these funds.
Consequently, any transaction or claim involving these funds can be done only through
the proper authorization from the barangays as juridical entities.
The determination, therefore, of whether or not the IRA funds were unlawfully withheld
or improperly released to third persons can only be determined if the barangays
participated as parties to this action. These questions cannot be resolved with finality
without the involvement of the barangays. After all, these controversies involve funds
rightfully belonging to the barangays. Hence, the barangays are indispensable parties in
this case.
44
An indispensable party is defined as parties-in-interest without whom there can be no
final determination of an action.[38] The nature of an indispensable party was thoroughly
discussed in Arcelona v. Court of Appeals,[39] to quote:
An indispensable party is a party who has such an interest in the controversy or subject
matter that a final adjudication cannot be made, in his absence, without injuring or
affecting that interest, a party who has not only an interest in the subject matter of the
controversy, but also has an interest of such nature that a final decree cannot be made
without affecting his interest or leaving the controversy in such a condition that its final
determination may be wholly inconsistent with equity and good conscience. It has also
been considered that an indispensable party is a person in whose absence there cannot be
a determination between the parties already before the court which is effective, complete,
or equitable. Further, an indispensable party is one who must be included in an action
before it may properly go forward.
A person is not an indispensable party, however, if his interest in the controversy or
subject matter is separable from the interest of the other parties, so that it will not
necessarily be directly or injuriously affected by a decree which does complete justice
between them. Also, a person is not an indispensable party if his presence would merely
permit complete relief between him and those already parties to the action, or if he has no
interest in the subject matter of the action. It is not a sufficient reason to declare a person
to be an indispensable party that his presence will avoid multiple litigation.[40]
In Arcelona, the Court also dwelt on the consequences of failure to include indispensable
parties in a case, categorically stating that the presence of indispensable parties is a
condition for the exercise of juridical power[41] and when an indispensable party is not
before the court, the action should be dismissed.[42] The absence of an indispensable
party renders all subsequent actions of the court null and void for want of authority to act,
not only as to the absent parties but even as to those present.[43]
The joinder of indispensable parties is mandatory. Without the presence of indispensable
parties to the suit, the judgment of the court cannot attain real finality. Strangers to a case
are not bound by the judgment rendered by the court.[44]
Clearly, this case was not initiated by the barangays themselves. Neither did the barangay
chairmen file the suit in representation of their respective barangays. Nothing from the
records shows otherwise. On this score alone, the case in the lower court should have
been dismissed.
Even if the barangays themselves had filed the case, still it would not prosper. The case
involves government funds and as such, any release therefrom can only be done in
accordance with the prevailing rules and procedures.
The Government Accounting and Auditing Manual (GAAM) provides that the local
treasurers shall maintain the depositary accounts in the name of their respective local
government units with banks.[45] Under the Local Government Code, the treasurer is
given the power, among others, to: (1) keep custody of barangay funds and properties;
and (2) disburse funds in accordance with the financial procedures provided by the Local
Government Code.[46] The same manual defines disbursements as constituting all cash
paid out during a given period either in currency or by check.[47]
Sec. 344 of the Local Government Code further provides for the following requirements
in cases of disbursements, to wit:
Sec. 344. No money shall be disbursed unless the local budget officer certifies to the
existence of appropriation that has been legally made for the purpose, the local
accountant has obligated said appropriation, and the local treasurer certifies to the
availability of funds for the purpose. Vouchers and payrolls shall be certified to and
approved by the head of the department or office who has administrative control of the
fund concerned, as to the validity, propriety, and legality of the claim involved. Except in
cases of disbursements involving regularly recurring administrative expenses xxx
approval of the disbursement voucher by the local chief executive himself shall be
required whenever local funds are disbursed.
Thus, as a safeguard against unwarranted disbursements, certifications are required from:
(a) the local budget officer as to the existence and validity of the appropriation; (b) the
local accountant as to the legal obligation incurred by the appropriation; (c) the local
treasurer as to the availability of funds; and (d) the local department head as to the
validity, propriety and legality of the claim against the appropriation.[48]
Further, the GAAM provides for the basic requirements applicable to all classes of
disbursements that shall be complied with, to wit:
One final note. There is no conclusive proof from the records
showing that the IRA funds for the 2nd and 3rd quarters of the barangays concerned remi
tted by the DBM hadalready been
withdrawn from the LBP Marawi Branch. Considering the implications of this action of
possibly depriving several local government units of their IRAs, the Court took the
initiative to request the COMELEC to issue certifications on who were the duly elected
chairmen of the barangays concerned. The COMELEC issued to this Court a list of the
elected barangay chairmen which confirmed the re-election of respondents as barangay
chairmen of their respective barangays.[51] If withdrawals were indeed made, whether by
the respondents or by impostors, the matter deserves to be investigated since public funds
are involved. Accordingly, we refer the matter to the Department of Interior and Local
Government (DILG) for investigation and appropriate action.
WHEREFORE, premises considered, the petition is GRANTED. The assailed
Decisions of the Court of Appeals and the Regional Trial Court are REVERSED and SET
ASIDE. The Petition for Mandamus filed before the Regional Trial Court is ordered
DISMISSED.
The alleged withdrawals of deposits representing the Internal Revenue Allotments for the
2nd and 3rd Quarters of 1997 of the barangays concerned from the Land Bank of
the Philippines, Marawi Branch, are referred to the DILG for investigation and
appropriate action. The DILG is hereby DIRECTED to INFORM the Court of the result
of its investigation within thirty (30) days from the completion thereof.

a) Certificate of Availability of Fund.Existence of lawful appropriation,

the unexpended balance of which, free from other obligations, is sufficient to cover the
expenditure, certified as available by an accounting officer or any other official required
to accomplish the certificate. No pronouncement as to costs.
SO ORDERED.
Use of moneys appropriated solely for the specific purpose for which appropriated, and
for no other, except when authorized by law or by a corresponding appropriating body.

b) Approval of claim or expenditure by head of office or his duly

authorized representative.
c) Documents to establish validity of claim. Submission of documents and
other evidences to establish the validity and correctness of the claim for payment.
d) Conformity of the expenditure to existing laws and regulations.
e) Proper accounting treatment.[49]

This prescribed legal framework governing the release and disbursement of IRA funds to
the respective barangays disabuses from the notion that a barangay chairman, relying
solely on his authority as a local executive, has the right to demand physical possession
of the IRA funds allocated by the national government to the barangay. The right to
demand for the funds belongs to the local government itself through the authorization of
their Sanggunian.[50]

45
THIRD DIVISION G.R. No. 168332

The first is a Petition for Certiorari under Rule 65 of the Rules of Court, docketed as
ANA MARIA A. KORUGA, G.R. No. 168332 G.R. No. 168332, praying for the annulment of the Court of Appeals (CA)
Petitioner, Resolution[1] in CA-G.R. SP No. 88422 dated April 18, 2005 granting the prayer for a
Writ of Preliminary Injunction of therein petitioners Teodoro O. Arcenas, Jr., Albert C.
- versus - Aguirre, Cesar S. Paguio, and Francisco A. Rivera (Arcenas, et al.).

TEODORO O. ARCENAS, JR., ALBERT C. AGUIRRE, Koruga is a minority stockholder of Banco Filipino Savings and Mortgage Bank. On
CESAR S. PAGUIO, FRANCISCO A. RIVERA, and THE August 20, 2003, she filed a complaint before the Makati RTC which was raffled to
HONORABLE COURT OF APPEALS, THIRD DIVISION, Branch 138, presided over by Judge Sixto Marella, Jr.[2] Korugas complaint alleged:
Respondents.
x-----------------------------x 10. 1 Violation of Sections 31 to 34 of the Corporation Code (Code) which prohibit self-
TEODORO O. ARCENAS, JR., ALBERT C. AGUIRRE, dealing and conflicts of interest of directors and officers, thus:
CESAR S. PAGUIO, and FRANCISCO A. RIVERA,
Petitioners, G.R. No. 169053 (a) For engaging in unsafe, unsound, and fraudulent banking practices that have
jeopardized the welfare of the Bank, its shareholders, who includes among others, the
Present: Petitioner, and depositors. (sic)
- versus -
YNARES-SANTIAGO, J., (b) For granting and approving loans and/or loaned sums of money to six (6)
Chairperson, dummy borrower corporations (Borrower Corporations) which, at the time of loan
HON. SIXTO MARELLA, JR., Presiding Judge, Branch CARPIO,* approval, had no financial capacity to justify the loans. (sic)
138, Regional Trial Courtof Makati City, and ANA MARIA A. CORONA,**
KORUGA, NACHURA, and (c) For approving and accepting a dacion en pago, or payment of loans with
Respondents. PERALTA, JJ. property instead of cash, resulting to a diminished future cumulative interest income by
the Bank and a decline in its liquidity position. (sic)
Promulgated:
(d) For knowingly giving favorable treatment to the Borrower Corporations in
June 19, 2009 which some or most of them have interests, i.e. interlocking directors/officers thereof,
interlocking ownerships. (sic)
x------------------------------------------------------------------------------------x
(e) For employing their respective offices and functions as the Banks officers
and directors, or omitting to perform their functions and duties, with negligence,
unfaithfulness or abuse of confidence of fiduciary duty, misappropriated or misapplied or
ratified by inaction the misappropriation or misappropriations, of (sic) almost P1.6
DECISION Billion Pesos (sic) constituting the Banks funds placed under their trust and
administration, by unlawfully releasing loans to the Borrower Corporations or refusing or
NACHURA, J.: failing to impugn these, knowing before the loans were released or thereafter that the
Banks cash resources would be dissipated thereby, to the prejudice of the Petitioner, other
Banco Filipino depositors, and the public.

10.2 Right of a stockholder to inspect the records of a corporation (including financial

Before this Court are two petitions that originated from a Complaint filed by Ana Maria
A. Koruga (Koruga) before the Regional Trial Court (RTC) of Makati City against the
Board of Directors of Banco Filipino and the Members of the Monetary Board of the
Bangko Sentral ng Pilipinas (BSP) for violation of the Corporation Code, for inspection
of records of a corporation by a stockholder, for receivership, and for the creation of a
management committee.
statements) under Sections 74 and 75 of the Code, as implemented by the Interim Rules;
(a) Unlawful refusal to allow the Petitioner from inspecting or otherwise
accessing the corporate records of the bank despite repeated demand in writing, where
she is a stockholder. (sic)
10.3 Receivership and Creation of a Management Committee pursuant to:

46
(a) Rule 59 of the 1997 Rules of Civil Procedure (Rules);
(b) Section 5.2 of R.A. No. 8799;
(c) Rule 1, Section 1(a)(1) of the Interim Rules;
(d) Rule 1, Section 1(a)(2) of the Interim Rules;
(e) Rule 7 of the Interim Rules;
(f) Rule 9 of the Interim Rules; and
(g) The General Banking Law of 2000 and the New Central Bank Act.[3]
On September 12, 2003, Arcenas, et al. filed their Answer raising, among others, the trial
courts lack of jurisdiction to take cognizance of the case. They also filed a Manifestation
and Motion seeking the dismissal of the case on the following grounds: (a) lack of
jurisdiction over the subject matter; (b) lack of jurisdiction over the persons of the
defendants; (c) forum-shopping; and (d) for being a nuisance/harassment suit. They then
moved that the trial court rule on their affirmative defenses, dismiss the intra-corporate
case, and set the case for preliminary hearing.
In an Order dated October 18, 2004, the trial court denied the Manifestation and Motion,
ruling thus:
The result of the procedure sought by defendants Arcenas, et al. (sic) is for the Court to
conduct a preliminary hearing on the affirmative defenses raised by them in their Answer.
This [is] proscribed by the Interim Rules of Procedure on Intracorporate (sic)
Controversies because when a preliminary hearing is conducted it is as if a Motion to
Dismiss was filed (Rule 16, Section 6, 1997 Rules of Civil Procedure). A Motion to
Dismiss is a prohibited pleading under the Interim Rules, for which reason, no favorable
consideration can be given to the Manifestation and Motion of defendants, Arcenas, et al.
The Court finds no merit to (sic) the claim that the instant case is a nuisance or
harassment suit.
WHEREFORE, the Court defers resolution of the affirmative defenses raised by the
defendants Arcenas, et al.[4]
Arcenas, et al. moved for reconsideration[5] but, on January 18, 2005, the RTC denied
the motion.[6] This prompted Arcenas, et al. to file before the CA a Petition
for Certiorari and Prohibition under Rule 65 of the Rules of Court with a prayer for the
issuance of a writ of preliminary injunction and a temporary retraining order (TRO).[7]
On February 9, 2005, the CA issued a 60-day TRO enjoining Judge Marella from
conducting further proceedings in the case.[8]
47
On February 22, 2005, the RTC issued a Notice of Pre-trial[9] setting the case for pre-
trial on June 2 and 9, 2005. Arcenas, et al. filed a Manifestation and Motion[10]before
the CA, reiterating their application for a writ of preliminary injunction. Thus, on April
18, 2005, the CA issued the assailed Resolution, which reads in part:
(C)onsidering that the Temporary Restraining Order issued by this Court on February 9,
2005 expired on April 10, 2005, it is necessary that a writ of preliminary injunction be
issued in order not to render ineffectual whatever final resolution this Court may render
in this case, after the petitioners shall have posted a bond in the amount of FIVE
HUNDRED THOUSAND (P500,000.00) PESOS.
SO ORDERED.[11]
Dissatisfied, Koruga filed this Petition for Certiorari under Rule 65 of the Rules of
Court. Koruga alleged that the CA effectively gave due course to Arcenas, et al.s petition
when it issued a writ of preliminary injunction without factual or legal basis, either in the
April 18, 2005 Resolution itself or in the records of the case. She prayed that this Court
restrain the CA from implementing the writ of preliminary injunction and, after due
proceedings, make the injunction against the assailed CA Resolution permanent.[12]
In their Comment, Arcenas, et al. raised several procedural and substantive issues. They
alleged that the Verification and Certification against Forum-Shopping attached to the
Petition was not executed in the manner prescribed by Philippine law since, as admitted
by Korugas counsel himself, the same was only a facsimile.
They also averred that Koruga had admitted in the Petition that she never asked for
reconsideration of the CAs April 18, 2005 Resolution, contending that the Petition did
not raise pure questions of law as to constitute an exception to the requirement of filing a
Motion for Reconsideration before a Petition for Certiorari is filed.
They, likewise, alleged that the Petition may have already been rendered moot and
academic by the July 20, 2005 CA Decision,[13] which denied their Petition, and held
that the RTC did not commit grave abuse of discretion in issuing the assailed orders, and
thus ordered the RTC to proceed with the trial of the case.
Meanwhile, on March 13, 2006, this Court issued a Resolution granting the prayer for a
TRO and enjoining the Presiding Judge of Makati RTC, Branch 138, from proceeding
with the hearing of the case upon the filing by Arcenas, et al. of a P50,000.00
bond. Koruga filed a motion to lift the TRO, which this Court denied on July 5, 2006.
On the other hand, respondents Dr. Conrado P. Banzon and Gen. Ramon Montao also
filed their Comment on Korugas Petition, raising substantially the same arguments as
Arcenas, et al.
G.R. No. 169053
G.R. No. 169053 is a Petition for Review on Certiorari under Rule 45 of the Rules of
Court, with prayer for the issuance of a TRO and a writ of preliminary injunction filed by
Arcenas, et al.
In their Petition, Arcenas, et al. asked the Court to set aside the Decision[14] dated July
20, 2005 of the CA in CA-G.R. SP No. 88422, which denied their petition, having found
no grave abuse of discretion on the part of the Makati RTC. The CA said that the RTC
Orders were interlocutory in nature and, thus, may be assailed by certiorari or prohibition
only when it is shown that the court acted without or in excess of jurisdiction or with
grave abuse of discretion. It added that the Supreme Court frowns upon resort to remedial
measures against interlocutory orders.
Arcenas, et al. anchored their prayer on the following grounds: that, in their Answer
before the RTC, they had raised the issue of failure of the court to acquire jurisdiction
over them due to improper service of summons; that the Koruga action is a nuisance or
harassment suit; that there is another case involving the same parties for the same cause
pending before the Monetary Board of the BSP, and this constituted forum-shopping; and
that jurisdiction over the subject matter of the case is vested by law in the BSP.[15]
Arcenas, et al. assign the following errors:
I. THE COURT OF APPEALS, IN FINDING NO GRAVE ABUSE OF
DISCRETION COMMITTED BY PUBLIC RESPONDENT REGIONAL TRIAL
COURT OF MAKATI, BRANCH 138, IN ISSUING THE ASSAILED ORDERS,
FAILED TO CONSIDER AND MERELY GLOSSED OVER THE MORE
TRANSCENDENT ISSUES OF THE LACK OF JURISDICTION ON THE PART OF
SAID PUBLIC RESPONDENT OVER THE SUBJECT MATTER OF THE CASE
BEFORE IT, LITIS PENDENTIA AND FORUM SHOPPING, AND THE CASE
BELOW BEING A NUISANCE OR HARASSMENT SUIT, EITHER ONE AND ALL
OF WHICH GOES/GO TO RENDER THE ISSUANCE BY PUBLIC RESPONDENT
OF THE ASSAILED ORDERS A GRAVE ABUSE OF DISCRETION.
II. THE FINDING OF THE COURT OF APPEALS OF NO GRAVE ABUSE
OF DISCRETION COMMITTED BY PUBLIC RESPONDENT REGIONAL TRIAL
COURT OF MAKATI, BRANCH 138, IN ISSUING THE ASSAILED ORDERS, IS
NOT IN ACCORD WITH LAW OR WITH THE APPLICABLE DECISIONS OF THIS
HONORABLE COURT.[16]
Meanwhile, in a Manifestation and Motion filed on August 31, 2005, Koruga prayed for,
among others, the consolidation of her Petition with the Petition for Review
on Certiorari under Rule 45 filed by Arcenas, et al., docketed as G.R. No. 169053. The
motion was granted by this Court in a Resolution dated September 26, 2005.
Our Ruling
Initially, we will discuss the procedural issue.
48
Arcenas, et al. argue that Korugas petition should be dismissed for its defective
Verification and Certification Against Forum-Shopping, since only a facsimile of the
same was attached to the Petition. They also claim that the Verification and Certification
Against Forum-Shopping, allegedly executed in Seattle, Washington, was not
authenticated in the manner prescribed by Philippine law and not certified by the
Philippine Consulate in the United States.
This contention deserves scant consideration.
On the last page of the Petition in G.R. No. 168332, Korugas counsel executed an
Undertaking, which reads as follows:
In view of that fact that the Petitioner is currently in the United States, undersigned
counsel is attaching a facsimile copy of the Verification and Certification Against Forum-
Shopping duly signed by the Petitioner and notarized by Stephanie N. Goggin, a Notary
Public for the Sate (sic) of Washington. Upon arrival of the original copy of the
Verification and Certification as certified by the Office of the Philippine Consul, the
undersigned counsel shall immediately provide duplicate copies thereof to the Honorable
Court.[17]
Thus, in a Compliance[18] filed with the Court on September 5, 2005, petitioner
submitted the original copy of the duly notarized and authenticated Verification and
Certification Against Forum-Shopping she had executed.[19] This Court noted and
considered the Compliance satisfactory in its Resolution dated November 16, 2005.
There is, therefore, no need to further belabor this issue.
We now discuss the substantive issues in this case.
First, we resolve the prayer to nullify the CAs April 18, 2005 Resolution.
We hold that the Petition in G.R. No. 168332 has become moot and academic. The writ
of preliminary injunction being questioned had effectively been dissolved by the CAs
July 20, 2005 Decision. The dispositive portion of the Decision reads in part:
The case is REMANDED to the court a quo for further proceedings and to resolve with
deliberate dispatch the intra-corporate controversies and determine whether there was
actually a valid service of summons. If, after hearing, such service is found to have been
improper, then new summons should be served forthwith.[20]
Accordingly, there is no necessity to restrain the implementation of the writ of
preliminary injunction issued by the CA on April 18, 2005, since it no longer exists.
However, this Court finds that the CA erred in upholding the jurisdiction of, and
remanding the case to, the RTC.
The resolution of these petitions rests mainly on the determination of one fundamental
issue: Which body has jurisdiction over the Koruga Complaint, the RTC or the BSP?
We hold that it is the BSP that has jurisdiction over the case.
A reexamination of the Complaint is in order.
Korugas Complaint charged defendants with violation of Sections 31 to 34 of the
Corporation Code, prohibiting self-dealing and conflict of interest of directors and
officers; invoked her right to inspect the corporations records under Sections 74 and 75 of
the Corporation Code; and prayed for Receivership and Creation of a Management
Committee, pursuant to Rule 59 of the Rules of Civil Procedure, the Securities
Regulation Code, the Interim Rules of Procedure Governing Intra-Corporate
Controversies, the General Banking Law of 2000, and the New Central Bank Act. She
accused the directors and officers of Banco Filipino of engaging in unsafe, unsound, and
fraudulent banking practices, more particularly, acts that violate the prohibition on self-
dealing.
It is clear that the acts complained of pertain to the conduct of Banco Filipinos banking
business. A bank, as defined in the General Banking Law,[21] refers to an entity engaged
in the lending of funds obtained in the form of deposits.[22] 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. Banks are affected with public interest because they receive funds from the general
public in the form of deposits. It is the Governments responsibility to see to it that the
financial interests of those who deal with banks and banking institutions, as depositors or
otherwise, are protected. In this country, that task is delegated to the BSP, which pursuant
to its Charter, is authorized to administer the monetary, banking, and credit system of
the Philippines. It 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.[23]
The law vests in the BSP the supervision over operations and activities of
banks. The New Central Bank Act provides:
Section 25. Supervision and Examination. - The Bangko Sentral 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.[24]
Specifically, the BSPs supervisory and regulatory powers include:
4.1 The issuance of rules of conduct or the establishment of standards of operation for
uniform application to all institutions or functions covered, taking into consideration the
distinctive character of the operations of institutions and the substantive similarities of
specific functions to which such rules, modes or standards are to be applied;
4.2 The conduct of examination to determine compliance with laws and regulations
if the circumstances so warrant as determined by the Monetary Board;
4.3 Overseeing to ascertain that laws and Regulations are complied with;
49
4.4 Regular investigation which shall not be oftener than once a year from the
last date of examination to determine whether an institution is conducting its
business on a safe or sound basis: Provided, That the deficiencies/irregularities found
by or discovered by an audit shall be immediately addressed;
4.5 Inquiring into the solvency and liquidity of the institution (2-D); or
4.6 Enforcing prompt corrective action.[25]
Koruga alleges that the dispute in the trial court involves the manner with which the
Directors (sic) have handled the Banks affairs, specifically the fraudulent loans
and dacion en pago authorized by the Directors in favor of several dummy corporations
known to have close ties and are indirectly controlled by the Directors.[26] Her
allegations, then, call for the examination of the allegedly questionable loans. Whether
these loans are covered by the prohibition on self-dealing is a matter for the BSP to
determine. These are not ordinary intra-corporate matters; rather, they involve banking
activities which are, by law, regulated and supervised by the BSP. As the Court has
previously held:
It is well-settled in both law and jurisprudence that the Central Monetary Authority,
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 a probable loss to its depositors or
creditors, forbid bank or non-bank financial institution to do business in the Philippines;
and shall designate an official of the BSP or other competent person as receiver to
immediately take charge of its assets and liabilities.[27]
Correlatively, the General Banking Law of 2000 specifically deals with loans contracted
by bank directors or officers, thus:
SECTION 36. Restriction on Bank Exposure to Directors, Officers, Stockholders
and Their Related Interests. No director or officer of any bank shall, directly or
indirectly, for himself or as the representative or agent of others, borrow from such bank
nor shall he become a guarantor, indorser or surety for loans from such bank to others, or
in any manner be an obligor or incur any contractual liability to the bank except with the
written approval of the majority of all the directors of the bank, excluding the director
concerned: Provided, That such written approval shall not be required for loans, other
credit accommodations and advances granted to officers under a fringe benefit plan
approved by the Bangko Sentral. The required approval shall be entered upon the records
of the bank and a copy of such entry shall be transmitted forthwith to the appropriate
supervising and examining department of the Bangko Sentral.
Dealings of a bank with any of its directors, officers or stockholders and their related
interests shall be upon terms not less favorable to the bank than those offered to others.
After due notice to the board of directors of the bank, the office of any bank director or
officer who violates the provisions of this Section may be declared vacant and the
director or officer shall be subject to the penal provisions of the New Central Bank Act.
The Monetary Board may regulate the amount of loans, credit accommodations and
guarantees that may be extended, directly or indirectly, by a bank to its directors,
officers, stockholders and their related interests, as well as investments of such bank
in enterprises owned or controlled by said directors, officers, stockholders and their
related interests. However, the outstanding loans, credit accommodations and
guarantees which a bank may extend to each of its stockholders, directors, or officers and
their related interests, shall be limited to an amount equivalent to their respective
unencumbered deposits and book value of their paid-in capital contribution in the bank:
Provided, however, That loans, credit accommodations and guarantees secured by assets
considered as non-risk by the Monetary Board shall be excluded from such limit:
Provided, further, That loans, credit accommodations and advances to officers in the form
of fringe benefits granted in accordance with rules as may be prescribed by the Monetary
Board shall not be subject to the individual limit.
The Monetary Board shall define the term related interests.
The limit on loans, credit accommodations and guarantees prescribed herein shall not
apply to loans, credit accommodations and guarantees extended by a cooperative bank to
its cooperative shareholders.[28]
Furthermore, the authority to determine whether a bank is conducting business in an
unsafe or unsound manner is also vested in the Monetary Board. The General Banking
Law of 2000 provides:
SECTION 56. Conducting Business in an Unsafe or Unsound Manner. In
determining whether a particular act or omission, which is not otherwise prohibited by
any law, rule or regulation affecting banks, quasi-banks or trust entities, may be deemed
as conducting business in an unsafe or unsound manner for purposes of this Section, the
Monetary Board shall consider any of the following circumstances:
56.1. The act or omission has resulted or may result in material loss or damage, or
abnormal risk or danger to the safety, stability, liquidity or solvency of the institution;
56.2. The act or omission has resulted or may result in material loss or damage or
abnormal risk to the institution's depositors, creditors, investors, stockholders or to the
Bangko Sentral or to the public in general;
56.3. The act or omission has caused any undue injury, or has given any unwarranted
benefits, advantage or preference to the bank or any party in the discharge by the director
or officer of his duties and responsibilities through manifest partiality, evident bad faith
or gross inexcusable negligence; or
50
56.4. The act or omission involves entering into any contract or transaction manifestly
and grossly disadvantageous to the bank, quasi-bank or trust entity, whether or not the
director or officer profited or will profit thereby.
Whenever a bank, quasi-bank or trust entity persists in conducting its business in an
unsafe or unsound manner, the Monetary Board may, without prejudice to the
administrative sanctions provided in Section 37 of the New Central Bank Act, take action
under Section 30 of the same Act and/or immediately exclude the erring bank from
clearing, the provisions of law to the contrary notwithstanding.
Finally, the New Central Bank Act grants the Monetary Board the power to impose
administrative sanctions on the erring bank:
Section 37. Administrative Sanctions on Banks and Quasi-banks. - Without prejudice to
the criminal sanctions against the culpable persons provided in Sections 34, 35, and 36 of
this Act, the Monetary Board may, at its discretion, impose upon any bank or quasi-
bank, their directors and/or officers, for any willful violation of its charter or by-laws,
willful delay in the submission of reports or publications thereof as required by law, rules
and regulations; any refusal to permit examination into the affairs of the institution; any
willful making of a false or misleading statement to the Board or the appropriate
supervising and examining department or its examiners; any willful failure or refusal to
comply with, or violation of, any banking law or any order, instruction or regulation
issued by the Monetary Board, or any order, instruction or ruling by the Governor; or
any commission of irregularities, and/or conducting business in an unsafe or
unsound manner as may be determined by the Monetary Board, the following
administrative sanctions, whenever applicable:
(a) fines in amounts as may be determined by the Monetary Board to be appropriate, but
in no case to exceed Thirty thousand pesos (P30,000) a day for each violation, taking into
consideration the attendant circumstances, such as the nature and gravity of the violation
or irregularity and the size of the bank or quasi-bank;
(b) suspension of rediscounting privileges or access to Bangko Sentral credit facilities;
(c) suspension of lending or foreign exchange operations or authority to accept new
deposits or make new investments;
(d) suspension of interbank clearing privileges; and/or
(e) revocation of quasi-banking license.
Resignation or termination from office shall not exempt such director or officer from
administrative or criminal sanctions.
The Monetary Board may, whenever warranted by circumstances, preventively suspend
any director or officer of a bank or quasi-bank pending an investigation: Provided, That
should the case be not finally decided by the Bangko Sentral within a period of one
hundred twenty (120) days after the date of suspension, said director or officer shall be
reinstated in his position: Provided, further, That when the delay in the disposition of the
case is due to the fault, negligence or petition of the director or officer, the period of
delay shall not be counted in computing the period of suspension herein provided.
The above administrative sanctions need not be applied in the order of their severity.
Whether or not there is an administrative proceeding, if the institution and/or the directors
and/or officers concerned continue with or otherwise persist in the commission of the
indicated practice or violation, the Monetary Board may issue an order requiring the
institution and/or the directors and/or officers concerned to cease and desist from the
indicated practice or violation, and may further order that immediate action be taken to
correct the conditions resulting from such practice or violation. The cease and desist
order shall be immediately effective upon service on the respondents.
The respondents shall be afforded an opportunity to defend their action in a hearing
before the Monetary Board or any committee chaired by any Monetary Board member
created for the purpose, upon request made by the respondents within five (5) days from
their receipt of the order. If no such hearing is requested within said period, the order
shall be final. If a hearing is conducted, all issues shall be determined on the basis of
records, after which the Monetary Board may either reconsider or make final its order.
The Governor is hereby authorized, at his discretion, to impose upon banking institutions,
for any failure to comply with the requirements of law, Monetary Board regulations and
policies, and/or instructions issued by the Monetary Board or by the Governor, fines not
in excess of Ten thousand pesos (P10,000) a day for each violation, the imposition of
which shall be final and executory until reversed, modified or lifted by the Monetary
Board on appeal.[29]
Koruga also accused Arcenas, et al. of violation of the Corporation Codes provisions on
self-dealing and conflict of interest. She invoked Section 31 of the Corporation Code,
which defines the liability of directors, trustees, or officers of a corporation for, among
others, acquiring any personal or pecuniary interest in conflict with their duty as directors
or trustees, and Section 32, which prescribes the conditions under which a contract of the
corporation with one or more of its directors or trustees the so-called self-dealing
directors[30] would be valid. She also alleged that Banco Filipinos directors violated
Sections 33 and 34 in approving the loans of corporations with interlocking
ownerships, i.e., owned, directed, or managed by close associates of Albert C. Aguirre.
Sections 31 to 34 of the Corporation Code provide:
Section 31. Liability of directors, trustees or officers. - Directors or trustees who wilfully
and knowingly vote for or assent to patently unlawful acts of the corporation or who are
guilty of gross negligence or bad faith in directing the affairs of the corporation or
acquire any personal or pecuniary interest in conflict with their duty as such directors or
trustees shall be liable jointly and severally for all damages resulting therefrom suffered
by the corporation, its stockholders or members and other persons.
51
When a director, trustee or officer attempts to acquire or acquires, in violation of his duty,
any interest adverse to the corporation in respect of any matter which has been reposed in
him in confidence, as to which equity imposes a disability upon him to deal in his own
behalf, he shall be liable as a trustee for the corporation and must account for the profits
which otherwise would have accrued to the corporation.
Section 32. Dealings of directors, trustees or officers with the corporation. - A contract
of the corporation with one or more of its directors or trustees or officers is voidable, at
the option of such corporation, unless all the following conditions are present:
1. That the presence of such director or trustee in the board meeting in which the contract
was approved was not necessary to constitute a quorum for such meeting;
2. That the vote of such director or trustee was not necessary for the approval of the
contract;
3. That the contract is fair and reasonable under the circumstances; and
4. That in case of an officer, the contract has been previously authorized by the board of
directors.
Where any of the first two conditions set forth in the preceding paragraph is absent, in the
case of a contract with a director or trustee, such contract may be ratified by the vote of
the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or
of at least two-thirds (2/3) of the members in a meeting called for the purpose: Provided,
That full disclosure of the adverse interest of the directors or trustees involved is made at
such meeting: Provided, however, That the contract is fair and reasonable under the
circumstances.
Section 33. Contracts between corporations with interlocking directors. - Except in cases
of fraud, and provided the contract is fair and reasonable under the circumstances, a
contract between two or more corporations having interlocking directors shall not be
invalidated on that ground alone: Provided, That if the interest of the interlocking director
in one corporation is substantial and his interest in the other corporation or corporations is
merely nominal, he shall be subject to the provisions of the preceding section insofar as
the latter corporation or corporations are concerned.
Stockholdings exceeding twenty (20%) percent of the outstanding capital stock shall be
considered substantial for purposes of interlocking directors.
Section 34. Disloyalty of a director. - Where a director, by virtue of his office, acquires
for himself a business opportunity which should belong to the corporation, thereby
obtaining profits to the prejudice of such corporation, he must account to the latter for all
such profits by refunding the same, unless his act has been ratified by a vote of the
stockholders owning or representing at least two-thirds (2/3) of the outstanding capital
stock. This provision shall be applicable, notwithstanding the fact that the director risked
his own funds in the venture.
Korugas invocation of the provisions of the Corporation Code is misplaced. In an earlier
case with similar antecedents, we ruled that:
The Corporation Code, however, is a general law applying to all types of corporations,
while the New Central Bank Act regulates specifically banks and other financial
institutions, including the dissolution and liquidation thereof. As between a general and
special law, the latter shall prevail generalia specialibus non derogant.[31]
Consequently, it is not the Interim Rules of Procedure on Intra-Corporate
Controversies,[32] or Rule 59 of the Rules of Civil Procedure on Receivership, that
would apply to this case. Instead, Sections 29 and 30 of the New Central Bank Act should
be followed, viz.:
Section 29. Appointment of Conservator. - Whenever, on the basis of a report submitted
by the appropriate supervising or examining department, the Monetary Board finds that a
bank or a quasi-bank is in a state of continuing inability or unwillingness to maintain a
condition of liquidity deemed adequate to protect the interest of depositors and creditors,
the Monetary Board may appoint a conservator with such powers as the Monetary Board
shall deem necessary to take charge of the assets, liabilities, and the management thereof,
reorganize the management, collect all monies and debts due said institution, and exercise
all powers necessary to restore its viability. The conservator shall report and be
responsible to the Monetary Board and shall have the power to overrule or revoke the
actions of the previous management and board of directors of the bank or quasi-bank.
xxxx
The Monetary Board shall terminate the conservatorship when it is satisfied that the
institution can continue to operate on its own and the conservatorship is no longer
necessary. The conservatorship shall likewise be terminated should the Monetary Board,
on the basis of the report of the conservator or of its own findings, determine that the
continuance in business of the institution would involve probable loss to its depositors or
creditors, in which case the provisions of Section 30 shall apply.
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 Bangko Sentral, to meet its
liabilities; or
(c) cannot continue in business without involving probable losses to its depositors or
creditors; or
52
(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.
xxxx
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.
The designation of a conservator under Section 29 of this Act or the appointment of a
receiver under this section shall be vested exclusively with the Monetary Board.
Furthermore, the designation of a conservator is not a precondition to the designation of a
receiver.[33]
On the strength of these provisions, it is the Monetary Board that exercises exclusive
jurisdiction over proceedings for receivership of banks.
Crystal clear in Section 30 is the provision that says the appointment of a receiver under
this section shall be vested exclusively with the Monetary Board. The term exclusively
connotes that only the Monetary Board can resolve the issue of whether a bank is to be
placed under receivership and, upon an affirmative finding, it also has authority to
appoint a receiver. This is further affirmed by the fact that the law allows the Monetary
Board to take action summarily and without need for prior hearing.
And, as a clincher, the law explicitly provides that 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 a 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.
From the foregoing disquisition, there is no doubt that the RTC has no jurisdiction to hear
and decide a suit that seeks to place Banco Filipino under receivership.
Koruga herself recognizes the BSPs power over the allegedly unlawful acts of Banco
Filipinos directors. The records of this case bear out that Koruga, through her legal
counsel, wrote the Monetary Board[34] on April 21, 2003 to bring to its attention the acts
she had enumerated in her complaint before the RTC. The letter reads in part:
Banco Filipino and the current members of its Board of Directors should be placed under
investigation for violations of banking laws, the commission of irregularities, and for
conducting business in an unsafe or unsound manner. They should likewise be placed
under preventive suspension by virtue of the powers granted to the Monetary Board
under Section 37 of the Central Bank Act. These blatant violations of banking laws
should not go by without penalty. They have put Banco Filipino, its depositors and
stockholders, and the entire banking system (sic) in jeopardy.
xxxx
We urge you to look into the matter in your capacity as regulators. Our clients, a minority
stockholders, (sic) and many depositors of Banco Filipino are prejudiced by a failure to
regulate, and taxpayers are prejudiced by accommodations granted by the BSP to Banco
Filipino[35]
WHEREFORE, the foregoing premises considered, the Petition in G.R. No. 168332
is DISMISSED, while the Petition in G.R. No. 169053 is GRANTED. The Decision of
the Court of Appeals dated July 20, 2005 in CA-G.R. SP No. 88422 is hereby SET
ASIDE. The Temporary Restraining Order issued by this Court on March 13, 2006 is
made PERMANENT. Consequently, Civil Case No. 03-985, pending before
the Regional Trial Court of Makati City, is DISMISSED.
SO ORDERED.

In a letter dated May 6, 2003, BSP Supervision and Examination Department III Director
Candon B. Guerrero referred Korugas letter to Arcenas for comment.[36] On June 6,
2003, Banco Filipinos then Executive Vice President and Corporate Secretary Francisco
A. Rivera submitted the banks comments essentially arguing that Korugas accusations
lacked legal and factual bases.[37]

On the other hand, the BSP, in its Answer before the RTC, said that it had been looking
into Banco Filipinos activities. An October 2002 Report of Examination (ROE) prepared
by the Supervision and Examination Department (SED) noted certain dacion payments,
out-of-the-ordinary expenses, among other dealings. On July 24, 2003, the Monetary
Board passed Resolution No. 1034 furnishing Banco Filipino a copy of the ROE with
instructions for the bank to file its comment or explanation within 30 to 90 days under
threat of being fined or of being subjected to other remedial actions. The ROE, the BSP
said, covers substantially the same matters raised in Korugas complaint. At the time of
the filing of Korugas complaint on August 20, 2003, the period for Banco Filipino to
submit its explanation had not yet expired.[38]

Thus, the courts jurisdiction could only have been invoked after the Monetary Board had
taken action on the matter and only 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.

Finally, there is one other reason why Korugas complaint before the RTC cannot
prosper. Given her own admission and the same is likewise supported by evidence that
she is merely a minority stockholder of Banco Filipino, she would not have the standing
to question the Monetary Boards action. Section 30 of the New Central Bank Act
provides:

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.

All the foregoing discussion yields the inevitable conclusion that the CA erred in
upholding the jurisdiction of, and remanding the case to, the RTC. Given that the RTC
does not have jurisdiction over the subject matter of the case, its refusal to dismiss the
case on that ground amounted to grave abuse of discretion.

53
THIRD DIVISION
G.R. No. 115849 January 24, 1996
FIRST PHILIPPINE INTERNATIONAL BANK (Formerly Producers Bank of the
Philippines) and MERCURIO RIVERA, petitioners,
vs.
COURT OF APPEALS, CARLOS EJERCITO, in substitution of DEMETRIO
DEMETRIA, and JOSE JANOLO,respondents.
DECISION
PANGANIBAN, J.:
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 certiorariunder Rule 45 of the Rules of Court, to set aside the
Decision promulgated January 14, 1994 of the respondent Court of Appeals1 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;
54
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 ponentefor 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 Decision3 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. 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
T-106933 70,899 sq. m. owned by Byme Investment, for a total price of PESOS: FIVE MILLION FIVE
T-106934 52,246 sq. m. HUNDRED THOUSAND (P5,500,000.00).
Thank you.
T-106935 96,768 sq. m.
(6) On October 12, 1987, the conservator of the bank (which has been placed under
T-106936 187,114 sq. m. conservatorship by the Central Bank since 1984) was replaced by an Acting Conservator
T-106937 481,481 sq. m. in the person of defendant Leonida T. Encarnacion. On November 4, 1987, defendant
Rivera wrote plaintiff Demetria the following letter (Exh. "F"):
My offer is for PESOS: THREE MILLION FIVE HUNDRED THOUSAND
Attention: Atty. Demetrio Demetria
(P3,500,000.00) PESOS, in cash.
Dear Sir:
Kindly contact me at Telephone Number 921-1344.
Your proposal to buy the properties the bank foreclosed from Byme investment Corp.
(3) On September 1, 1987, defendant Rivera made on behalf of the bank a formal reply
located at Sta. Rosa, Laguna is under study yet as of this time by the newly created
by letter which is hereunder quoted (Exh. "C"):
committee for submission to the newly designated Acting Conservator of the bank.
September 1, 1987 For your information.
JP M-P GUTIERREZ ENTERPRISES (7) What thereafter transpired was a series of demands by the plaintiffs for compliance by
142 Charisma St., Doña Andres II the bank with what plaintiff considered as a perfected contract of sale, which demands
Rosario, Pasig, Metro Manila were in one form or another refused by the bank. As detailed by the trial court in its
Attention: JOSE O. JANOLO decision, on November 17, 1987, plaintiffs through a letter to defendant Rivera (Exhibit
Dear Sir: "G") tendered payment of the amount of P5.5 million "pursuant to (our) perfected sale
Thank you for your letter-offer to buy our six (6) parcels of acquired lots at Sta. Rosa, agreement." Defendants refused to receive both the payment and the letter. Instead, the
Laguna (formerly owned by Byme Industrial Corp.). Please be informed however that the parcels of land involved in the transaction were advertised by the bank for sale to any
bank's counter-offer is at P5.5 million for more than 101 hectares on lot basis. interested buyer (Exh, "H" and "H-1"). Plaintiffs demanded the execution by the bank of
We shall be very glad to hear your position on the on the matter. the documents on what was considered as a "perfected agreement." Thus:
Best regards. Mr. Mercurio Rivera
(4) On September 17, 1987, plaintiff Janolo, responding to Rivera's aforequoted reply, Manager, Producers Bank
wrote (Exh. "D"): Paseo de Roxas, Makati
September 17, 1987 Metro Manila
Producers Bank Dear Mr. Rivera:
Paseo de Roxas This is in connection with the offer of our client, Mr. Jose O. Janolo, to purchase your
Makati, Metro Manila 101-hectare lot located in Sta. Rosa, Laguna, and which are covered by TCT No. T-
Attention: Mr. Mercurio Rivera 106932 to 106937.
Gentlemen: From the documents at hand, it appears that your counter-offer dated September 1, 1987
In reply to your letter regarding my proposal to purchase your 101-hectare lot located at of this same lot in the amount of P5.5 million was accepted by our client thru a letter
Sta. Rosa, Laguna, I would like to amend my previous offer and I now propose to buy the dated September 30, 1987 and was received by you on October 5, 1987.
said lot at P4.250 million in CASH.. In view of the above circumstances, we believe that an agreement has been perfected. We
Hoping that this proposal meets your satisfaction. were also informed that despite repeated follow-up to consummate the purchase, you now
(5) There was no reply to Janolo's foregoing letter of September 17, 1987. What took refuse to honor your commitment. Instead, you have advertised for sale the same lot to
place was a meeting on September 28, 1987 between the plaintiffs and Luis Co, the others.
Senior Vice-President of defendant bank. Rivera as well as Fajardo, the BYME lawyer, In behalf of our client, therefore, we are making this formal demand upon you to
attended the meeting. Two days later, or on September 30, 1987, plaintiff Janolo sent to consummate and execute the necessary actions/documentation within three (3) days from
the bank, through Rivera, the following letter (Exh. "E"): your receipt hereof. We are ready to remit the agreed amount of P5.5 million at your
The Producers Bank of the Philippines advice. Otherwise, we shall be constrained to file the necessary court action to protect the
Paseo de Roxas, Makati interest of our client.
Metro Manila We trust that you will be guided accordingly.
Attention: Mr. Mercurio Rivera (8) Defendant bank, through defendant Rivera, acknowledged receipt of the foregoing
Re: 101 Hectares of Land letter and stated, in its communication of December 2, 1987 (Exh. "I"), that said letter has
in Sta. Rosa, Laguna been "referred . . . to the office of our Conservator for proper disposition" However, no
Gentlemen: response came from the Acting Conservator. On December 14, 1987, the plaintiffs made

55
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
56
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 ground8 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 —
57
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
58
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.
59
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
60
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.
61
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)", citingthe 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."38 However, 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.
62
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.
63
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. . .
. Rodolfo Romey to testify on their behalf, as he would have been in the best position to
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, citingPhilippine 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
64
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
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.

65
THIRD DIVISION
[G.R. No. 162270. April 06, 2005]
ABACUS REAL ESTATE DEVELOPMENT CENTER, INC., petitioner, vs. THE
MANILA BANKING CORPORATION, respondent.
DECISION
GARCIA, J.:
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 petitioners 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 Banks then acting president, the late Vicente G. Puyat, in a bid to
save the banks 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
Banks 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 groups 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
66
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 attorneys 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 latters 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 attorneys fees;
3. Ordering the DISMISSAL of defendants 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 Banks 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 BANKS 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 banks 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 courts 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 respondents 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 respondents appeal was filed
on time. Explained that court in its Resolution of February 17, 2004, denying petitioners
motion for reconsideration:
67
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 reconsideration was truly filed by registered mail
on July 6, 1999 through registry receipt no. 1633.
Secondly, the appellants 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 Banks]
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 appellants 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 appellees 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 appellees counsel appears thereon to have been
received on July 6, 1999 (7/6/99), which enhances the probability of the motion for
reconsiderationbeing 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 appellants 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 powers necessary for these purposes including, but not limited to, bringing suits and
rule, accorded great weight, if not binding upon it,[10] save for the most compelling and foreclosing mortgages in the name of the banking institution. (Emphasis supplied)
cogent reasons.[11] As nothing in the record indicates any of such exceptions, the factual Clearly, the receiver appointed by the Central Bank to take charge of the properties of
conclusion of the appellate court that respondent filed its appeal on time, supported as it Manila Bank only had authority to administer the same for the benefit of its creditors.
is by substantial evidence, must be affirmed. Granting or approving an exclusive option to purchase is not an act of administration, but
Going to the second issue, petitioner insists that the option to purchase the lot and an act of strict ownership, involving, as it does, the disposition of property of the bank.
building in question granted to it by the late Vicente G. Puyat, then acting president of Not being an act of administration, the so-called approval by Atty. Renan Santos amounts
Manila Bank, was binding upon the latter. On the other hand, respondent has consistently to no approval at all, a bank receiver not being authorized to do so on his own.
maintained that the late Vicente G. Puyat had no authority to act for and represent Manila For sure, Congress itself has recognized that a bank receiver only has powers of
Bank, the latter having been placed under receivership by the Central Bank at the time of administration. Section 30 of the New Central Bank Act[15] expressly provides that [t]he
the granting of the exclusive option to purchase. receiver shall immediately gather and take charge of all the assets and liabilities of the
There can be no quibbling that respondent Manila Bank was under receivership, pursuant institution, administer the same for the benefit of its creditors, and exercise the general
to Central Banks MB Resolution No. 505 dated May 22, 1987, at the time the late powers of a receiver under the Revised Rules of Court but shall not, with the exception of
Vicente G. Puyat granted the exclusive option to purchase to the Laureano group of administrative expenditures, pay or commit any act that will involve the transfer or
investors. Owing to this defining reality, the appellate court was correct in declaring that disposition of any asset of the institution
Vicente G. Puyat was without authority to grant the exclusive option to purchase the lot In all, respondent banks receiver was without any power to approve or ratify the exclusive
and building in question. The invocation by the appellate court of the following option to purchase granted by the late Vicente G. Puyat, who, in the first place, was
pronouncement in Villanueva vs. Court of Appeals[12] was apropos, to say the least: himself bereft of any authority, to bind the bank under such exclusive option. Respondent
the assets of the bank pass beyond its control into the possession and control of the Manila Bank may not thus be compelled to sell the land and building in question to
receiver whose duty it is to administer the assets for the benefit of the creditors of the petitioner Abacus under the terms of the latters exclusive option to purchase.
bank. Thus, the appointment of a receiver operates to suspend the authority of the bank WHEREFORE, the instant petition is DENIED and the challenged issuances of the
and of its directors and officers over its property and effects, such authority being reposed Court of Appeals AFFIRMED.
in the receiver, and in this respect, the receivership is equivalent to an injunction to Costs against petitioner.
restrain the bank officers from intermeddling with the property of the bank in any way. SO ORDERED.
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 banks 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 Banks receiver, Atty. Renan Santos, during a lunch meeting held with Benjamin
Bitanga in March 1990.
Petitioners 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 Banks 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

68
EN BANC
G.R. No. L-21146 September 20, 1965
RURAL BANK OF LUCENA, INC., petitioner,
vs.
HON. FRANCISCO ARCA, as Judge of the Court of First Instance of Manila,
Branch 1, and CENTRAL BANK OF THE PHILIPPINES, respondents.
REYES, J.B.L., J.:
The Rural Bank of Lucena, Inc., a banking corporation organized under Republic Act No.
720, instituted, on June 22, 1961, in the Court of First Instance of Manila (Civil Case No.
47345) an action to collect damages and to enjoin the Central Bank from enforcing
Resolution No. 928 of its Monetary Board, finding that the Rural Bank of Lucena
(Lucena for short), through its officers, directors, and employees, had committed acts
substantially prejudicial to the Government, depositors, and creditors, and directing
Lucena to reorganize its board of directors; to refrain from granting or renewing loans, or
accept new deposits, and not to issue drafts or make disbursements without the approval
of the supervising Central Bank examiners, and threatening Lucena that its management
would be taken over if the latter should fail to comply with the resolution. After issue
joined and trial of the case, and while the litigation was still undecided by the Court of
First Instance, the Monetary Board, having been informed that the Director of its
Department of Rural Banks recommended the liquidation of the Rural Bank of Lucena,
adopted on February 2, 1962 its Resolution No. 122 (Petition, Annex "C") —
To request the Solicitor General, pursuant to Section 29 of Republic Act No. 265, to file a
petition in the proper courts for the liquidation of the affairs of the Rural Bank of Lucena,
Inc.
Notice was given by Central Bank officials, on February 10, 1962 that the Lucena bank
was temporarily closed pending final decision of the Court, and that business be
transacted with Central Bank representatives only.
Two days later (February 12, 1962), the Lucena bank filed suit in the Court of First
Instance of Quezon (Tayabas) annual Resolution 122 of the Monetary Board (Case No.
6471) and enjoin its enforcement; and on February 14 the court issued ex parte a writ of
preliminary injunction to such effect.
On the same day, the Court of First Instance of Manila, per Judge, now Court of Appeals
Justice, Magno Gatmaitan of Branch XIV, decided Case No. 47345, enjoining
enforcement of Resolution No. 928 of the Monetary Board, for having been issued
without the prior hearing prescribed by section 10 of the Rural Bank Act, and ordering
the Central Bank to pay P5,000.00 damages and costs. The Central Bank appealed.
Upon the other hand, the Court of First Instance of Quezon Province, in its Case No.
6741, on February, 24, 1962, dissolved its preliminary injunction against the enforcement
of Resolution 122 of the Monetary Board. Other than filing a motion for reconsideration
(ultimately denied on January 9, 1963) the Lucena bank took no other steps to prosecute
the case it had filed.
On the 31st of March 1962, invoking section 29 of Republic Act 265, the Central Bank,
as liquidator, petitioned the Court of First Instance of Manila for assistance in the
liquidation of the Lucena bank (Civil Case No. 50019). Upon motion, and after hearing
the parties, Judge Arca issued on interlocutory order on March 28, 1963, the dispositive
portion of which is to the following effect (Petition, Annex "D"):
The Rural Bank of Lucena thru its duly authorized officers or representatives, is hereby
ordered to turn over to the Central Bank, thru its duly authorized representative, within a
69
period of five (5) days from receipt of copy of this order, the physical possession of all of
said Rural Bank of Lucena's assets, properties and papers. Should the Rural Bank of
Lucena or its officers fail to comply with the above order within the period indicated
herein, the Central Bank, thru its authorized representatives, is hereby authorized to take
actual and physical possession of all said assets, properties and papers of the Rural Bank
of Lucena, duly inventoried in the presence of the Provincial Fiscal, the Provincial
Commander, the Provincial Treasurer, and the Provincial Auditor of Quezon province, or
their duly authorized representatives.
The Rural Bank of Lucena resorted to this Court on certiorari, claiming that Judge Arca
gravely abused his discretion in issuing the above order, in that —
(a) it interferes with the immediately executory judgment of Judge Gatmaitan in Case No.
47345 of the Court of First Instance of Manila;
(b) Section 29 of the Central Bank Act (R.A. 265) does not apply;
(c) there was no prior valid take over of assets nor due hearing of the liquidated Bank;
(d) Judge Gatmaitan's decision constitutes a judicial review of the Monetary Board's
action that cannot be nullified by the challenged order of Judge Area; and
(e) the turn over should not be ordered before trial on the merits.1awphîl.nèt
This Court issued a temporary restraining order until April 25, 1963, but the same was
not renewed when it expired.
We see no irreconcilable conflict between section 10 (as amended) of Republic Act No.
720 (Rural Banks Act) and section 29 of Republic Act No. 265 (Central Bank Act). The
former provides in substance as follows:
The director of the Department of the Central Bank designated by the Monetary Board to
supervise Rural Banks ... upon proof that the Rural Bank or its board of directors or
officers are conducting and managing the affairs of the bank in a manner contrary to
laws, orders, instructions, rules and regulations promulgated by the Monetary Board or in
any manner substantially prejudicial to the interests of the government, depositors or
creditors, to take over the management of such bank when specifically authorized to do
so by the Monetary Board after due hearing until a new board of directors and officers are
elected and qualified. ...
It is easily seen that what this section authorized is the take over of the management by
the Central Bank, until the governing body of the offending Rural Bank is recognized
with a view to assuring compliance by it with the laws and regulations.
Upon the other hand, section 29 6f the Central Bank Act (R. A. 265) has in view a much
more drastic step, the liquidation of a rural bank by taking over its assets and converting
them into money to pay off its creditors. Said section prescribes:
SEC. 29. Proceedings 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 statement 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 fee 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 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.
Considering that section 27 of the Rural Banks law (R.A. No. 720) expressly declares
that —
The provisions of Republic Acts numbered 265 and 337, in so far as applicable and not in
conflict with any provision of this Act, are hereby made a part of this Act.
we find no room for questioning the applicability of section 29 of Republic Act No. 265
(Central Bank Act) to rural banks organized under Republic Act 720, whenever the
Monetary Board should find that the rural bank affected is insolvent, or that its
continuance in business would involve probable loss to its depositors or creditors, and
that it cannot resume business with safety.
It follows that on the assumption that under section 10 of the Rural Banks Act the
Monetary Board may not take over the management of a rural bank without giving the
latter a hearing, i.e., an opportunity to rebut the charge that it has contravened applicable
laws, rules and regulations to the substantial prejudice of the government, its depositors
and creditors, such a previous hearing is nowhere required by section 29 of the Central
Bank Law. Manifestly, whether a rural bank's "continuance in business would involve
probable loss" to its clients or creditors and that it "cannot resume business with safety,"
is a matter of appreciation and judgment that the law entrusts primarily to the Monetary
Board. Equally apparent is that if the rural bank affected is in the condition previously
adverted to, every minute of delay in securing its assets from dissipation inevitably
increases the danger to the creditors. For this reason, the statute has provided for a
subsequent judicial review of the Monetary Board, in lieu of a previous hearing.
In point of fact, the petitioner Rural Bank of Lucena did file a petition (Annex "G") for
judicial review in the Court of First Instance of Quezon Province, dated February 12,
1962, and challenged the validity of Resolution No. 122 of the Monetary Board (Case
No. 6471) ; but the Court of First Instance of Quezon dissolved the preliminary
injunction issued in that case and allowed Resolution No. 122 to take effect, without any
steps being taken for a review of such action. This being the case, and in view of the
manifest reluctance the Lucena bank's officials to comply with the Monetary Board's
resolution, the Central Bank had cause to seek judicial assistance for the discharge of its
duties as liquidator.
The petitioner rural bank seems to take the view that the proceedings had before Judge
Gatmaitan in Case No. 47345, Branch XIV, of the Court of First Instance of Manila
constituted the judicial review required by section 29 of Republic Act No. 265, the
Central Bank Act. Such a stand is untenable, for the case tried and decided by Judge
Gatmaitan concerned an attempt by the Central Bank to take over management under
70
section 10 of the Rural Banks law (R.A. No. 720) in connection with the Monetary
Board's resolution No. 928 of June 16, 1961. Even more conclusive is the consideration
that said action (Case No. 47345) was filed on June 22, 1961, and could not possibly be a
judicial review of the Resolution No. 122 adopted eight months later, on February 2,
1962. A review cannot precede the adoption of the resolution being reviewed. This
proposition requires no demonstration.
The narrated events also rebut the contention that the order of Judge Area, issued on
March 28, 1963, in Case No. 50019, constitutes unlawful interference with the
enforcement of Judge Gatmaitan's decision of February 14, 1962, the issues involved
being different in each case. As heretofore pointed out one involved a take over of
management under section 10 of the Rural Banks Act, and the other a seizure of assets
and liquidation under section 29 of the Central Bank law (R.A. 265).
Nor can the proceedings before Judge Area be deemed judicial review of the 1962
resolution No. 122 of the Monetary Board, if only because by law (section 29, R. A. 265)
such review must be asked within 10 days from notice of the resolution of the Board.
Between the adoption of Resolution No. 122 and the challenged order of Judge Arca,
more than one year had elapsed. Hence, the validity of the Monetary Board's resolution
can no longer be litigated before Judge Arca, whose role under the fourth paragraph of
section 29 is confined to assisting and supervising the liquidation of the Lucena bank.
Whether or not the Central Bank acted with arbitrariness or bad faith in decreeing that
circumstances called for the liquidation of the Lucena Rural Bank, and should be
answerable in damages, should be threshed out and determined, not by Judge Arca but in
Case No. 6471 of the Court of First Instance of Quezon Province, which was filed within
the 10-day period prescribed by the Central Bank law, and which appears to be still
pending, unless the Lucena bank had abandoned such litigation, a fact that we need not
decide at present. Suffice it to say that Judge Arca had no reason to inquire into the merits
of the case before issuing the disputed order requiring the surrender of the assets and
papers of the Lucena bank, because: (1) neither the statute (sec. 29, R.A. 265) nor the
constitutional requirement of due process demand that the correctness of the Monetary
Board's resolution to stop operation and proceed to the liquidation of the Lucena Rural
Bank should first be adjudged before making the resolution effective, it being enough that
a subsequent judicial review by provided (section 29, R.A. 265; 12 Am. Jur. 305, sec.
611; Bourjois vs. Chapman, 301 U.S. 183, 81 Law Ed. 1027, 1032; American Surety Co.
vs. Baldwin, 77 Law Ed. 231, 86 ALR 307; Wilson vs. Standefer, 46 Law Ed. 612); (2)
the period for asking such judicial review had elapsed with excess between the adoption
of the Monetary Board Resolution No. 122 and the filing of the case by the Central Bank
in the Court of First Instance of Manila; (3) the correctness of said resolution had already
been put in issue before the Court of Quezon Province; (4) because the latter court had
refused to stop implementation of the Resolution of the Monetary Board when it
dissolved its own preliminary injunction; and (5) because the Lucena Bank had
apparently acquiesced in the action taken by the Court of Quezon Province, since the
rural bank had not sought that the action of the Quezon court be set aside by a higher
court.
IN VIEW OF THE FOREGOING, the writ applied for is denied with costs against the
petitioner Lucena Rural Bank, Inc.
THIRD DIVISION
G.R. No. 191424 August 7, 2013
ALFEO D. VIVAS, ON HIS BEHALF AND ON BEHALF OF THE
SHAREHOLDERS OF EUROCREDIT COMMUNITY BANK, PETITIONER,
vs.
THE MONETARY BOARD OF THE BANGKO SENTRAL NG PILIPINAS AND
THE PHILIPPINE DEPOSIT INSURANCE CORPORATION, RESPONDENTS.
DECISION
MENDOZA, J.:
This is a petition for prohibition with prayer for the issuance of a status quo ante order or
writ of preliminary injunction ordering the respondents to desist from closing EuroCredit
Community Bank, Incorporated (ECBI) and from pursuing the receivership thereof. The
petition likewise prays that the management and operation of ECBI be restored to its
Board of Directors (BOD) and its officers.
The Facts
The Rural Bank of Faire, Incorporated (RBFI) was a duly registered rural banking
institution with principal office in Centro Sur, Sto. Niño, Cagayan. Record shows that the
corporate life of RBFI expired on May 31, 2005.1Notwithstanding, petitioner Alfeo D.
Vivas (Vivas) and his principals acquired the controlling interest in RBFI sometime in
January 2006. At the initiative of Vivas and the new management team, an internal audit
was conducted on RBFI and results thereof highlighted the dismal operation of the rural
bank. In view of those findings, certain measures calculated to revitalize the bank were
allegedly introduced.2 On December 8, 2006, the Bangko Sentral ng Pilipinas (BSP)
issued the Certificate of Authority extending the corporate life of RBFI for another fifty
(50) years. The BSP also approved the change of its corporate name to EuroCredit
Community Bank, Incorporated, as well as the increase in the number of the members of
its BOD, from five (5) to eleven (11).3
Pursuant to Section 28 of Republic Act (R.A.) No. 7653, otherwise known as The New
Central Bank Act, the Integrated Supervision Department II (ISD II) of the BSP
conducted a general examination on ECBI with the cut-off date of December 31, 2007.
Shortly after the completion of the general examination, an exit conference was held on
March 27, 2008 at the BSP during which the BSP officials and examiners apprised Vivas,
the Chairman and President of ECBI, as well as the other bank officers and members of
its BOD, of the advance findings noted during the said examination. The ECBI submitted
its comments on BSP’s consolidated findings and risk asset classification through a letter,
dated April 8, 2008.4
Sometime in April 2008, the examiners from the Department of Loans and Credit of the
BSP arrived at the ECBI and cancelled the rediscounting line of the bank. Vivas appealed
the cancellation to BSP.5 Thereafter, the Monetary Board (MB) issued Resolution No.
1255, dated September 25, 2008, placing ECBI under Prompt Corrective Action (PCA)
framework because of the following serious findings and supervisory concerns noted
during the general examination: 1] negative capital of ?14.674 million and capital
adequacy ratio of negative 18.42%; 2] CAMEL (Capital Asset Management Earnings
Liquidity) composite rating of "2" with a Management component rating of "1"; and 3]
serious supervisory concerns particularly on activities deemed unsafe or unsound.6 Vivas
claimed that the BSP took the above courses of action due to the joint influence exerted
by a certain hostile shareholder and a former BSP examiner.7
Through its letter, dated September 30, 2008, the BSP furnished ECBI with a copy of the
Report of Examination (ROE) as of December 31, 2007. In addition, the BSP directed the
71
bank’s BOD and senior management to: 1] infuse fresh capital of ?22.643 million; 2]
book the amount of ?28.563 million representing unbooked valuation reserves on
classified loans and other risks assets on or before October 31, 2008; and 3] take
appropriate action necessary to address the violations/exceptions noted in the
examination.8
Vivas moved for a reconsideration of Resolution No. 1255 on the grounds of non-
observance of due process and arbitrariness. The ISD II, on several instances, had invited
the BOD of ECBI to discuss matters pertaining to the placement of the bank under PCA
framework and other supervisory concerns before making the appropriate
recommendations to the MB. The proposed meeting, however, did not materialize due to
postponements sought by Vivas.9
In its letter, dated February 20, 2009, the BSP directed ECBI to explain why it transferred
the majority shares of RBFI without securing the prior approval of the MB in apparent
violation of Subsection X126.2 of the Manual of Regulation for Banks (MORB).10 Still
in another letter,11 dated March 31, 2009, the ISD II required ECBI to explain why it did
not obtain the prior approval of the BSP anent the establishment and operation of the
bank’s sub-offices.
Also, the scheduled March 31, 2009 general examination of the books, records and
general condition of ECBI with the cut-off date of December 31, 2008, did not push
through. According to Vivas, ECBI asked for the deferment of the examination pending
resolution of its appeal before the MB. Vivas believed that he was being treated unfairly
because the letter of authority to examine allegedly contained a clause which pertained to
the Anti-Money Laundering Law and the Bank Secrecy Act.12
The MB, on the other hand, posited that ECBI unjustly refused to allow the BSP
examiners from examining and inspecting its books and records, in violation of Sections
25 and 34 of R.A. No. 7653. In its letter,13 dated May 8, 2009, the BSP informed ECBI
that it was already due for another annual examination and that the pendency of its appeal
before the MB would not prevent the BSP from conducting another one as mandated by
Section 28 of R.A. No. 7653.
In view of ECBI’s refusal to comply with the required examination, the MB issued
Resolution No. 726,14 dated May 14, 2009, imposing monetary penalty/fine on ECBI,
and referred the matter to the Office of the Special Investigation (OSI) for the filing of
appropriate legal action. The BSP also wrote a letter,15 dated May 26, 2009, advising
ECBI to comply with MB Resolution No. 771, which essentially required the bank to
follow its directives. On May 28, 2009, the ISD II reiterated its demand upon the ECBI
BOD to allow the BSP examiners to conduct a general examination on June 3, 2009.16
In its June 2, 2009 Letter-Reply,17 ECBI asked for another deferment of the examination
due to the pendency of certain unresolved issues subject of its appeal before the MB, and
because Vivas was then out of the country. The ISD II denied ECBI’s request and
ordered the general examination to proceed as previously scheduled.18
Thereafter, the MB issued Resolution No. 823,19 dated June 4, 2009, approving the
issuance of a cease and desist order against ECBI, which enjoined it from pursuing
certain acts and transactions that were considered unsafe or unsound banking practices,
and from doing such other acts or transactions constituting fraud or might result in the
dissipation of its assets.
On June 10, 2009, the OSI filed with the Department of Justice (DOJ) a complaint for
Estafa Through Falsification of Commercial Documents against certain officials and
employees of ECBI. Meanwhile, the MB issued Resolution No. 1164,20 dated August
13, 2009, denying the appeal of ECBI from Resolution No. 1255 which placed it under
PCA framework. On November 18, 2009, the general examination of the books and
records of ECBI with the cut-off date of September 30, 2009, was commenced and ended
in December 2009. Later, the BSP officials and examiners met with the representatives of
ECBI, including Vivas, and discussed their findings.21 On December 7, 2009, the ISD II
reminded ECBI of the non-submission of its financial audit reports for the years 2007 and
2008 with a warning that failure to submit those reports and the written explanation for
such omission shall result in the imposition of a monetary penalty.22 In a letter, dated
February 1, 2010, the ISD II informed ECBI of MB Resolution No. 1548 which denied
its request for reconsideration of Resolution No. 726.
On March 4, 2010, the MB issued Resolution No. 27623 placing ECBI under
receivership in accordance with the recommendation of the ISD II which reads:
On the basis of the examination findings as of 30 September 2009 as reported by the
Integrated Supervision Department (ISD) II, in its memorandum dated 17 February 2010,
which findings showed that the Eurocredit Community Bank, Inc. – a Rural Bank
(Eurocredit Bank) (a) is unable to pay its liabilities as they become due in the ordinary
course of business; (b) has insufficient realizable assets to meet liabilities; (c) cannot
continue in business without involving probable losses to its depositors and creditors; and
(d) has willfully violated a cease and desist order of the Monetary Board for acts or
transactions which are considered unsafe and unsound banking practices and other acts or
transactions constituting fraud or dissipation of the assets of the institution, and
considering the failure of the Board of Directors/management of Eurocredit Bank to
restore the bank’s financial health and viability despite considerable time given to address
the bank’s financial problems, and that the bank had been accorded due process, the
Board, in accordance with Section 30 of Republic Act No. 7653 (The New Central Bank
Act), approved the recommendation of ISD II as follows:
To prohibit the Eurocredit Bank from doing business in the Philippines and to place its
assets and affairs under receivership; and
To designate the Philippine Deposit Insurance Corporation as Receiver of the bank.
Assailing MB Resolution No. 276, Vivas filed this petition for prohibition before this
Court, ascribing grave abuse of discretion to the MB for prohibiting ECBI from
continuing its banking business and for placing it under receivership. The petitioner
presents the following
ARGUMENTS:
(a)
It is grave abuse of discretion amounting to loss of jurisdiction to apply the general law
embodied in Section 30 of the New Central Bank Act as opposed to the specific law
embodied in Sections 11 and 14 of the Rural Banks Act of 1992.
(b)
Even if it assumed that Section 30 of the New Central Bank Act is applicable, it is still
the gravest abuse of discretion amounting to lack or excess of jurisdiction to execute the
law with manifest arbitrariness, abuse of discretion, and bad faith, violation of
constitutional rights and to further execute a mandate well in excess of its parameters.
(c)
The power delegated in favor of the Bangko Sentral ng Pilipinas to place rural banks
under receiverships is unconstitutional for being a diminution or invasion of the powers
of the Supreme Court, in violation of Section 2, Article VIII of the Philippine
Constitution.24
Vivas submits that the respondents committed grave abuse of discretion when they
erroneously applied Section 30 of R.A. No. 7653, instead of Sections 11 and 14 of the
72
Rural Bank Act of 1992 or R.A. No. 7353. He argues that despite the deficiencies,
inadequacies and oversights in the conduct of the affairs of ECBI, it has not committed
any financial fraud and, hence, its placement under receivership was unwarranted and
improper. He posits that, instead, the BSP should have taken over the management of
ECBI and extended loans to the financially distrained bank pursuant to Sections 11 and
14 of R.A. No. 7353 because the BSP’s power is limited only to supervision and
management take-over of banks.
He contends that the implementation of the questioned resolution was tainted with
arbitrariness and bad faith, stressing that ECBI was placed under receivership without
due and prior hearing in violation of his and the bank’s right to due process. He adds that
respondent PDIC actually closed ECBI even in the absence of any directive to this effect.
Lastly, Vivas assails the constitutionality of Section 30 of R.A. No. 7653 claiming that
said provision vested upon the BSP the unbridled power to close and place under
receivership a hapless rural bank instead of aiding its financial needs. He is of the view
that such power goes way beyond its constitutional limitation and has transformed the
BSP to a sovereign in its own "kingdom of banks."25
The Court’s Ruling
The petition must fail.
Vivas Availed of the Wrong Remedy
To begin with, Vivas availed of the wrong remedy. The MB issued Resolution No. 276,
dated March 4, 2010, in the exercise of its power under R.A. No. 7653. Under Section 30
thereof, any act of the MB placing a bank under conservatorship, receivership or
liquidation may not be restrained or set aside except on a petition for certiorari. Pertinent
portions of R.A. 7653 read:
Section 30. –
x x x x.
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.
x x x x. [Emphases supplied]
Prohibition is already unavailing
Granting that a petition for prohibition is allowed, it is already an ineffective remedy
under the circumstances obtaining. Prohibition or a "writ of prohibition" is that process
by which a superior court prevents inferior courts, tribunals, officers, or persons from
usurping or exercising a jurisdiction with which they have not been vested by law, and
confines them to the exercise of those powers legally conferred. Its office is to restrain
subordinate courts, tribunals or persons from exercising jurisdiction over matters not
within its cognizance or exceeding its jurisdiction in matters of which it has
cognizance.26 In our jurisdiction, the rule on prohibition is enshrined in Section 2, Rule
65 of the Rules on Civil Procedure, to wit:
Sec. 2. Petition for prohibition - When the proceedings of any tribunal, corporation,
board, officer or person, whether exercising judicial, quasi-judicial or ministerial
functions, are without or in excess of its or his jurisdiction, or with grave abuse of
discretion amounting to lack or excess of jurisdiction, and there is no appeal or any other
plain, speedy, and adequate remedy in the ordinary course of law, a person aggrieved
thereby may file a verified petition in the proper court, alleging the facts with certainty
and praying that the judgment be rendered commanding the respondent to desist from
further proceedings in the action or matter specified therein, or otherwise granting such
incidental reliefs as the law and justice require.
x x x x.
Indeed, prohibition is a preventive remedy seeking that a judgment be rendered which
would direct the defendant to desist from continuing with the commission of an act
perceived to be illegal.27 As a rule, the proper function of a writ of prohibition is to
prevent the doing of an act which is about to be done. It is not intended to provide a
remedy for acts already accomplished.28
Though couched in imprecise terms, this petition for prohibition apparently seeks to
prevent the acts of closing of ECBI and placing it under receivership. Resolution No.
276, however, had already been issued by the MB and the closure of ECBI and its
placement under receivership by the PDIC were already accomplished. Apparently, the
remedy of prohibition is no longer appropriate. Settled is the rule that prohibition does
not lie to restrain an act that is already a fait accompli.29
The Petition Should Have Been Filed in the CA
Even if treated as a petition for certiorari, the petition should have been filed with the CA.
Section 4 of Rule 65 reads:
Section 4. When and where petition filed. — The petition shall be filed not later than
sixty (60) days from notice of the judgment, order or resolution. In case a motion for
reconsideration or new trial is timely filed, whether such motion is required or not, the
sixty (60) day period shall be counted from notice of the denial of said motion.
The petition shall be filed in the Supreme Court or, if it relates to the acts or omissions of
a lower court or of a corporation, board, officer or person, in the Regional Trial Court
exercising jurisdiction over the territorial area as defined by the Supreme Court. It may
also be filed in the Court of Appeals whether or not the same is in aid of its appellate
jurisdiction, or in the Sandiganbayan if it is in aid of its appellate jurisdiction. If it
involves the acts or omissions of a quasi-judicial agency, unless otherwise provided by
law or these Rules, the petition shall be filed in and cognizable only by the Court of
Appeals. [Emphases supplied]
That the MB is a quasi-judicial agency was already settled and reiterated in the case of
Bank of Commerce v. Planters Development Bank And Bangko Sentral Ng Pilipinas.30
Doctrine of Hierarchy of Courts
Even in the absence of such provision, the petition is also dismissible because it simply
ignored the doctrine of hierarchy of courts. True, the Court, the CA and the RTC have
original concurrent jurisdiction to issue writs of certiorari, prohibition and mandamus.
The concurrence of jurisdiction, however, does not grant the party seeking any of the
extraordinary writs the absolute freedom to file a petition in any court of his choice. The
petitioner has not advanced any special or important reason which would allow a direct
resort to this Court. Under the Rules of Court, a party may directly appeal to this Court
only on pure questions of law.31 In the case at bench, there are certainly factual issues as
Vivas is questioning the findings of the investigating team.
Strict observance of the policy of judicial hierarchy demands that where the issuance of
the extraordinary writs is also within the competence of the CA or the RTC, the special
action for the obtainment of such writ must be presented to either court. As a rule, the
Court will not entertain direct resort to it unless the redress desired cannot be obtained in
the appropriate lower courts; or where exceptional and compelling circumstances, such as
73
cases of national interest and with serious implications, justify the availment of the
extraordinary remedy of writ of certiorari, prohibition, or mandamus calling for the
exercise of its primary jurisdiction.32 The judicial policy must be observed to prevent an
imposition on the precious time and attention of the Court.
The MB Committed No Grave Abuse of Discretion
In any event, no grave abuse of discretion can be attributed to the MB for the issuance of
the assailed Resolution No. 276.
Vivas insists that the circumstances of the case warrant the application of Section 11 of
R.A. No. 7353, which provides:
Sec. 11. The power to supervise the operation of any rural bank by the Monetary Board
as herein indicated shall consist in placing limits to the maximum credit allowed to any
individual borrower; in prescribing the interest rate, in determining the loan period and
loan procedures, in indicating the manner in which technical assistance shall be extended
to rural banks, in imposing a uniform accounting system and manner of keeping the
accounts and records of rural banks; in instituting periodic surveys of loan and lending
procedures, audits, test-check of cash and other transactions of the rural banks; in
conducting training courses for personnel of rural banks; and, in general, in supervising
the business operations of the rural banks.
The Central Bank shall have the power to enforce the laws, orders, instructions, rules and
regulations promulgated by the Monetary Board, applicable to rural banks; to require
rural banks, their directors, officers and agents to conduct and manage the affairs of the
rural banks in a lawful and orderly manner; and, upon proof that the rural bank or its
Board of Directors, or officers are conducting and managing the affairs of the bank in a
manner contrary to laws, orders, instructions, rules and regulations promulgated by the
Monetary Board or in a manner substantially prejudicial to the interest of the
Government, depositors or creditors, to take over the management of such bank when
specifically authorized to do so by the Monetary Board after due hearing process until a
new board of directors and officers are elected and qualified without prejudice to the
prosecution of the persons responsible for such violations under the provisions of
Sections 32, 33 and 34 of Republic Act No. 265, as amended.
x x x x.
The thrust of Vivas’ argument is that ECBI did not commit any financial fraud and,
hence, its placement under receivership was unwarranted and improper. He asserts that,
instead, the BSP should have taken over the management of ECBI and extended loans to
the financially distrained bank pursuant to Sections 11 and 14 of R.A. No. 7353 because
the BSP’s power is limited only to supervision and management take-over of banks, and
not receivership.
Vivas argues that implementation of the questioned resolution was tainted with
arbitrariness and bad faith, stressing that ECBI was placed under receivership without
due and prior hearing, invoking Section 11 of R.A. No. 7353 which states that the BSP
may take over the management of a rural bank after due hearing.33 He adds that because
R.A. No. 7353 is a special law, the same should prevail over R.A. No. 7653 which is a
general law.
The Court has taken this into account, but it appears from all over the records that ECBI
was given every opportunity to be heard and improve on its financial standing. The
records disclose that BSP officials and examiners met with the representatives of ECBI,
including Vivas, and discussed their findings.34 There were also reminders that ECBI
submit its financial audit reports for the years 2007 and 2008 with a warning that failure
to submit them and a written explanation of such omission shall result in the imposition
of a monetary penalty.35 More importantly, ECBI was heard on its motion for
reconsideration. For failure of ECBI to comply, the MB came out with Resolution No.
1548 denying its request for reconsideration of Resolution No. 726. Having been heard
on its motion for reconsideration, ECBI cannot claim that it was deprived of its right
under the Rural Bank Act.
Close Now, Hear Later
At any rate, if circumstances warrant it, the MB may forbid a bank from doing business
and place it under receivership without prior notice and hearing. Section 30 of R.A. No.
7653 provides, viz:
Sec. 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 Bangko Sentral, to meet its
liabilities; or
(c) cannot continue in business without involving probable losses to its depositors or
creditors; or
(d) has wilfully 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.
[Emphases supplied.]
x x x x.
Accordingly, there is no conflict which would call for the application of the doctrine that
a special law should prevail over a general law. It must be emphasized that R.A .No.
7653 is a later law and under said act, the power of the MB over banks, including rural
banks, was increased and expanded. The Court, in several cases, upheld the power of the
MB to take over banks without need for prior hearing. It is not necessary inasmuch as the
law entrusts to the MB the appreciation and determination of whether any or all of the
statutory grounds for the closure and receivership of the erring bank are present. The MB,
under R.A. No. 7653, has been invested with more power of closure and placement of a
bank under receivership for insolvency or illiquidity, or because the bank’s continuance
in business would probably result in the loss to depositors or creditors. In the case of
Bangko Sentral Ng Pilipinas Monetary Board v. Hon. Antonio-Valenzuela,36 the Court
reiterated the doctrine of "close now, hear later," stating that it was justified as a measure
for the protection of the public interest. Thus:
The "close now, hear later" doctrine has already been justified as a measure for the
protection of the public interest. Swift action is called for on the part of the BSP when it
finds that a bank is in dire straits. Unless 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.37[Emphasis supplied]
In Rural Bank of Buhi, Inc. v. Court of Appeals,38 the Court also wrote that
x x x 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
74
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.39
The doctrine is founded on practical and legal considerations to obviate 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.40 Swift, adequate and
determined actions must be taken against financially distressed and mismanaged banks
by government agencies lest the public faith in the banking system deteriorate to the
prejudice of the national economy.
Accordingly, the MB can immediately implement its resolution prohibiting a banking
institution to do business in the Philippines and, thereafter, appoint the PDIC as receiver.
The procedure for the involuntary closure of a bank is summary and expeditious in
nature. Such action of the MB shall be final and executory, but may be later subjected to
a judicial scrutiny via a petition for certiorari to be filed by the stockholders of record of
the bank representing a majority of the capital stock. Obviously, this procedure is
designed to protect the interest of all concerned, that is, the depositors, creditors and
stockholders, the bank itself and the general public. The protection afforded public
interest warrants the exercise of a summary closure.
In the case at bench, the ISD II submitted its memorandum, dated February 17, 2010,
containing the findings noted during the general examination conducted on ECBI with
the cut-off date of September 30, 2009. The memorandum underscored the inability of
ECBI to pay its liabilities as they would fall due in the usual course of its business, its
liabilities being in excess of the assets held. Also, it was noted that ECBI’s continued
banking operation would most probably result in the incurrence of additional losses to the
prejudice of its depositors and creditors. On top of these, it was found that ECBI had
willfully violated the cease-and-desist order of the MB issued in its June 24, 2009
Resolution, and had disregarded the BSP rules and directives. For said reasons, the MB
was forced to issue the assailed Resolution No. 276 placing ECBI under receivership. In
addition, the MB stressed that it accorded ECBI ample time and opportunity to address its
monetary problem and to restore and improve its financial health and viability but it
failed to do so.
In light of the circumstances obtaining in this case, the application of the corrective
measures enunciated in Section 30 of R.A. No. 7653 was proper and justified.
Management take-over under Section 11 of R.A. No. 7353 was no longer feasible
considering the financial quagmire that engulfed ECBI showing serious conditions of
insolvency and illiquidity. Besides, placing ECBI under receivership would effectively
put a stop to the further draining of its assets.
No Undue Delegation of Legislative Power
Lastly, the petitioner challenges the constitutionality of Section 30 of R.A. No. 7653, as
the legislature granted the MB a broad and unrestrained power to close and place a
financially troubled bank under receivership. He claims that the said provision was an
undue delegation of legislative power. The contention deserves scant consideration.
Preliminarily, Vivas’ attempt to assail the constitutionality of Section 30 of R.A. No.
7653 constitutes collateral attack on the said provision of law. Nothing is more settled
than the rule that the constitutionality of a statute cannot be collaterally attacked as
constitutionality issues must be pleaded directly and not collaterally.41 A collateral attack
on a presumably valid law is not permissible. Unless a law or rule is annulled in a direct
proceeding, the legal presumption of its validity stands.42
Be that as it may, there is no violation of the non-delegation of legislative
power.1âwphi1 The rationale for the constitutional proscription is that "legislative
discretion as to the substantive contents of the law cannot be delegated. What can be
delegated is the discretion to determine how the law may be enforced, not what the law
shall be. The ascertainment of the latter subject is a prerogative of the legislature. This
prerogative cannot be abdicated or surrendered by the legislature to the delegate."43
"There are two accepted tests to determine whether or not there is a valid delegation of
legislative power, viz, the completeness test and the sufficient standard test. Under the
first test, the law must be complete in all its terms and conditions when it leaves the
legislature such that when it reaches the delegate the only thing he will have to do is
enforce it. Under the sufficient standard test, there must be adequate guidelines or
stations in the law to map out the boundaries of the delegate's authority and prevent the
delegation from running riot. Both tests are intended to prevent a total transference of
legislative authority to the delegate, who is not allowed to step into the shoes of the
legislature and exercise a power essentially legislative."44
In this case, under the two tests, there was no undue delegation of legislative authority in
the issuance of R.A. No. 7653. To address the growing concerns in the banking industry,
the legislature has sufficiently empowered the MB to effectively monitor and supervise
banks and financial institutions and, if circumstances warrant, to forbid them to do
business, to take over their management or to place them under receivership. The
legislature has clearly spelled out the reasonable parameters of the power entrusted to the
MB and assigned to it only the manner of enforcing said power. In other words, the MB
was given a wide discretion and latitude only as to how the law should be implemented in
order to attain its objective of protecting the interest of the public, the banking industry
and the economy.
WHEREFORE, the petition for prohibition is DENIED.
SO ORDERED.

75
SECOND DIVISION
G.R. No. 73884 September 24, 1987
SPOUSES ROMEO LIPANA and MILAGROS LIPANA, petitioners,
vs.
DEVELOPMENT BANK OF RIZAL, respondent.
PARAS, J.:
This is a petition for review on certiorari of the August 30, 1985 Order of the Regional
Trial Court of Pasig denying petitioners' Motion to Lift Stay of Execution in Civil Case
No. 50802.
During the period from 1982 to January, 1984, herein petitioners opened and maintained
both time and savings deposits with the herein respondent Development Bank of Rizal all
in the aggregate amount of P939,737.32. When some of the Time Deposit Certificates
matured, petitioners were not able to cash them but instead were issued a manager's
check which was dishonored upon presentment. Demands for the payment of both time
and savings deposits having failed, on March 14, 1984, petitioners filed with the Regional
Trial Court of Pasig a Complaint With Prayer For Issuance of a Writ of Preliminary
Attachment for collection of a sum of money with damages, docketed therein as Civil
Case No. 50802 (Record, pp. 3-11).
Respondent Judge, in an Order dated March 19, 1984 (Ibid., p. 19-21), ordered the
issuance of a writ of attachment, and pursuant thereto, a writ of attachment dated March
20, 1984 was issued in favor of the petitioners (Ibid., p. 33).
On June 27, 1984, respondent bank filed its Answer (Ibid., p. 58-61).
On July 23, 1984, petitioners filed a Motion For Judgment on the Pleadings (Ibid., pp. 68-
73), opposed by respondent bank (Ibid., pp. 74-76), but respondent judge, in a Decision
dated November 13, 1984, rendered judgment in favor of petitioners. The dispositive
portion of the said Decision, reads:
IN VIEW OF ALL THE FOREGOING, the Court renders judgment in favor of the
plaintiffs, ordering the defendant to pay the total sum of P939,737.32 plus stipulated
interest; the sum equivalent to 15% of the amount due as attorney's fees; and costs of suit.
The counterclaim is dismissed, for lack of merit.
Meanwhile, on August 10, 1984, the Monetary Board, in its Resolution No. 1009, finding
that the condition of respondent bank was one of insolvency and that its continuance in
business would result in probable loss to its depositors and creditors, decided to place it
under receivership (Rollo, p. 84).
On December 7, 1984, petitioners filed a Motion for Execution Pending Appeal (Rcd.,
pp. 91-93), which was opposed by respondent bank (Ibid., p. 94-96). On December 27,
1984, petitioners filed their Reply to the opposition (Ibid., pp. 98-101), to which
respondent bank filed its Rejoinder on January 1, 1985 (Ibid., pp. 102-105).
In an order dated January 29, 1985, respondent judge ordered the issuance of a writ of
execution (Ibid., p. 106).
On February 11, 1985, respondent bank filed a Motion for Reconsideration of order dated
January 29, 1985 and to Stay Writ of Execution (Ibid., pp. 109-110), opposed by
petitioners (Ibid., p. 111) but in an Order dated March 6, 1985, respondent judge stayed
the execution (Ibid., p. 113).
On August 7, 1985, petitioners filed a Motion to Lift Stay of Execution (Ibid., pp. 119-
122), opposed by respondent bank (Ibid., pp. 123-127), and in an Order dated August 30,
1985, respondent judge denied the said motion (Ibid., p. 130). Hence, the instant petition
(Rollo, pp. 8-17).
76
The Second Division of the Court, in a resolution dated May 5, 1986, resolved to require
the respondent to comment (Ibid., p. 52). In compliance therewith, respondent bank filed
its Comment on June 9, 1986 (Ibid., pp. 53-58).
The petition was given due course in a resolution dated August 11, 1986, and the parties
were required to file their respective memoranda (Ibid., p. 61). In compliance therewith,
petitioners filed their Memorandum on September 19, 1986 (Ibid., p. 63-75), while
respondent bank filed its Memorandum on September 25, 1986 (Ibid., pp. 76-83), and the
case was considered submitted for deliberation in the Resolution dated October 8, 1986
(Ibid., p. 88)
Petitioners raised the following issues:
1. Respondent judge cannot legally stay execution of judgement that has already become
final and executory;
2. The placing under receivership by the Central Bank of the respondent bank, long after
the complaint was filed removed it from the application of the doctrine in Re: Central
Bank vs. Morfe (63 SCRA 113);
3. The filing of the complaint for a sum of money With damages against respondent bank
and the subsequent attachment of its property in Pasig, Metro Manila long before the
receivership took place render inapplicable the doctrine laid down by this Honorable
Supreme Court in the said Morfe case;
4. The indefinite stay of execution without a ruling as to how long it will last, amounts to
deprivation of petitioners of their property without due process of law.
The instant petition is without merit.
I.
The main issue in this case is whether or not respondent judge could legally stay
execution of judgment that has already become final and executory.
The answer is in the affirmative.
The rule that once a decision becomes final and executory, it is the ministerial duty of the
court to order its execution, admits of certain exceptions as in cases of special and
exceptional nature where it becomes imperative in the higher interest of justice to direct
the suspension of its execution (Vecine vs. Geronimo, 59 O.G. 579); whenever it is
necessary to accomplish the aims of justice (Pascual vs. Tan, 85 Phil. 164); or when
certain facts and circumstances transpired after the judgment became final which could
render the execution of the judgment unjust (Cabrias vs. Adil, 135 SCRA 354).
In the instant case, the stay of the execution of judgment is warranted by the fact that
respondent bank was placed under receivership. To execute the judgment would unduly
deplete the assets of respondent bank to the obvious prejudice of other depositors and
creditors, since, as aptly stated in Central Bank of the Philippines vs. Morfe (63 SCRA
114), 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 depositors. The assets of the 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.
Moreover, it will be noted that respondent bank was placed under receivership on August
10, 1984, and the Decision of respondent judge is dated November 13, 1984.
Accordingly, in line with the ruling in the aforesaid Morfe case, which reads:
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. ...
petitioners 'complaint should have been dismissed.
II.
It is the contention of petitioners, however, that the placing under receivership of
respondent bank long after the filing of the complaint removed it from the doctrine in the
said Morfe case.
This contention is untenable. The time of the filing of the complaint is immaterial. It is
the execution that win obviously prejudice the other depositors and creditors. Moreover,
as stated in the said Morfe case, the effect of the judgment is only to fix the amount of the
debt, and not give priority over other depositors and creditors.
III.
Anent the contention of petitioners that the attachment of one of the properties of
respondent bank was erased by virtue of the delayed receivership is to expand the power
of the Central Bank, Suffice it to say that in the case of Central Bank of the Philippines,
et al. vs. Court of Appeals, et al. (Resolution of this Court dated September 17, 1984 in
G.R. No. 33302), wherein the original plaintiff Algue Inc. was able to obtain a writ of
preliminary attachment against the original defendant Island Savings Bank, this Court
refused to recognize any preference resulting from such attachment and ruled that after a
declaration of insolvency, the remedy of the depositors is to intervene in the liquidation
proceedings.
IV.
It is also contended by the petitioners that the indefinite stay of execution without ruling
as to how long it will last, amounts to a deprivation of their property without due process
of law.
Said contention, likewise, is devoid of merit. Apart from the fact that the stay of
execution is not only in accordance with law but is also supported by jurisprudence, such
staying of execution is not without a time limit. In fact, the Monetary Board, in its
resolution No. 4-33 approved the liquidation of respondent bank on April 26, 1985 and
ordered, among others, the filing of a petition in the Regional Trial Court praying for
assistance of said court in the liquidation of the bank. (Rollo, p. 81). The staying of the
writ of execution will be lifted after approval by the liquidation court of the project of
distribution, and the liquidator or his deputy will authorize payments to all claimants
concerned in accordance with the approved project of distribution.
PREMISES CONSIDERED, the instant petition is hereby DISMISSED.
SO ORDERED.

77
THIRD DIVISION
G.R. No. 97218 May 17, 1993
PROVIDENT SAVINGS BANK, petitioner,
vs.
COURT OF APPEALS, Former SPECIAL EIGHTH DIVISION and WILSON
CHUA, respondents.
Gonzales, Batiller, Bilog & Associates for petitioner.
Resty R. Villanueva for private respondent.
MELO, J.:
The error, if error it be, of respondent Court of Appeals which petitioner seeks to rectify
via the petitioner for certiorari before us refers to respondent court's major conclusion
arrived at in CA-G.R. CV No. 21312 (Javellana (P), Kalalo, Dayrit, JJ) barring petitioner
from foreclosing the subject realty on account of prescription. Petitioner begs to differ,
insisting that the period during which it was placed under receivership by the Central
Bank is akin to a caso fortuito and should not thus be reckoned against it.
Both petitioner and private respondent accepted the synthesized factual backdrop
formulated by respondent court, to wit:
This an appeal by both plaintiff and defendant from the decision of the Regional Trial
Court of the National Capital Judicial 29 September 1988, in Civil Case No. 977-NW,
which directed plaintiff-appellant to pay defendant-appellant the personal obligation of
the spouses Guarin to defendant-appellant in the amount of P62,500.00, together with the
interest, penalties, and bank charges due thereon, and ordering defendant-appellant
thereafter to: (1) release the real estate mortgage executed by the spouses Lorenzo K.
Guarin and Liwayway J. Guarin in favor of defendant bank on 16 February 1967; (2)
return to surrender to plaintiff-appellant, as successor-in-interest of the spouses Guarin,
the latter's Owner's Duplicate of Title No. 177014; (3) pay plaintiff-appellant P20,000.00
as and for attorney's fees; and, (4) pay the costs of suit.
The established fact are:
On 16 February 1967, the spouses Lorenzo K. Guarin and Liwayway J. Guarin (Guarins)
obtained a loan from defendant-appellant in the amount of P62,500.00 payable on or
before 20 June 1967. As security for the loan, they executed a real estate mortgage in
favor of defendant-appellant over a parcel of land covered by TCT No. 177014. (Exhs. C
and D).
In September, 1972, defendant-appellant was placed under receivership by the Central
Bank of the Philippines until 27 July 1981 when the receivership was set aside by the
Honorable Supreme Court.
On 11 December 1984, Lorenzo K. Guarin, in reply to the letter of latter's counsel
informing that the mortgaged property would be sold at public auction on 27 December
1984, assured he and his wife had every intention of paying their obligation and
requesting for a recomputation of their account and a postponement of the foreclosure
sale. (Exh. 1).
On 10 February 1986, the Guarins received a Statement of Account from defendant-
appellant showing two outstanding accounts as of 15 February 1986. One was account of
Lorenzo K. Guarin in the amount of P591,088.80, and the other was the account of L.K.
Guarin Manufacturing Co., Inc. in the amount of P6,287,380.27 (Attachment to Exh. 2)
On 26 February 1986, Lorenzo K. Guarin wrote defendant-appellant stating that he was
ready and willing to pay his obligation in the total amount of P591,088.80 as recomputed
78
by defendant-appellant whenever defendant-appellant was already to receive the payment
and inquiring as to when his mortgaged title would be available for him to pick up. (Exh.
2)
Defendant-appellant replied on 27 February 1986 that Lorenzo K. Guarin may make
payment at its office in Makati, Metro Manila, but that the mortgaged title could not be
released to him even after the payment of the obligation of P591,088.80 as it also served
as security for the indebtedness of L.Y. Guarin Manufacturing Co., Inc., to defendant-
appellant which was undertaken by Lorenzo K. Guarin in his personal capacity and as
president of the corporation. (Exh. 3)
On 20 May 1986, plaintiff-appellant wrote defendant-appellant saying that the mortgaged
property of the Guarins had been offered to him as payment of the judgment he obtained
against the Guarins in Civil Case No. Q-47465 entitled, "Wilson Chua vs. Lorenzo K.
Guarin", and requesting for defendant-appellant's conformity to the assignment and
expressing his willingness to pay for the obligation of Mr. Guarin so that the title could
be released by defendant-appellant. (Exh. 4)
On 10 July 1986, the Guarins and plaintiff-appellant executed a Deed of Absolute Sale
With Assumption of Mortgaged whereby the Guarins sold the mortgaged property to
Guarins sold the appellant for the sum of P250,000.00 and plaintiff-appellant undertook
to assume the mortgaged obligation of the Guarins with defendant-appellant which as of
15 February 1985 amounted to P591,088.80.(Exh. B).
On 5 August 1986, plaintiff-appellant informed defendant-appellant that as a result of the
judgment in Civil Case No. Q-47645, the mortgaged property had been sold to him by the
Guarins, as evidenced by the Deed of Sale enclosed for guidance and information of
defendant-appellant. He requested that he be allowed to pay the loan secured by the
mortgaged, otherwise, he would be constrained to bring the matter to court. (Exh. 5) In
reply, defendant-appellant, on 11 August 1986, informed plaintiff-appellant that his
request could be granted if he would settle the obligation of L.K. Guarin Manufacturing
Co., Inc., as well and defendant-appellant's letter to Mr. Guarin dated 27 February 1986.
(Exh. 6)
On 3 August 1987, counsel for plaintiff-appellant addressed a letter to defendant-
appellant informing that plaintiff-appellant had purchased the mortgaged property from
the Guarin's and requesting that the owner's copy of TCT No. 177014 in the possession of
defendant-appellant be released to him so that he can register the sale and have the title to
the property transferred in his name. He likewise, informed defendant-appellant that it
had lost whatever right or action had against the Guarins because of prescription. (Exh.
E) Defendant-appellant replied on 10 August 1987 stating the reasons why they could not
comply with plaintiff-appellant's demands. (Exh. F)
On 21 August 1986, plaintiff-appellant filed a complaint against defendant-appellant to
compel the latter to: (1) release the real estate mortgaged executed by the Guarins in
favor of defendant-appellant on 16 February 1967; (2) return or surrender to plaintiff-
appellant, as successor-in-interest of the Guarins, the latter's owner's duplicate of TCT
No. 177014; and (3) pay plaintiff-appellant P2,750,000.00 as actual and/or consequential
damages, moral damages as may be proved during the trial, exemplary damages as may
be reasonably assessed by the court, and attorney's fees of P50,00.00. Defendant-
appellant answered the complaint thereof and setting up special and affirmative defenses.
After trial, judgment was rendered as stated in the opening paragraph hereof from which
both parties appealed . . . . (pp. 35-37, Rollo.)
Concerning the challenge posed by Provident Saving Bank against the personality of
Wilson Chua to initiate the action to compel the release of the real estate mortgage and
the delivery of the owner's duplicate copy of the certificate of title, respondent court
noted that Wilson Chua can be considered a real-property-in-interest because he is the
successor-in-interest of the Guarins who is naturally entitled to the realty as against the
so-called right of Provident Savings Bank, as mortgagee, to foreclose the mortgage which
had become stale through sheer lapse of time. The matter of novation in the form of
substitution of the debtor without corresponding acquiesence of the mortgagee was
viewed by respondent court to be legally inconsequential due to the demeanor of the
mortgagee-bank in requiring Wilson Chua to pay the indebtedness of Lorenzo Guarin,
posterior to the change of obligors, which act was construed as equivalent to consent.
To the question of whether petitioner can still foreclose the subject realty, respondent
court gave a negative response on account of the absence of proof to indicate that the
bank was precluded from collecting indebtedness while it was under receivership from
September, 1972 until July 20,1981. Thus, there was no legal interruption of the pres-
criptive period to speak of, said respondent court, which intervened between June 20,
1967, the date the mortgage matured, and June 20, 1977 the last day within which
petitioner could have foreclosed the mortgage.
Respondent court did not also heed the suggestion of the petitioner bank to interpret
Wilson Chua's assumption of the mortgage on July 10, 1986 as tantamount to an explicit
acknowledgement that the obligation was outstanding and had not yet prescribed.
As a result of these observations, respondent court reversed the decision of the trial court
insofar as it ordered Wilson Chua to pay the sum of P591,088.80 to the bank and
affirmed the other dispositions made the court of origin (p. 42, Rollo).
Following the unfavorable judgment, the bank filed a motion for reconsideration and a
motion for new trial premised on newly discovered evidence relative to a statement of
account unearthed by the bank's liaison officer from the loose folders on October 18,
1990 which it believed to be of legal significance to the case. But respondent court was
unperturbed, observing that the vital piece of document could have been located in the
course of trial had the slightest degree of prudence been exercised, considering that the
statement of account sprouted the same day the liaison officer was advised to take an
inventory of the records ( p. 45, Rollo).
Hence, the petitioner at bar.
Consistent with its theory premised on fuerza major, petitioner insists that it can not be
blamed for not lifting a finger, so speak, during the period when it was enjoined by the
Central Bank on September 15, 1972 from transacting business until this Court affirmed
on July 27,1981 the decision of the Court of Appeals annulling the proscription against
petitioner in Central Bank vs. Court of Appeals (106 SCRA 143 [1981]. We are not
unaware of the rule laid down in Teal Motor Co. vs. Court of First Instance of Manila (51
Phil. 549 [1928]; Martin, Commentaries and Jurisprudence on the Philippine Commercial
Laws, 1986 Revised ed., p.125) that the appointment of a receiver does not dissolve the
corporation nor does it interfere with the exercise of its corporate rights. But this
principles is, of course, applicable to a situation where there is no restraint imposed on
the corporation, unlike in the case at bar where petitioner Provident Savings Bank was
specifically forbidden and immobilized from doing business in the Philippines on
September 15, 1972 through Monetary Board Resolution No. 1766 until 1981 when the
decision in Central Bank vs. Court of Appeals (supra, at p. 150) was rendered. The
question which immediately crops up is whether a foreclose proceeding falls within the
purview of the phrase "doing business". In Mentholatum Co., Inc., et al. vs. Mangaliman,
et al. (72 Phil. 524 [1941]; Moreno, Philippine Law Dictionary, Second ed., 1972, p.
186), the term was construed by Justice Laurel to refer to:
79
. . . a continuity of commercial dealings and arrangements, and contemplates to that
extent, the exercise of some of the words or the normally incident to, and in progressive
prosecution of, the purpose ands object of its organizations. (p. 528; emphasis supplied.)
Withal, we believe that a foreclose is deemed embraced by the phrase "doing business" as
a preparatory measure to acquiring or holding property for petitioner as a saving bank
under Section 34 of the General Banking Act. Like any other banking institution,
petitioner is vested with the usual attributes and powers of a corporation under Section 36
of the Corporation Code (Vitug, Pandect of Commercial Law and Jurisprudence, 1990
ed., p. 475). The prerogative of a bank to foreclose is implicit from and is even necessary
to enforce collection of secured debts under Section 36(11) and 45 of the Corporation
Code, in conjunction with Section 29 of the General Banking Act (6 Fletcher,
206; Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the
Philippines, 1990 ed., p. 325).
When a bank is prohibited to do business by the Central Bank and a receiver is appointed
for such bank, that bank would not be able to do new business, i.e., to grant new loans or
to accept new deposits. However, the receiver of the bank is obliged to collect debts
owing to the bank, which debts form part of the assets of the bank. The receiver must
assemble the assets and pay the obligation of the bank under receivership, and take steps
to prevent dissipation of such assets. Accordingly, the the receiver of the bank is obliged
to collect pre-existing debts due to the bank, and in connection therewith, to foreclose
mortgages securing debts. This is not to ignore The Philippine Trust Co. vs. HSBC (67
Phil. 204 [1939], for in that case, the Court simply rejected the objections of certain
creditors to the report of a receiver, that is, objections that the receiver did not report the
collection made before the beginning of his receivership. It would follow that the bank is
bound by the acts, or failure to act, of the receiver. At the same time, the receiver is liable
to the bank for culpable or negligent failure to collect the assets of such bank and to
safeguard said assets.
Having arrived at the conclusion that the foreclosure is part of bank's business activity
which could not have been pursued by the receiver then because of the circumstances
discussed in the Central Bank case, we are thus convinced that the prescriptive period
was legally interrupted by fuerza mayor in 1972 on account on the prohibition imposed
by the Monetary Board against petitioner from transacting business, until the directive of
the board was nullified in 1981. Indeed, the period during which the obligee was
prevented by a caso fortuito from enforcing his right is not reckoned against him (Article
1154, New Civil Code). When prescription is interrupted, all the benefits acquired so far
from the possession cease and when prescription starts anew, it will be entirely a new
one. This concept should not be equated with suspension where the past period is
included in the computation being added to the period after prescription is resumed
(4 Tolentino, Commentaries and Jurisprudence on the Civil Code of the Philippines, 1991
ed., pp. 18-19). Consequently, when the closure of was set aside in 1981, the period of
ten years within which to foreclose under Article 1142 of the New Civil Code began to
run again and, therefore, the action filed on August 21, 1986 to compel petitioner to
release the mortgage carried with it the mistaken notion that petitioner's own suit
foreclosure had prescribed. What exacerbates the situation is the letter of private
respondent requesting petitioner on August 6, 1986 that private respondent be allowed to
pay the loan secured by the mortgage as the result of the Deed of Sale executed by the
Guarins in his favor on July 10, 1986 (pp. 36-37, Rollo). In point of law, this written
communication is synonymous to an express acknowledgment of the obligation and had
the effect of interrupting the prescription for the second time (Article 1155, New Civil
Code; Osmeña vs. Rama, 14 Phil. 99 [1909]; 4 Tolentino, supra at p. 50). And this piece
of document necessarily estops private respondent from setting up prescription vis-a-
vis his unfounded supposition that acknowledgment of the debt is of no moment because
the right of the petitioner to foreclose had long prescribed in 1977 (p. 13, Petition; p. 7,
Comment; pp. 19 and 58, Rollo).
Contrary to respondent court's prescription of the existence of novation, the evidence at
hand does not buttress a finding along this line from the mere fact that petitioner
supposedly did not question the substitution when the bank reacted to private
respondent's offer to pay the loan (p. 39, Rollo). What seems to have escaped respondent
court's attention was the condition imposed by the petitioner that it will grant private
respondent's request if the latter will also shoulder the obligation incurred by Lorenzo
Guarin in his capacity as president of the corporation (p.37, Rollo). The consent of the
petitioner to the substitution, as creditor, was thus erroneously appreciated.
With the conclusions reached, we need not discuss the other issues raised in the petition.
WHEREFORE, the petition is hereby GRANTED. The decision dated August 31, 1990,
including the resolution dated February 6, 1991 of respondent court are hereby set aside
and another one entered dismissing Wilson Chua's complaint. No special pronouncement
is made to costs.

80
FIRST DIVISION
G.R. No. 141297 October 8, 2001
DOMINGO R. MANALO, petitioner,
vs.
COURT OF APPEALS (Special Twelfth Division) and PAIC SAVINGS AND
MORTGAGE BANK, respondents.
PUNO, J.:
This petition for certiorari seeks the review of the Decision of the Court of Appeals in
C.A.-G.R. SP. No. 50341 promulgated December 23, 1999, which affirmed an Order
issued by the Regional Trial Court, Branch 112, Pasay City, in Civil Case No. 9011 dated
December 9, 1998.
On July 19, 1983, S. Villanueva Enterprises, represented by its president, Therese
Villanueva Vargas, obtained a loan of three million pesos (P3,000,000.00) and one
million pesos (P1,000,000.00) from the respondent PAIC Savings and Mortgage Bank
and the Philippine American Investments Corporation (PAIC), respectively. To secure
payment of both debts, Vargas executed in favor of the respondent and PAIC a Joint First
Mortgage1 over two parcels of land registered under her name. One of the lots, located in
Pasay City with an area of nine hundred nineteen square meters (919 sq. m.) and covered
by TCT No. 6076, is the subject of the present case. Section 2 of the mortgage contract
states that "the properties mortgaged therein shall include all buildings and improvements
existing on the mortgaged property at the time of the execution of the mortgage contract
and thereafter."2
S. Villanueva Enterprises defaulted in paying the amortizations due. Despite repeated
demands from the respondent, it failed to settle its loan obligation. Accordingly,
respondent instituted extrajudicial foreclosure proceedings over the mortgaged lots. On
August 22, 1984, the Pasay City property was sold at a public auction to the respondent
itself, after tendering the highest bid. The respondent then caused the annotation of the
corresponding Sheriff's Certificate of Sale3 on the title of the land on December 4, 1984.
After the lapse of one year, or the statutory period extended by law to a mortgagor to
exercise his/her right of redemption, title was consolidated in respondent's name for
failure of Vargas to redeem.
On October 29, 1986, the Central Bank of the Philippines filed a Petition4 for assistance
in the liquidation of the respondent with the Regional Trial Court. The petition was given
due course in an Order5 dated May 19, 1987.
It appears that from the years 1986 to 1991, Vargas negotiated with the respondent
(through its then liquidator, the Central Bank) for the repurchase of the foreclosed
property. The negotiations, however, fizzled out as Vargas cannot afford the repurchase
price fixed by the respondent based on the appraised value of the land at that time. On
October 4, 1991, Vargas filed a case for annulment of mortgage and extrajudicial
foreclosure sale before Branch 116 of the Pasay City Regional Trial Court. On July 22,
1993, the court rendered a decision6 dismissing the complaint and upholding the validity
of the mortgage and foreclosure sale. On appeal, the appellate court upheld the assailed
judgment and declared the said mortgage and foreclosure proceedings to be in accord
with law.7 This decision of the Court of Appeals subsequently became final and
executory when we summarily dismissed Vargas' Petition for Review on Certiorari for
having been filed beyond the reglementary period.8
In the meantime, on June 22, 1992, respondent petitioned the Regional Trial Court,
Branch 112, of Pasay City, herein court a quo, for the issuance of a writ of possession for
the subject property in Civil Case No. 9011. This is in view of the consolidation of its
81
ownership over the same as mentioned earlier. Vargas and S. Villanueva Enterprises, Inc.
filed their opposition thereto. After which, trial ensued.
During the pendency of Civil Case No. 9011 (for the issuance of a writ of possession),
Vargas, on December 23, 1992, executed a Deed of Absolute Sale9 selling, transferring,
and conveying ownership of the disputed lot in favor of a certain Armando Angsico.
Notwithstanding this sale, Vargas, still representing herself to be the lawful owner of the
property, leased the same to petitioner Domingo R. Manalo on August 25, 1994.
Pertinent provisions of the lease agreement10 state:
"3. (a) The lease is for a period of ten year lease (sic), involving 450 square meters, a
portion of the above 919 square meter property.
x x x (d) The LESSEE has to introduce into the said 450 square meter premises
improvements thereon (sic) consisting of one story building to house a Karaoke Music
Restaurant Business, which improvements constructed thereof (sic), upon the termination
of the lease contract, by said LESSEE be surrendered in favor of the LESSOR (sic).''11
Later, on June 29, 1997, Armando Angsico, as buyer of the property, assigned his rights
therein to petitioner.12
On April 21, 1998, the court a quo granted the petition for the issuance of the Writ of
Possession.13 The writ was subsequently issued on April 24, 1998, the pertinent portion
of which reads:14
"NOW THEREFORE you are hereby commanded that you cause oppositors THERESE
VILLANUEVA VARGAS and S. VILLANUEVA ENTERPRISES, INC. and any and all
persons claiming rights or title under them, to forthwith vacate and surrender the
possession of subject premises in question known as that parcel of land and
improvements covered by TCT No. 6076 of the Registry of Deeds of Pasay City; you are
hereby further ordered to take possession and deliver to the petitioner PAIC SAVINGS
AND MORTGAGE BANK the subject parcel of land and improvements."
Shortly, on May 8, 1998, S. Villanueva Enterprises and Vargas moved for its
quashal.15 Thereafter on June 25, 1998, petitioner, on the strength of the lease contract
and Deed of Assignment made in his favor, submitted a Permission to File an Ex-
parte Motion to Intervene.16 It bears mentioning, however, that before petitioner sought
intervention in the present case, he had separately instituted a Complaint for Mandamus,
docketed as Civil Case No. 98-0868 before another branch17 of the Pasay City RTC to
compel PAIC Bank to allow him to repurchase the subject property.
On October 7, 1998, the court a quo denied the Motion to Quash and Motion to Intervene
filed respectively by Vargas and petitioner.18 A Motion for Reconsideration and a
Supplemental Motion for Reconsideration were filed by the petitioner which, however,
were similarly denied on December 9, 1998.
Petitioner then sought relief with the Court of Appeals, filing therein a Petition for
Certiorari. While this was awaiting resolution, he entered into another lease
agreement,19 this time with the respondent, represented by its liquidator, over the same
450 sq. m. portion of the lot. The contract fixed a period of one month beginning January
28, 1999, renewable for another month at the exclusive option of the lessor, respondent
PAIC Bank.
On December 23, 1999, the appellate court rendered the impugned Decision, dismissing
the petition, thus:
"All told, WE find the Order, subject of the instant Petition for Certiorari and Prohibition,
to be not without rational bases and we observe that the court a quo, in issuing its
questioned Order, committed no grave abuse of discretion amounting to lack of
jurisdiction.
WHEREFORE, the Petition for Certiorari and Prohibition is hereby DISMISSED and the
assailed December 9, 1998 Order is AFFIRMED in all respects.
SO ORDERED."20
Hence, this appeal, where petitioner raises and argues the following legal issues:
"I. Whether or not public respondent acted without or in excess of its jurisdiction and/or
was patently in error when it affirmed the denial of petitioner's motion for intervention,
despite the fact that he has a legal interest, being a lessee and an assignee of the property
subject matter of this case.
II. Whether or not the public respondent committed grave abuse of discretion when it
held that what are required to be instituted before the liquidation court are those claims
against the insolvent banks only considering that the private respondent bank is legally
dead due to insolvency and considering further that there is already a liquidation court
(Regional Trial Court of Makati, Branch 57, docketed as Spec. Pro. No. M-1280) which
is exclusively vested with jurisdiction to hear all matters and incidents on liquidation
pursuant to Section 29, Republic Act No. 265, otherwise known as The Central Bank Act,
as amended.
III. Whether or not the public respondent committed grave abuse of discretion and/or was
patently in error in affirming the ruling of the trial court, totally disregarding the
arguments raised in petitioner's supplemental motion for reconsideration only through a
minute order and without taking into consideration the fact that there is a pending action
in another court (RTC, Pasay City, Branch 231 ) which presents a prejudicial question to
the case at bar.
IV. Whether or not the petitioner is estopped from questioning private respondent's
ownership when it entered into a contract of lease involving the property in question."21
We will first resolve the jurisdictional and procedural questions raised by the petitioner.
I.
Petitioner postulates that the lower court should have dismissed respondent's "Ex-
Parte Petition for Issuance of Writ of Possession" in Civil Case No. P-9011 for want of
jurisdiction over the subject matter of the claim. The power to hear the same, he insists,
exclusively vests with the Liquidation Court pursuant to Section 29 of Republic Act No.
265, otherwise known as The Central Bank Act.22 He then cites our decision
in Valenzuela v. Court of Appeals,23where we held that "if there is a judicial liquidation
of an insolvent bank, all claims against the bank should be filed in the liquidation
proceeding." For going to another court, the respondent, he accuses, is guilty of forum
shopping.
These contentions can not pass judicial muster. The pertinent portion of Section 29 states:
"x x x 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 institution. The court
shall have jurisdiction in the same proceedings to assist in the adjudication of disputed
claims against the bank or non-bank financial intermediary performing quasi-banking
functions and the enforcement of individual liabilities of the stockholders and do all that
is necessary to preserve the assets of such institution and to implement the liquidation
plan approved by the Monetary Board, x x x"24 (emphasis supplied.)
Petitioner apparently failed to appreciate the correct meaning and import of the above-
quoted law. The legal provision only finds operation in cases where there are claims
against an insolvent bank. In fine, the exclusive jurisdiction of the liquidation court
pertains only to the adjudication of claims against the bank. It does not cover the reverse
situation where it is the bank which files a claim against another person or legal entity.
82
This interpretation of Section 29 becomes more obvious in the light of its intent. The
requirement that all claims against the bank be pursued in the liquidation proceedings
filed by the Central Bank is intended to prevent multiplicity of actions against the
insolvent bank and designed to establish due process and orderliness in the liquidation of
the bank, to obviate the proliferation of litigations and to avoid injustice and
arbitrariness.25 The lawmaking body contemplated that for convenience, only one court,
if possible, should pass upon the claims against the insolvent bank and that the
liquidation court should assist the Superintendents of Banks and regulate his
operations.26
It then ought to follow that petitioner's reliance on Section 29 and the Valenzuela case is
misplaced. The Petition for the Issuance of a Writ of Possession in Civil Case No. 9011 is
not in the nature of a disputed claim against the bank. On the contrary, it is an action
instituted by the respondent bank itself for the preservation of its asset and protection of
its property. It was filed upon the instance of the respondent's liquidator in order to take
possession of a tract of land over which it has ownership claims.
To be sure, the liquidator took the proper course of action when it applied for a writ in the
Pasay City RTC. Act 3135,27 entitled An Act to Regulate the Sale of Property Under
Special Powers Inserted In or Annexed To Real Estate Mortgages, mandates that
jurisdiction over a Petition for Writ of Possession lies with the court of the province, city,
or municipality where the property subject thereof is situated. This is sanctioned by
Section 7 of the said Act, thus:
"SECTION 7. In any sale made under the provisions of this Act, the purchaser may
petition the Court of First Instance of the province or place where the property or any
part thereof is situated, to give him possession thereof during the redemption period,
furnishing bond in an amount equivalent to the use of the property for a period of twelve
months, to indemnify the debtor in case it be shown that the sale was made without
violating the mortgage or without complying with the requirements of this Act x x
x"28 (emphasis supplied)
Since the land subject of this controversy is located in Pasay City, then the city's RTC
should rightly take cognizance of the case, to the exclusion of other courts.
Anent petitioner's auxiliary contention that respondent should be held guilty of forum
shopping for not filing the case in the liquidation court, suffice it to state here that the
doctrine only ponders situations where two (or more) cases are pending before different
tribunals.29 Well to point, we have laid down the yardstick to determine whether a party
violated the rule against forum shopping as where the elements of litis pendentia are
present or where a final judgment in one case will amount to res judicata in the
other.30 Inasmuch as the case at bar is the only one filed by the respondent for the
issuance of a writ of possession over the subject property, there is no occasion for the
doctrine to apply.
Petitioner next casts doubt on the capacity of the respondent to continue litigating the
petition for the issuance of the writ. He asserts that, being under liquidation, respondent
bank is already a "dead" corporation that cannot maintain the suit in the RTC. Hence, no
writ may be issued in its favor.
The argument is devoid of merit. A bank which had been ordered closed by the monetary
board retains its juridical personality which can sue and be sued through its liquidator.
The only limitation being that the prosecution or defense of the action must be done
through the liquidator.31 Otherwise, no suit for or against an insolvent entity would
prosper. In such situation, banks in liquidation would lose what justly belongs to them
through a mere technicality.32
That the law allows a bank under liquidation to participate in an action can be clearly
inferred from the third paragraph of the same Section 29 of The Central Bank Act earlier
quoted, which authorizes or empowers a liquidator to institute actions, thus: "x x x and he
(liquidator) 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."33 (emphasis supplied.)
It is therefore beyond dispute that respondent was legally capacitated to petition the
court a quo for the issuance of the writ.
II.
Petitioner likewise proffers one other procedural obstacle, which is the pendency of Civil
Case No. 98-0868 in Branch 231 of Pasay City RTC. The said action is the complaint he
filed against the respondent for the latter to receive and accept the redemption price of
eighteen million pesos for the subject property. He argues that the primary issue therein
constitutes a prejudicial question in relation to the present case in that if the Court therein
will grant petitioner's prayer, then this will necessarily negate the possessory writ issued
by the court a quo.
Again, we are not persuaded. A prejudicial question is one which arises in a case the
resolution of which is a logical antecedent of the issue involved therein, and the
cognizance of which pertains to another tribunal.34 It generally comes into play in
a situation where a civil action and a criminal action are both pending and there exists in
the former an issue which must be preemptively resolved before the criminal action may
proceed, because howsoever the issue raised in the civil action is resolved would be
determinative juris et de jure of the guilt or innocence of the accused in the criminal case.
The rationale behind the principle of prejudicial question is to avoid two conflicting
decisions.35
Here, aside from the fact that Civil Case No. 98-0868 and the present one are both civil in
nature and therefore no prejudicial question can arise from the existence of the two
actions,36 it is apparent that the former action was instituted merely to frustrate the
Court's ruling in the case at bar granting the respondent the right to possess the subject
property. It is but a canny and preemptive maneuver on the part of the petitioner to delay,
if not prevent, the execution of a judgment adverse to his interests. It bears stressing that
the complaint for mandamus was filed only on May 7, 1998, sixteen days after the lower
court granted respondent's petition and thirteen days after it issued the writ. It cannot then
possibly prejudice a decided case.
At any rate, it taxes our imagination why the questions raised in Case No. 98-0868 must
be considered determinative of Case No. 9011. The basic issue in the former is whether
the respondent, as the purchaser in the extra-judicial foreclosure proceedings, may be
compelled to have the property repurchased or resold to a mortgagor's successor-in-
interest (petitioner): while that in the latter is merely whether the respondent, as the
purchaser in the extrajudicial foreclosure proceedings, is entitled to a writ of possession
after the statutory period for redemption has expired. The two cases, assuming both are
pending, can proceed separately and take their own direction independent of each other.
III.
Having disposed of the jurisdictional and procedural issues, we now come to the merits
of the case. Petitioner seeks intervention in this case by virtue of the lease agreement and
the deed of assignment executed in his favor by the mortgagor (Vargas) and an alleged
buyer (Angsico) of the land, respectively. He posits that as a lessee and assignee in
83
possession of the foreclosed real estate, he automatically acquires interest over the
subject matter of the litigation. This interest is coupled with the fact that he introduced
improvements thereon, consisting of a one-storey building which houses a karaoke-music
restaurant, allegedly to the tune of fifteen million pesos (P15,000,000.00). Enforcing the
writ, he adds, without hearing his side would be an injustice to him.
Intervention is a remedy by which a third party, not originally impleaded in the
proceeding, becomes a litigant therein to enable him to protect or preserve a right or
interest which may be affected by such proceeding.37 The pertinent provision is stated in
Section 1, Rule 19 of the 1997 Rules of Civil Procedure, thus:
"SECTION 1. Who may intervene. — A person who has a legal interest in the matter in
litigation, or in the success of either of the parties, or an interest against both, or is so
situated as to be adversely affected by a distribution or other disposition of property in
the custody of the court or of an officer thereof may, with leave of court, be allowed to
intervene in the action. The court shall consider whether or not the intervention will
unduly delay or prejudice the adjudication of the rights of the original parties, and
whether or not the intervenor's rights may be fully protected in a separate proceeding."38
Intervention is not a matter of right but may be permitted by the courts only when the
statutory conditions for the right to intervene is shown.39 Thus, the allowance or
disallowance of a motion to intervene is addressed to the sound discretion of the
court.40 In determining the propriety of letting a party intervene in a case, the tribunal
should not limit itself to inquiring whether "a person (1) has a legal interest in the matter
in litigation; (2) or in the success of either of the parties; (3) or an interest against both;
(4) or when is so situated as to be adversely affected by a distribution or other disposition
of property in the custody of the court or of an officer thereof."41 Just as important, as we
have stated in Big Country Ranch Corporation v. Court of Appeals,42 is the function to
consider whether or not the intervention will unduly delay or prejudice the adjudication
of the rights of the original parties, and whether or not the intervenor's rights may be fully
protected in a separate proceeding.
The period within which a person may intervene is also restricted. Section 2, Rule 19 of
the 1997 Rules of Civil Procedure requires:
"SECTION 2. Time to intervene. — The motion to intervene may be filed at any time
before the rendition of judgment by the trial court, x x x"
After the lapse of this period, it will not be warranted anymore. This is because, basically,
intervention is not an independent action but is ancillary and supplemental to an existing
litigation.43
Taking into account these fundamental precepts, we rule that the petitioner may not
properly intervene in the case at bar. His insistence to participate in the proceeding is an
unfortunate case of too little, too late.
In the first place, petitioner's Ex-parte Permission to File a Motion to Intervene was
submitted to the RTC only on June 25, 1998. At that stage, the lower court had already
granted respondent's petition for the writ in an Order dated April 21, 1998. It had issued
the Writ of Possession on April 24, 1998. Petitioner's motion then was clearly out of
time, having been filed only at the execution stage. For that reason alone, it must meet the
consequence of denial. While it is true that on May 8, 1998, Vargas and S. Villanueva
Enterprises moved to quash the writ, that did not in any way affect the nature of the
RTC's Order as an adjudication on the merits. The issuance of the Order is in essence a
rendition of judgment within the purview of Section 2, Rule 19.
Allowing petitioner to intervene, furthermore, will serve no other purpose but to unduly
delay the execution of the writ, to the prejudice of the respondent. This cannot be
countenanced considering that after the consolidation of title in the buyer's name, for IN VIEW WHEREOF, finding no cogent reason to disturb the assailed Decision, the
failure of the mortgagor to redeem, the writ of possession becomes a matter of right.44 Its instant petition is hereby DENIED.
issuance to a purchaser in an extrajudicial foreclosure is merely a ministerial SO ORDERED.
function.45 As such, the court neither exercises its official discretion nor judgment.46 If
only to stress the writ's ministerial character, we have, in previous cases, disallowed
injunction to prohibit its issuance,47 just as we have held that issuance of the same may
not be stayed by a pending action for annulment of mortgage or the foreclosure itself.48
Even if he anchors his intervention on the purported interest he has over the land and the
improvements thereon, petitioner, still, should not be allowed to do so. He admits that he
is a mere lessee and assignee. Whatever possessory rights he holds only emanate from
that of Vargas, from whom he leased the lot, and from whom his assignor/predecessor-in-
interest bought it. Therein lies the precariousness of his title. Petitioner cannot validly
predicate his supposed interest over the property in litigation on that of Vargas, for the
simple reason that as early as December 4, 1985, the latter has already been stripped of
all her rights over the land when she, as mortgagor, failed to redeem it. A mortgagor has
only one year within which to redeem her foreclosed real estate.49 After that period, she
loses all her interests over it. This is in consonance with Section 78 of the General
Banking Act, 50 viz.:
"x x x In the event of foreclosure, whether judicially or extrajudicially, of any mortgage
on real estate which is security for any loan granted before the passage of this Act or the
provisions of this Act, the mortgagor or debtor whose real property has been sold at
public auction, judicially or extrajudicially, for the full or partial payment of an
obligation to any bank, banking or credit institution, within the purview of this Act shall
have the right, within one year after the sale of the real estate mortgage as a result of the
foreclosure of the respective mortgage, to redeem the property by paying the amount
fixed by the court in the order or execution x x x"51(emphasis supplied.)
Being herself bereft of valid title and rights, Vargas can not legitimately convey any to
some other person. She could not have lawfully sold the land to Angsico nor leased it to
petitioner for her own account. It is axiomatic that one can not transmit what one does not
have.52 It ought to follow that petitioner could not have acquired any right or interest
from Vargas.
Withal, all is not lost for the petitioner. He can still fully protect his rights in Civil Case
No. 98-0868 or the complaint for mandamus he filed before Branch 231 of the Pasay City
RTC. There, he can ventilate his side to a fuller extent as that would be the more
appropriate venue for elucidating whatever legal basis he alleges in compelling the
respondent to sell to him the currently disputed land.
IV.
This brings us to petitioner's final point. He briefly asserts that his act of entering into a
lease contract with the respondent should not affect his right to redeem the subject
property.
The possible legal implication of the lease on the petitioner's act of trying to redeem the
disputed lot is a question which, in our opinion, can best be resolved in the mandamus
complaint. Whether the agreement must be construed as a waiver on his part of
exercising his purported right of redemption is an issue best left for the court therein to
decide. Whether by acknowledging the legality of the respondent's claim and title over
the land at the time of the execution of the contract, he likewise perpetually barred
himself from redeeming the same is a matter which can be addressed most aptly in that
pending action. Hence, there is presently no need for us to squarely rule on this ultimate
point.

84
SECOND DIVISION
G.R. No. L-46208 April 5, 1990
FIDELITY SAVINGS AND MORTGAGE BANK, petitioner,
vs.
HON. PEDRO D. CENZON, in his capacity as Presiding Judge of the Court of First
Instance of Manila (Branch XL) and SPOUSES TIMOTEO AND OLIMPIA
SANTIAGO, respondents.
Agapito S. Fajardo and Marino E. Eslao for petitioner.
Leovillo C. Agustin Law Offices for private respondents.
REGALADO, J.:
The instant petition seeks the review, on pure questions of law, of the decision rendered
by the Court of First Instance of Manila (now Regional Trial Court), Branch XL, on
December 3, 1976 in Civil Case No. 84800,1 ordering herein petitioner to pay private
respondents the following amounts:
(a) P90,000.00 with accrued interest in accordance with Exhibits A and B until fully paid;
(b) P30,000,00 as exemplary damages; and
(c) P10,000.00 as and for attorney's fees.
The payment by the defendant Fidelity Savings and Mortgage Bank of the
aforementioned sums of money shall be subject to the Bank Liquidation Rules and
Regulations embodied in the Order of the Court of First Instance of Manila, Branch XIII,
dated October 3, 1972, Civil Case No. 86005, entitled, "IN RE: Liquidation of the
Fidelity Savings Bank versus Central Bank of the Philippines, Liquidator."
With costs against the defendant Fidelity Savings and Mortgage Bank.
SO ORDERED.
Private respondents instituted this present action for a sum of money with damages
against Fidelity Savings and Mortgage Bank, Central Bank of the Philippines, Eusebio
Lopez, Jr., Arsenio M. Lopez, Sr., Arsenio S. Lopez, Jr., Bibiana E. Lacuna, Jose C.
Morales, Leon P. Cusi, Pilar Y. Pobre-Cusi and Ernani A. Pacana. On motion of herein
private respondents, as plaintiffs, the amended complaint was dismissed without
prejudice against defendants Jose C. Morales, Leon P. Cusi, Pilar Y. Pobre-Cusi and
Ernani A. Pacana. 2 In its aforesaid decision of December 3, 1976, the court a
quo dismissed the complaint as against defendants Central Bank of the Philippines,
Eusebio Lopez, Jr., Arsenio S. Lopez, Jr., Arsenio M. Lopez, Sr. and Bibiana S. Lacuna.
Back on August 10, 1973, the plaintiffs (herein private respondents) and the defendants
Fidelity Savings and Mortgage Bank (petitioner herein), Central Bank of the Philippines
and Bibiana E. Lacuna had filed in said case in the lower court a partial stipulation of
facts, as follows:
COME NOW herein plaintiffs, SPOUSES TIMOTEO M. SANTIAGO and OLIMPIA R.
SANTIAGO, herein defendants FIDELITY SAVINGS AND MORTGAGE BANK and
the CENTRAL BANK OF THE PHILIPPINES, and herein defendant BIBIANA E.
LACUNA, through their respective undersigned counsel, and before this Honorable
Court most respectfully submit the following Partial Stipulation of Facts:
1. That herein plaintiffs are husband and wife, both of legal age, and presently residing at
No. 480 C. de la Paz Street, Sta. Elena, Marikina, Rizal;
2. That herein defendant Fidelity Savings and Mortgage Bank is a corporation duly
organized and existing under and by virtue of the laws of the Philippines; that defendant
Central Bank of the Philippines is a corporation duly organized and existing under and by
virtue of the laws of the Philippines;
85
3. That herein defendant Bibiana E. Lacuna is of legal age and a resident of No. 42 East
Lawin Street, Philamlife Homes, Quezon City, said defendant was an assistant Vice-
President of the defendant fidelity Savings and Mortgage Bank,
4. That sometime on May 16, 1968, here in plaintiffs deposited with the defendant
Fidelity Savings Bank the amount of FIFTY THOUSAND PESOS (P50,000.00) under
Savings Account No. 16-0536; that likewise, sometime on July 6, 1968, herein plaintiff,-
deposited with the defendant Fidelity Savings and Mortgage Bank the amount of FIFTY
THOUSAND PESOS (P50,000.00) under Certificate of Time Deposit No. 0210; that the
aggregate amount of deposits of the plaintiffs with the defendant Fidelity Savings and
Mortgage Bank is ONE HUNDRED THOUSAND PESOS (P100,000.00);
5. That on February 18, 1969, the Monetary Board, after finding the report of the
Superintendent of Banks, that the condition of the defendant Fidelity Savings and
Mortgage Bank is one of insolvency, to be true, issued Resolution No. 350 deciding,
among others, as follows:
1) To forbid the Fidelity Savings Bank to do business in the Philippines;
2) To instruct the Acting Superintendent of Banks to take charge, in the name of the
Monetary Board, of the Bank's assets
6. That pursuant to the above-cited instructions of the Monetary Board, the
Superintendent of Banks took charge in the name of the Monetary Board, of the assets of
defendant Fidelity Savings Bank on February 19, 1969; and that since that date up to this
date, the Superintendent of Banks (now designated as Director, Department of
Commercial and Savings Banks) has been taking charge of the assets of defendant
Fidelity Savings and Mortgage Bank;
7. That sometime on October 10, 1969 the Philippine Deposit Insurance Corporation paid
the plaintiffs the amount of TEN THOUSAND PESOS (P10,000.00) on the aggregate
deposits of P100,000.00 pursuant to Republic Act No. 5517, thereby leaving a deposit
balance of P90,000.00;
8. That on December 9, 1969, the Monetary Board issued its Resolution No. 2124
directing the liquidation of the affairs of defendant Fidelity Savings Bank;
9. That on January 25, 1972, the Solicitor General of the Philippines filed a "Petition for
Assistance and Supervision in Liquidation" of the affairs of the defendant Fidelity
Savings and Mortgage Bank with the Court of First Instance of Manila, assigned to
Branch XIII and docketed as Civil Case No. 86005;
10. That on October 3, 1972, the Liquidation Court promulgated the Bank Rules and
Regulations to govern the liquidation of the affairs of defendant Fidelity Savings and
Mortgage Bank, prescribing the rules on the conversion of the Bank's assets into money,
processing of claims against it and the manner and time of distributing the proceeds from
the assets of the Bank;
11. That the liquidation proceedings has not been terminated and is still pending up to the
present;
12. That herein plaintiffs, through their counsel, sent demand letters to herein defendants,
demanding the immediate payment of the aforementioned savings and time deposits.
WHEREFORE, it is respectfully prayed that the foregoing Partial Stipulation of Facts be
approved by this Honorable Court, without prejudice to the presentation of additional
documentary or testimonial evidence by herein parties.
Manila, Philippines, August 10, 1973. 3
Assigning error in the judgment of the lower court quoted ab antecedents, petitioner
raises two questions of law, to wit:
1. Whether or not an insolvent bank like the Fidelity Savings and Mortgage Bank may be
adjudged to pay interest on unpaid deposits even after its closure by the Central Bank by
reason of insolvency without violating the provisions of the Civil Code on preference of
credits; and
2. Whether or not an insolvent bank like the Fidelity Savings and Mortgage Bank may be
adjudged to pay moral and exemplary damages, attorney's fees and costs when the
insolvency is caused b the anomalous real estate transactions without violating the
provisions of the Civil Code on preference of credits.
There is merit in the petition.
It is settled jurisprudence that a banking institution which has been declared insolvent and
subsequently ordered closed by the Central Bank of the Philippines cannot be held liable
to pay interest on bank deposits which accrued during the period when the bank is
actually closed and non-operational.
In The Overseas Bank of Manila vs. Court of Appeals and Tony D. Tapia, 4 we held that:
It is a matter of common knowledge, which We take judicial notice of, that what enables
a bank to pay stipulated interest on money deposited with it is that thru the other aspects
of its operation it is able to generate funds to cover the payment of such interest. Unless a
bank can lend money, engage in international transactions, acquire foreclosed mortgaged
properties or their proceeds and generally engage in other banking and financing
activities from which it can derive income, it is inconceivable how it can carry on as a
depository obligated to pay stipulated interest. Conventional wisdom dictates this
inexorable fair and just conclusion. And it can be said that all who deposit money in
banks are aware of such a simple economic proposition. Consequently, it should be
deemed read into every contract of deposit with a bank that the obligation to pay interest
on the deposit ceases the moment the operation of the bank is completely suspended by
the duly constituted authority, the Central Bank.
This was reiterated in the subsequent case of The Overseas Bank of Manila vs. The Hon.
Court of Appeals and Julian R. Cordero. 5 and in the recent cases of Integrated Realty
Corporation, et al. vs. Philippine National Bank, et al. and the Overseas Bank of Manila
vs. Court of appeals, et al. 6
From the aforecited authorities, it is manifest that petitioner cannot be held liable for
interest on bank deposits which accrued from the time it was prohibited by the Central
Bank to continue with its banking operations, that is, when Resolution No. 350 to that
effect was issued on February 18, 1969.
The order, therefore, of the Central Bank as receiver/liquidator of petitioner bank
allowing the claims of depositors and creditors to earn interest up to the date of its closure
on February 18, 1969, 7 in line with the doctrine laid down in the jurisprudence above
cited.
Although petitioner's formulation of the second issue that it poses is slightly inaccurate
and defective, we likewise find the awards of moral and exemplary damages and
attorney's fees to be erroneous.
The trial court found, and it is not disputed, that there was no fraud or bad faith on the
part of petitioner bank and the other defendants in accepting the deposits of private
respondents. Petitioner bank could not even be faulted in not immediately returning the
amount claimed by private respondents considering that the demand to pay was made and
Civil Case No. 84800 was filed in the trial court several months after the Central Bank
had ordered petitioner's closure. By that time, petitioner bank was no longer in a position
to comply with its obligations to its creditors, including herein private respondents. Even
the trial court had to admit that petitioner bank failed to pay private respondents because
86
it was already insolvent. 8 Further, this case is not one of the specified or analogous cases
wherein moral damages may be recovered. 9
There is no valid basis for the award of exemplary damages which is supposed to serve as
a warning to other banks from dissipating their assets in anomalous transactions. It was
not proven by private respondents, and neither was there a categorical finding made by
the trial court, that petitioner bank actually engaged in anomalous real estate transactions.
The same were raised only during the testimony of the bank examiner of the Central
Bank, 10 but no documentary evidence was ever presented in support thereof. Hence, it
was error for the lower court to impose exemplary damages upon petitioner bank since, in
contracts, such sanction requires that the offending party acted in a wanton, fraudulent,
reckless, oppressive or malevolent manner. 11 Neither does this case present the situation
where attorney's fees may be awarded. 12
In the absence of fraud, bad faith, malice or wanton attitude, petitioner bank may,
therefore, not be held responsible for damages which may be reasonably attributed to the
non-performance of the obligation. 13 Consequently, we reiterate that under the premises
and pursuant to the aforementioned provisions of law, it is apparent that private
respondents are not justifiably entitled to the payment of moral and exemplary damages
and attorney's fees.
While we tend to agree with petitioner bank that private respondents' claims should he
been filed in the liquidation proceedings in Civil Case No. 86005, entitled "In Re:
Liquidation of the Fidelity Savings and Mortgage Bank," pending before Branch XIII of
the then Court of First Instance of Manila, we do not believe that the decision rendered in
the instant case would be violative of the legal provisions on preference and concurrence
of credits. As the trial court puts it:
. . . But this order of payment should not be understood as raising these deposits to the
category of preferred credits of the defendant Fidelity Savings and Mortgage Bank but
shall be paid in accordance with the Bank Liquidation Rules and Regulations embodied
in the Order of the. Court of First Instance of Manila, Branch XIII dated October 3, 1972
(Exh. 3). . . . 14
WHEREFORE, the judgment appealed from is hereby MODIFIED. Petitioner Fidelity
Savings and Mortgage Bank is hereby declared liable to pay private respondents Timoteo
and Olimpia Santiago the sum of P90,000.00, with accrued interest in accordance with
the terms of Savings Account Deposit No. 16-0536 (Exhibit A) and Certificate of Time
Deposit No. 0210 (Exhibit B) until February 18, 1969. The awards for moral and
exemplary damages, and attorney's fees are hereby DELETED. No costs.SO ORDERED.
SECOND DIVISION
[G.R. No. 135706. October 1, 2004]
SPS. CESAR A. LARROBIS, JR. and VIRGINIA S. LARROBIS, petitioners,
vs. PHILIPPINE VETERANS BANK, respondent.
DECISION
AUSTRIA-MARTINEZ, J.:
Before us is a petition for review of the decision of the Regional Trial Court (RTC), Cebu
City, Branch 24, dated April 17, 1998,[1] and the order denying petitioners motion for
reconsideration dated August 25, 1998, raising pure questions of law.[2]
The following facts are uncontroverted:
On March 3, 1980, petitioner spouses contracted a monetary loan with respondent
Philippine Veterans Bank in the amount of P135,000.00, evidenced by a promissory note,
due and demandable on February 27, 1981, and secured by a Real Estate Mortgage
executed on their lot together with the improvements thereon.
On March 23, 1985, the respondent bank went bankrupt and was placed under
receivership/liquidation by the Central Bank from April 25, 1985 until August 1992.[3]
On August 23, 1985, the bank, through Francisco Go, sent the spouses a demand letter
for accounts receivable in the total amount of P6,345.00 as of August 15, 1984,[4] which
pertains to the insurance premiums advanced by respondent bank over the mortgaged
property of petitioners.[5]
On August 23, 1995, more than fourteen years from the time the loan became due and
demandable, respondent bank filed a petition for extrajudicial foreclosure of mortgage of
petitioners property.[6] On October 18, 1995, the property was sold in a public auction by
Sheriff Arthur Cabigon with Philippine Veterans Bank as the lone bidder.
On April 26, 1996, petitioners filed a complaint with the RTC, Cebu City, to declare the
extra-judicial foreclosure and the subsequent sale thereof to respondent bank null and
void.[7]
In the pre-trial conference, the parties agreed to limit the issue to whether or not the
period within which the bank was placed under receivership and liquidation was a
fortuitous event which suspended the running of the ten-year prescriptive period in
bringing actions.[8]
On April 17, 1998, the RTC rendered its decision, the fallo of which reads:
WHEREFORE, premises considered judgment is hereby rendered dismissing the
complaint for lack of merit. Likewise the compulsory counterclaim of defendant is
dismissed for being unmeritorious.[9]
It reasoned that:
defendant bank was placed under receivership by the Central Bank from April 1985 until
1992. The defendant bank was given authority by the Central Bank to operate as a private
commercial bank and became fully operational only on August 3, 1992. From April 1985
until July 1992, defendant bank was restrained from doing its business. Doing business as
construed by Justice Laurel in 222 SCRA 131 refers to:
.a continuity of commercial dealings and arrangements and contemplates to that extent,
the performance of acts or words or the exercise of some of the functions normally
incident to and in progressive prosecution of the purpose and object of its organization.
The defendant banks right to foreclose the mortgaged property prescribes in ten (10)
years but such period was interrupted when it was placed under receivership. Article
1154 of the New Civil Code to this effect provides:
The period during which the obligee was prevented by a fortuitous event from enforcing
his right is not reckoned against him.
In the case of Provident Savings Bank vs. Court of Appeals, 222 SCRA 131, the Supreme
Court said.
Having arrived at the conclusion that a foreclosure is part of a banks activity which could
not have been pursued by the receiver then because of the circumstances discussed in the
Central Bank case, we are thus convinced that the prescriptive period was legally
interrupted by fuerza mayor in 1972 on account of the prohibition imposed by the
Monetary Board against petitioner from transacting business, until the directive of the
Board was nullified in 1981. Indeed, the period during which the obligee was prevented
by a caso fortuito from enforcing his right is not reckoned against him. (Art. 1154, NCC)
When prescription is interrupted, all the benefits acquired so far from the possession
cease and when prescription starts anew, it will be entirely a new one. This concept
should not be equated with suspension where the past period is included in the
87
computation being added to the period after the prescription is presumed (4 Tolentino,
Commentaries and Jurisprudence on the Civil Code of the Philippines 1991 ed. pp. 18-
19), consequently, when the closure of the petitioner was set aside in 1981, the period of
ten years within which to foreclose under Art. 1142 of the N.C.C. began to run and,
therefore, the action filed on August 21, 1986 to compel petitioner to release the
mortgage carried with it the mistaken notion that petitioners own suit for foreclosure has
prescribed.
Even assuming that the liquidation of defendant bank did not affect its right to foreclose
the plaintiffs mortgaged property, the questioned extrajudicial foreclosure was well
within the ten (10) year prescriptive period. It is noteworthy to mention at this point in
time, that defendant bank through authorized Deputy Francisco Go made the first
extrajudicial demand to the plaintiffs on August 1985. Then on March 24, 1995
defendant bank through its officer-in-charge Llanto made the second extrajudicial
demand. And we all know that a written extrajudicial demand wipes out the period that
has already elapsed and starts anew the prescriptive period. (Ledesma vs. C.A., 224
SCRA 175.)[10]
Petitioners filed a motion for reconsideration which the RTC denied on August 25,
1998.[11] Thus, the present petition for review where petitioners claim that the RTC
erred:
I
IN RULING THAT THE PERIOD WITHIN WHICH RESPONDENT BANK WAS
PUT UNDER RECEIVERSHIP AND LIQUIDATION WAS A FORTUITOUS EVENT
THAT INTERRUPTED THE RUNNING OF THE PRESCRIPTIVE PERIOD.
II
IN RULING THAT THE WRITTEN EXTRA-JUDICIAL DEMAND MADE BY
RESPONDENT ON PETITIONERS WIPED OUT THE PERIOD THAT HAD
ALREADY ELAPSED.
III
IN DENYING PETITIONERS MOTION FOR RECONSIDERATION OF ITS HEREIN
ASSAILED DECISION.[12]
Petitioners argue that: since the extra-judicial foreclosure of the real estate mortgage was
effected by the bank on October 18, 1995, which was fourteen years from the date the
obligation became due on February 27, 1981, said foreclosure and the subsequent sale at
public auction should be set aside and declared null and void ab initio since they are
already barred by prescription; the court a quo erred in sustaining the respondents theory
that its having been placed under receivership by the Central Bank between April 1985
and August 1992 was a fortuitous event that interrupted the running of the prescriptive
period;[13] the court a quos reliance on the case of Provident Savings Bank vs. Court of
Appeals[14] is misplaced since they have different sets of facts; in the present case, a
liquidator was duly appointed for respondent bank and there was no judgment or court
order that would legally or physically hinder or prohibit it from foreclosing petitioners
property; despite the absence of such legal or physical hindrance, respondent banks
receiver or liquidator failed to foreclose petitioners property and therefore such inaction
should bind respondent bank;[15] foreclosure of mortgages is part of the
receivers/liquidators duty of administering the banks assets for the benefit of its
depositors and creditors, thus, the ten-year prescriptive period which started on February
27, 1981, was not interrupted by the time during which the respondent bank was placed
under receivership; and the Monetary Boards prohibition from doing business should not
be construed as barring any and all business dealings and transactions by the bank,
otherwise, the specific mandate to foreclose mortgages under Sec. 29 of R.A. No. 265 as
amended by Executive Order No. 65 would be rendered nugatory.[16] Said provision
reads:
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 the official of the Central Bank or a person of recognized competence in
banking or finance, as receiver to immediately take charge its 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.
Petitioners further contend that: the demand letter, dated March 24, 1995, was sent after
the ten-year prescriptive period, thus it cannot be deemed to have revived a period that
has already elapsed; it is also not one of the instances enumerated by Art. 1115 of the
Civil Code when prescription is interrupted;[17] and the August 23, 1985 letter by
Francisco Go demanding P6,345.00, refers to the insurance premium on the house of
petitioners, advanced by respondent bank, thus such demand letter referred to another
obligation and could not have the effect of interrupting the running of the prescriptive
period in favor of herein petitioners insofar as foreclosure of the mortgage is
concerned.[18]
Petitioners then prayed that respondent bank be ordered to pay them P100,000.00 as
moral damages, P50,000.00 as exemplary damages and P100,000.00 as attorneys
fees.[19]
Respondent for its part asserts that: the period within which it was placed under
receivership and liquidation was a fortuitous event that interrupted the running of the
prescriptive period for the foreclosure of petitioners mortgaged property; within such
period, it was specifically restrained and immobilized from doing business which
includes foreclosure proceedings; the extra-judicial demand it made on March 24, 1995
wiped out the period that has already lapsed and started anew the prescriptive period;
respondent through its authorized deputy Francisco Go made the first extra-judicial
demand on the petitioners on August 23, 1985; while it is true that the first demand letter
of August 1985 pertained to the insurance premium advanced by it over the mortgaged
property of petitioners, the same however formed part of the latters total loan obligation
with respondent under the mortgage instrument and therefore constitutes a valid extra-
judicial demand made within the prescriptive period.[20]
In their Reply, petitioners reiterate their earlier arguments and add that it was respondent
that insured the mortgaged property thus it should not pass the obligation to petitioners
through the letter dated August 1985.[21]
To resolve this petition, two questions need to be answered: (1) Whether or not the period
within which the respondent bank was placed under receivership and liquidation
proceedings may be considered a fortuitous event which interrupted the running of the
prescriptive period in bringing actions; and (2) Whether or not the demand letter sent by
88
respondent banks representative on August 23, 1985 is sufficient to interrupt the running
of the prescriptive period.
Anent the first issue, we answer in the negative.
One characteristic of a fortuitous event, in a legal sense and consequently in relations to
contract, is that its occurrence must be such as to render it impossible for a party to fulfill
his obligation in a normal manner.[22]
Respondents claims that because of a fortuitous event, it was not able to exercise its right
to foreclose the mortgage on petitioners property; and that since it was banned from
pursuing its business and was placed under receivership from April 25, 1985 until August
1992, it could not foreclose the mortgage on petitioners property within such period since
foreclosure is embraced in the phrase doing business, are without merit.
While it is true that foreclosure falls within the broad definition of doing business, that is:
a continuity of commercial dealings and arrangements and contemplates to that extent,
the performance of acts or words or the exercise of some of the functions normally
incident to and in progressive prosecution of the purpose and object of its
organization.[23]
it should not be considered included, however, in the acts prohibited whenever banks are
prohibited from doing business during receivership and liquidation proceedings.
This we made clear in Banco Filipino Savings & Mortgage Bank vs. Monetary Board,
Central Bank of the Philippines[24] where we explained that:
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
banks 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.[25]
This is consistent with the purpose of receivership proceedings, i.e., to receive
collectibles and preserve the assets of the bank in substitution of its former management,
and prevent the dissipation of its assets to the detriment of the creditors of the bank.[26]
When a bank is declared insolvent and placed under receivership, the Central Bank,
through the Monetary Board, determines whether to proceed with the liquidation or
reorganization of the financially distressed bank. A receiver, who concurrently represents
the bank, then takes control and possession of its assets for the benefit of the banks
creditors. A liquidator meanwhile assumes the role of the receiver upon the determination
by the Monetary Board that the bank can no longer resume business. His task is to
dispose of all the assets of the bank and effect partial payments of the banks obligations
in accordance with legal priority. In both receivership and liquidation proceedings, the
bank retains its juridical personality notwithstanding the closure of its business and may
even be sued as its corporate existence is assumed by the receiver or liquidator. The
receiver or liquidator meanwhile acts not only for the benefit of the bank, but for its
creditors as well.[27]
In Provident Savings Bank vs. Court of Appeals,[28] we further stated that:
When a bank is prohibited from continuing to do business by the Central Bank and a
receiver is appointed for such bank, that bank would not be able to do new business, i.e.,
to grant new loans or to accept new deposits. However, the receiver of the bank is in
fact obliged to collect debts owing to the bank, which debts form part of the assets of
the bank. The receiver must assemble the assets and pay the obligation of the bank
under receivership, and take steps to prevent dissipation of such assets.
Accordingly, the receiver of the bank is obliged to collect pre-existing debts due to
the bank, and in connection therewith, to foreclose mortgages securing such
debts.[29] (Emphasis supplied.)
It is true that we also held in said case that the period during which the bank was placed
under receivership was deemed fuerza mayor which validly interrupted the prescriptive
period.[30] This is being invoked by the respondent and was used as basis by the trial
court in its decision. Contrary to the position of the respondent and court a quo however,
such ruling does not find application in the case at bar.
A close scrutiny of the Provident case, shows that the Court arrived at said conclusion,
which is an exception to the general rule, due to the peculiar circumstances of Provident
Savings Bank at the time. In said case, we stated that:
Having arrived at the conclusion that a foreclosure is part of a banks business
activity which could not have been pursued by the receiver then because of the
circumstances discussed in the Central Bank case, we are thus convinced that the
prescriptive period was legally interrupted by fuerza mayor in 1972 on account of the
prohibition imposed by the Monetary Board against petitioner from transacting business,
until the directive of the Board was nullified in 1981.[31] (Emphasis supplied.)
Further examination of the Central Bank case reveals that the circumstances of Provident
Savings Bank at the time were peculiar because after the Monetary Board issued MB
Resolution No. 1766 on September 15, 1972, prohibiting it from doing business in the
Philippines, the banks majority stockholders immediately went to the Court of First
Instance of Manila, which prompted the trial court to issue its judgment dated February
20, 1974, declaring null and void the resolution and ordering the Central Bank to desist
from liquidating Provident. The decision was appealed to and affirmed by this Court in
1981. Thus, the Superintendent of Banks, which was instructed to take charge of the
assets of the bank in the name of the Monetary Board, had no power to act as a receiver
of the bank and carry out the obligations specified in Sec. 29 of the Central Bank Act.[32]
In this case, it is not disputed that Philippine Veterans Bank was placed under
receivership by the Monetary Board of the Central Bank by virtue of Resolution No. 364
on April 25, 1985, pursuant to Section 29 of the Central Bank Act on insolvency of
banks. [33]
Unlike Provident Savings Bank, there was no legal prohibition imposed upon herein
respondent to deter its receiver and liquidator from performing their obligations under the
law. Thus, the ruling laid down in the Provident case cannot apply in the case at bar.
There is also no truth to respondents claim that it could not continue doing business from
the period of April 1985 to August 1992, the time it was under receivership. As correctly
pointed out by petitioner, respondent was even able to send petitioners a demand letter,
through Francisco Go, on August 23, 1985 for accounts receivable in the total amount
of P6,345.00 as of August 15, 1984 for the insurance premiums advanced by respondent
bank over the mortgaged property of petitioners. How it could send a demand letter on
unpaid insurance premiums and not foreclose the mortgage during the time it was
prohibited from doing business was not adequately explained by respondent.
Settled is the principle that a bank is bound by the acts, or failure to act of its
receiver.[34] As we held in Philippine Veterans Bank vs. NLRC,[35] a labor case which
also involved respondent bank,
all the acts of the receiver and liquidator pertain to petitioner, both having assumed
petitioners corporate existence. Petitioner cannot disclaim liability by arguing that the
89
non-payment of MOLINAs just wages was committed by the liquidators during the
liquidation period.[36]
However, the bank may go after the receiver who is liable to it for any culpable or
negligent failure to collect the assets of such bank and to safeguard its assets.[37]
Having reached the conclusion that the period within which respondent bank was placed
under receivership and liquidation proceedings does not constitute a fortuitous event
which interrupted the prescriptive period in bringing actions, we now turn to the second
issue on whether or not the extra-judicial demand made by respondent bank, through
Francisco Go, on August 23, 1985 for the amount of P6,345.00, which pertained to the
insurance premiums advanced by the bank over the mortgaged property, constitutes a
valid extra-judicial demand which interrupted the running of the prescriptive period.
Again, we answer this question in the negative.
Prescription of actions is interrupted when they are filed before the court, when there is a
written extra-judicial demand by the creditors, and when there is any written
acknowledgment of the debt by the debtor.[38]
Respondents claim that while its first demand letter dated August 23, 1985 pertained to
the insurance premium it advanced over the mortgaged property of petitioners, the same
formed part of the latters total loan obligation with respondent under the mortgage
instrument, and therefore, constitutes a valid extra-judicial demand which interrupted the
running of the prescriptive period, is not plausible.
The real estate mortgage signed by the petitioners expressly states that:
This mortgage is constituted by the Mortgagor to secure the payment of the loan and/or
credit accommodation granted to the spouses Cesar A. Larrobis, Jr. and Virginia S.
Larrobis in the amount of ONE HUNDRED THIRTY FIVE THOUSAND (P135,000.00)
PESOS ONLY Philippine Currency in favor of the herein Mortgagee.[39]
The promissory note, executed by the petitioners, also states that:
FOR VALUE RECEIVED, I/WE, JOINTLY AND SEVERALLY, PROMISE TO PAY
THE PHILIPPINE VETERANS BANK, OR ORDER, AT ITS OFFICE AT CEBU CITY
THE SUM OF ONE HUNDRED THIRTY FIVE THOUSAND PESOS (P135,000.00),
PHILIPPINE CURRENCY WITH INTEREST AT THE RATE OF FOURTEEN PER
CENT (14%) PER ANNUM FROM THIS DATE UNTIL FULLY PAID.[40]
Considering that the mortgage contract and the promissory note refer only to the loan of
petitioners in the amount of P135,000.00, we have no reason to hold that the insurance
premiums, in the amount of P6,345.00, which was the subject of the August 1985
demand letter, should be considered as pertaining to the entire obligation of petitioners.
In Quirino Gonzales Logging Concessionaire vs. Court of Appeals,[41] we held that the
notices of foreclosure sent by the mortgagee to the mortgagor cannot be considered
tantamount to written extrajudicial demands, which may validly interrupt the running of
the prescriptive period, where it does not appear from the records that the notes are
covered by the mortgage contract.[42]
In this case, it is clear that the advanced payment of the insurance premiums is not part of
the mortgage contract and the promissory note signed by petitioners. They pertain only to
the amount of P135,000.00 which is the principal loan of petitioners plus interest. The
arguments of respondent bank on this point must therefore fail.
As to petitioners claim for damages, however, we find no sufficient basis to award the
same. For moral damages to be awarded, the claimant must satisfactorily prove the
existence of the factual basis of the damage and its causal relation to defendants
acts.[43] Exemplary damages meanwhile, which are imposed as a deterrent against or as
a negative incentive to curb socially deleterious actions, may be awarded only after the
claimant has proven that he is entitled to moral, temperate or compensatory
damages.[44] Finally, as to attorneys fees, it is demanded that there be factual, legal and
equitable justification for its award.[45] Since the bases for these claims were not
adequately proven by the petitioners, we find no reason to grant the same.
WHEREFORE, the decision of the Regional Trial Court, Cebu City, Branch 24, dated
April 17, 1998, and the order denying petitioners motion for reconsideration dated
August 25, 1998 are hereby REVERSED and SET ASIDE. The extra-judicial foreclosure
of the real estate mortgage on October 18, 1995, is hereby declared null and void and
respondent is ordered to return to petitioners their owners duplicate certificate of title.
Costs against respondent.
SO ORDERED.

90

SECOND DIVISION
PRODUCERS BANK OF THE G.R. No. 152071
PHILIPPINES,
Petitioner,
Present:
CARPIO MORALES, J.*,
- versus- Acting Chairperson,
TINGA,
VELASCO, JR.,
LEONARDO-DE CASTRO, and**
EXCELSA INDUSTRIES, INC., BRION, JJ.
Respondent.
Promulgated:
May 8, 2009
x --------------------------------------------------------------------------------------x
DECISION
TINGA, J.:
This is a petition for review on certiorari[1] under Rule 43 of the 1997 Rules of Civil
Procedure, assailing the decision[2] and resolution[3] of the Court of Appeals in CA-G.R.
CV No. 59931. The Court of Appeals decision[4] reversed the decision of the Regional
Trial Court (RTC), Branch 73, Antipolo, Rizal, upholding the extrajudicial foreclosure of
the mortgage on respondents properties, while the resolution denied petitioners motion
for reconsideration.[5]
As borne by the records of the case, the following factual antecedents appear:
Respondent Excelsa Industries, Inc. is a manufacturer and exporter of fuel products,
particularly charcoal briquettes, as an alternative fuel source. Sometime in January 1987,
respondent applied for a packing credit line or a credit export advance with petitioner
Producers Bank of the Philippines, a banking institution duly organized and existing
under Philippines laws.[6]
The application was supported by Letter of Credit No. M3411610NS2970 dated 14
October 1986. Kwang Ju Bank, Ltd. of Seoul, Korea issued the letter of credit through its
correspondent bank, the Bank of the Philippine Islands, in the amount of US$23,000.00
for the account of Shin Sung Commercial Co., Ltd., also located in Seoul, Korea. T.L.
World Development Corporation was the original beneficiary of the letter of credit. On
05 December 1986, for value received, T.L. World transferred to respondent all its rights
and obligations under the said letter of credit. Petitioner approved respondents application
for a packing credit line in the amount of P300,000.00, of which about P96,000.00 in
91
principal remained outstanding.[7] Respondent executed the corresponding promissory
notes evidencing the indebtedness.[8]
Prior to the application for the packing credit line, respondent had obtained a loan from
petitioner in the form of a bill discounted and secured credit accommodation in the
amount of P200,000.00, of which P110,000.00 was outstanding at the time of the
approval of the packing credit line. The loan was secured by a real estate mortgage dated
05 December 1986 over respondents properties covered by Transfer Certificates of Titles
(TCT) No. N-68661, N-68662, N-68663, N-68664, N-68665 and N-68666, all issued by
the Register of Deeds of Marikina.[9]
Significantly, the real estate mortgage contained the following clause:
For and in consideration of those certain loans, overdraft and/or other credit
accommodations on this date obtained from the MORTGAGEE, and to secure the
payment of the same, the principal of all of which is hereby fixed at FIVE HUNDRED
THOUSAND PESOS ONLY (P500,000.00) Pesos, Philippine Currency, as well as those
that the MORTGAGEE may hereafter extend to the MORTGAGOR, including interest
and expenses or any other obligation owing to the MORTGAGEE, the MORTGAGOR
does hereby transfer and convey by way of mortgage unto the MORTGAGEE, its
successors or assigns, the parcel(s) of land which is/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
encumbrances.[10]
On 17 March 1987, respondent presented for negotiation to petitioner drafts drawn under
the letter of credit and the corresponding export documents in consideration for its
drawings in the amounts of US$5,739.76 and US$4,585.79. Petitioner purchased the
drafts and export documents by paying respondent the peso equivalent of the drawings.
The purchase was subject to the conditions laid down in two separate undertakings by
respondent dated 17 March 1987 and 10 April 1987.[11]
On 24 April 1987, Kwang Ju Bank, Ltd. notified petitioner through cable that the Korean
buyer refused to pay respondents export documents on account of typographical
discrepancies. Kwang Ju Bank, Ltd. returned to petitioner the export documents.[12]
Upon learning about the Korean importers non-payment, respondent sent petitioner a
letter dated 27 July 1987, informing the latter that respondent had brought the matter
before the Korea Trade Court and that it was ready to liquidate its past due account with
petitioner. Respondent sent another letter dated 08 September 1987, reiterating the same
assurance. In a letter 05 October 1987, Kwang Ju Bank, Ltd. informed petitioner that it
would be returning the export documents on account of the non-acceptance by the
importer.[13]
Petitioner demanded from respondent the payment of the peso equivalent of the export
documents, plus interest and other charges, and also of the other due and unpaid loans.
Due to respondents failure to heed the demand, petitioner moved for the extrajudicial
foreclosure on the real estate mortgage over respondents properties.
Per petitioners computation, aside from charges for attorneys fees and sheriffs fees,
respondent had a total due and demandable obligation of P573,225.60, including interest,
in six different accounts, namely:
1) EBP-PHO-87-1121 (US$4,585.97 x 21.212) = P119,165.06
2) EBP-PHO-87-1095 (US$ 5,739.76 x 21.212) = 151,580.97
3) BDS-001-87 = 61,777.78
4) BDS-030/86 A = 123,555.55
5) BDS-PC-002-/87 = 55,822.91
6) BDS-005/87 = 61,323.33
P573,225.60[14]
The total approved bid price, which included the attorneys fees and sheriff fees, was
pegged at P752,074.63. At the public auction held on 05 January 1988, the Sheriff of
Antipolo, Rizal issued a Certificate of Sale in favor of petitioner as the highest
bidder.[15] The certificate of sale was registered on 24 March 1988.[16]
On 12 June 1989, petitioner executed an affidavit of consolidation over the foreclosed
properties after respondent failed to redeem the same. As a result, the Register of Deeds
of Marikina issued new certificates of title in the name of petitioner.[17]
On 17 November 1989, respondent instituted an action for the annulment of the
extrajudicial foreclosure with prayer for preliminary injunction and damages against
petitioner and the Register of Deeds of Marikina. Docketed as Civil Case No. 1587-A,
the complaint was raffled to Branch 73 of the RTC of Antipolo, Rizal. The complaint
prayed, among others, that the defendants be enjoined from causing the transfer of
ownership over the foreclosed properties from respondent to petitioner.[18]
On 05 April 1990, petitioner filed a petition for the issuance of a writ of possession,
docketed as LR Case No. 90-787, before the same branch of the RTC of Antipolo, Rizal.
The RTC ordered the consolidation of Civil Case No, 1587-A and LR Case No. 90-
787.[19]
On 18 December 1997, the RTC rendered a decision upholding the validity of the
extrajudicial foreclosure and ordering the issuance of a writ of possession in favor of
petitioner, to wit:
WHEREFORE, in Case No. 1587-A, the court hereby rules that the foreclosure of
mortgage for the old and new obligations of the plaintiff Excelsa Industries Corp., which
has remained unpaid up to the time of foreclosure by defendant Producers Bank of the
Philippines was valid, legal and in order; In Case No. 787-A, the court hereby orders for
the issuance of a writ of possession in favor of Producers Bank of the Philippines after
the properties of Excelsa Industries Corp., which were foreclosed and consolidated in the
92
name of Producers Bank of the Philippines under TCT No. 169031, 169032, 169033,
169034 and 169035 of the Register of Deeds of Marikina.
SO ORDERED.[20]
The RTC held that petitioner, whose obligation consisted only of receiving, and not of
collecting, the export proceeds for the purpose of converting into Philippine currency and
remitting the same to respondent, cannot be considered as respondents agent. The RTC
also held that petitioner cannot be presumed to have received the export proceeds,
considering that respondent executed undertakings warranting that the drafts and
accompanying documents were genuine and accurately represented the facts stated
therein and would be accepted and paid in accordance with their tenor.[21]
Furthermore, the RTC concluded that petitioner had no obligation to return the export
documents and respondent could not expect their return prior to the payment of the export
advances because the drafts and export documents were the evidence that respondent
received export advances from petitioner.[22]
The RTC also found that by its admission, respondent had other loan obligations obtained
from petitioner which were due and demandable; hence, petitioner correctly exercised its
right to foreclose the real estate mortgage, which provided that the same secured the
payment of not only the loans already obtained but also the export advances.[23]
Lastly, the RTC found respondent guilty of laches in questioning the foreclosure sale
considering that petitioner made several demands for payment of respondents outstanding
loans as early as July 1987 and that respondent acknowledged the failure to pay its loans
and advances.[24]
The RTC denied respondents motion for reconsideration.[25] Thus, respondent elevated
the matter to the Court of Appeals, reiterating its claim that petitioner was not only a
collection agent but was considered a purchaser of the export
On 30 May 2001, the Court of Appeals rendered the assailed decision, reversing the
RTCs decision, thus:
WHEREFORE, the appeal is hereby GRANTED. The decision of the trial court dated
December 18, 1997 is REVERSED and SET ASIDE. Accordingly, the foreclosure of
mortgage on the properties of appellant is declared as INVALID. The issuance of the writ
of possession in favor of appellee is ANNULLED. The following damages are hereby
awarded in favor of appellant:
(a) Moral damages in the amount of P100,000.00;
(b) Exemplary damages in the amount of P100,000.00; and
(c) Costs.
SO ORDERED.[26]
The Court of Appeals held that respondent should not be faulted for the dishonor of the
drafts and export documents because the obligation to collect the export proceeds from
Kwang Ju Bank, Ltd. devolved upon petitioner. It cited the testimony of petitioners
manager for the foreign currency department to the effect that petitioner was respondents
agent, being the only entity authorized under Central Bank Circular No. 491 to collect
directly from the importer the export proceeds on respondents behalf and converting the
same to Philippine currency for remittance to respondent. The appellate court found that
respondent was not authorized and even powerless to collect from the importer and it
appeared that respondent was left at the mercy of petitioner, which kept the export
documents during the time that respondent attempted to collect payment from the Korean
importer.
The Court of Appeals disregarded the RTCs finding that the export documents were the
only evidence of respondents export advances and that petitioner was justified in refusing
to return them. It opined that granting petitioner had no obligation to return the export
documents, the former should have helped respondent in the collection efforts instead of
augmenting respondents dilemma.
Furthermore, the Court of Appeals found petitioners negligence as the cause of the
refusal by the Korean buyer to pay the export proceeds based on the following: first,
petitioner had a hand in preparing and scrutinizing the export documents wherein the
discrepancies were found; and, second, petitioner failed to advise respondent about the
warning from Kwang Ju Bank, Ltd. that the export documents would be returned if no
explanation regarding the discrepancies would be made.
The Court of Appeals invalidated the extrajudicial foreclosure of the real estate mortgage
on the ground that the posting and publication of the notice of extrajudicial foreclosure
proceedings did not comply with
the personal notice requirement under paragraph 12[27] of the real estate mortgage
executed between petitioner and respondent. The Court of Appeals also overturned the
RTCs finding that respondent was guilty of estoppel by laches in questioning the
extrajudicial foreclosure sale.
Petitioners motion for reconsideration[28] was denied in a Resolution dated 29 January
2002. Hence, the instant petition, arguing that the Court of Appeals erred in finding
petitioner as respondents agent, which was liable for the discrepancies in the export
documents, in invalidating the foreclosure sale and in declaring that respondent was not
estopped from questioning the foreclosure sale.[29]
93
The validity of the extrajudicial foreclosure of the mortgage is dependent on the
following issues posed by petitioner: (1) the coverage of the blanket mortgage clause; (2)
petitioners failure to furnish personal notice of the foreclosure to respondent; and (3)
petitioners obligation as negotiating bank under the letter of credit.
Notably, the errors cited by petitioners are factual in nature. Although the instant case is a
petition for review under Rule 45 which, as a general rule, is limited to reviewing errors
of law, findings of fact being conclusive as a matter of general principle, however,
considering the conflict between the factual findings of the RTC and the Court of
Appeals, there is a need to review the factual issues as an exception to the general
rule.[30]
Much of the discussion has revolved around who should be liable for the dishonor of the
draft and export documents. In the two undertakings executed by respondent as a
condition for the negotiation of the drafts, respondent held itself liable if the drafts were
not accepted. The two undertakings signed by respondent are similarly-worded and
contained respondents express warranties, to wit:
In consideration of your negotiating the above described draft(s), we hereby warrant
that the said draft(s) and accompanying documents thereon are valid, genuine and
accurately represent the facts stated therein, and that such draft(s) will be accepted
and paid in accordance with its/their tenor. We further undertake and agree, jointly
and severally, to defend and hold you free and harmless from any and all actions, claims
and demands whatsoever, and to pay on demand all damages actual or compensatory
including attorneys fees, costs and other awards or be adjudged to pay, in case of suit,
which you may suffer arising from, by reason, or on account of your negotiating the
above draft(s) because of the following discrepancies or reasons or any other discrepancy
or reason whatever.
We hereby undertake to pay on demand the full amount of the above draft(s) or any
unpaid balance thereof, the Philippine perso equivalent converted at the prevailing
selling rate (or selling rate prevailing at the date you negotiate our draft, whichever is
higher) allowed by the Central Bank with interest at the rate prevailing today from the
date of negotiation, plus all charges and expenses whatsoever incurred in connection
therewith. You shall neither be obliged to contest or dispute any refusal to accept or to
pay the whole or any part of the above draft(s), nor proceed in any way against the
drawee, the issuing bank or any endorser thereof, before making a demand on us for the
payment of the whole or any unpaid balance of the draft(s).(Emphasis supplied)[31]
In Velasquez v. Solidbank Corporation,[32] where the drawer therein also executed a
separate letter of undertaking in consideration for the banks negotiation of its sight drafts,
the Court held that the drawer can still be made liable under the letter of undertaking even
if he is discharged due to the banks failure to protest the non-acceptance of the drafts.
The Court explained, thus:
Petitioner, however, can still be made liable under the letter of undertaking. It bears
stressing that it is a separate contract from the sight draft. The liability of petitioner under
the letter of undertaking is direct and primary. It is independent from his liability under
the sight draft. Liability subsists on it even if the sight draft was dishonored for non-
acceptance or non-payment.
Respondent agreed to purchase the draft and credit petitioner its value upon the
undertaking that he will reimburse the amount in case the sight draft is dishonored. The
bank would certainly not have agreed to grant petitioner an advance export payment were
it not for the letter of undertaking. The consideration for the letter of undertaking was
petitioners promise to pay respondent the value of the sight draft if it was dishonored for
any reason by the Bank of Seoul.[33]
Thus, notwithstanding petitioners alleged failure to comply with the requirements of
notice of dishonor and protest under Sections 89[34] and 152,[35] respectively, of the
Negotiable Instruments Law, respondent may not escape its liability under the separate
undertakings, where respondent promised to pay on demand the full amount of the drafts.
The next question, therefore, is whether the real estate mortgage also served as security
for respondents drafts that were not accepted and paid by the Kwang Ju Bank, Ltd.
Respondent executed a real estate mortgage containing a blanket mortgage clause, also
known as a dragnet clause. It has been settled in a long line of decisions that mortgages
given to secure future advancements are valid and legal contracts, 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.[36]
In Union Bank of the Philippines v. Court of Appeals,[37] the nature of a dragnet clause
was explained, thus:
Is one which is specifically phrased to subsume all debts of past and 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, et cetera.[38]
xxx
Petitioner, therefore, was not precluded from seeking the foreclosure of the real estate
mortgage based on the unpaid drafts drawn by respondent. In any case, respondent had
admitted that aside from the unpaid drafts, respondent also had due and demandable loans
secured from another account as evidenced by Promissory Notes (PN Nos.) BDS-001-87,
BDS-030/86 A, BDS-PC-002-/87 and BDS-005/87.
94
However, the Court of Appeals invalidated the extrajudicial foreclosure of the mortgage
on the ground that petitioner had failed to furnish respondent personal notice of the sale
contrary to the stipulation in the real estate mortgage.
Petitioner, on the other hand, claims that under paragraph 12[39] of the real estate
mortgage, personal notice of the foreclosure sale is not a requirement to the validity of
the foreclosure sale.
A perusal of the records of the case shows that a notice of sheriffs sale[40] was sent by
registered mail to respondent and received in due course.[41] Yet, respondent claims that
it did not receive the notice but only learned about it from petitioner. In any event,
paragraph 12 of the real estate mortgage requires petitioner merely to furnish respondent
with the notice and does not oblige petitioner to ensure that respondent actually receives
the notice. On this score, the Court holds that petitioner has performed its obligation
under paragraph 12 of the real estate mortgage.
As regards the issue of whether respondent may still question the foreclosure sale, the
RTC held that the sale was conducted according to the legal procedure, to wit:
Plaintiff is estopped from questioning the foreclosure. The plaintiff is guilty of laches and
cannot at this point in time question the foreclosure of the subject properties. Defendant
bank made demands against the plaintiff for the payment of plaintiffs outstanding loans
and advances with the defendant as early as July 1997. Plaintiff acknowledged such
outstanding loans and advances to the defendant bank and committed to liquidate the
same. For failure of the plaintiff to pay its obligations on maturity, defendant bank
foreclosed the mortgage on subject properties on January 5, 1988 the certificate of sale
was annotated on March 24, 1988 and there being no redemption made by the plaintiff,
title to said properties were consolidated in the name of defendant in July 1989.
Undeniably, subject foreclosure was done in accordance with the prescribed rules as may
be borne out by the exhibits submitted to this Court which are Exhibit 33, a notice of
extrajudicial sale executed by the Sheriff of Antipolo, Exhibit 34 certificate posting of
extrajudicial sale, Exhibit 35 return card evidencing receipt by plaintiff of the notice of
extrajudicial sale and Exhibit 21 affidavit of publication.
The Court adopts and approves the aforequoted findings by the RTC, the same being
fully supported by the evidence on record.
WHEREFORE, the instant petition for review on certiorari is GRANTED and the
decision and resolution of the Court of Appeals in CA-G.R. CV No. 59931 are
REVERSED and SET ASIDE. The decision of the Regional Trial Court Branch 73,
Antipolo, Rizal in Civil Case No. 1587-A and LR Case No. 90-787 is REINSTATED.
SO ORDERED.
SECOND DIVISION
G.R. No. 187425 March 28, 2011
COMMISSIONER OF CUSTOMS, Petitioner,
vs.
AGFHA INCORPORATED, Respondent.
DECISION
MENDOZA, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court assailing
the February 25, 2009 Decision1 of the Court of Tax Appeals En Banc (CTA-En Banc),
in CTA EB Case No. 136, which affirmed the October 18, 2005 Resolution2 of its
Second Division (CTA-Second Division), in CTA Case No. 5290, finding petitioner, the
Commissioner of Customs (Commissioner), liable to pay respondent AGFHA
Incorporated (AGFHA)the amount of US$160,348.08 for the value of the seized shipment
which was lost while in petitioner’s custody.
On December 12, 1993, a shipment containing bales of textile grey cloth arrived at the
Manila International Container Port (MICP). The Commissioner, however, held the
subject shipment because its owner/consignee was allegedly fictitious. AGFHA
intervened and alleged that it was the owner and actual consignee of the subject
shipment.
On September 5, 1994, after seizure and forfeiture proceedings took place, the District
Collector of Customs, MICP, rendered a decision3 ordering the forfeiture of the subject
shipment in favor of the government.
AGFHA filed an appeal. On August 25, 1995, the Commissioner rendered a
decision4 dismissing it.
On November 4, 1996, the CTA-Second Division reversed the Commissioner’s August
25, 1995 Decision and ordered the immediate release of the subject shipment to AGFHA.
The dispositive portion of the CTA-Second Division Decision5 reads:
WHEREFORE, in view of the foregoing premises, the instant Petition for Review is
hereby GRANTED. Accordingly, the decision of the respondent in Customs Case No.
94-017, dated August 25, 1995, affirming the decision of the MICP Collector, dated
September 5, 1994, which decreed the forfeiture of the subject shipments in favor of the
government, is hereby REVERSED and SET ASIDE. Respondent is hereby ORDERED
to effect the immediate RELEASE of the subject shipment of goods in favor of the
petitioner. No costs.
SO ORDERED.
On November 27, 1996, the CTA-Second Division issued an entry of judgment declaring
the above-mentioned decision final and executory.6
Thereafter, on May 20, 1997, AGFHA filed a motion for execution.
In its June 4, 1997 Resolution, the CTA-Second Division held in abeyance its action on
AGFHA’s motion for execution in view of the Commissioner’s appeal with the Court of
Appeals (CA), docketed as CA-G.R. SP No. 42590 and entitled "Commissioner of
Custom v. The Court of Tax Appeals and AGFHA, Incorporated."
On May 31, 1999, the CA denied due course to the Commissioner’s appeal for lack of
merit in a decision,7 the dispositive portion of which reads:
WHEREFORE, the instant petition is hereby DENIED DUE COURSE and DISMISSED
for lack of merit. Accordingly, the Commissioner of Customs is hereby ordered to effect
the immediate release of the shipment of AGFHA, Incorporated described as "2 x 40"
Cont. No. NYKU-6772906 and NYKU-6632117 STA 197 Bales of Textile Grey Cloth"
placed under Hold Order No. H/CI/01/2293/01 dated 22 January 1993.
95
No costs.
SO ORDERED.
Thereafter, the Commissioner elevated the aforesaid CA Decision to this Court via a
petition for review on certiorari, docketed as G.R. No. 139050 and entitled "Republic of
the Philippines represented by the Commissioner of Customs v. The Court of Tax Appeals
and AGFHA, Inc."
On October 2, 2001, the Court dismissed the petition.8
On January 14, 2002, the Court denied with finality the Commissioner’s motion for
reconsideration of its October 2, 2001 Decision.
On March 18, 2002, the Entry of Judgment was issued by the Court declaring its
aforesaid decision final and executory as of February 5, 2002.
In view thereof, the CTA-Second Division issued the Writ of Execution, dated October
16, 2002, directing the Commissioner and his authorized subordinate or representative to
effect the immediate release of the subject shipment. It further ordered the sheriff to see
to it that the writ would be carried out by the Commissioner and to make a report thereon
within thirty (30) days after receipt of the writ. The writ, however, was returned
unsatisfied.
On July 23, 2003, the CTA-Second Division received a copy of AGFHA’s Motion to
Show Cause dated July 21, 2003.
Acting on the motion, the CTA-Second Division issued a notice setting it for hearing on
August 1, 2003 at 9:00 o’clock in the morning.
In its August 13, 2003 Resolution, the CTA-Second Division granted AGFHA’s motion
and ordered the Commissioner to show cause within fifteen (15) days from receipt of said
resolution why he should not be disciplinary dealt with for his failure to comply with the
writ of execution.
On September 1, 2003, Commissioner’s counsel filed a Manifestation and Motion, dated
August 28, 2003, attaching therewith a copy of an Explanation (With Motion for
Clarification) dated August 11, 2003 stating, inter alia, that despite diligent efforts to
obtain the necessary information and considering the length of time that had elapsed
since the subject shipment arrived at the Bureau of Customs, the Chief of the Auction and
Cargo Disposal Division of the MICP could not determine the status, whereabouts and
disposition of said shipment.
Consequently, AGFHA filed its Motion to Cite Petitioner in Contempt of Court dated
September 13, 2003. After a series of pleadings, on November 17, 2003, the CTA-Second
Division denied, among others, AGFHA’s motion to cite petitioner in contempt for lack
of merit. It, however, stressed that the denial was without prejudice to other legal
remedies available to AGFHA.
On August 13, 2004, the Commissioner received AGFHA’s Motion to Set Case for
Hearing, dated April 12, 2004, allegedly to determine: (1) whether its shipment was
actually lost; (2) the cause and/or circumstances surrounding the loss; and (3) the amount
the Commissioner should pay or indemnify AGFHA should the latter’s shipment be
found to have been actually lost.
On May 17, 2005, after the parties had submitted their respective memoranda, the CTA-
Second Division adjudged the Commissioner liable to AGFHA. Specifically, the
dispositive portion of the resolution reads:
WHEREFORE, premises considered, the Bureau of Customs is adjudged liable to
petitioner AGFHA, INC. for the value of the subject shipment in the amount of ONE
HUNDERED SIXTY THOUSAND THREE HUNDRED FORTY EIGHT AND 08/100
US DOLLARS (US$160,348.08). The Bureau of Custom’s liability may be paid in
Philippine Currency, computed at the exchange rate prevailing at the time of actual
payment, with legal interests thereon at the rate of 6% per annum computed from
February 1993 up to the finality of this Resolution. In lieu of the 6% interest, the rate of
legal interest shall be 12% per annum upon finality of this Resolution until the value of
the subject shipment is fully paid.
The payment shall be taken from the sale or sales of the goods or properties which were
seized or forfeited by the Bureau of Customs in other cases.
SO ORDERED.9
On June 10, 2005, the Commissioner filed his Motion for Partial Reconsideration arguing
that (a) the enforcement and satisfaction of respondent’s money claim must be pursued
and filed with the Commission on Audit pursuant to Presidential Decree (P.D.) No. 1445;
(b) respondent is entitled to recover only the value of the lost shipment based on its
acquisition cost at the time of importation; and (c) taxes and duties on the subject
shipment must be deducted from the amount recoverable by respondent.
On the same day, the Commissioner received AGFHA’s Motion for Partial
Reconsideration claiming that the 12% interest rate should be computed from the time its
shipment was lost on June 15, 1999 considering that from such date, petitioner’s
obligation to release their shipment was converted into a payment for a sum of money.
On October 18, 2005, after the filing of several pleadings, the CTA-Second Division
promulgated a resolution which reads:
WHEREFORE, premises considered, respondent Commissioner of Customs’ "Motion for
Partial Reconsideration" is hereby PARTIALLY GRANTED. The Resolution dated May
17, 2005 is hereby MODIFIED but only insofar as the Court did not impose the payment
of the proper duties and taxes on the subject shipment. Accordingly, the dispositive
portion of Our Resolution, dated May 17, 2005, is hereby MODIFIED to read as follows:
WHEREFORE, premises considered, the Bureau of Customs is adjudged liable to
petitioner AGFHA, INC. for the value of the subject shipment in the amount of ONE
HUNDRED SIXTY THOUSAND THREE HUNDRED FORTY EIGHT AND 08/100
US DOLLARS (US$160,348.08), subject however, to the payment of the prescribed
taxes and duties, at the time of the importation. The Bureau of Custom’s liability may be
paid in Philippine Currency, computed at the exchange rate prevailing at the time of
actual payment, with legal interests thereon at the rate of 6% per annum computed from
February 1993 up to the finality of this Resolution. In lieu of the 6% interest, the rate of
legal interest shall be 12% per annum upon finality of this Resolution until the value of
the subject shipment is fully paid.
The payment shall be taken from the sale or sales of the goods or properties which were
seized or forfeited by the Bureau of Customs in other cases.
SO ORDERED.
Petitioner AGFHA, Inc.’s "Motion for Partial Reconsideration" is hereby DENIED for
lack of merit.
SO ORDERED.10
Consequently, the Commissioner elevated the above-quoted resolution to the CTA-En
Banc.
On February 25, 2009, the CTA-En Banc promulgated the subject decision dismissing the
petition for lack of merit and affirming in toto the decision of the CTA-Second Division.
On March 18, 2009, the Commissioner filed his Motion for Reconsideration, but it was
denied by the CTA-En Banc in its April 13, 2009 Resolution.
Hence, this petition.
ISSUE
96
Whether or not the Court of Tax Appeals was correct in awarding the respondent the
amount of US$160,348.08, as payment for the value of the subject lost shipment that was
in the custody of the petitioner.
In his petition, the Commissioner basically argues two (2) points: 1] the respondent is
entitled to recover the value of the lost shipment based only on its acquisition cost at the
time of importation; and 2] the present action has been theoretically transformed into a
suit against the State, hence, the enforcement/satisfaction of petitioner’s claim must be
pursued in another proceeding consistent with the rule laid down in P.D. No. 1445.
He further argues that the basis for the exchange rate of its liability lacks basis. Based on
the Memorandum, dated August 27, 2002, of the Customs Operations Officers, the true
value of the subject shipment is US$160,340.00 based on its commercial invoices which
have been found to be spurious. The subject shipment arrived at the MICP on December
12, 1992 and the peso-dollar exchange rate was ₱20.00 per US$1.00. Thus, this
conversion rate must be applied in the computation of the total land cost of the subject
shipment being claimed by AGFHA or ₱3,206,961.60 plus interest.
The Commissioner further contends that based on Executive Order No. 688 (The 1999
Tariff and Customs Code of the Philippines), the proceeds from any legitimate
transaction, conveyance or sale of seized and/or forfeited items for importations or
exportations by the customs bureau cannot be lawfully disposed of by the petitioner to
satisfy respondent’s money judgment. EO 688 mandates that the unclaimed proceeds
from the sale of forfeited goods by the Bureau of Customs (BOC) will be considered as
customs receipts to be deposited with the Bureau of Treasury and shall form part of the
general funds of the government. Any disposition of the said unclaimed proceeds from
the sale of forfeited goods will be violative of the Constitution, which provides that "No
money shall be paid out of the Treasury except in pursuance of an appropriation made by
law."11
Thus, the Commissioner posits that this case has been transformed into a suit against the
State because the satisfaction of AGFHA’s claim will have to be taken from the national
coffers. The State may not be sued without its consent. The BOC enjoys immunity from
suit since it is invested with an inherent power of sovereignty which is taxation.
To recover the alleged loss of the subject shipment, AGFHA’s remedy here is to file a
money claim with the Commission on Audit (COA) pursuant to Act No. 3083 (An Act
Defining the Condition under which the Government of the Philippine Island may be
Sued) and Commonwealth Act No. 327 (An Act Fixing the Time within which the
Auditor General shall render his Decisions and Prescribing the Manner of Appeal
therefrom, as amended by P.D. No. 1445). Upon the determination of State liability, the
prosecution, enforcement or satisfaction thereof must still be pursued in accordance with
the rules and procedures laid down in P.D. No. 1445, otherwise known as the
Government Auditing Code of the Philippines.
On the other hand, AGFHA counters that, in line with prevailing jurisprudence, the
applicable peso-dollar exchange rate should be the one prevailing at the time of actual
payment in order to preserve the real value of the subject shipment to the date of its
payment. The CTA-En Banc Decision does not constitute a money claim against the
State. The Commissioner’s obligation to return the subject shipment did not arise from an
import-export contract but from a quasi-contract particularly solutio indebiti under
Article 2154 of the Civil Code. The payment of the value of the subject lost shipment was
in accordance with Article 2159 of the Civil Code. The doctrine of governmental
immunity from suit cannot serve as an instrument for perpetrating an injustice on a
citizen. When the State violates its own laws, it cannot invoke the doctrine of state
immunity to evade liability. The commission of an unlawful or illegal act on the part of and contrary to reason is not allowed in law. Justice and equity now demand that the
the State is equivalent to implied consent. State's cloak of invincibility against suit and liability be shredded.1awphi1
THE COURT’S RULING Accordingly, we agree with the lower courts' directive that, upon payment of the
The petition lacks merit. necessary customs duties by respondent, petitioner's "payment shall be taken from the
The Court agrees with the ruling of the CTA that AGFHA is entitled to recover the value sale or sales of goods or properties seized or forfeited by the Bureau of Customs."
of its lost shipment based on the acquisition cost at the time of payment. WHEREFORE, the assailed decisions of the Court of Appeals in CA-G.R. SP Nos.
In the case of C.F. Sharp and Co., Inc. v. Northwest Airlines, Inc. the Court ruled that the 75359 and 75366 are hereby AFFIRMED with MODIFICATION. Petitioner Republic of
rate of exchange for the conversion in the peso equivalent should be the prevailing rate at the Philippines, represented by the Commissioner of the Bureau of Customs, upon
the time of payment: payment of the necessary customs duties by respondent Unimex Micro-Electronics
In ruling that the applicable conversion rate of petitioner's liability is the rate at the time GmBH, is hereby ordered to pay respondent the value of the subject shipment in the
of payment, the Court of Appeals cited the case of Zagala v. Jimenez, interpreting the amount of Euro 669,982.565. Petitioner's liability may be paid in Philippine currency,
provisions of Republic Act No. 529, as amended by R.A. No. 4100. Under this law, computed at the exchange rate prevailing at the time of actual payment.
stipulations on the satisfaction of obligations in foreign currency are void. Payments of SO ORDERED.14 [Emphases supplied]
monetary obligations, subject to certain exceptions, shall be discharged in the currency In line with the ruling in UNIMEX Micro-Electronics GmBH, the Commissioner of
which is the legal tender in the Philippines. But since R.A. No. 529 does not provide for Customs should pay AGFHA the value of the subject lost shipment in the amount of
the rate of exchange for the payment of foreign currency obligations incurred after its US$160,348.08 which liability may be paid in Philippine currency computed at the
enactment, the Court held in a number of cases that the rate of exchange for the exchange rate prevailing at the time of the actual payment.
conversion in the peso equivalent should be the prevailing rate at the time of WHEREFORE, the February 25, 2009 Decision of the Court of Tax Appeals En Banc,
payment.12 [Emphases supplied] in CTA EB Case No. 136, is AFFIRMED. The Commissioner of Customs is hereby
Likewise, in the case of Republic of the Philippines represented by the Commissioner of ordered to pay, in accordance with law, the value of the subject lost shipment in the
Customs v. UNIMEX Micro-Electronics GmBH,13 which involved the seizure and amount of US$160,348.08, computed at the exchange rate prevailing at the time of actual
detention of a shipment of computer game items which disappeared while in the custody payment after payment of the necessary customs duties.
of the Bureau of Customs, the Court upheld the decision of the CA holding that SO ORDERED.
petitioner’s liability may be paid in Philippine currency, computed at the exchange rate
prevailing at the time of actual payment.
On the issue regarding the state immunity doctrine, the Commissioner cannot escape
liability for the lost shipment of goods. This was clearly discussed in the UNIMEX
Micro-Electronics GmBH decision, where the Court wrote:
Finally, petitioner argues that a money judgment or any charge against the government
requires a corresponding appropriation and cannot be decreed by mere judicial order.
Although it may be gainsaid that the satisfaction of respondent's demand will ultimately
fall on the government, and that, under the political doctrine of "state immunity," it
cannot be held liable for governmental acts (jus imperii), we still hold that petitioner
cannot escape its liability. The circumstances of this case warrant its exclusion from the
purview of the state immunity doctrine.
As previously discussed, the Court cannot turn a blind eye to BOC's ineptitude and
gross negligence in the safekeeping of respondent's goods. We are not likewise
unaware of its lackadaisical attitude in failing to provide a cogent explanation on the
goods' disappearance, considering that they were in its custody and that they were
in fact the subject of litigation. The situation does not allow us to reject respondent's
claim on the mere invocation of the doctrine of state immunity. Succinctly, the
doctrine must be fairly observed and the State should not avail itself of this
prerogative to take undue advantage of parties that may have legitimate claims
against it.
In Department of Health v. C.V. Canchela & Associates, we enunciated that this Court, as
the staunch guardian of the people's rights and welfare, cannot sanction an injustice so
patent in its face, and allow itself to be an instrument in the perpetration thereof. Over
time, courts have recognized with almost pedantic adherence that what is inconvenient

97
 As a consequence, on June 14, 1996, respondent Bank filed a petition for extrajudicial
THIRD DIVISION foreclosure of the abovementioned mortgages with the Office of the Provincial Sheriff of
Laguna. As of June 10, 1996, petitioners' obligations amounted to P287,187.50, plus
interests, charges and expenses. On June 25, 1996 the Provincial Sheriff issued a Notice
SPOUSES NELSON R. VILLANUEVA and MYRA G.R. No. 163433
of Sale of the subject mortgaged property.6 It would appear, however, that the auction
P. VILLANUEVA, Present:
sale did not push through because on June 9, 2000, respondent Bank re-applied for
Petitioners,
extrajudicial foreclosure of the same mortgage. On July 25, 2000, the Provincial Sheriff
VELASCO, JR., J., Chairperson,
issued a Notice of Sale Re-Application of Foreclosure Case and set the public auction of
- versus - LEONARDO-DE CASTRO*
the subject property on August 25, 2000.7 As of June 15, 2000, petitioners' mortgage
PERALTA,
debt was P713,465.35, plus interests, charges and expenses.
THE COURT OF APPEALS, PROVIDENT RURAL ABAD, and
BANK OF SANTA CRUZ (LAGUNA), INC., and MENDOZA, JJ.
Petitioners then wrote a letter-request addressed to the Officer-in-Charge of the Office of
THE CLERK OF COURT OF THE REGIONAL
the Clerk of Court of the RTC, Santa Cruz, Laguna questioning the amount of its
TRIAL COURT OF LAGUNA AS EX- Promulgated:
outstanding obligations to respondent Bank and requesting that the public auction
OFFICIOPROVINCIAL SHERIFF,
scheduled on August 25, 2000 be suspended until after its objection to the amount being
Respondents.
sought by respondent Bank is resolved by the court.8
August 22, 2011
However, petitioners letter-request was denied.

Aggrieved, petitioners filed, on August 2, 2000, a Petition for Declaratory Relief,

Accounting and Damages praying that the stipulated interests, charges and expenses on
its loans be declared null and void for being contrary to law, morals, good customs,
x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x public order or public policy as they are exorbitant, usurious, iniquitous and
unconscionable. The Petition was docketed as Civil Case No. SC-4032.9

DECISION
PERALTA, J.:
Assailed in the present petition for review on certiorari under Rule 45 of the Rules of
Court are the Decision1 and Resolution2 of the Court of Appeals (CA) dated June 16,
2003 and April 28, 2004, respectively, in CA-G.R. CV No. 73256. The CA Decision
affirmed the July 31, 2001 Order3 of the Regional Trial Court (RTC) of Santa Cruz,
Laguna, Branch 91, which dismissed herein petitioners' petition for declaratory relief,
while the CA Resolution denied petitioners' Motion for Reconsideration.
The pertinent facts of the case are as follows:
Sometime in 1994, herein petitioners applied for separate loans amounting
to P100,000.00 and P125,000.00, which were granted by herein respondent Provident
Rural Bank of Sta. Cruz, Laguna, Inc. (respondent Bank).
As security for the loans, petitioners executed two separate promissory notes the due
dates of which both fall on August 20, 1995.4 Petitioners also executed two separate real
estate mortgages over the same parcel of agricultural land located in Sta. Cruz, Laguna.5
On September 5, 2000, respondent Bank filed a Motion to Dismiss contending that the
petition is barred by res judicata and that petitioners are guilty of forum
shopping.10 Respondent Bank argued that: on August 23, 1996, petitioners filed a
complaint (docketed as Civil Case No. SC-3422) against it (respondent Bank) before the
RTC of Sta. Cruz, Laguna, Branch 86, seeking to declare as usurious the interests,
penalties and other charges which petitioners and respondent Bank had agreed upon in
the subject real estate mortgages and promissory notes; that these same stipulated
interest, penalties and other charges are the subject matter of the petition for declaratory
relief; that respondent Bank also filed a Motion to Dismiss in Civil Case No. SC-3422 on
the ground of lack of cause of action and suspension of the usury law; that respondent
Bank's Motion to Dismiss was denied by the RTC but upon appeal, the CA, in CA-G.R.
SP No. 49065, annulled the RTC Order and granted the said Motion.
Petitioners filed their Opposition to respondent Bank's Motion to Dismiss.11
Subsequently, on July 31, 2001, the RTC issued an Order dismissing petitioners' Petition
for Declaratory Relief holding that the said Petition is barred by prior judgment,
considering that the decision of the CA in CA-G.R. SP No. 49065 already settled the
issues of usury and the right of petitioners to claim the abolition or reduction of the
subject interest rates, which are the same issues raised by petitioners in their Petition for
Declaratory Relief.12

Petitioners failed to pay their loans when they became due. Petitioners then filed an appeal with the CA assailing the abovementioned Order of the
RTC.

98

On June 16, 2003, the CA promulgated the presently assailed Decision affirming the
Order of the RTC and ruling that all the elements of res judicata are present.
Petitioners' Motion for Reconsideration was denied by the CA via its April 28, 2004
Resolution.
Hence, the present petition for review on certiorari.
Petitioners contend that the principle of res judicata does not apply in the present case on
the ground that there is no identity of subject matter and cause of action in Civil Case
Nos. 3422 and 4032.
Petitioners further argue that even if all the elements of res judicata are present in the
instant case, equity dictates that this principle should not be applied; otherwise, the court
would be sanctioning respondent Bank's enrichment at the expense of petitioners through
the imposition of exorbitant, unconscionable and usurious interest rates, penalties and
other charges; in such a case, petitioners claim that justice would be sacrificed in favor of
technicality.
Lastly, petitioners aver that they did not violate the rule on forum shopping because Civil
Case No. SC-3422, the case being cited by respondent Bank in its Motion to Dismiss,
was already decided by the CA in 1999, before petitioners filed their Petition for
Declaratory Relief on August 2, 2000, and that there is no other pending case involving
the same parties, subject matter and cause of action.
The petition lacks merit.
Anent petitioners' first contention, res judicata literally means a matter adjudged; a thing
judicially acted upon or decided; a thing or matter settled by judgment.13 It lays the rule
that an existing final judgment or decree rendered on the merits, without fraud or
collusion, by a court of competent jurisdiction, upon any matter within its jurisdiction, is
conclusive of the rights of the parties or their privies, in all other actions or suits in the
same or any other judicial tribunal of concurrent jurisdiction on the points and matters in
issue in the first suit.14
The elements of res judicata are: (1) the judgment sought to bar the new action must be
final; (2) the decision must have been rendered by a court having jurisdiction over the
subject matter and the parties; (3) the disposition of the case must be a judgment on the
merits; and (4) there must be as between the first and second action, identity of parties,
subject matter, and causes of action.15 The Court finds that the CA and the RTC did not
err in finding that all of the abovementioned elements are present in the instant case.
There is no dispute that the first three elements, as enumerated above, are present. As
correctly held by the CA, the issues raised in Civil Case No. SC-3422 were already
decided with finality by this Court when it denied petitioners' petition for review
on certiorari in its Resolution dated August 23, 1999 in G.R. No. 139385. The said
Resolution became final and executory on December 20, 1999.
99
With respect to the fourth element, there is also no dispute that there is identity of parties.
However, the Court is not persuaded by petitioners' argument that there is no identity of
subject matter and cause of action.
On the issue of identity of subject matter, this Court has held that the subject of an action
is defined as the matter or thing with respect to which the controversy has arisen,
concerning which a wrong has been done.16
The subject matters in Civil Case No. SC-3422 are the interest rates as well as penalties
and other charges stipulated in the promissory notes and real estate mortgages executed
by petitioners. These are the same subject matters in Civil Case No. SC-4032.
As to the cause of action, Rule 2, Section 2 of the Rules of Court defines cause of action
as the act or omission by which a party violates a right of another. With respect to the
identity of causes of action, this Court has laid down the test in determining whether or
not the causes of action in the first and second cases are identical, to wit: would the same
evidence support and establish both the present and former cause of action? If so, the
former recovery is a bar; if otherwise, it does not stand in the way of the former action.17
In the instant case, the cause of action in both Civil Case Nos. SC-3422 and 4032 is the
act of respondent Bank in imposing what petitioners alleged as exorbitant,
unconscionable and usurious interest rates, penalties and other charges. There is, thus, no
doubt that the same evidence is required to establish the cause of action in both of these
cases.
In fact, the issues (whether or not the interest rates, penalties and charges imposed by
respondent Bank are usurious and unconscionable) and the reliefs sought (reduction of
the said interest rates, penalties and surcharges to an amount not exceeding 12% per
annum) in both cases are essentially the same.
Neither is the Court persuaded by petitioners' contention that, in any case, the Court
should not apply the principle of res judicata because to do so would be tantamount to
allowing respondent Bank to unjustifiably and illegally enrich itself at the expense of
petitioners by imposing interests, penalties and other charges beyond what the law and
equity allows.
It is true that res judicata is to be disregarded if its rigid application would involve the
sacrifice of justice to technicality.18 However, the present case does not fall under this
exception.
Petitioners contend that the interest rate of 24% per annum stipulated in the mortgage
contract, which they executed in favor of respondent Bank, is usurious. This Court has
consistently held that for sometime now, usury has been legally non-existent and that
interest can now be charged as lender and borrower may agree upon.19 In fact, Section 1
of Central Bank Circular No. 905, Series of 1982, which took effect on January 1, 1983,
expressly provides that [t]he rate of interest, including commissions, premiums, fees and
other charges, on a loan or forbearance of any money, goods, or credits, regardless of
maturity and whether secured or unsecured, that may be charged or collected by any
person, whether natural or juridical, shall not be subject to any ceiling prescribed under or
pursuant to the Usury Law, as amended. Nonetheless, this Court has also held in a
number of cases, that nothing in the circular grants lenders carte blanche authority to
raise interest rates to levels which will either enslave their borrowers or lead to a
hemorrhaging of their assets.20 Thus, the stipulated interest rates are illegal if they are
unconscionable.
The question now is whether the 24% per annum interest rate is unreasonable under the
circumstances obtaining in the present case.
The Court rules in the negative.
In Spouses Zacarias Bacolor and Catherine Bacolor v. Banco Filipino Savings and
Mortgage Bank, Dagupan City Branch,21 this Court held that the interest rate of 24% per
annum on a loan of P244,000.00, agreed upon by the parties, may not be considered as
unconscionable and excessive. As such, the Court ruled that the borrowers cannot renege
on their obligation to comply with what is incumbent upon them under the contract of
loan as the said contract is the law between the parties and they are bound by its
stipulations.22
Also, in Garcia v. Court of Appeals,23 this Court sustained the agreement of the parties
to a 24% per annum interest on an P8,649,250.00 loan finding the same to be reasonable
and clearly evidenced by the amended credit line agreement entered into by the parties as
well as two promissory notes executed by the borrower in favor of the lender.
Based on the above jurisprudence, the Court finds that the 24% per annum interest rate,
provided for in the subject mortgage contracts for a loan of P225,000.00, may not be
considered unconscionable. Moreover, considering that the mortgage agreement was
freely entered into by both parties, the same is the law between them and they are bound
to comply with the provisions contained therein.
The Court also upholds the validity of the 6% per annum penalty charge. In Development
Bank of the Philippines v. Family Foods Manufacturing Co., Ltd.,24 this Court,
sustaining the validity of an 8% per annum penalty charge on separate loans
of P500,000.00 and P440,000.00, held that:
This Court has recognized a penalty clause as an accessory obligation which the parties
attach to a principal obligation for the purpose of insuring the performance thereof by
imposing on the debtor a special prestation (generally consisting in the payment of a sum
of money) in case the obligation is not fulfilled or is irregularly or inadequately fulfilled.
The enforcement of the penalty can be demanded by the creditor only when the non-
performance is due to the fault or fraud of the debtor. The non-performance gives rise to
the presumption of fault; in order to avoid the payment of the penalty, the debtor has the
burden of proving an excuse the failure of the performance was due to either force
majeure or the acts of the creditor himself.
In this case, respondents failed to discharge the burden. Thus, they cannot avoid the
payment of the agreed penalty charge.25
100
In a similar manner, herein petitioners bound themselves to pay the stipulated penalty
charge of 6% per annum of the principal amount of loan as penalty for inexcusable
neglect to pay any amount of t[he] loan when due.26 Since petitioners failed to present
evidence that their failure to perform their obligation was due to either force majeure or
the acts of respondent Bank or to any justifiable or excusable cause, they are obliged to
pay the penalty charge as agreed upon.
Lastly, it is wrong for petitioners to argue that they are not guilty of forum shopping on
the ground that there is no other pending case involving the same parties, subject matter
and cause of action as their petition for declaratory relief.
Settled is the rule that forum shopping is the act of a litigant who repetitively availed of
several judicial remedies in different courts, simultaneously or successively, all
substantially founded on the same transactions and the same essential facts and
circumstances, and all raising substantially the same issues, either pending in or already
resolved adversely by some other court, to increase his chances of obtaining a favorable
decision if not in one court, then in another.27
Forum shopping can be committed in three ways: (1) by filing multiple cases based on
the same cause of action and with the same prayer, the previous case not having been
resolved yet (where the ground for dismissal is litis pendentia); (2) by filing multiple
cases based on the same cause of action and with the same prayer, the previous case
having been finally resolved (where the ground for dismissal is res judicata); and (3) by
filing multiple cases based on the same cause of action but with different prayers
(splitting of causes of action, where the ground for dismissal is also
either litis pendentia or res judicata).28
More particularly, the elements of forum-shopping are: (a) identity of parties or at least
such parties that represent the same interests in both actions; (b) identity of rights asserted
and reliefs prayed for, the relief being founded on the same facts; (c) identity of the two
preceding particulars, such that any judgment rendered in the other action will, regardless
of which party is successful, amount to res judicata in the action under consideration.29
All the abovementioned elements are present in the instant case. As discussed earlier,
petitioners petition for declaratory relief involves the same parties, cause of action and
reliefs prayed for as Civil Case No. SC-3422 which case was decided with finality by this
Court as shown by the entry of judgment dated December 20, 1999 in G.R. No. 139385.
In addition, it has been held above that the judgment in Civil Case No. SC-3422 (G.R.
No. 139385) amounts to res judicata in the present case.
Contrary to petitioners' asseveration, Civil Case No. SC-3422 need not be pending in
order that the rule on forum shopping may apply, because as mentioned above, forum
shopping may still be committed if one files multiple cases involving the same parties
causes of action and prayer and the previous case has already been finally resolved.
Hence, there is no other conclusion than that petitioners are guilty of forum shopping.
WHEREFORE, the petition is DENIED. The Decision and Resolution of the Court of
Appeals dated June 16, 2003 and April 28, 2004, respectively, are AFFIRMED.
SO ORDERED.
 is that prior to the release of the loan, a Memorandum of Agreement (MOA) between the
supplier of the cattle, Remad Livestock Corporation (REMAD), and the cooperative,
EN BANC shall have been signed providing the level of inventory of stocks to be delivered,
specifications as to breed, condition of health, age, color, and weight. The MOA shall
RUBEN REYNA and LLOYD SORIA, G.R. No. 167219 further provide for a buy-back agreement, technology, transfer, provisions for biologics
Petitioners, requirement and technical visits and replacement of sterile, unproductive
Present: stocks.[4] Allegedly contained in the contracts was a stipulation that the release of the
CORONA, C.J., loan shall be made sixty (60) days prior to the delivery of the stocks.[5]
CARPIO,
CARPIO MORALES, The Ipil Branch approved the applications of four cooperatives. R.T. Lim Rubber
VELASCO, JR., Marketing Cooperative (RT Lim RMC) and Buluan Agrarian Reform Beneficiaries MPC
NACHURA,* (BARBEMCO) were each granted two loans. Tungawan Paglaum Multi-Purpose
LEONARDO-DE CASTRO, Cooperative (Tungawan PFMPC) and Siay Farmers Multi-Purpose Cooperative
BRION, (SIFAMCO) were each granted one loan. Pursuant to the terms of the CFP, the
- versus - PERALTA, cooperatives individually entered into a contract with REMAD, denominated as a Cattle-
BERSAMIN, Breeding and Buy-Back Marketing Agreement.[6]
DEL CASTILLO, In December 1993, the Ipil Branch granted six loans to the four cooperative borrowers in
ABAD, the following amounts:
VILLARAMA, JR.,
PEREZ, Date Name Amount Amount of Amount Paid
MENDOZA, and of of of Livestock to Cattle
SERENO, JJ. Release Borrower Loan Insurance Supplier (REMAD)
12-10-93 RTLim RMC P 795,305 P 62,305 P 733,000
Promulgated: 12-10-93 BARBEMCO 482,825 37,825 445,000
COMMISSION ON AUDIT, 12-16-93 Tungawan PFMPC 482,825 37,825 445,000
Respondent. February 8, 2011 12-22-93 SIFAMCO 983,010 77,010 906,000
x-----------------------------------------------------------------------------------------x 12-22-93 RTLim RMC 187,705 14,705 173,000
12-22-
93 BARBEMCO 448,105 35,105 413,000 TOTAL P3,375,775 264,775 3,115,000[7]
DECISION

PERALTA, J.:
Before this Court is a Petition for certiorari,[1] under Rule 64 of the Rules of Court,
seeking to set aside Resolution No. 2004-046,[2] dated December 7, 2004, of the
Commission on Audit (COA).
The facts of the case are as follows:
The Land Bank of the Philippines (Land Bank) was engaged in a cattle-financing
program wherein loans were granted to various cooperatives. Pursuant thereto, Land
Banks Ipil, Zamboanga del Sur Branch (Ipil Branch) went into a massive information
campaign offering the program to cooperatives.
Cooperatives who wish to avail of a loan under the program must fill up a Credit Facility
Proposal (CFP) which will be reviewed by the Ipil Branch. As alleged by Emmanuel B.
Bartocillo, Department Manager of the Ipil Branch, the CFP is a standard and prepared
form provided by the Land Bank main office to be used in the loan application as
mandated by the Field Operations Manual.[3] One of the conditions stipulated in the CFP
As alleged by petitioners, the terms of the CFP allowed for pre-payments or advancement
of the payments prior to the delivery of the cattle by the supplier REMAD. This Court
notes, however, that copies of the CFPs were not attached to the records of the case at
bar. More importantly, the very contract entered into by the cooperatives and REMAD, or
the Cattle-Breeding and Buy-Back Marketing Agreement[8] did not contain a provision
authorizing prepayment.
Three checks were issued by the Ipil Branch to REMAD to serve as advanced payment
for the cattle. REMAD, however, failed to supply the cattle on the dates agreed upon.
In post audit, the Land Bank Auditor disallowed the amount of P3,115,000.00 under CSB
No. 95-005 dated December 27, 1996 and Notices of Disallowance Nos. 96-014 to 96-
019 in view of the non-delivery of the cattle.[9] Also made as the basis of the
disallowance was the fact that advanced payment was made in violation of bank policies
and COA rules and regulations. Specifically, the auditor found deficiencies in the CFPs,
to wit:

101
The Auditor commented that the failure of such loan projects deprived the farmer-
beneficiaries the opportunity to improve their economic condition.
From the Credit Facilities Proposals (CFP), the Auditor noted the following deficiencies.
xxxx
4. No. 1 of the loan terms and conditions allowed prepayments without taking into
consideration the interest of the Bank. Nowhere in the documents reviewed disclosed
about prepayment scheme with REMAD, the supplier/dealer.
There was no justification for the prepayment scheme. Such is a clear deviation from
existing procedures on asset financing under which the Bank will first issue a letter
guarantee for the account of the borrower. Payment thereof will only be effected upon
delivery of asset, inspection and acceptance of the same by the borrower.
The prepayment arrangement also violates Section 88 of Presidential Decree (PD) No.
1445, to quote:
Prohibition against advance payment on government Except with the prior approval of
the President (Prime Minister), the government shall not be obliged to make an advance
payment for services not yet rendered or for supplies and materials not yet delivered
under any contract therefor. No payment, partial or final shall be made on any such
contract except upon a certification by the head of the agency concerned to have effect
that the services or supplies and materials have been delivered in accordance with the
terms of the contract and have been duly inspected and accepted.
Moreover, the Manual on FOG Lending Operations (page 35) provides the systems and
procedures for releasing loans, to quote:
Loan Proceeds Released Directly to the Supplier/Dealer Proceeds of loans granted for the
acquisition of farm machinery equipment; and sub-loan components for the purchase of
construction materials, farm inputs, etc. shall be released directly to the accredited
dealers/suppliers. Payment to the dealer shall be made after presentation of
reimbursement documents (delivery/ official receipts/ purchase orders) acknowledged by
the authorized LBP representative that same has been delivered.
In cases where supplier requires Cash on Delivery (COD), the checks may be issued and
the cooperative and a LBP representative shall release the check to the supplier and then
take delivery of the object of financing.[10]
The persons found liable by the Auditor for the amount of P3,115,000.00 which was
advanced to REMAD were the following employees of the Ipil Branch:
1. Emmanuel B. Bartocillo Department Manager II
2. George G. Hebrona Chief, Loans and Discounts Division
3. Petitioner Ruben A. Reyna Senior Field Operations Specialist
4. Petitioner Lloyd V. Soria Loans and Credit Analyst II
5. Mary Jane T. Cunting[11] Cash Clerk IV
6. Leona O. Cabanatan Bookkeeper III/Acting Accountant.[12]
102
The same employees, including petitioners, were also made respondents in a Complaint
filed by the COA Regional Office No. IX, Zamboanga City, before the Office of the
Ombudsman for Gross Negligence, Violation of Reasonable Office Rules and
Regulations, Conduct Prejudicial to the Interest of the Bank and Giving Unwarranted
Benefits to persons, causing undue injury in violation of Section 3(e) of Republic Act
(R.A.) No. 3019, otherwise known as the Anti-Graft and Corrupt Practices Act.[13]
On January 28, 1997, petitioners filed a Joint Motion for Reconsideration claiming that
the issuance of the Notice of Disallowance was premature in view of the pending case in
the Office of the Ombudsman. The Motion was denied by the Auditor. Unfazed,
petitioners filed an appeal with the Director of COA Regional Office No. IX, Zamboanga
City. On August 29, 1997, the COA Regional Office issued Decision No. 97-
001 affirming the findings of the Auditor. On February 4, 1998, petitioners filed a Motion
for Reconsideration, which was denied by the Regional Office in Decision No. 98-
005[14] issued on February 18, 1998.
Petitioners did not file a Petition for Review or a Notice of Appeal from the COA
Regional Office Decision as required under Section 3, Rule VI[15] of the 1997 Revised
Rules of Procedure of the COA. Thus, the Decision of the Director of COA Regional
Office No. IX became final and executory pursuant to Section 51[16] of the Government
Auditing Code of the Philippines. Consequently, on April 12, 1999, the Director of the
COA Regional Office No. IX issued a Memorandum to the Auditor directing him to
require the accountant of the Ipil Branch to record in their books of account the said
disallowance.[17]
On July 12, 1999, the Auditor sent a letter to the Land Bank Branch Manager requiring
him to record the disallowance in their books of account. On August 10, 1999, petitioners
sent a letter[18] to COA Regional Office No. IX, seeking to have the booking of the
disallowance set aside, on the grounds that they were absolved by the Ombudsman in a
February 23, 1999 Resolution,[19] and that the Bangko Sentral ng Pilipinas had approved
the writing off of the subject loans.
The February 23, 1999 Resolution of the Ombudsman was approved by Margarito P.
Gervacio, Jr. the Deputy Ombudsman for Mindanao, the dispositive portion of which
reads:
WHERFORE, premises considered, the instant complaint is hereby dismissed for lack of
sufficient evidence.
SO ORDERED.[20]
COA Regional Office No. IX endorsed to the Commission proper the matter raised by the
petitioners in their August 10, 1999 letter. This is contained in its February 28, 2000
letter/endorsement,[21] wherein the Director of COA Regional Office No. IX maintained
his stand that the time for filing of a petition for review had already lapsed. The Regional
Director affirmed the disallowance of the transactions since the same were irregular and
disadvantageous to the government, notwithstanding the Ombudsman resolution
absolving petitioners from fault.
In a Notice[22] dated June 29, 2000, the COA requested petitioners to submit a reply in
response to the letter/endorsement of the Regional Office Director. On August 10, 2000,
petitioners submitted their Compliance/ Reply[23], wherein they argued that the
Ombudsman Resolution is a supervening event and is a sufficient ground for exemption
from the requirement to submit a Petition for Review or a Notice of Appeal to the
Commission proper. Petitioners also argued that by invoking the jurisdiction of the
Commission proper, the Regional Director had waived the fact that the case had already
been resolved for failure to submit the required Petition for Review.
On July 17, 2003, the COA rendered Decision No. 2003-107[24] affirming the rulings of
the Auditor and the Regional Office, to wit:
WHEREFORE, foregoing premises considered, this Commission hereby affirms both the
subject disallowance amounting to P3,115,000 and the Order of the Director, COA
Regional Office No. IX, Zamboanga City, directing the recording of subject disallowance
in the LBP books of accounts. This is, however, without prejudice to the right of herein
appellants to run after the supplier for reimbursement of the advance payment for the
cattle.[25]
In denying petitioners request for the lifting of the booking of the disallowance, the COA
ruled that after a circumspect evaluation of the facts and circumstances, the dismissal by
the Office of the Ombudsman of the complaint did not affect the validity and propriety of
the disallowance which had become final and executory.[26]
On August 22, 2003, petitioners filed a Motion for Reconsideration, which was, however,
denied by the COA in a Resolution[27] dated December 7, 2004.
Hence, herein petition, with petitioners raising the following grounds in support of the
petition, to wit:
RESPONDENT COA COMMITTED GRAVE ABUSE OF DISCRETION
AMOUNTING TO LACK OF JURISDICTION IN DECLARING THE PREPAYMENT
STIPULATION IN THE CONTRACT BETWEEN THE BANK AND REMAD
PROSCRIBED BY SECTION 103 OF P.D. NO. 1445, OTHERWISE KNOWN AS THE
STATE AUDIT CODE OF THE PHILIPPINES.
RESPONDENT COA COMMITTED GRAVE ABUSE OF DISCRETION
AMOUNTING TO LACK OF JURISDICTION FOR HOLDING THE PETITIONERS
ADMINISTRATIVELY LIABLE FOR HAVING PROCESSED THE LOANS OF THE
BORROWING COOPERATIVES IN ACCORDANCE WITH THE BANKS MANUAL
(FOG) LENDING OPERATIONS.
RESPONDENT COA COMMITTED GRAVE ABUSE OF DISCRETION
AMOUNTING TO LACK OF JURISDICTION WHEN IT HELD THE PETITIONERS
LIABLE AND, THEREFORE, IN EFFECT LIKEWISE OBLIGATED TO REFUND
THE DISALLOWED AMOUNT EVEN AS AMONG OTHER THINGS THEY ACTED
IN EVIDENT GOOD FAITH. MORE SO, AS THE COLLECTIBLES HAVE BEEN
ALREADY EFFECTIVELY WRITTEN-OFF.[28]
The petition is not meritorious.
103
I.
Anent the first issue raised by petitioners, the same is without merit. Petitioners argue
said issue on three points: first, the COA is estopped from declaring the prepayment
stipulation as invalid;[29] second, the prepayment clause in the Land Bank-REMAD
contract is valid;[30] and third, it is a matter of judicial knowledge that is not unusual for
winning bidders involving public works to enter into contracts with the government
providing for partial prepayment of the contract price in the form of mobilization
funds.[31]
As to their contention that the COA is estopped from declaring the prepayment
stipulation as invalid, petitioners argue in the wise:
xxxx
The CATTLE BREEDING AND BUY BACK MARKETING AGREEMENT sample of
which is attached as Annex I was a Contract prepared by the bank and REMAD, it was
agreed to by the cooperatives. It was a standard Contract used in twenty two (22) Land
Bank branches throughout the country. It provided in part:
6.1 That the release of the loan shall be made directly to the supplier 60 days
prior to the delivery of stocks per prepayment term of REMAD LIVESTOCK
COPORATION (supplier). Inspection shall be done before the 60th day/delivery of the
stocks.
Again, these Contracts were standard bank forms from Land Bank head office. None of
the Petitioners participated in the drafting of the same.[32]
In the absence of grave abuse of discretion, questions of fact cannot be raised in a petition
for certiorari, under Rule 64 of the Rules of Court. The office of the petition
for certiorari is not to correct simple errors of judgment; any resort to the said petition
under Rule 64, in relation to Rule 65, of the 1997 Rules of Civil Procedure is limited to
the resolution of jurisdictional issues.[33] Accordingly, since the validity of the
prepayment scheme is inherently a question of fact, the same should no longer be looked
into by this Court.
In any case, even assuming that factual questions may be entertained, the facts do not
help petitioners' cause for the following reasons: first, the supposed Annex I does not
contain a stipulation authorizing a pre-payment scheme; and second, petitioners clearly
violated the procedure of releasing loans contained in the Bank's Manual on Field Office
Guidelines on Lending Operations (Manual on Lending Operations).
A perusal of the aforementioned Annex I,[34] the Cattle-Breeding and Buy-Back
Marketing Agreement, would show that stipulation 6.1 which allegedly authorizes
prepayment does not exist. To make matters problematic is that nowhere in the records of
the petition can one find a document which embodies such a stipulation. It bears stressing
that the Auditor noted in his report that, nowhere in the documents reviewed disclosed
about prepayment scheme with REMAD, the supplier/dealer.
Moreover, it is surprising that one of petitioners defense is that they processed the
cooperatives' applications in accordance with their individual job descriptions as
provided in the Banks Manual on Field Office Guidelines on Lending
Operations[35] when, on the contrary, petitioners seem to be oblivious of the fact that
they clearly violated the procedure in releasing loans which is embodied in the very same
Manual on Lending Operations, to wit:
Loan Proceeds Released Directly to the Supplier/Dealer Proceeds of loans granted for
the acquisition of farm machinery equipment; and sub-loan components for the purchase
of construction materials, farm inputs, etc. shall be released directly to the accredited
dealers/suppliers. Payment to the dealer shall be made after presentation of
reimbursement documents (delivery/ official receipts/ purchase orders) acknowledged by
the authorized LBP representative that same has been delivered.[36]
However, this Court is not unmindful of the fact that petitioners contend that the Legal
Department of Land Bank supposedly passed upon the issue of application of Section 88
of PD 1445. Petitioners argue that in an alleged August 22, 1996 Memorandum issued by
the Land Bank, it opined that Section 88 of PD 1445 is not applicable.[37] Be that as it
may, this Court is again constrained by the fact that petitioners did not offer in evidence
the alleged August 22, 1996 Land Bank Memorandum. Therefore, the supposed tenor of
the said document deserves scant consideration. In any case, even
assuming arguendo that petitioners are correct in their claim, they still cannot hide from
the fact that they violated the procedure in releasing loans embodied in the Manual on
Lending Operations as previously discussed.
To emphasize, the Auditor noted that nowhere in the documents reviewed disclosed about
prepayment scheme with REMAD. It is well settled that findings of fact of quasi-judicial
agencies, such as the COA, are generally accorded respect and even finality by this
Court, if supported by substantial evidence, in recognition of their expertise on the
specific matters under their jurisdiction.[38] If the prepayment scheme was in fact
authorized, petitioners should have produced the document to prove such fact as alleged
by them in the present petition. However, as stated before, even this Court is at a loss as
to whether the prepayment scheme was authorized as a review of Annex I, the document
to which petitioners base their authority to make advance payments, does not contain
such a stipulation or provision. Highlighted also is the fact that petitioners clearly
violated the procedure in releasing loans found in the Manual on Lending Operations
which provides that payments to the dealer shall only be made after presentation of
reimbursement documents acknowledged by the authorized LBP representative that the
same has been delivered.
In addition, this Court notes that much reliance is made by petitioners on their allegation
that the terms of the CFP allowed for prepayments or advancement of the payments prior
to the delivery of the cattle by the supplier REMAD. It appears, however, that a CFP,
even if admittedly a pro forma contract and emanating from the Land Bank main
office, is merely a facility proposal and not the contract of loan between Land Bank
and the cooperatives. It is in the loan contract that the parties embody the terms and
conditions of a transaction. If there is any agreement to release the loan in advance to
REMAD as a form of prepayment scheme, such a stipulation should exist in the loan
104
contract. There is, nevertheless, no proof of such stipulation as petitioners had failed to
attach the CFPs or the loan contracts relating to the present petition.
Based on the foregoing, the COA should, therefore, not be faulted for finding that
petitioners facilitated the commission of the irregular transaction. The evidence they
presented before the COA was insufficient to prove their case. So also, even this Court is
at a loss as to the truthfulness and veracity of petitioners' allegations as they did not even
present before this Court the documents that would serve as the basis for their claims.
II.
Anent the second ground raised by petitioners, the same is again without merit.
Petitioners impute on the COA grave abuse of discretion when it held petitioners
administratively liable for having processed the loans of the borrowing cooperatives. This
Court stresses, however, that petitioners cannot rely on their supposed observance of the
procedure outlined in the Manual on Lending Operations when clearly the same provides
that payment to the dealer shall be made after presentation of reimbursement documents
(delivery/official receipts/purchase orders) acknowledged by the authorized LBP
representative that the same has been delivered. Petitioners have not made a case to
dispute the COA's finding that they violated the foregoing provision. Any presumption,
therefore, that public officials are in the regular performance of their public functions
must necessarily fail in the presence of an explicit rule that was violated.
There is no grave abuse of discretion on the part of the COA as petitioners were given all
the opportunity to argue their case and present any supporting evidence with the COA
Regional Director. Moreover, it bears to point out that even if petitioners' period to
appeal had already lapsed, the COA Commission Proper even resolved their August 10,
1999 letter where they raised in issue the favorable ruling of the Ombudsman.
III.
Anent, the last issue raised by petitioners, the same is without merit.
Petitioners contend that respondents Order, requiring them to refund the
disallowed transaction, is functus officio, the amount having been legally written-off.[39]
A perusal of the records would show that Land Bank Vice-President Conrado B. Roxas
sent a Memorandum[40] dated August 5, 1998 to the Head of the Ipil Branch, advising
them that the accounts subject of the present petition have been written-off, to wit:
We are pleased to inform you that Bangko Sentral ng Pilipinas (BSP) in its letter dated
July 20, 1998 has approved the write-off of your recommended Agrarian Reform Loan
Accounts and Commercial Loan Accounts as covered by LBP Board Resolution Nos. 98-
291 and 98-292, respectively, both dated June 18, 1998 x x x.[41]
The Schedule of Accounts for Write-Off[42] attached to the August 5, 1998
Memorandum shows that the same covered the two loans given to BARBEMCO, the two
loans given to RTLim RMC, and the only loan given to Tungawan PFPMC. The total
amount approved for write-off was P2,209,000.00.[43] Moreover, petitioners contend
that the last loan given to SIFAMCO was also the subject of a write-off in a similar
advice given to the Buug Branch. The total approved write-off in the second
Memorandum[44] was for P906,000.00.
In its Comment,[45] the COA argues that the fact that the audit
disallowance was allegedly written-off is of no moment. Respondent
maintains that Section 66 of PD 1445[46] expressly granted unto it the right to
compromise monetary liabilities of the government.[47] The COA, thus, theorizes that
without its approval, the alleged write-off is ineffectual. The same argument was
reiterated by the COA in its Memorandum.[48]
The COAs argument deserves scant consideration.
A write-off is a financial accounting concept that allows for the reduction in value of an
asset or earnings by the amount of an expense or loss. It is a means of removing bad
debts from the financial records of the business.
In Land Bank of the Philippines v. Commission on Audit,[49] this Court ruled that Land
Bank has the power and authority to write-off loans, to wit:
LBP was created as a body corporate and government instrumentality to provide timely
and adequate financial support in all phases involved in the execution of needed agrarian
reform (Rep. Act No. 3844, as amended, Sec. 74). Section 75 of its Charter vests in LBP
specific powers normally exercised by banking institutions, such as the authority to grant
short, medium and long-term loans and advances against security of real estate and/or
other acceptable assets; to guarantee acceptance(s), credits, loans, transactions or
obligations; and to borrow from, or rediscount notes, bills of exchange and other
commercial papers with the Central Bank. In addition to the enumeration of specific
powers granted to LBP, Section 75 of its Charter also authorizes it:
12. To exercise the general powers mentioned in the Corporation Law and the General
Banking Act, as amended, insofar as they are not inconsistent or incompatible with this
Decree.
One of the general powers mentioned in the General Banking Act is that provided for in
Section 84 thereof, reading:
xxxx
Writing-off loans and advances with an outstanding amount of one hundred thousand
pesos or more shall require the prior approval of the Monetary Board (As amended by PD
71).
It will, thus, be seen that LBP is a unique and specialized banking institution, not an
ordinary "government agency" within the scope of Section 36 of Pres. Decree No.
1445. As a bank, it is specifically placed under the supervision and regulation of the
Central Bank of the Philippines pursuant to its Charter (Sec. 97, Rep. Act No. 3844,
105
as amended by Pres. Decree No. 251). In so far as loans and advances are concerned,
therefore, it should be deemed primarily governed by Central Bank Circular No.
958, Series of 1983, which vests the determination of the frequency of writing-off
loans in the Board of Directors of a bank provided that the loans written-off do not
exceed a certain aggregate amount. The pertinent portion of that Circular reads:
b. Frequency/ceiling of write-off. The frequency for writing-off loans and advances
shall be left to the discretion of the Board of Directors of the bank
concerned. Provided, that the aggregate amount of loans and advances which may be
written-off during the year, shall in no case exceed 3% of total loans and investments;
Provided, further, that charge-offs are made against allowance for possible losses,
earnings during the year and/or retained earnings.[50]
While the power to write-off is not expressly granted in the charter of the Land Bank, it
can be logically implied, however, from the Land Bank's authority to exercise the general
powers vested in banking institutions as provided in the General Banking Act (Republic
Act 337). The clear intendment of its charter is for the Land Bank to be clothed not only
with the express powers granted to it, but also with those implied, incidental and
necessary for the exercise of those express powers.[51]
In the case at bar, it is thus clear that the writing-off of the loans involved was a valid act
of the Land Bank. In writing-off the loans, the only requirement for the Land Bank was
that the same be in accordance with the applicable Bangko Sentral circulars, it being
under the supervision and regulation thereof. The Land Bank recommended for write-off
all six loans granted to the cooperatives, and it is worthy to note that the Bangko
Sentral granted the same. The write-offs being clearly in accordance with law, the COA
should, therefore, adhere to the same, unless under its general audit jurisdiction under PD
1445, it finds that under Section 25(1) the fiscal responsibility that rests directly with the
head of the government agency has not been properly and effectively discharged.
On this note, the reliance of respondent on Section 66 of PD 1445 is baseless as a reading
thereof would show that the same does not pertain to the COAs power to compromise
claims. Probably, what respondent wanted to refer to was Section 36 which provides:
Section 36. Power to compromise claims. -
1. When the interest of the government so requires, the Commission may compromise or
release in whole or in part, any claim or settled liability to any government agency not
exceeding ten thousand pesos and with the written approval of the Prime Minister,
it may likewise compromise or release any similar claim or liability not exceeding one
hundred thousand pesos, the application for relief therefrom shall be submitted, through
the Commission and the Prime Minister, with their recommendations, to the National
Assembly.
2. The respective governing bodies of government-owned or controlled corporations,
and self-governing boards, commissions or agencies of the government shall have
the exclusive power to compromise or release any similar claim or liability when
expressly authorized by their charters and if in their judgment, the interest of their
respective corporations or agencies so requires. When the charters do not so provide, the
power to compromise shall be exercised by the Commission in accordance with the
preceding paragraph.

x x x x[52]
Under Section 36, the use of the word may shows that the power of the COA to
compromise claims is only permissive, and not mandatory. Further, the second paragraph
of Section 36 clearly states that respective governing bodies of government-owned or
controlled corporations, and self-governing boards, commissions or agencies of the
government shall have the exclusive power to compromise or release any similar claim or
liability when expressly authorized by their charters. Nowhere in Section 36 does it state
that the COA must approve a compromise made by a government agency; the only
requirement is that it be authorized by its charter. It, therefore, bears to stress that the
COA does not have the exclusive prerogative to settle and compromise liabilities to the
Government.
The foregoing pronouncements notwithstanding, this Court rules that writing-off a loan
does not equate to a condonation or release of a debt by the creditor.
As an accounting strategy, the use of write-off is a task that can help a company maintain
a more accurate inventory of the worth of its current assets. In general banking practice,
the write-off method is used when an account is determined to be uncollectible and an
uncollectible expense is recorded in the books of account. If in the future, the debt
appears to be collectible, as when the debtor becomes solvent, then the books will be
adjusted to reflect the amount to be collected as an asset. In turn, income will be credited
by the same amount of increase in the accounts receivable.
Write-off is not one of the legal grounds for extinguishing an obligation under the Civil
Code.[53] It is not a compromise of liability. Neither is it a condonation, since in
condonation gratuity on the part of the obligee and acceptance by the obligor are
required.[54] In making the write-off, only the creditor takes action by removing the
uncollectible account from its books even without the approval or participation of the
debtor.
Furthermore, write-off cannot be likened to a novation, since the obligations of both
parties have not been modified.[55] When a write-off occurs, the actual worth of the asset
is reflected in the books of accounts of the creditor, but the legal relationship between the
creditor and the debtor still remains the same the debtor continues to be liable to the
creditor for the full extent of the unpaid debt.
Based on the foregoing, as creditor, Land Bank may write-off in its books of account the
advance payment released to REMAD in the interest of accounting accuracy given that
the loans were already uncollectible. Such write-off, however, as previously discussed,
does not equate to a release from liability of petitioners.
Accordingly, the Land Bank Ipil Branch must be required to record in its books of
account the Php3,115,000.00 disallowance, and petitioners, together with their four co-
employees,[56] should be personally liable for the said amount. Such liability, is,
however, without prejudice to petitioners right to run after REMAD, to whom they
illegally disbursed the loan, for the full reimbursement of the advance payment for the
cattle as correctly ruled by the COA in its July 17, 2003 Decision.[57]
106
On a final note, it bears to point out that a cursory reading of the Ombudsman's resolution
will show that the complaint against petitioners was dismissed not because of a finding of
good faith but because of a finding of lack of sufficient evidence. While the evidence
presented before the Ombudsman may not have been sufficient to overcome the burden
in criminal cases of proof beyond reasonable doubt,[58] it does not, however, necessarily
follow, that the administrative proceedings will suffer the same fate as only substantial
evidence is required, or that amount of relevant evidence which a reasonable mind might
accept as adequate to justify a conclusion.[59]
An absolution from a criminal charge is not a bar to an administrative prosecution or vice
versa.[60] The criminal case filed before the Office of the Ombudsman is distinct and
separate from the proceedings on the disallowance before the COA. So also, the dismissal
by Margarito P. Gervacio, Jr., Deputy Ombudsman for Mindanao, of the criminal charges
against petitioners does not necessarily foreclose the matter of their possible liability as
warranted by the findings of the COA.
In addition, this Court notes that the Ombudsman's Resolution relied on an alleged April
6, 1992 Memorandum of the Field Loans Review Department which supposedly
authorized the Field Offices to undertake a prepayment scheme. On the other hand, the
same Ombudsman's Resolution also made reference to a January 19, 1994 Memorandum
of EVP Diaz and a May 31, 1994 Memorandum of VP FSD which tackled the prohibition
on advance payment to suppliers. All these documents, however, were again not attached
to the records of the case at bar. Particularly, the supposed April 6, 1992 Memorandum of
the Field Loans Review Department was not even mentioned nor raised by petitioners as
a defense in herein petition.
The decisions and resolutions emanating from the COA did not tackle the supposed April
6, 1992 Memorandum of the Field Loans Review Department which allegedly authorized
the Field Offices to undertake a pre-payment scheme. While it is possible that such
document would have shown that petitioners were in good faith, the same should have
been presented by them in the proceedings before the Commission proper - an act which
they were not able to do because of their own negligence in allowing the period to file an
appeal to lapse. The April 6, 1992 Memorandum of the Field Loans Review Department
would have been the best evidence to free petitioners from their liability. It appears,
however, that they did not present the same before the COA and it is already too late in
the day for them to present such document before this Court.
Petitioners' allegation of grave abuse of discretion by the COA implies such capricious
and whimsical exercise of judgment as is equivalent to lack of jurisdiction or, in other
words, the exercise of the power in an arbitrary manner by reason of passion, prejudice,
or personal hostility; and it must be so patent or gross as to amount to an evasion of a
positive duty or to a virtual refusal to perform the duty enjoined or to act at all in
contemplation of law.[61] It is imperative for petitioners to show caprice and
arbitrariness on the part of the COA whose exercise of discretion is being assailed. Proof
of such grave abuse of discretion, however, is wanting in this case.
WHEREFORE, premises considered, the petition is DENIED. Decision No. 2003-107
dated July 17, 2003 and Resolution No. 2004-046 dated December 7, 2004, of the
Commission on Audit, are hereby AFFIRMED.
SO ORDERED.

THIRD DIVISION
[G.R. No. 95326. March 11, 1999]
ROMEO P. BUSUEGO, CATALINO F. BANEZ and RENATO F. LIM, petitioners,
vs. THE HONORABLE COURT OF APPEALS and THE MONETARY BOARD
OF THE CENTRAL BANK OF THE PHILIPPINES, respondents.
DECISION
PURISIMA, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court seeking a
reversal of the Decision[1], dated September 14, 1990, of the Court of Appeals in CA-
G.R. CV No. 23656.
As culled from the records, the facts of the case are as follows:
The 16th regular examination of the books and records of the PAL Employees Savings
and Loan Association, Inc. ("PESALA") was conducted from March 14 to April 16, 1988
by a team of CB examiners headed by Belinda Rodriguez. Following the said
examination, several anomalies and irregularities committed by the herein petitioners;
PESALA's directors and officers, were uncovered, among which are:
1. Questionable investment In a multi-million peso real estate project (Pesalaville)
2. Conflict of interest in the conduct of business
3. Unwarranted declaration and payment of dividends
4. Commission of unsound and unsafe business practices.
On July 19, 1988,, Central Bank ("CB") Supervision and Examination Section ("SES")
Department IV Director Ricardo. F. Lirio sent a letter to the Board of Directors of
PESALA inviting them to a conference on July 21, 1988 to discuss subject findings noted
in the said 16th regular examination, but petitioners did not attend such conference.
On July 28, 1988, petitioner Renato Lim wrote the PESALA's Board of Directors
explaining his side on the said examination of PESALA's records and requesting that a
copy of his letter be furnished the CB, which was fortwith made by the Board.[2]
On July 29, 1988, PESALA's Board of Directors sent to Director Lirio a letter concerning
the 16th regular examination of PESALA's records.
On September 9, 1988, the Monetary Board adopted and issued MB Resolution No. 805
the pertinent provisions of which are as follows:
"1. To note the report on the examination of the PAL Employees' Savings and Loan
Association, Inc. (PESALA) as of December 31, 1987, as submitted in a memorandum of
the Director, Supervision and Examination Section (SES) Department IV, dated August
19, 1988;
2. To require the board of directors of PESALA to immediately inform the members of
PESALA of the results of the Central Bank examination and their effects on the financial
condition of the Association;
xxx
5. To include the names of Mr. Catalino Banez, Mr. Romeo Busuego and Mr. Renato
Lim in the Sector's watchlist to prevent them from holding responsible positions in any
institution under Central Bank supervision;
6. To require PESALA to enforce collection of the overpayment to the Vista Grande
Management and Development Corporation and to require the accounting of P12.28
million unaccounted and unremitted bank loan proceeds and P3.9 million other
unsupported cash disbursements from the responsible directors and officers; or to
properly charge these against their respective accounts, if necessary;
107
7. To require the board of directors of PESALA to file civil and criminal cases against
Messrs. Catalino Banez, Romeo Busuego and Renato Lim for all the misfeasance and
malfeasance committed by them, as warranted by the evidence;
8. To require the board of directors of PESALA to improve the operations of the
Association, correct all violations noted, and adopt internal control measures to prevent
the recurrence of similar incidents as shown in Annex E of the subject memorandum of
the Director, SES Department IV;"[3]
xxx xxx xxx
On January 23, 1989, petitioners filed a Petition for Injunction with Prayer for the
Immediate Issuance of a Temporary Restraining Order[4] docketed as Civil Case No. Q-
89-1617 before Branch 104 of the Regional Trial Court of Quezon City.
On January 26 1989, the said court issued a temporary restraining order[5] enjoining the
defendant, the Monetary Board of the Central Bank, (now Banko Sentral ng Pilipinas)
from including the names of petitioners in the watchlist.
On February 10, 1989, the same trial court issued a writ of preliminary injunction[6],
conditioned upon the filing by petitioners of a bond in the amount of Ten Thousand
(P10,000.00) Pesos each. The Monetary Board presented a Motion for
Reconsideration[7] of the said Order, but the same was denied.
On September 11, 1989, the trial court handed down its Decision,[8] disposing thus:
"WHEREFORE, judgment is hereby rendered declaring Monetary Board Resolution No.
805 as void and inexistent. The writ of preliminary prohibitory injunctions issued on
February 10, 1989 is deemed permanent. Costs against respondent."
The Monetary Board appealed the aforesaid Decision to the Court of Appeals which
came out with a Decision[9] of reversal on September 14, 1990, the decretal portion of
which is to the following effect:
"WHEREFORE, the decision appealed from is hereby reversed and another one entered
dismissing the petition for injunction."
Dissatisfied with the said Decision of the Court of Appeals, petitioners have come to this
Court via the present petition for review on certiorari.
On June 5, 1992, petitioners filed an "Urgent Motion for the Immediate Issuance of a
Temporary Restraining Order and/or Writ of Preliminary Injunction against the Secretary
of Justice and the City Prosecutor of Pasay"[10] stating that several complaints were
lodged against the petitioners before the Office of the City Prosecutor of Pasay City
pursuant to Monetary Board Resolution No. 805; that the said complaints were dismissed
by the City Prosecutor and the dismissals were appealed to the Secretary of Justice for
review, some of which have been reversed already. Petitioners prayed that a Temporary
Restraining Order and/or Writ of Preliminary Injunction issue "restraining and enjoining
the Secretary of Justice and the City Prosecutor of Pasay City from proceeding and taking
further actions, and more specially from filing Informations in I.S. Nos.-90-1836; 90-
1831; 90-1835; 90-1832; 90-1248; 90-1249; 90-3031; 90-3032; 90-1837; 90-
1834, pending the final resolution of the case at bar xxx." However, in the
Resolution[11] dated September 9, 1992, the court denied the said motion.
The petition poses as issues for resolution.
I
WHETHER OR NOT THE PETITIONERS WERE DEPRIVED OF THEIR RIGHT TO
A NOTICE AND THE OPPORTUNITY TO BE HEARD BY THE MONETARY
BOARD PRIOR TO ITS ISSUANCE OF MONETARY BOARD RESOLUTION NO.
805.
II
WHETHER OR NOT THE RESPONDENT BOARD IS LEGALLY BOUND TO
OBSERVE THE ESSENTIAL REQUIREMENTS OF DUE PROCESS OF A VALID
CHARGE, NOTICE AND OPPORTUNITY TO BE HEARD INSOFAR AS THE
PETITIONERS' SUBJECT CASE IS CONCERNED.
III
WHETHER OR NOT MONETARY BOARD RESOLUTION NO. 805 IS NULL AND
VOID FOR BEING VIOLATIVE OF PETITIONERS' RIGHTS TO DUE PROCESS.
With respect to the first issue, the trial court said:
"The evidence submitted preponderates in favor of petitioners. The deprivation of
petitioners' rights in the Resolution undermines the constitutional guarantee of due
process. Petitioners were never notified that they were being investigated, much so, they
were not informed of any charges against them and were not afforded the opportunity to
adduce countervailing evidence so as to deserve the punitive measures promulgated in
Resolution No. 805 of the Monetary Board. xxx[12]
The foregoing disquisition by the trial court is untenable under the facts and
circumstances of the case. Petitioners were duly afforded their right to due process by the
Monetary Board, it appearing that:
1. Petitioners were invited by Director Lirio to a conference scheduled for July 21, 1988
to discuss the findings made in the 16th regular examination of PESALA's
records. Petitioners did not attend, said conference;
2. Petitioner Renato Lim's letter of July 28, 1988 to PESALA's Board of Directors,
explaining his side of the controversy, was forwarded to the Monetary Board which the
latter considered in adopting Monetary Board Resolution No. 805; and
3. PESALA's Board of Director's letter, dated July 29, 1988, to the Monetary Board,
explaining the Board's side of the controversy, was properly considered in the adoption of
Monetary Board Resolution No. 805.
Petitioners therefore cannot complain of deprivation of their right to due process, as they
were given ample opportunity by the Monetary Board to air their Submission and
defenses as to the findings of irregularity during the said 16th regular examination. The
essence of due process is to be afforded a reasonable opportunity to be heard and to
submit any evidence one may have in support of his defense.[13]What is offensive to due
process is the denial of the opportunity to be heard.[14] Petitioners having availed of their
opportunity to present their position to the Monetary Board by their letters-explanation,
they were not denied due process[15].
Petitioners cite Ang Tibay v. CIR[16] and assert that the following requisites of
procedural due process were not observed by the Monetary Board:
1. The right to a hearing, which includes the right to present one's case and submit
evidence in support thereof;
2. The tribunal must consider the evidence presented;
3. The decision must have something to support itself;
4. The evidence must be substantial;
5. The decision must be rendered on the evidence presented at the hearing, or at least
contained in the record and disclosed to the parties affected;
6. The tribunal or body or any of its judges must act or its or his own independent
consideration of the law and facts of the controversy and not simply accept the view of a
subordinate in arriving at a decision;
7. The board or body should, in all controversial questions, render its decision in such a
manner that the parties to the proceedings can know the various issues involved, and the
reason for the decision rendered.
108
Contrary to petitioners' allegation, it appears that the requisites of procedural due process
were complied with by the Monetary Board before it issued the questioned Monetary
Board Resolution No. 805.Firstly, the petitioners were invited to a conference to discuss
the findings gathered during the 16th regular examination of PESALA's records. (The
requirement of a hearing is complied with as long as there was an opportunity to be
heard, and not necessarily that an actual hearing was conducted.[17]) Secondly, the
Monetary Board considered the evidence presented. Thirdly, fourthly and fifthly,
Monetary Board Resolution No. 805 was adopted on the basis of said findings unearthed
during the 16th regular examination of PESALA's records and derived from the letter-
comments submitted by the parties. Sixthly, the members of the Monetary Board acted
independently on their own in issuing subject Resolution, placing reliance on the said
findings made during the 16th regular examination. Lastly, the reason for the issuance of
Monetary Board Resolution No. 805 is readily apparent, which is to prevent further
irregularities from being committed and to prosecute the officials responsible therefor.
With respect to the second issue, there is tenability in petitioners' contention that the
Monetary Board, as an administrative agency, is legally bound to observe due process,
although they are free from the rigidity of certain procedural requirements. As held
in Adamson and Adamson, Inc. v. Amores[18]:
"While administrative tribunals exercising quasi-judicial functions are free from the
rigidity of certain procedural requirements they are bound by law and practice to observe
the fundamental and essential requirements of due process in justiciable cases presented
before them. However, the standard of due process that must be met in administrative
tribunals allows a certain latitude as long as the element of fairness is not ignored. Hence,
there is no denial of due process where records show that hearings were held with prior
notice to adverse parties. But even in the absence of previous notice, there is no denial of
procedural due, process as long as the parties are given the opportunity to be heard."
Even Section 28, (c) and (d), of Republic Act No. 3779 ("RA 3779") delineating the
powers of the Monetary Board over savings and loan associations, require observance of
due process in the exercise of its powers:
xxx
(c) To conduct at least once every year, and whenever necessary, any inspection,
examination or investigation of the books, and records, business affairs, administration,
and financial condition of any savings and loan association with or without prior
notice but always with fairness and reasonable opportunity for the association or any of
its officials to give their side of the case. x x x
(d) After proper notice and hearing, to suspend a savings and loan association for
violation of law, for unsafe and unsound practices or for reason of insolvency. x x x
x x x.
(f) To decide, after appropriate notice and hearings any controversy as to the rights or
obligations of the savings and loan association, its directors, officers, stockholders and
members under its charter, and, by order, to enforce the same;
x x x" (italics supplied)
Anent the third issue, petitioners theorize that Monetary Board Resolution No. 805 is null
and void for being violative of petitioners' right to due process. To support their stance,
they cite the trial court's ruling, to wit:
"A reading of Monetary Board Resolution No. 805 discloses that it imposes
administrative sanctions against petitioners. In fact, it does not only penalize petitioners
by including them in the watchlist to prevent them from holding responsible positions in
any institution under Central Bank supervision,' it mandates the PESALA Board of
Directors as well to file Civil and Criminal charges against them 'for all the misfeasance
and malfeasance committed by them, as warranted by the evidence.' Monetary Board
Resolution No. 805 virtually deprives petitioners their respective gainful employment,
and at the same time marks them for judicial prosecution. The crucial question here is
that were petitioners afforded due process in the investigations conducted which
prompted the issuance of Monetary Board Resolution No. 805?
x x x Although the Monetary Board is free from the rigidity of certain procedural
requirements, it failed 'to observe the essential requirement of due process' (Adamson and
Adamson, Inc. v. Amores, 152 SCRA 237) specifically its failure to afford petitioners the
opportunity to be heard. In short, there is a clear showing of arbitrariness resulting in an
irreparable injury against petitioners as the Resolution certainly affects their 'life, liberty
and property.'
Monetary Board Resolution No. 805 Violates basic and essential requirements. It must
therefore be, as it is hereby, declared, as void and inexistent because among other things,
it openly derogates the fundamental rights of petitioners."
Petitioners opine that with the issuance of Monetary Board Resolution No. 805, "they are
now barred from being elected or designated as officers again of PESALA, and are
likewise prevented from future engagements or employments in all institutions under the
supervision of the Central Bank thereby virtually depriving them of the opportunity to
seek employments in the field which they can excel and are best fitted." According to
them, the Monetary Board is not vested with "the authority to disqualify persons from
occupying positions in institutions under the supervision of the Central Bank without
proper notice and hearing" nor is it vested with authority "to file civil and criminal cases
against its officers/directors for suspected fraudulent acts."
Petitioners' contentions are untenable. It must be remembered that the Central Bank of
the. Philippines (now Bangko Sentral ng Pilipinas), through the Monetary Board, is the
government agency charged with the responsibility of administering the monetary,
banking and credit system of the country[19] and is granted the power of supervision and
examination over banks and non-bank financial institutions performing quasi-banking
functions, of which savings and loan associations, such as PESALA, form part of[20].
The special law governing savings and loan association is Republic Act No. 3779, as
amended, otherwise known as the "Savings and Loan Association Act." Said law
authorizes the Monetary Board to conduct regular yearly examinations of the books and
records of savings and loan associations, to suspend, a savings and loan association for
violation of law, to decide any controversy over the obligations and duties of directors
and officers, and to take remedial measures, among others. Section 28 of Rep. Act No.
3779, reads:
"SEC. 28. Supervisory powers over savings and loan associations. - In addition to
whatever powers have been conferred by the foregoing provisions, the Monetary Board
shall have the power to exercise the following:
xxx
(c) To conduct at least once every year, and whenever- necessary, any inspection,
examination or investigation of the books and records, business affairs, administration,
and financial condition of any savings and loan association with or without prior notice
but always with fairness and reasonable opportunity for the association or any of its
officials to give their side of the case. Whenever an inspection, examination or
investigation is conducted under this grant of power, the person authorized to do so may
seize books and records and keep them under his custody after giving proper receipts
therefor; may make any marking or notation on any paper, record, document or book to
109
show that it has been examined and verified and may padlock or seal shelves, vaults,
safes, receptacles or similar containers and prohibit the opening thereof without first
securing authority therefor, for as long as may be necessary in connection with the
investigation or examination being conducted. The official of the Central Bank in charge
of savings and loan associations and his deputies are hereby authorized to administer
oaths to any director, officer or employee of any association under the supervision of the
Monetary Board;
xxx
(d) After proper notice and hearing, to suspend a savings and loan association for
violation of law, for unsafe and unsound practices or for reason of insolvency. The
Monetary Board may likewise, upon the proof that a savings and loan association or its
board or directors or officers are conducting and managing its affairs in a manner
contrary to laws, orders, instructions, rules and regulations promulgated by the Monetary
Board or in a manner substantially prejudicial to the interest of the government,
depositors or creditor, take over the management of the savings and loan association after
due hearing, until a new board of directors and officers are elected and qualified without
prejudice to the prosecution of the persons responsible for such violations. The
management by the Monetary Board shall be without expense to the savings and loan
association, except such as is actually necessary for its operation, pending the election
and qualification of a new board of directors and officers to take the place of those
responsible for the violation or acts contrary to the interest of the government, depositors
or creditors;
xxx
(f) To decide, after appropriate notice and hearings any controversy as to the rights or
obligations of the savings and loan association, its directors, officers, stockholders and
members under its charter, and, by order, to enforce the same;
xxx
(l) To conduct such investigations, take such remedial measures, exercise all powers
which are now or may hereafter be conferred upon it by Republic Act Numbered Two
Hundred sixty-five in the enforcement of this legislation, and impose upon associations,
whether stock or noti-stock their directors and/or officers administrative sanctions under
Sections 34-A or 34-B of Republic Act Two Hundred sixty-five, as amended."
From the foregoing, it is gleanable that the Central Bank, through the Monetary
Board, is empowered to conduct investigations and examine the records of savings and
loan associations. If any irregularity is discovered in the process, the Monetary Board
may impose appropriate sanctions, such as suspending the offender from holding office
or from being employed with the Central Bank, or placing the names of the offenders in a
watchlist.
The requirement of prior notice is also relaxed under Section 28 (c) of RA 3779 as
investigations or examinations may be conducted with or without prior notice "but
always with fairness and reasonable opportunity for the association or any of its officials
to give their side." As may be gathered from the records, the said requirement was
properly complied with by the respondent Monetary Board.
We sustain the ruling of the Court of Appeals that petitioners' suspension was only
preventive in nature and therefore, no notice or, hearing was necessary. Until such time
that the petitioners have proved their innocence, they may be preventively suspended
from holding office so as not to influence the conduct of investigation, and to prevent the
commission of further irregularities.
Neither were petitioners deprived of their lawful calling as they are free to look for
another employment so long as the agency or company involved is not subject to Central
Bank control and supervision.Petitioners can still practise their profession or engage in
business as long as these are not within the ambit of Monetary Board Resolution No. 805.
All things studiedly considered, the court upholds the validity of Monetary Board
Resolution No. 805 and affirms the decision of the respondent court.
WHEREFORE, the petition is DENIED, and the assailed Decision dated September 14,
1990 of the Court of Appeals AFFIRMED. No pronouncement as to costs.
SO ORDERED.

110
SECOND DIVISION
THE FACTS

On March 9, 2005, the Board of Directors of the PDIC (PDIC Board) adopted Resolution
PHILIPPINE DEPOSIT G.R. No. 176438 No. 2005-03-032[3] approving the conduct of an investigation, in accordance with
INSURANCE CORPORATION Section 9(b-1) of Republic Act (R.A.) No. 3591, as amended, on the basis of the Reports
(PDIC), Present: of Examination of the Bangko Sentral ng Pilipinas (BSP) on ten (10) banks, four (4) of
Petitioner, which are respondents in this petition for review. The said resolution also created a
CARPIO, J., Chairperson, Special Investigation Team to conduct the said investigation, with the authority to
NACHURA, administer oaths, to examine, take and preserve testimony of any person relating to the
PERALTA, subject of the investigation, and to examine pertinent bank records.
- versus - ABAD, and
MENDOZA, JJ.

PHILIPPINE COUNTRYSIDE On May 25, 2005, the PDIC Board adopted another resolution, Resolution No. 2005-05-
RURAL BANK, INC., RURAL 056,[4] approving the conduct of an investigation on PCRBI based on a Complaint-
BANK OF CARMEN (CEBU), Affidavit filed by a corporate depositor, the Philippine School of Entrepreneurship and
INC., BANK OF EAST Management (PSEMI) through its president, Jacinto L. Jamero.
ASIA(MINGLANILLA, CEBU), INC.,
and PILIPINO RURAL BANK (CEBU), INC., Promulgated: On June 3, 2005, in accordance with the two PDIC Board resolutions, then PDIC
Respondents. President and Chief Executive Officer Ricardo M. Tan issued the Notice of
January 24, 2011 Investigation[5] to the President or The Highest Ranking Officer of PCRBI.

x ----------------------------------------------------------------------------------------x
DECISION
MENDOZA, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court filed by the
Philippine Deposit Insurance Corporation (PDIC) assailing the September 18, 2006
Decision of the Court of Appeals-Cebu (CA-Cebu), which granted the petition for
injunction filed by respondents Philippine Countryside Rural Bank, Inc. (PCRBI), Rural
Bank of Carmen (Cebu), Inc. (RBCI), Bank of East Asia (Minglanilla, Cebu),
Inc. (BEAI), and Pilipino Rural Bank (Cebu), Inc. (PRBI), all collectively referred to as
Banks. The dispositive portion of the CA-Cebu decision reads:
WHEREFORE, in view of all the foregoing premises, the petition for injunction is
hereby GRANTED. The respondent PDIC is restrained from further conducting
investigations or examination on petitioners-banks without the requisite approval from
the Monetary Board.
SO ORDERED.[1]
In a resolution dated January 25, 2007, the CA-Cebu denied petitioners motion for
reconsideration for lack of merit.[2]
On June 7, 2005, the PDIC Investigation Team personally served the Notice of
Investigation on PCRBI at its Head Office in Pajo, Lapu-Lapu City.[6]
According to PDIC, in the course of its investigation, PCRBI was found to have granted
loans to certain individuals, which were settled by way of dacion of properties. These
properties, however, had already been previously foreclosed and consolidated under the
names of PRBI, BEAI and RBCI.[7]
On June 15, 2005, PDIC issued similar notices of investigation to PRBI[8] and BEAI.[9]
The notices stated that the investigation was to be conducted pursuant to Section 9 (b-1)
of the PDIC Charter and upon authority of PDIC Board Resolution No. 2005-03-032
authorizing the twelve (12) named representatives of PDIC to conduct the
investigation.[10]
The investigation was sought because the Banks were found to be among the ten (10)
banks collectively known as Legacy Banks. The Reports of General and Special
Examinations of the BSP as of June 30, 2004, disclosed, among others, that the Legacy
Banks were commonly owned and/or controlled by Legacy Plans Inc. (now Legacy
Consolidated Plans, Inc.), and Celso Gancayco delos Angles, Jr. and his family.[11]
The notice of investigation was served on PRBI the next day, June 16, 2005.[12]

111

On June 25, 2005, a separate notice of investigation[13] was served on RBCI. The latter
provided the PDIC Investigation Team with certified copies of the loan documents they
had requested, until its president received an order directing him not to allow the
investigation.[14]
Subsequently, PRBI and BEAI refused entry to their bank premises and access to their
records and documents by the PDIC Investigation Team, upon advice of their respective
counsels.[15]
On June 16 and 17, 2005, Atty. Victoria G. Noel (Atty. Noel) of the Tiongson & Antenor
Cruz Law Office sent letters to the PDIC[16] informing it of her legal advice to PCRBI
and BEAI not to submit to PDIC investigation on the ground that its investigatory power
pursuant to Section 9(b-1) of R.A. No. 3591, as amended (An Act Establishing The
Philippine Deposit Insurance Corporation, Defining Its Powers And Duties And For
Other Purposes), cannot be differentiated from the examination powers accorded to
PDIC under Section 8, paragraph 8 of the same law, under which, prior approval from the
Monetary Board is required.
On June 17, 2005, PDIC General Counsel Romeo M. Mendoza sent a reply to Atty. Noel
stating that PDICs investigation power, as distinguished from the examination power of
the PDIC under Section 8 of the same law, does not need prior approval of the Monetary
Board.[17] PDIC then urged PRBI and BEAI not to impede the conduct of PDICs
investigation as the same constitutes a violation of the PDIC Charter for which PRBI and
BEAI may be held criminally and/or administratively liable.[18]
On June 27 and 28, 2005, the Banks, through counsel, sought further clarification from
PDIC on its source of authority to conduct the impending investigations and requested
that PDIC refrain from proceeding with the investigations.[19]
Simultaneously, the Banks wrote to the Monetary Board requesting a clarification on the
parameters of PDICs power of investigation/examination over the Banks and for an
issuance of a directive to PDIC not to pursue the investigations pending the requested
clarification.[20]
On June 28, 2005, PRBI and BEAI again received letters from PDIC, dated June 24,
2005, which appeared to be final demands on them to allow its investigation.[21] PRBI
and BEAI replied that letters of clarification had been sent to PDIC and the Monetary
Board.[22] Pending action on such requests, PDIC was requested to refrain from
proceeding with the investigation.[23]
112
Notwithstanding, on July 11, 2005, the Banks received a letter, dated July 8, 2005, from
the PDIC General Counsel reiterating its position that prior Monetary Board approval
was not a pre-requisite to PDICs exercise of its investigative power.[24]
Not in conformity, on July 28, 2005, the Banks filed a Petition for Declaratory Relief
with a Prayer for the Issuance of a TRO and/or Writ of Preliminary Injunction (RTC
Petition) before the Regional Trial Court of Makati (RTC-Makati) which was docketed as
Civil Case No. 05-697.[25]
In the RTC Petition, the Banks prayed for a judgment interpreting Section 9(b-1) of the
PDIC Charter, as amended, to require prior Monetary Board approval before PDIC could
exercise its investigation/examination power over the Banks.[26]
PDIC filed a motion to dismiss alleging that the RTC had no jurisdiction over the said
petition since a breach had already been committed by the Banks when they received the
notices of investigation, and because PDIC need not secure prior Monetary Board
approval since examination and investigation are two different terms.[27]
Later, the Banks withdrew their application for a temporary restraining
order (TRO) reasoning that lower courts cannot issue injunctions against PDIC. Thus, the
Banks instituted a petition for injunction with application for TRO and/or Preliminary
Injunction (CA-Manila petition) before the Court of Appeals-Manila (CA-Manila). The
case was docketed as CA-G.R. SP No. 91038.[28]
Even before the CA-Manila could rule on the application for a TRO and/or writ of
preliminary injunction, the RTC-Makati dismissed the petition on the ground that there
already existed a breach of law that isolated the case from the jurisdiction of the trial
court.[29]
The Banks filed a motion for reconsideration but it was denied by the RTC for lack of
merit.[30] On February 10, 2006, the Banks filed a notice of appeal[31] which they later
withdrew on February 28, 2006.[32]
In view of the dismissal of the RTC-Makati petition, the CA-Manila dismissed the
petition for injunction for being moot and academic. In its Decision, dated February 1,
2006,[33] the CA-Manila wrote:
What remained for the petitioners to do was to litigate over the breach or violation by
ordinary action, as the circumstances ensuing from the breach or violation warrant. The
ordinary action may either be in the same case, if the RTC permitted the conversion, in
which event the RTC may allow the parties to file such pleadings as may be necessary or
proper, pursuant to Sec. 5, Rule 63; or the petitioners may file another action in the
proper court (e.g. including the Court of Appeals, should injunction be among the reliefs
to be sought) upon some cause of action that has arisen from the breach or violation.[34]
Thereafter, on March 14, 2006, the Banks filed their Petition for Injunction with Prayer
for Preliminary Injunction[35] (CA-Cebu Petition) with the CA-Cebu (CA-Cebu).
On March 15, 2006, the CA-Cebu issued a resolution granting the Banks application for a
TRO. This enjoined the PDIC, its representatives or agents or any other persons or
agency assisting them or acting for and in their behalf from conducting
examinations/investigations on the Banks head and branch offices without securing the
requisite approval from the Monetary Board of BSP.[36]
During the pendency of the CA-Cebu petition, PDIC filed with this Court a Petition for
Certiorari, Prohibition and Mandamus with Prayer for Issuance of Temporary
Restraining Order and/or Writ of Preliminary Injunction under Rule 65 docketed as G.R.
No. 173370.[37] It alleged that the CA-Cebu committed grave abuse of discretion
amounting to lack or excess of jurisdiction in taking cognizance of the Banks petition,
and in issuing a TRO and a writ of preliminary injunction.[38]
On July 31, 2006, this Court issued a resolution dismissing the petition for certiorari in
G.R. No. 173370. The Resolution reads:
Considering the allegations, issues and arguments adduced in the petition for certiorari,
prohibition and mandamus with prayer for preliminary injunction and/or restraining order
dated 19 July 2006, the Court resolves to DISMISS the petition for failure to sufficiently
show that the questioned resolution of the Court of Appeals is tainted with grave abuse of
discretion. Moreover, the petition failed to conform with Rule 65 and other related
provisions of the 1997 Rules of Civil Procedure, as amended, governing petitions for
certiorari, prohibition and mandamus filed with the Supreme Court, since petitioner failed
to submit a verified statement of material date of receipt of the assailed resolution dated
16 May 2006 in accordance with Section 4, Rule 65 in relation to the second paragraph of
Section 3, Rule 46. In any event, the petition is premature since no motion
for reconsideration of the questioned resolution of the Court of Appeals was filed prior to
the availment of this special civil action and there are no sufficient allegations to bring
the case within the recognized exceptions to this rule.[39]
On September 18, 2006, after both parties had submitted their respective memoranda, the
CA-Cebu rendered a decision granting the writ of preliminary injuction,[40]pertinent
portions of which read:
[A]fter undergoing a series of amendments, the controlling law with respect to PDICs
power to conduct examination of banks is-prior approval of the Monetary Board is a
condition sine qua non for PDIC to exercise its power of examination. To rule otherwise
would disregard the amendatory law of the PDICs charter.
The Court is not also swayed by the contention of respondent that what it seeks to
conduct is an investigation and not an examination of petitioners transactions, hence prior
approval of the Monetary Board is a mere surplusage.
The ordinary definition of the words examination and investigation would lead one to
conclude that both pertain to the same thing and there seems to be no fine line
113
differentiating one from the other. Blacks Law Dictionary defines the word investigate as
to examine and inquire into with care and accuracy; to find out by careful inquisition;
examination and the word examination as an investigation. In Collins Dictionary of
Banking and Finance, the word investigation is defined as an examination to find out
what is wrong.
In the case of Anti-Graft League of the Philippines, Inc. vs. Hon. Ortega, et al.,[41] the
Supreme Court using Ballentines Law Dictionary defines an investigation as an inquiry,
judicial or otherwise, for the discovery or collection of facts concerning the matter or
matters involved. Such common definitions would show that there is really nothing to
distinguish between these two (2) terms as to support the PDIC view differentiating
Section 9 (b-1) from paragraph 8, Section 8 of the PDIC Charter.
In the realm of the PDIC rules, specifically under Section 3 of PDIC Regulatory Issuance
No. 2205-02[42] investigation is defined as: Investigation shall refer to fact-
finding examination, study, inquiry, for determining whether the allegations in a
complaint or findings in a final report of examination may properly be the subject of an
administrative, criminal or civil action.
From the foregoing definition alone, it can be easily deduced that investigation and
examination are synonymous terms. Simply stated, investigation encompasses a fact-
finding examination. Thus, it is inconsistent with the rules if respondent PDIC be (sic)
allowed to conduct an investigation without the approval of the Monetary Board.
Moreover, the Court sees that the rationale of the law in requiring a (sic) prior approval
from the Monetary Board whenever an examination or in this case an investigation needs
to be conducted by the PDIC is obviously to ensure that there is no overlapping of efforts,
duplication of functions and more importantly to provide a check and balance to the
otherwise unrestricted power of respondent PDIC to conduct investigations on banks
insured by it.
With the foregoing premises, this Court rules that a prior approval from the Monetary
Board is necessary before respondent PDIC can proceed with its investigations on
petitioners-banks.[43]
PDIC moved for reconsideration but it was denied in a resolution dated January 25,
2007.[44]
Hence, this petition.
THE ISSUES
I.
WHETHER RESPONDENT BANKS VIOLATED THE RULE AGAINST FORUM
SHOPPING WHEN THEY FILED THE PETITION FOR INJUNCTION BEFORE
THE COURT OF APPEALS-CEBU.
II.
WHETHER THE PRONOUNCEMENT OF THE REGIONAL TRIAL COURT OF
MAKATI IN THE PETITION FOR DECLARATORY RELIEF
CONSTITUTES RES JUDICATA TO THE PETITION FOR INJUNCTION IN
THE COURT OF APPEALS-CEBU.
III.
WHETHER PETITIONER WAS DEPRIVED OF ITS OPPORTUNITY TO BE
HEARD WHEN THE COURT OF APPEALS-CEBU ISSUED THE WRIT OF
INJUNCTION.
IV.
WHETHER THE ISSUES RAISED BY PETITIONERS ARE THE SAME ISSUES
RAISED IN G.R. NO. 173370 WHICH WAS EARLIER DISMISSED BY THIS
COURT.
V.
WHETHER THE COURT OF APPEALS ERRED IN FINDING THAT PRIOR
APPROVAL OF THE MONETARY BOARD OF THE BANGKO SENTRAL NG
PILIPINAS IS NECESSARY BEFORE THE PDIC MAY CONDUCT AN
INVESTIGATION OF RESPONDENT BANKS.
THE COURTS RULING
I - Whether respondent banks violated the rule against forum shopping when they filed
the petition for injunction before the Court of Appeals-Cebu.
II - Whether the pronouncement of the Regional Trial Court of Makati in the petition
for declaratory relief constitutes res judicata to thepetition for injunction in the
Court of Appeals-Cebu.
In the recent case of Sameer Oversees Placement Agency, Inc. v. Mildred
R. Santos,[45] the Court discussed the matter of forum shopping:
114
Forum shopping is defined as an act of a party, against whom an adverse judgment or
order has been rendered in one forum, of seeking and possibly getting a favorable opinion
in another forum, other than by appeal or special civil action for certiorari. It may also be
the institution of two or more actions or proceedings grounded on the same cause on the
supposition that one or the other court would make a favorable disposition. There is
forum shopping where the elements of litis pendentia are present, namely: (a) there is
identity of parties, or at least such parties as represent the same interest in both actions;
(b) there is identity of rights asserted and relief prayed for, the relief being founded on the
same set of facts; and (c) the identity of the two preceding particulars is such that any
judgment rendered in the pending case, regardless of which party is successful, would
amount to res judicata in the other. It is expressly prohibited by this Court because it
trifles with and abuses court processes, degrades the
administration of justice, and congests court dockets. A willful and deliberate violation of
the rule against forum shopping is a ground for summary dismissal of the case, and may
also constitute direct contempt.[46]
Juxtaposing the RTC-Makati, CA-Manila and CA-Cebu petitions, what must be
determined here, is whether the elements of litis pendentia are present between and
among these petitions, i.e. whether (a) there is identity of parties, or at least such parties
as represent the same interest in both actions; (b) there is identity of rights asserted and
relief prayed for, the relief being founded on the same set of facts; and (c) the identity of
the two preceding particulars is such that any judgment rendered in the pending case,
regardless of which party is successful, would amount to res judicata in the other.
The first element is clearly present as between the RTC-Makati petition and the CA-Cebu
petition. Both involved the Banks on one hand, and the PDIC on the other.
The second and third elements of litis pendentia, however, are patently wanting. The
rights asserted and reliefs prayed for were different, though founded on the same set of
facts. The RTC-Makati Petition was one for declaratory relief while the CA-Manila
Petition was one for injunction with a prayer for preliminary injunction.
A petition for declaratory relief is filed by any person interested under a deed, will,
contract or other written instrument, or whose rights are affected by a statute, executive
order or regulation, ordinance, or any other governmental regulation, before breach or
violation, thereof, to determine any question of construction or validity arising, and for a
declaration of his rights or duties thereunder.[47]
Injunction, on the other hand, is a judicial writ, process or proceeding whereby a party is
directed either to do a particular act, in which case it is called a mandatory injunction, or
to refrain from doing a particular act, in which case it is called a prohibitory
injunction. As a main action, injunction seeks to permanently enjoin the defendant
through a final injunction issued by the court and contained in the judgment.[48]
Clearly, there is a marked difference between the reliefs sought under an action for
declaratory relief and an action for injunction. While an action for declaratory relief seeks
a declaration of rights or duties, or the determination of any question or validity arising
under a statute, executive order or regulation, ordinance, or any other governmental
regulation, or under a deed, will, contract or other written instrument, under which his
rights are affected, and before breach or violation, an action for injunction ultimately
seeks to enjoin or to compel a party to perform certain acts.
Moreover, as stated in the RTC-Makati Decision, because the Banks had already
breached the provisions of law on which declaratory judgment was being sought, it was
without jurisdiction to take cognizance of the same. Any judgment rendered in the RTC-
Makati petition would not amount to res judicata in the CA-Manila Petition. Thus, the
RTC was correct in dismissing the case, having been bereft of jurisdiction to take
cognizance of the action for declaratory judgment.
As between the CA-Manila and the CA-Cebu petitions, the second and third elements
of litis pendentia are absent. The rights asserted and reliefs prayed for were different,
although founded on the same set of facts.
The CA-Manila Petition is a petition for injunction wherein the Banks prayed that:
1) Immediately upon filing of this Petition, a Writ of Preliminary Injunction and/or
Temporary Restraining Order be issued commanding the respondent and all its officers,
employees and agents to cease and desist from proceeding with the investigations sought
to be conducted on the petitioners head and branch offices while the Petition for
Declaratory Relief before Branch 58 of the Makati Regional Trial Court is pending.
2) After due proceedings, judgment be rendered declaring as permanent the Writ of
Preliminary Injunction and/or Temporary Restraining Order prayed for above.
Other equitable reliefs are likewise prayed for.[49]
[Underscoring supplied]
The CA-Cebu Petition, on the other hand, is denominated as a Petition for Injunction
With Prayer for Writ of Preliminary Injunction and/or Restraining Order. The Banks
prayed therein that:
1) Upon filing of this Petition, a Writ of Preliminary Injunction and/or Temporary
Restraining Order be issued forthwith, enjoining Respondent PDIC and all its officers,
employees and agents to cease and desist from conducting examinations/investigations on
Petitioner Banks head and branch offices without securing the requisite approval from the
Monetary Board of the Bangko Sentral ng Pilipinas, as required by Sec. 8, Paragraph 8 of
the PDIC Charter, as amended;
2) After due proceedings, judgment be rendered declaring as permanent the Writ of
Preliminary Injunction and/or Temporary Restraining Order prayed for above.
Other equitable reliefs are likewise prayed for.[50]
115
As can be gleaned from the above-cited portions of the CA-Manila and CA-Cebu
petitions, the petitions seek different reliefs.
Therefore, as between and among the RTC Makati, and the CA-Manila and CA-Cebu
petitions, there is no forum shopping.
III - Whether petitioner was deprived of its opportunity to be heard when the Court of
Appeals-Cebu issued the writ of injunction.
PDIC alleges that the CA-Cebu, in issuing the TRO in its March 15, 2006 Resolution,
and subsequently, the preliminary injunction in its May 16, 2006 Resolution, violated the
fundamental rule that courts should avoid issuing injunctive relief which would in effect
dispose of the main case without trial.[51] PDIC argues that a TRO is intended only as a
restraint until the propriety of granting a temporary injunction can be determined, and it
goes no further than to preserve the status until that determination.[52] Moreover, its
purpose is merely to suspend proceedings until such time when there may be an
opportunity to inquire whether any injunction should be granted, and it is not intended to
operate as an injunction pendente lite, and should not, in effect, determine the issues
involved before the parties can have their day in court, or give an advantage to either
party by proceeding in the acquisition or alteration of the property the right to which is
disputed while the hands of the other party are tied.[53]
On the other hand, the Banks claim that PDIC was given every opportunity to present its
arguments against the issuance of the injunction.[54] Its active participation in the
proceedings negates its assertion that it was denied procedural due process in the issuance
of the writ of injunction.[55] Citing Salonga v. Court of Appeals,[56] the Banks state that
the essence of due process is the reasonable opportunity to be heard and to submit
evidence one may have in support of ones defense,[57] and PDIC was able to do so.
On March 15, 2006, the CA-Cebu issued a resolution granting their prayer for a 60-day
TRO, and requiring PDIC to file its comment.[58] The
latter thereafter filed itsComment ad Cautelam dated March 30, 2006.[59] [Underscoring
ours]
On May 16, 2006, the CA-Cebu issued another resolution, this time granting the prayer
for a preliminary injunction and requiring the parties to file their respective
memoranda. PDIC thereafter filed its memorandum dated July 31, 2006.[60]
On September 18, 2006, the CA-Cebu promulgated its Decision granting the Petition for
Injunction.[61] PDIC filed a motion for reconsideration dated October 10,
2006,[62] which was subsequently denied.
The essence of procedural due process is found in the reasonable opportunity to be heard
and submit ones evidence in support of his defense.[63] The Court finds that procedural
due process was observed by the CA-Cebu. The parties were afforded equal opportunity
to present their arguments. In the absence of any indication to the contrary, the CA-Cebu
must be accorded the presumption of regularity in the performance of their
functions. However, as discussed herein, the matter of whether it erred in its conclusion
and issuance of the TRO, preliminary injunction and final injunction is another matter
altogether.
IV Whether the issues raised by petitioner are the same issues raised in G.R. No.
173370 which was earlier dismissed by this Court.
In G.R. 173370, a petition for certiorari under Rule 65 of the Rules of Court, PDIC
alleged that the CA-Cebu committed grave abuse of discretion amounting to lack or
excess of jurisdiction in taking cognizance of the Banks petition, and in issuing a TRO
and a writ of preliminary injunction.[64]
In the case at bench, a petition for review under Rule 45, PDICs core contention is that
the CA-Cebu erred in finding that prior approval of the
Monetary Board of the BSP is necessary before it may conduct an investigation of the
Banks.
Clearly then, the two petitions were of different nature raising different issues.
G.R. 173370 challenged the CA-Cebus having taken cognizance of the Banks petition
and interlocutory orders on the issuance of a TRO and a writ of preliminary
injunction. This case, however, strikes at the core of the final decision on the merits of
the CA-Cebu, and not merely the interlocutory orders. While both G.R. 173370 and the
present case may have been anchored on the same set of facts, that is, the refusal of the
Banks to allow PDIC to conduct an investigation without the prior consent of the
Monetary Board, the issues raised in the two petitions are not identical. Moreover, the
disposal of the first case does not amount to res judicata in this case.
V Whether the Court of Appeals-Cebu erred in finding that prior approval of the
Monetary Board of the Bangko Sentral ng Pilipinas is necessary before the PDIC may
conduct an investigation of respondent banks.
PDIC is of the position that in order for it to exercise its power of investigation, the law
requires that:
(a) The investigation is based on a complaint of a depositor or any other government
agency, or on the report of examination of [the] Bangko Sentral ng Pilipinas (BSP) and/or
PDIC; and,
116
(b) The complaint alleges, or the BSP and/or PDIC Report of Examination contains
adverse findings of, fraud, irregularities or anomalies committed by the Bank and/or its
directors, officers, employees or agents; and,
(c) The investigation is upon the authority of the PDIC Board of Directors.[65]
It argues that when it commenced its investigation on the Banks, all of the
aforementioned requirements were met. PDIC stresses that its power of examination is
different from its power of investigation, in such that the former requires prior approval
of the Monetary Board while the latter requires merely the approval of the PDIC
Board.[66] It further claims that the power of examination cannot be exercised within
twelve (12) months from the last examination conducted, whereas the power of
investigation is without limitation as to the frequency of its conduct. It states that the
purpose of the PDICs power of examination is merely to look into the condition of the
bank, whereas the power of investigation aims to address fraud, irregularities and
anomalies based on complaints from depositors and other government agencies or upon
reports of examinations conducted by the PDIC itself or by the BSP.[67]
The Banks, on the other hand, are of the opinion that a holistic reading of the PDIC
charter shows that petitioners power of examination is synonymous with its power of
investigation.[68] They cite, as bases, the law
dictionary definitions, Section 8, Eighth paragraph[69] and Section 9(b-1)[70] of the
PDIC Charter, and Rule 1, Section 3(1) of PDIC Regulatory Issuance No. 2005-02,
which defines investigation as follows:
(l) Investigation shall refer to fact-finding examination, study or inquiry for determining
whether the allegations in a complaint or findings in a final report of examination may
properly be the subject of an administrative, criminal or civil action.
The Banks further cite Section X658 of the Manual of Regulations for Banks, which
states:
Sec. X658 - Examination by the BSP. The term examination shall, henceforth, refer to an
investigation of an institution under the supervisory authority of the BSP to determine
compliance with laws and regulations. It shall include determination that the institution is
conducting its business on a safe and sound basis. Examination requires full and
comprehensive looking into the operations and books of institutions, and shall include,
but need not be limited to the following:
a. Determination of the banks solvency and liquidity position;
b. Evaluation of asset quality as well as determination of sufficiency of valuation reserves
on loans and other risk assets;

c. Review of all aspects of bank operations;
d. Assessment of risk management system, including the evaluation of the effectiveness
of the bank managements oversight functions, policies, procedures, internal control and
audit;
e. Appraisal of overall management of the bank;
f. Review of compliance and applicable laws, rules and regulations; and any other
activities relevant to the above.
After an evaluation of the respective positions of the parties, the Court is of the view that
the Monetary Board approval is not required for PDIC to conduct an investigation on the
Banks.
The disagreement stems from the interpretation of these two key provisions of the PDIC
Charter. The confusion can be attributed to the fact that although investigation and
examination are two separate and
distinct procedures under the charter of the PDIC and the BSP, the words seem to be used
loosely and interchangeably.
It does not help that indeed these terms are very closely related in a generic
sense. However, while examination connotes a mere generic perusal or inspection,
investigation refers to a more intensive scrutiny for a more specific fact-finding
purpose. The latter term is also usually associated with proceedings conducted prior to
criminal prosecution.
The PDIC was created by R.A. No. 3591 on June 22, 1963 as an insurer of deposits in all
banks entitled to the benefits of insurance under the PDIC Charter to promote and
safeguard the interests of the depositing public by way of providing permanent and
continuing insurance coverage of all insured deposits. It is a government instrumentality
that operates under the Department of Finance. Its primary purpose is to act as deposit
insurer, as a co-regulator of banks, and as receiver and liquidator of closed banks.[71]
Section 1 of the PDIC Charter states:
SECTION 1. There is hereby created a Philippine Deposit Insurance Corporation
hereinafter referred to as the Corporation which shall insure, as herein provided, the
deposits of all banks which are entitled to the benefits of insurance under this Act, and
which shall have the powers hereinafter granted.
The Corporation shall, as a basic policy, promote and safeguard the interests of the
depositing public by way of providing permanent and continuing insurance coverage on
all insured deposits.
Section 1 of R.A. No. 9576 further provides: An Act Increasing the Maximum Deposit
Insurance Coverage, and in connection therewith, to Strengthen the Regulatory and
117
Administrative Authority, and Financial Capability of the Philippine Deposit Insurance
Corporation (PDIC), amending for this purpose R.A. No. 3591, as Amended, otherwise
known as the PDIC Charter.
SECTION 1. Statement of State Policy and Objectives. - It is hereby declared to be the
policy of the State to strengthen the mandatory deposit insurance coverage system to
generate, preserve, maintain faith and confidence in the countrys banking system, and
protect it from illegal schemes and machinations.
Towards this end, the government must extend all means and mechanisms necessary for
the Philippine Deposit Insurance Corporation to effectively fulfill its vital task of
promoting and safeguarding the interests of the depositing public by way of providing
permanent and continuing insurance coverage on all insured deposits, and in helping
develop a sound and stable banking system at all times.
Under its charter, the PDIC is empowered to conduct examination of banks with prior
approval of the Monetary Board:
Eighth To conduct examination of banks with prior approval of the Monetary
Board: Provided, That no examination can be conducted within twelve (12) months from
the last examination date: Provided, however, That the Corporation may, in coordination
with the Bangko Sentral, conduct a special examination as the Board of Directors, by an
affirmative vote of a majority of all its members, if there is a threatened or impending
closure of a bank; Provided, further, That, notwithstanding the provisions of Republic
Act No. 1405, as amended, Republic Act No. 6426, as amended, Republic Act No. 8791,
and other laws, the Corporation and/or the Bangko Sentral, may inquire into or examine
deposit accounts and all information related thereto in case there is a finding of unsafe or
unsound banking practice; Provided, That to avoid overlapping of efforts, the
examination shall maximize the efficient use of the relevant reports, information, and
findings of the Bangko Sentral, which it shall make available to the Corporation; (As
amended by R.A. 9302, 12 August 2004, R.A. 9576, 1 June 2009)
xxx. [Underlining supplied]
Section 9(b-1) of the PDIC Charter further provides that the PDIC Board shall have the
power to:
POWERS AND RESPONSIBILITIES AND PROHIBITIONS
SECTION 9. xxx
(b) The Board of Directors shall appoint examiners who shall have power, on behalf of
the Corporation to examine any insured bank. Each such examiner shall have the power
to make a thorough examination of all the affairs of the bank and in doing so, he shall
have the power to administer oaths, to examine and take and preserve the testimony of
any of the officers and agents thereof, and, to compel the presentation of books,
documents, papers, or records necessary in his judgment to ascertain the facts relative to
the condition of the bank; and shall make a full and detailed report of the condition of the
bank to the Corporation. The Board of Directors in like manner shall appoint claim
agents who shall have the power to investigate and examine all claims for
insured deposits and transferred deposits. Each claim agent shall have the power to
administer oaths and to examine under oath and take and preserve testimony of any
person relating to such claim. (As amended by E.O. 890, 08 April 1983; R.A. 7400, 13
April 1992)
(b-1) The investigators appointed by the Board of Directors shall have the power on
behalf of the Corporation to conduct investigations on frauds, irregularities and anomalies
committed in banks, based on reports of examination conducted by the Corporation
and Bangko Sentral ng Pilipinas or complaints from depositors or from other government
agency. Each such investigator shall have the power to administer oaths, and to examine
and take and preserve the testimony of any person relating to the subject of
investigation. (As added by R.A. 9302, 12 August 2004)
xxx. [Underscoring supplied]
As stated above, the charter empowers the PDIC to conduct an investigation of a bank
and to appoint examiners who shall have the power to examine any insured bank.Such
investigators are authorized to conduct investigations on frauds, irregularities and
anomalies committed in banks, based on an examination conducted by the PDIC and the
BSP or on complaints from depositors or from other government agencies.
The distinction between the power to investigate and the power to examine is emphasized
by the existence of two separate sets of rules governing the procedure in the conduct of
investigation and examination. Regulatory Issuance (RI) No. 2005-02 or the PDIC Rules
on Fact-Finding Investigation of Fraud, Irregularities and Anomalies Committed in
Banks covers the procedural requirements of the exercise of the PDICs power of
investigation. On the other hand, RI No. 2009-05 sets forth the guidelines for the conduct
of the power of examination.
The definitions provided under the two aforementioned regulatory issuances elucidate on
the distinction between the power of examination and the power of investigation.
Section 2 of RI No. 2005-02 states that its coverage shall be applicable to all fact-
finding investigations on fraud, irregularities and/or anomalies committed in banks that
are conducted by PDIC based on: [a] complaints from depositors or other government
agencies; and/or [b] final reports of examinations of banks conducted by the Bangko
Sentral ng Pilipinas and/or PDIC.
The same issuance states that the Final Report of Examination[72] is one of the three pre-
requisites to the conduct of an investigation, in addition to the authorization of the PDIC
Board[73] and a complaint.[74] Juxtaposing this provision with Section 9(b-1) of the
PDIC Charter, since an examination is explicitly made the basis of a fact-finding
examination, then clearly examination and investigation are two different proceedings. It
would obviously defy logic to make the result of an investigation the basis of the same
118
proceeding. Thus, RI No. 2005-02 defines an investigation as a fact-finding examination,
study or inquiry for determining whether the allegations in a complaint or findings in a
final report of examination may properly be the subject of an administrative, criminal or
civil action.[75]
The Banks cite the dictionary definitions of examination and investigation to justify their
conclusion that these terms refer to one and the same proceeding. It is tempting to use
these two terms interchangeably, which practice may be perfectly justified in a purely
literary sense. Indeed, a reading of the PDIC Charter shows that the two terms have been
used interchangeably at some point. However, based on the provisions aforecited, the
intention of the laws is clearly to differentiate between the process of investigation and
that of examination.
In 2009, to clarify procedural matters, PDIC released RI No. 2009-05 or the Rules and
Regulations on Examination of Banks. Section 2 thereof differentiated between the two
types of examination as follows:
Section 2. Types of Examination
a. Regular Examination - An examination conducted independently or jointly with the
BSP. It requires the prior approval of the PDIC Board of Directors and the Monetary
Board (MB). It may be conducted only after an interval of at least twelve (12) months
from the closing date of the last Regular Examination.
b. Special Examination An examination conducted at any time in coordination with the
BSP, by an affirmative vote of a majority of all the members of the PDIC Board of
Directors, without need of prior MB approval, if there is a threatened or impending bank
closure as determined by the PDIC Board of Directors. [Underscoring supplied]
Section 3 of RI No. 2009-05 provides for the general scope of the PDIC examination:
Section 3. Scope of Examination
The examination shall include, but need not be limited to, the following:
a. Determination of the banks solvency and liquidity position;
b. Evaluation of asset quality as well as determination of sufficiency of valuation reserves
on loans and other risk assets;
c. Review of all aspects of bank operations;
d. Assessment of risk management system, including the evaluation of the effectiveness
of the bank managements oversight functions, policies, procedures, internal control and
audit;
e. Appraisal of overall management of the bank;
 of investigation, time is always of essence, and it is prudent to expedite the proceedings if
f. Review of compliance with applicable banking laws, and rules and regulations, an accurate conclusion is to be arrived at, as an investigation is only as precise as the
including PDIC issuances; evidence on which it is based. The promptness with which such evidence is gathered is
always of utmost importance because evidence, documentary evidence in particular, is
g. Follow-through of specific exceptions/ violations noted during a previous examination; remarkably fungible. A PDIC investigation is conducted to determine[e] whether the
and allegations in a complaint or findings in a final report of examination may properly be the
subject of an administrative, criminal or civil action.[76] In other words, an investigation
h. Any other activity relevant to the above. is based on reports of examination and an examination is conducted with prior Monetary
Board approval. Therefore, it would be unnecessary to secure a separate approval for the
conduct of an investigation. Such would merely prolong the process and provide
Rule 2, Section 1 of PDIC RI No. 2005-02 or the PDIC Rules on Fact-Finding unscrupulous individuals the opportunity to cover their tracks.
Investigation of Fraud, Irregularities and Anomalies Committed in Banks provides for
the scope of fact-finding investigations as follows: Indeed, while in a literary sense, the two terms may be used interchangeably, under the
PDIC Charter, examination and investigation refer to two different processes. To
SECTION 1. Scope of the Investigation. reiterate, an examination of banks requires the prior consent of the Monetary Board,
whereas an investigation based on an examination report, does not.
Fact-finding Investigations shall be limited to the particular acts or omissions subject of a
complaint or a Final Report of Examination. WHEREFORE, the petition is GRANTED. The Decision and Resolution of the Court
of Appeals in CA G.R. CEB SP. No. 01550, dated September 18, 2006 and January 25,
2007 are REVERSED and SET ASIDE.
From the above-cited provisions, it is clear that the process of examination covers a wider
scope than that of investigation. SO ORDERED.

Examination involves an evaluation of the current status of a bank and determines its
compliance with the set standards regarding solvency, liquidity, asset valuation,
operations, systems, management, and compliance with banking laws, rules and
regulations.

Investigation, on the other hand, is conducted based on specific findings of certain acts or
omissions which are subject of a complaint or a Final Report of Examination.

Clearly, investigation does not involve a general evaluation of the status of a bank. An
investigation zeroes in on specific acts and omissions uncovered via an examination, or
which are cited in a complaint.

An examination entails a review of essentially all the functions and facets of a bank and
its operation. It necessitates poring through voluminous documents, and requires a
detailed evaluation thereof. Such a process then involves an intrusion into a banks
records.

In contrast, although it also involves a detailed evaluation, an investigation centers on

specific acts of omissions and, thus, requires a less invasive assessment.

The practical justification for not requiring the Monetary Board approval to conduct an
investigation of banks is the administrative hurdles and paperwork it entails, and the
correspondent time to complete those additional steps or requirements. As in other types

119
 a finding that the evidence adduced was uncontroverted, the assistant city prosecutor
THIRD DIVISION recommended the filing of the Information for qualified theft against respondent.[8]

BSB GROUP, INC., represented by its President, Mr. G.R. No. 168644 Accordingly, respondent was charged before the Regional Trial Court of Manila, Branch
RICARDO BANGAYAN, 36, in an Information, the inculpatory portion of which reads:
Petitioner,
Present: 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
CORONA, J., Chairperson, then and there willfully, unlawfully and feloniously with intent [to] gain and without the
VELASCO, JR., knowledge and consent of the owner thereof, take, steal and carry away cash money in
-versus- NACHURA, the total amount ofP1,534,135.50 belonging to BSB GROUP OF COMPANIES
PERALTA, and represented by RICARDO BANGAYAN, to the damage and prejudice of said owner in
MENDOZA, JJ. the aforesaid amount of P1,534,135.50, Philippine currency.

SALLY GO a.k.a. SALLY GO-BANGAYAN, That in the commission of the said offense, said accused acted with grave abuse of
Respondent. Promulgated: 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
February 16, 2010 money.
x-----------------------------------------------------------------------------------------x
Contrary to law.[9]

DECISION

PERALTA, J.:
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. 87600[1] dated April 20, 2005, which
reversed and set aside the September 13, 2004[2] and November 5, 2004[3] Orders issued
by the Regional Trial Court of Manila, Branch 36[4] 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 Bangayans 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 Prosecutors Office a complaint for estafa and/or
qualified theft[5] against respondent, alleging that several checks[6] representing the
aggregate amount of P1,534,135.50 issued by the companys customers in payment of
their obligation were, instead of being turned over to the companys 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
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 Banks 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 respondents 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]

120

Meanwhile, the prosecution was able to present in court the testimony of Elenita
Marasigan (Marasigan), the representative of Security Bank. In a nutshell, Marasigans
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 Marasigans 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.[21] The
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 Petition[24] 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 Marasigans testimony dealing with respondents 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
121
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 respondents 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 Marasigans 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 latters 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 respondents 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 Marasigans testimony on the
particulars of respondents 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,
122
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,[39] otherwise 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.
Subsequent statutory enactments[43] 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.[46] That 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 judgment. Thus:
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 petitioners 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
123
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 petitioners 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 prosecutions 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
respondents 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 respondents
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 respondents 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 individuals 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.
 Pacific Assets Holdings, Inc. (MPAH), an affiliate of First Pacific Company Limited
EN BANC (First Pacific).

WILSON P. GAMBOA, G.R. No. 176579 The Antecedents

Petitioner,
The facts, according to petitioner Wilson P. Gamboa, a stockholder of Philippine Long
Present: Distance Telephone Company (PLDT), are as follows:1
- versus - On 28 November 1928, the Philippine Legislature enacted Act No. 3436 which granted
CORONA, C.J., PLDT a franchise and the right to engage in telecommunications business. In 1969,
FINANCE SECRETARY MARGARITO B. TEVES, FINANCE CARPIO, General Telephone and Electronics Corporation (GTE), an American company and a
UNDERSECRETARY JOHN P. SEVILLA, AND VELASCO, JR., major PLDT stockholder, sold 26 percent of the outstanding common shares of PLDT to
COMMISSIONER RICARDO ABCEDE OF THE LEONARDO- PTIC. In 1977, Prime Holdings, Inc. (PHI) was incorporated by several persons,
PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT DE CASTRO, including Roland Gapud and Jose Campos, Jr. Subsequently, PHI became the owner of
(PCGG) IN THEIR CAPACITIES AS CHAIR AND BRION, 111,415 shares of stock of PTIC by virtue of three Deeds of Assignment executed by
MEMBERS, RESPECTIVELY, OF THE PRIVATIZATION PERALTA,
PTIC stockholders Ramon Cojuangco and Luis Tirso Rivilla. In 1986, the 111,415 shares
COUNCIL, BERSAMIN,
of stock of PTIC held by PHI were sequestered by the Presidential Commission on Good
CHAIRMAN ANTHONI SALIM OF FIRST PACIFIC CO., DEL
Government (PCGG). The 111,415 PTIC shares, which represent about 46.125 percent of
LTD. IN HIS CAPACITY AS DIRECTOR OF METRO CASTILLO,
the outstanding capital stock of PTIC, were later declared by this Court to be owned by
PACIFIC ASSET HOLDINGS INC., CHAIRMAN MANUEL ABAD, the Republic of the Philippines.2
V. PANGILINAN OF PHILIPPINE LONG DISTANCE VILLARAMA,
TELEPHONE COMPANY (PLDT) IN HIS CAPACITY AS JR., In 1999, First Pacific, a Bermuda-registered, Hong Kong-based investment firm, acquired
MANAGING DIRECTOR OF FIRST PACIFIC CO., LTD., PEREZ, the remaining 54 percent of the outstanding capital stock of PTIC. On 20 November
PRESIDENT NAPOLEON L. NAZARENO OF PHILIPPINE MENDOZA, and 2006, the Inter-Agency Privatization Council (IPC) of the Philippine Government
LONG DISTANCE TELEPHONE COMPANY, CHAIR FE SERENO, JJ. announced that it would sell the 111,415 PTIC shares, or 46.125 percent of the
BARIN OF THE SECURITIES EXCHANGE COMMISSION, outstanding capital stock of PTIC, through a public bidding to be conducted on 4
and PRESIDENT FRANCIS LIM OF THE PHILIPPINE December 2006. Subsequently, the public bidding was reset to 8 December 2006, and
STOCK EXCHANGE, only two bidders, Parallax Venture Fund XXVII (Parallax) and Pan-Asia Presidio
Respondents. Capital, submitted their bids. Parallax won with a bid of P25.6 billion or US$510 million.
PABLITO V. SANIDAD and Promulgated:
ARNO V. SANIDAD, Thereafter, First Pacific announced that it would exercise its right of first refusal as a
Petitioners-in-Intervention. June 28, 2011 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
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x 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
DECISION Government for the price of P25,217,556,000 or US$510,580,189. The sale was
completed on 28 February 2007.

CARPIO, J.:
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
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 Pacifics
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

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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 Courts
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 PTICs Articles of
Incorporation. First Pacific announced its intention to match Parallaxs 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 governments 111,415 PTIC shares bore due diligence, transparency and
conformity with existing legal procedures; and (b) First Pacifics intended acquisition of
the governments 111,415 PTIC shares resulting in First Pacifics 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 PTICs 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
125
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 Pacifics common shareholdings in PLDT from 30.7 percent to 37 percent, and
this, combined with Japanese NTT DoCoMos 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 Pacifics 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 Japans NTT DoCoMo, which is the worlds 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 PLDTs 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 x7
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 Courts 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 tourists 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
126
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 Courts Decision of 21 February 2003 via a petition for
review under Rule 45. The Courts 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 issue which 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 PLDTs franchise could be revoked, a dire
consequence directly affecting petitioners 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 Taada 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 Taada, further declared that when
a mandamus proceeding involves the assertion of a public right, the requirement of
127
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 petitioners
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 patrimony28 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
PLDTs 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
128
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 petitioners arguments and adopt petitioners
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 Nazarenos 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
petitioners allegation of foreigners dominating the common shareholdings of
PLDT. Nazarenostressed 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 petitioners
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 petitioners claim of foreigners
holding more than 40 percent of PLDTs 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 Courts jurisdiction over the petition; (2)
petitioners 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 persons property (the shareholders stock in the utility
company) on the basis of another partys alleged failure to satisfy a requirement that is a
condition only for that other partys 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 PLDTs 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 Courts 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 Courts 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
129
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 SECs 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 corporations 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, petitioners suggestion to reckon
PLDTs foreign equity only on the basis of PLDTs 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 petitioners view
that only common shares should form the basis for computing a public utilitys 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 Constitutions 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.
130
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.
131
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 lawsreserving certain areas of investments to
Filipino citizens.
132
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. PLDTs 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. PLDTs 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 PLDTs 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 PLDTs 2010 General Information Sheet
(GIS),54which 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 PLDTs 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 PLDTs 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 States 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 xcorporations 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.
133
To repeat, (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 exercise
control over PLDT; (2) Filipinos own only 35.73% of PLDTs 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 States
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,68 this 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
134
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.
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 PLDTs voting shares, as admitted by respondents and as stated in PLDTs 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.
FIRST DIVISION
G.R. NOS. 174457-59
EXPRESS INVESTMENTS III PRIVATE LTD. AND EXPORT DEVELOPMENT
CANADA, Petitioner,
vs.
DAYAN TELECOMMUNICATIONS, INC., THE BANK OF NEW YORK (AS
TRUSTEE FOR THE HOLDERS OF THE US$200,000,000 13.5% SENIOR
NOTES OF DAYAN TELECOMMUNICATIONS, INC.) AND ATTY. REMIGIO
A. NOVAL (AS THE COURT-APPOINTED REHABILITATION RECEIVER OF
BAYANTEL), Respondents.
DECISION
VILLARAMA, JR., J.:
Before us are seven consolidated petitions for review on certiorari filed m connection
with the corporate rehabilitation of Bayan Telecommunications, Inc. (Bayantel).
The Petition for Partial Review on Certiorari1 in G.R. Nos. 174457-59 was filed by
Express Investments III Private Ltd. and Export Development Canada to assail the
August 18, 2006 Decision2 of the Court of Appeals in CA-G.R. SP No. 87203.
On the other hand, the Petition for Review on Certiorari3 in G.R. Nos. 175418-20 was
filed by The Bank of New York; Avenue Asia Investments, L.P.; Avenue Asia
International, Ltd.; Avenue Asia Special Situations Fund II, L.P.; Avenue Asia Capital
Partners, L.P. and Avenue Asia Special Situations Fund III, L.P. Said petition questions
as well the said August 18, 2006 Court of Appeals Decision, and also the November 8,
2006 Resolution 4 of the Court of Appeals in CA-G.R. SP Nos. 87100 and 87111
affirming the June 28, 2004 Decision5 of the Regional Trial Court (RTC) of Pasig City,
Branch 158, in SEC Case No. 03-25.
Meanwhile, the Petition for Review on Certiorari6 in G.R. No. 177270 was filed by The
Bank of New York, in its capacity as trustee for the holders of the US$200 million 13.5%
Senior Notes of Bayantel and upon the instructions of the Informal Steering Committee,
to contest the Decision7 and Resolution8 of the Court of Appeals in CA-G.R. SP No.
89894 which nullified the November 9, 2004 and March 15, 2005 Orders of the Pasig
RTC, Branch 158, in SEC Case No. 03-25 insofar as it defined the powers and functions
of the Monitoring Committee.
The facts, as culled from the records of these cases, follow:
Respondent Bayantel is a duly organized domestic corporation engaged in the business of
providing telecommunication services. It is 98.6% owned by Bayan Telecommunications
Holdings Corporation (BTHC), which in turn is 85.4% owned by the Lopez Group of
Companies and Benpres Holdings Corporation.
On various dates between the years 1995 and 2001, Bayantel entered into several credit
agreements with Express Investments III Private Ltd. And Export Development Canada
(petitioners in G.R. Nos. 174457-59), Asian Finance and Investment Corporation,
Bayerische Landesbank (Singapore Branch) and Clearwater Capital Partners Singapore
Pte Ltd., as agent for Credit Industriel et Commercial (Singapore), Deutsche Bank AG,
Equitable PCI Bank, JP Morgan Chase Bank, Metropolitan Bank and Trust Co., P.T.
Bank Negara Indonesia (Persero), TBK, Hong Kong Branch, Rizal Commercial Banking
Corporation and Standard Chartered Bank. To secure said loans, Bayantel executed an
Omnibus Agreement dated September 19, 1995 and an EVTELCO Mortgage Trust
Indenture9 dated December 12, 1997.10
Pursuant to the Omnibus Agreement, Bayantel executed an Assignment Agreement in
favor of the lenders under the Omnibus Agreement (hereinafter, Omnibus Creditors,
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Bank Creditors, or secured creditors). In the Assignment Agreement, Bayantel bound
itself to assign, convey and transfer to the Collateral Agent, the following properties as
collateral security for the prompt and complete payment of its obligations to the Omnibus
Creditors:
(i) all monies payable to Bayantel under the Project Documents (as the term is defined by
the Omnibus Agreement);
(ii) all Project Documents and all Contract Rights arising thereunder;
(iii) all receivables;
(iv) all general intangibles;
(v) each of the Accounts (as the term is defined by the Omnibus Agreement);
(vi) all amounts maintained in the Accounts and all monies, securities and instruments
deposited or required to be deposited in the Accounts;
(vii) all other chattel paper and documents;
(viii) all other property, assets and revenues of Bayantel, whether tangible or intangible;
and
(ix) all proceeds and products of any and all of the foregoing.11
In July 1999, Bayantel issued US$200 million worth of 13.5% Senior Notes pursuant to
an Indenture12 dated July 22, 1999 that it entered into with The Bank of New York
(petitioner in G.R. Nos. 175418-20) as trustee for the holders of said notes. Pursuant to
the said Indenture, the notes are due in 2006 and Bayantel shall pay interest on them
semi-annually. Bayantel managed to make two interest payments, on January 15, 2000
and July 15, 2000, before it defaulted on its obligation.
Foreseeing the impossibility of further meeting its obligations, Bayantel sent, in October
2001, a proposal for the restructuring of its debts to the Bank Creditors and the Holders
of Notes. To facilitate the negotiations between Bayantel and its creditors, an Informal
Steering Committee was formed composed of Avenue Asia Investments, L.P., Avenue
Asia International, Ltd., Avenue Asia Special Situations Fund II, L.P., Avenue Asia
Capital Partners, L.P. (petitioners in G.R. Nos. 175418-20) and Van Eck Global
Opportunity Masterfund, Ltd. The members of the Informal Steering Committee are the
assignees of the unsecured credits extended to Bayantel by J.P. Morgan Europe, Ltd.,
Bayerische Landesbank Singapore Branch and Deutsche Bank AG, London in the total
principal amount of US$13,637,485.20. They are holders, as well, of the Notes issued by
Bayantel pursuant to the Indenture dated July 22, 1999.
In its initial proposal called the "First Term Sheet," Bayantel suggested a 25% write-off
of the principal owing to the Holders of Notes. The Informal Steering Committee rejected
the idea, but accepted Bayantel’s proposal to pay the restructured debt, pari passu,13 out
of its cash flow. This pari passu or equal treatment of debts, however, was opposed by
the Bank Creditors who invoked their security interest under the Assignment Agreement.
Bayantel continued to pay reduced interest on its debt to the Bank Creditors but stopped
paying the Holders of Notes starting July 17, 2000. By May 31, 2003, Bayantel’s total
indebtedness had reached US$674 million or P35.928 billion in unpaid principal and
interest, based on the prevailing conversion rate of US$1 = P53.282. Out of its total
liabilities, Bayantel allegedly owes 43.2% or US$291 million (P15.539 billion) to the
Holders of the Notes.
On July 25, 2003, The Bank of New York, as trustee for the Holders of the Notes, wrote
Bayantel an Acceleration Letter declaring immediately due and payable the principal,
premium interest, and other monetary obligations on all outstanding Notes. Then, on July
30, 2003, The Bank of New York filed a petition14 for the corporate rehabilitation of
Bayantel upon the instructions of the Informal Steering Committee.
On August 8, 2003, the Pasig RTC, Branch 158, issued a Stay Order15 which directed,
among others, the suspension of all claims against Bayantel and required the latter’s
creditors and other interested parties to file a comment or opposition to the petition. The
court appointed Dr. Conchita L. Manabat to act as rehabilitation receiver but the latter
declined.16 In her stead, the court appointed Atty. Remigio A. Noval (Atty. Noval) who
took his oath and posted a bond on September 26, 2003.17
On November 28, 2003, the Rehabilitation Court gave due course to the petition and
directed the Rehabilitation Receiver to submit his recommendations to the court within
120 days from the initial hearing.18 After several extensions, Atty. Noval filed on March
22, 2004 a Compliance and Submission of the Report as Compelling Evidence that
Bayantel may be Successfully Rehabilitated.19
In his report, Atty. Noval classified Bayantel’s debts into three: (1) those owed to secured
Bank Creditors pursuant to the Omnibus Agreements (Omnibus Creditors) in the total
amount of US$334 million or P17.781 billion; (2) those owed to Holders of the Senior
Notes and Bank Creditors combined (Chattel Creditors), comprising US$625 million, of
which US$473 million (P25.214 billion) is principal and US$152 million (P8.106 billion)
is accrued unpaid interest; and (3) those that Bayantel owed to persons other than
Financial Creditors/unsecured creditors in the amount of US$49 million or P2.608
billion.
According to The Bank of New York, out of the US$674 million that respondent owes its
creditors under groups 2 and 3 above, the amount outstanding under the Senior Notes
represent 43.2% of its liabilities as of May 31, 2003. Subsequently, negotiations for the
restructuring of Bayantel’s debt reached an impasse when the Informal Steering
Committee insisted on a pari passu treatment of the claims of both secured and unsecured
creditors.
Meanwhile, on January 20, 2004, Bayantel filed a "Motion to Include Radio
Communications Philippines, Inc. [RCPI] and Naga Telephone Company [Nagatel] as
Debtor-Corporations for Rehabilitation x x x."20
The Rehabilitation Court denied said motion in an Order21 dated April 19, 2004.
The fallo of said order reads:
WHEREFORE, the Court resolves the pending incidents as follows:
1. The Urgent Motion to Resolve of petitioner is hereby granted. The creditors of
Bayantel, whether secured or unsecured, should be treated equally and on the same
footing or pari passu until the rehabilitation proceedings is terminated in accordance with
the Interim Rules;
2. The Motion of Bayantel to Include RCPI and Nagatel in the present rehabilitation
proceedings as debtor-corporations is denied;
3. The Motion of Bayantel to Exempt from the Stay Order the payment of the
compensation package of its former employees per Annex "A" attached to said motion is
granted, subject to the verification and confirmation of the items therein by the
Rehabilitation Receiver;
4. The Motion of Petitioner to Strike Out the proposed rehabilitation plan of Bayantel is
denied.
SO ORDERED.22
On June 28, 2004, the Pasig RTC, Branch 158, acting as a Rehabilitation Court, approved
the Report and Recommendations23 attached by the Receiver to his "Submission with
Prayer for Further Guidance from the Honorable Court,"24 subject to the following
clarifications and/or amendments:
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1. The ruling on the pari passu treatment of all creditors whose claims are subject to
restructuring shall be maintained and shall extend to all payment terms and treatment of
past due interest.
2. Due regard shall be given to the rights of the secured creditors and no changes in the
security positions of the creditors shall be granted as a result of the rehabilitation plan as
amended and approved herein.
3. The level of sustainable debt of the rehabilitation plan, as amended, shall be reduced to
the amount of [US]$325,000,000 for a period of 19 years.
4. Unsustainable debt shall be converted into an appropriate instrument that shall not be a
financial burden for Bayantel.
5. All provisions relating to equity in the rehabilitation plan, as approved and amended,
must strictly conform to the requirements of the Constitution limiting foreign ownership
to 40%.
6. A Monitoring Committee shall be formed composed of representatives from all classes
of the restructured debt. The Rehabilitation Receiver’s role shall be limited to the powers
of monitoring and oversight as provided in the Interim Rules.
All powers provided for in the Report and Recommendations, which exceed the
monitoring and oversight functions mandated by the Interim Rules shall be amended
accordingly.
SO ORDERED.25
Dissatisfied, The Bank of New York filed a Notice of Appeal26 on August 6, 2004. So
did Avenue Asia Investments, L.P., Avenue Asia International, Ltd., Avenue Asia
Special Situations Fund II, L.P., Avenue Asia Capital Partners, L.P., and Avenue Asia
Special Situations Fund III, L.P. which filed a Joint Record on Appeal27 on August 9,
2004.
On September 28, 2004, Bayantel submitted an Implementing Term Sheet to the
Rehabilitation Court and the Receiver. Claiming that said Term Sheet was inadequate to
protect the interest of the creditors, The Bank of New York (petitioner in G.R. No.
177270) filed a Manifestation28 dated October 15, 2004 praying for the constitution of a
Monitoring Committee and the creation of a convertible debt instrument to cover the
unsustainable portion of the restructured debt.
On November 9, 2004, the Rehabilitation Court issued an Order29 directing the creation
of a Monitoring Committee to be composed of one member each from the group of
Omnibus Creditors and unsecured creditors, and a third member to be chosen by the
unanimous vote of the first two members. In the same Order, the court defined the scope
of the Monitoring Committee’s authority, as follows:
x x x The Monitoring Committee shall participate with the Receiver in monitoring and
overseeing the actions of the Board of Directors of Bayantel and may, by majority vote,
adopt, modify, revise or substitute, any of the following items:
(1) any proposed Annual OPEX Budgets;
(2) any proposed Annual CAPEX Budgets;
(3) any proposed Reschedule;
(4) any proposed actions by the Receiver on a payment default;
(5) terms of Management Incentivisation Scheme and Management Targets;
(6) the EBITDA/Revenue ratios set by the Bayantel Board of Directors; and
(7) any other proposed actions by the Bayantel Board of Directors including, without
limitation, issuance of new shares, sale of core and noncore assets, change of business,
etc. that will materially affect the terms and conditions of the rehabilitation plan and its
implementation.
In case of disagreement between the Monitoring Committee and the Board of Directors
of Bayantel on any of the foregoing matters, the same shall be submitted to the Court for
resolution.30
On November 16, 2004, The Bank of New York filed a Petition for Review31 before the
Court of Appeals. The petition was docketed as CAG. R. SP No. 87100 in the Fifteenth
Division of the Court of Appeals. On even date, Avenue Asia Investments, L.P., Avenue
Asia International, Ltd., Avenue Asia Special Situations Fund II, L.P., Avenue Asia
Capital Partners, L.P., and Avenue Asia Special Situations Fund III, L.P (Avenue Asia
Capital Group) filed a similar petition32 which was docketed as CA-G.R. SP No. 87111
in the Second Division of the Court of Appeals. Both petitions contest the Rehabilitation
Court’s June 28, 2004 Decision for, among others, fixing the level of Bayantel’s
sustainable debt at US$325 million to be paid in 19 years.
Thereafter, on November 30, 2004, petitioners Express Investments III Private Ltd. and
Export Development Canada along with Bayerische Landesbank (Singapore Branch),
Credit Industriel et Commercial, Deutsche Bank AG, P.T. Bank Negara Indonesia
(Persero), TBK, Hong Kong Branch and Rizal Commercial Banking Corporation filed a
Petition for Review33 which was docketed as CA-G.R. No. 87203 in the Tenth Division
of the Court of Appeals. The secured creditors likewise assailed the Rehabilitation
Court’s June 28, 2004 Decision insofar as it ordered the pari passu treatment of all claims
against Bayantel. Said petitioners invoke a lien over the cash flow and receivables of
Bayantel by virtue of the Assignment Agreement.
On December 23, 2004, Bayantel filed an Omnibus Motion34 for the consolidation of
CA-G.R. SP Nos. 87111 and CA-G.R. SP No. 87203 with CA-G.R. SP No. 87100, the
lowest-numbered case.
In a Resolution dated January 20, 2005, the Court of Appeals, Fifteenth Division, ordered
the consolidation of CA-G.R. SP No. 87203 with CA-G.R. SP No. 87100. This was
accepted by the Court of Appeals, Seventh Division, in a Resolution35 dated March 29,
2005. Then, in the Resolution36 dated June 10, 2005, the Court of Appeals, First
Division, ordered the consolidation of CA-G.R. SP No. 87111 with 87100 and the
transmittal of the records of the three cases to the Seventh Division.
Meanwhile, on January 10, 2005, Atty. Noval submitted to the Rehabilitation Court an
Implementing Term Sheet37 to serve as a guide for Bayantel’s Rehabilitation. The same
was approved in an Order38 dated March 15, 2005. In the same Order, the Rehabilitation
Court appointed Avenue Asia Investments L.P. and Export Development Canada to
represent the unsecured and secured creditors, respectively, in the Monitoring
Committee.
On May 26, 2005, Bayantel filed a petition for certiorari and Prohibition39 docketed as
CA-G.R. SP No. 89894 in the Court of Appeals. Said petition assailed the Rehabilitation
Court’s Orders dated November 9, 2004 and March 15, 2005, for purportedly conferring
upon the Monitoring Committee, powers of management and control over its operations.
The Court of Appeals Decision in CA-G.R. Nos. 87100, 87111 and 87203
In the assailed August 18, 2006 Decision, the Court of Appeals dismissed the petitions in
CA-G.R. SP Nos. 87100, 87111 and 87203 for lack of merit. The appellate court upheld
the Rehabilitation Court’s determination of Bayantel’s sustainable debt at US$325
million payable in 19 years. It rejected the Receiver’s proposal to set the sustainable debt
at US$370 million payable in 15 years, and the proposal of the Avenue Asia Capital
Group to set it at US$471 million payable in 12 years.
The Court of Appeals agreed with the Rehabilitation Court that it is reasonable to adopt a
level of sustainable debt that approximates respondent Bayantel’s proposal because the
137
latter is in the best position to determine the level of sustainable debt that it can manage.
It found Bayantel’s proposal more credible considering that it was prepared using
"updated financial information with realistic cash flow figures."[40] The appellate court
noted that Bayantel’s proposal was drafted without regard for its status as a "niche
player" in the telecommunications market and after factoring the cost of reorganization.
In contrast, it expressed concern that the proposals submitted by Avenue Asia Capital
Group and the Receiver might eventually leave Bayantel with an unworkable financial
debt-to-revenue ratio.
The Court of Appeals also confirmed the Rehabilitation Court’s authority to approve,
reject, substitute, or even change the rehabilitation plans submitted by the Receiver and
the parties. It upheld the trial court in adopting the Receiver’s recommendation to limit
the equity conversion of Bayantel’s unsustainable debt to 40% of its paid-up capital. This
percentage, the appellate court explains, is consistent with the constitutional limitation on
the allowable foreign equity in Filipino corporations. It also maintained the write-off of
penalties and default interest and recomputation of Bayantel’s past due interest, as a valid
exercise of discretion by the Rehabilitation Court under the Interim Rules of Procedure
on Corporate Rehabilitation (Interim Rules). The appellate court negated any violation of
the pari passu principle with the use of these measures since they shall apply to all
classes of creditors.
As to the claim of the secured creditors in CA-G.R. SP No. 87203, the Court of Appeals
ruled that while rehabilitation is ongoing, the sole control over the security on the
receivables and cash flow of Bayantel is vested in the Rehabilitation Court. To allow
otherwise would not only violate the Stay Order but interfere as well with the duty of the
Receiver to "take possession, control and custody of the debtor’s assets." 41 Ultimately,
the Court of Appeals ruled that preference in payment cannot be accorded the secured
creditors since preference applies only in liquidation proceedings.
Discontented, The Bank of New York and the Avenue Asia Capital Group (petitioners in
CA-G.R. SP Nos. 87100 and 87111) filed a Motion for Partial Reconsideration.42 Said
motion was, however, denied in the Resolution dated November 8, 2006.
In the meantime, Express Investments III Private Ltd. and Export Development Canada
had filed before this Court a Petition for Partial Review on Certiorari of the Court of
Appeals Decision docketed as G.R. Nos. 174457-59. According to petitioners, the other
secured creditors who were also petitioners in CA-G.R. SP No. 87203 had not remained
in contact with them and had not authorized them to file further petitions on their behalf.
On December 28, 2006, The Bank of New York and the Avenue Asia Capital Group also
filed their own Petition for Review on Certiorari which was docketed as G.R. Nos.
175418-20.
The Court of Appeals Decision in CA-G.R. SP No. 89894
In CA-G.R. SP No. 89894, the Court of Appeals rendered the assailed Decision dated
October 27, 2006 declaring null and void the November 9, 2004 and March 15, 2005
Orders of the Rehabilitation Court insofar as they defined the powers and functions of the
Monitoring Committee.
The appellate court found grave abuse of discretion on the part of the Rehabilitation
Court for conferring upon the Monitoring Committee the power to modify, reverse or
overrule the proposals of Bayantel’s Board of Directors relative to operations. It stressed
that the Committee’s functions are confined to monitoring and overseeing the operations
of Bayantel to ensure its compliance with the terms and conditions of the Rehabilitation
Plan. To conform therewith, the appellate court restated the Committee’s powers as
follows:
The Monitoring Committee shall participate with the Receiver in monitoring and
overseeing the operations of Bayantel to ensure compliance by Bayantel with the terms
and conditions of the Rehabilitation Plan. In the event Bayantel fails to meet any of the
milestones under the Rehabilitation Plan or fails to comply with any material provision
thereunder, the Monitoring Committee may, by majority
vote, recommend modifications, revisions and substitutions of the following items:
x x x x43 (Emphasis supplied)
The Court of Appeals likewise approved of the Implementing Term Sheet, clarifying that
the same is not intended to address every contingency that may arise in the
implementation of the Plan. It assured that any doubt in the interpretation of the Term
Sheet shall be resolved by the Rehabilitation Court.
Lastly, the appellate court affirmed the creation of a convertible debt instrument to cover
the unsustainable portion of respondent’s debt. It perceives such instrument as a tool to
generate surplus cash to satisfy Bayantel’s debt under Tranche B. As well, it serves as a
buy-back scheme for the assignment and transfer of credits by the Financial Creditors in a
manner that will not unduly burden Bayantel.
Issues
On October 19, 2006, Express Investments III Private Ltd. and Export Development
Canada 44 filed a Petition for Partial Review on Certiorari which was docketed as G.R.
Nos. 174457-59. Said petition, which seeks the reversal of the August 18, 2006 Decision
of the Court of Appeals insofar as it dismissed the petition of the secured creditors in CA-
G.R. SP No. 87203, essentially proffers the following issues for resolution: (1) whether
the claims of secured and unsecured creditors should be treated pari passu during
rehabilitation; (2) whether the pari passu treatment of creditors during rehabilitation
impairs the Assignment Agreement between respondent and petitioners; (3) whether an
impairment in the security position of petitioners can be justified as a valid exercise of
police power.
On the other hand, The Bank of New York and the Avenue Asia Capital Group filed a
Petition for Review on Certiorari docketed as G.R. Nos. 175418-20, to question the
appellate court’s August 18, 2006 Decision as well as its November 8, 2006 Resolution in
CA-G.R. SP Nos. 87100 and 87111. This second consolidated petition raises the
following issues: (1) whether the Court of Appeals erred in setting Bayantel’s sustainable
debt at US$325 million, payable in 19 years; (2) whether a debtor may submit a
rehabilitation plan in a creditor-initiated rehabilitation; (3) whether the conversion of debt
to equity in excess of 40% of the outstanding capital stock in favor of petitioners violates
the constitutional limit on foreign ownership of a public utility; (4) whether the write-off
of respondent’s penalties and default interest and recomputation of its past due interest
violate the pari passu principle; and (5) whether petitioners are entitled to costs.
On February 22, 2007, respondent Bayantel moved for the consolidation of G.R. Nos.
174457-59 with G.R. Nos. 175418-20. In a Resolution45 dated April 23, 2007, we
directed the Division Clerk of Court to study the feasibility of consolidating said cases. In
a Memorandum Report46 dated May 17, 2007, the First Division Clerk of Court
recommended the consolidation of G.R. Nos. 174457-59 with G.R. Nos. 175418-20.
On May 21, 2007, The Bank of New York, as trustee for the Holders of the Senior Notes,
filed a Petition for Review on Certiorari, docketed as G.R. No. 177270, to assail the
October 27, 2006 Decision and March 23, 2007 Resolution of the Court of Appeals in
CA-G.R. SP No. 89894. Amplified, the petition presents the lone issue of whether the
Monitoring Committee in this case may exercise control over Bayantel’s operations.
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In a Resolution47 dated June 6, 2007, we directed the Division Clerk of Court to study
the feasibility of consolidating G.R. No. 177270 with G.R. Nos. 174457-59 and G.R.
Nos. 175418-20. To avoid conflicting decisions on related cases, the Assistant Clerk of
Court recommended the consolidation of the three cases. By Resolution48 dated July 11,
2007, the Court ordered the consolidation of G.R. No. 177270 with G.R. Nos. 174457- 59
and G.R. Nos. 175418-20.
The Parties’ Arguments
In G.R. Nos. 174457-59
The petitioners/secured creditors argue primarily that the pari passu treatment of
creditors during rehabilitation has no basis in law. According to petitioners, all that
Presidential Decree No. 902-A49 (PD 902-A) provides is the suspension of all claims
against the debtor corporation during rehabilitation so that the Receiver can exercise his
powers free from judicial or extrajudicial interference. If the equity policy is to be
considered at all, they believe that the equity policy should be construed to accord
creditors with similar rights or uniform treatment. In line with this, petitioners assert
priority under the Assignment Agreement to receive from Bayantel’s surplus cash flow
and to be paid in full, ahead of all other creditors.
The petitioners/secured creditors contend that the pari passu treatment of claims impairs
the Omnibus Agreement and the Assignment Agreement. Such impairment, they posit,
cannot be justified as a proper exercise of police power for three reasons: first, there is no
law which authorizes the equal treatment of claims; second, there is no enabling law;
and third, it is not reasonably necessary for the success of the rehabilitation.
Petitioners point out that the Interim Rules mandates instead that the rehabilitation plan
shall give due regard to the interest of the secured creditors. For petitioners, the
preservation of Bayantel’s chattels alone is inadequate to meet said requirement since the
value thereof depreciates over time. They go on to invoke international practices on
bankruptcy and rehabilitation which purportedly recognize the distinction between the
rights of secured and unsecured creditors. Petitioners warn of dire consequences to the
international credit standing of the Philippines, the financial market, and the influx of
foreign investments if the pari passu principle would be upheld. Finally, petitioners
maintain that a "Trigger Event"50 had occurred which rendered respondent’s obligations
due and demandable. Thus, despite their failure to notify respondent of the alleged Events
of Default, petitioners believe that they can rightfully proceed against the securities.
For its part, respondent Bayantel reasons that enforcing preference in payment at this
stage of the rehabilitation would only disrupt the progress it has made so far. It assures
petitioners that their security rights are adequately protected in case the collateral assets
are disposed. Respondent adds that no single payment scheme is applicable in all
rehabilitation proceedings and the peculiar circumstances of its case warrant the pari
passu treatment of its creditors.
In G.R. Nos. 175418-20
Mainly, petitioners Bank of New York and Avenue Asia Capital Group impute error on
the Court of Appeals for affirming the Rehabilitation Court’s decision which adopted the
sustainable debt level Bayantel proposed. The court a quo fixed respondent’s sustainable
debt at US$325 million payable within 19 years against the Receiver’s proposal of
US$370 million payable in 15 years. Petitioners dispute Bayantel’s financial projections
as unreliable and contrived, designed to bear out a reduced level of sustainable debt and
justify a substantial write-off of its debts. In order to arrive at a reasonable level of
sustainable debt, they believe that the prospective cash flow of Bayantel must be
reckoned against industry standards. Petitioners point out that the Interim Rules only
allows the debtor, in a creditor-initiated petition for corporate rehabilitation, to file a
comment or opposition but not to submit its own rehabilitation plan. They warn that if the
fulfillment of the obligation would be made to depend on the sole will of Bayantel, the
entire obligation would be void.
Petitioners fault the trial court for basing the sustainable debt on the state of the
telecommunications industry in the country rather than consulting the financial
projections and business models submitted by petitioners and the Receiver. They stress
that the state of the telecommunications industry is not among those which the court may
take judicial notice of by discretion.
Petitioners maintain that converting the unsustainable debt to 77.7% equity in Bayantel
will not violate the nationality requirement of the 1987 Constitution. They aver that the
debts to domestic bank creditors51 account is US$473 million or 70.18% of Bayantel’s
total liabilities. Considering the substantial write-off of penalties and default interest in
the amount of US$34,044,553.00 and past due interest of US$25,243,381.07, petitioners
believe that it is only fair to accord the Financial Creditors greater equity in Bayantel to
compensate for said losses.
Moreover, it is the petitioners’ view that the write-off contravenes the pari
passu principle because they would suffer greater losses than the Omnibus Creditors.
According to petitioners, approximately 82% of the penalties and interests shall be borne
by the unsecured creditors and the Holders of Notes. In the same vein, petitioners protest
the recomputation of past due interest in accordance with the rate proposed by the
Receiver. They claim that recomputation would result in the condonation of 89% of the
accrued interest owing them. The Receiver’s report shows that as of the filing of the
present petition, the total accrued interest amounts to US$106,054,197.66, of which,
US$91,100,000 are due the Holders of Notes.
Finally, petitioners reiterate their claim for costs. In its Order dated March 15, 2005, the
Rehabilitation Court awarded costs of suit to petitioner Bank of New York. In particular,
it granted the latter’s prayer for the payment of filing fees, costs of publication and
professional fees. Even then, petitioner bank claims that a huge amount of its expenses
for the professional fees of counsels and advisers remain unpaid. More importantly, it
asserts precedence in payment over the preferred creditors. In the alternative, the Bank of
New York prays that the costs of suit be incorporated in the award to the nonfinancial or
trade creditors. Similarly, the Avenue Asia Capital Group seeks reimbursement for the
docket fees, publication expenses and the professional fees it has paid its counsels and
financial adviser. It invokes Article 2208 of the Civil Code and the provisions of the
Indenture as legal bases therefor.
Meanwhile, the secured creditors in G.R. Nos. 174457-59 filed a Memorandum52 dated
April 30, 2009 with a prayer for the dismissal of the bondholders’ petition in G.R. Nos.
175418-20. For the secured creditors, the sustainable debt set by the Courts of Appeals is
a more manageable and realistic undertaking compared to herein petitioners’ proposal.
They add that the fact that Bayantel’s actual revenues are lower than its cash flow
projections belies any scheme to avoid paying its debts in full. The secured creditors
agree with the appellate court in limiting the conversion of the unsustainable debt to a
maximum of 40% shares in Bayantel as more in keeping with the Constitution.
Further, the secured creditors point out that there is nothing in the Interim Rules which
prohibits a debtor company from submitting an alternative rehabilitation plan in creditor-
initiated proceedings. In support of this, they cite Section 22,53 Rule 4 of said rules
which permits the debtor to modify its proposed plan or submit a revised or substitute
139
plan. According to them, Bayantel’s suggestion as to the terms of payment does not
constitute a potestative condition that would render the obligation void.
The secured creditors, however, join petitioners in protesting the condonation of penalties
and default interest. Rather than observing absolute equality, they insist that the pari
passu principle should be applied such that creditors within the same class are treated
alike.
In response, respondent Bayantel submitted on May 21, 2009, a Consolidated
Memorandum54 in G.R. Nos. 175418-20 and G.R. No. 177270. It practically echoed
the ratio decidendi of the Court of Appeals in dismissing both petitions.
In G.R. Nos. 175418-20, Bayantel defends the Rehabilitation Court for adopting the
sustainable debt level it proposed. Such approval by the court alone, Bayantel reasons,
did not make the payment of its debt a condition whose fulfillment rests on its sole will,
as to render the obligation void under Article 118255 of the Civil Code. Respondent
maintains that among the stakeholders, it is in the best position to determine the level of
debt that it can pay. Moreover, it believes that a majority of the secured creditors are
comfortable with the approved sustainable debt since only two of them appealed.
Respondent insists that altering the sustainable debt at this point would be
counterproductive.
Respondent equally opposes the Bondholders’ proposal to reduce the company’s capital
expenditures to between 9% and 11% to make more funds available for debt servicing.
This approach, according to Bayantel, ignores its need to make significant investments in
new infrastructure in order to cope with competitors. Respondent disputes the value of
petitioners’ projections which were derived by benchmarking Bayantel’s income, as a
company under rehabilitation, against those of the major players, PLDT and Digitel.
Furthermore, respondent maintains that its rehabilitation plan was based on accurate
financial data and operation reports. It insists that the Interim Rules allows a debtor, in
creditor-initiated rehabilitation proceedings, to submit an alternative plan. It agrees with
the Rehabilitation Court’s decision to restrict conversion of the unsustainable debt to 40%
of fully paid-up capital in Bayantel. Respondent believes that the waiver of penalties and
default interest and the recomputation of past due interest will not violate the pari
passu principle because said measures shall apply equally to all creditors. Lastly,
respondent admits limited liability for costs pursuant to the Assignment Agreement but
not for those incurred by petitioners under "non-consensual scenarios."
In G.R. No. 177270
In this petition for review, the Bank of New York, as trustee for the holders of the 13.5%
Senior Notes of respondent Bayantel, challenges the Court of Appeals decision nullifying
the Monitoring Committee’s power to modify, reverse or overrule the decision of
Bayantel’s Board of Directors on certain matters. It invokes Section 23,56 Rule 4 of the
Interim Rules as legal basis to justify the Rehabilitation Court’s grant of extensive
powers to the Monitoring Committee. The pertinent portion of said Rule states:
In approving the rehabilitation plan, the court shall issue the necessary orders or
processes for its immediate and successful implementation. It may impose such terms,
conditions, or restrictions as the effective implementation and monitoring thereof may
reasonably require, or for the protection and preservation of the interests of the creditors
should the plan fail.
Petitioner contends that the magnitude and complexity of respondent’s business
necessitate close monitoring of its operations to ensure successful rehabilitation.
Specifically, the Bank of New York expresses concern over Bayantel’s taciturn
disposition as regards its budget and expansion costs. Petitioner believes that such lack of
transparency can be addressed by empowering the Monitoring Committee to approve
measures that will ultimately affect respondent’s ability to settle its debts.
Moreover, petitioner assures that the Implementing Term Sheet provides safeguards
against the improvident disapproval by the Monitoring Committee of proposed measures.
Petitioner is of the view that the functions of the Monitoring Committee would be
rendered illusory if all disagreements on key areas would have to be heard by the
Rehabilitation Court. Petitioner explains that the Monitoring Committee’s powers do not
in any way supplant those of the Board of Directors. The Bank of New York claims that
it is customary to allow creditors to monitor and supervise the debtor’s operations as
demonstrated by the restructuring experiences of certain Asian countries.
Petitioner submits that the Rehabilitation Court did not intend to give the Monitoring
Committee powers that are concurrent with those of the Receiver on account of the
differing interests that they represent in rehabilitation. It argues that if at all, the court a
quo committed a mere error of judgment not correctible by certiorari. Petitioner adds that
even if a petition for certiorari was proper, the 60-day reglementary period provided by
the Rules of Court had already lapsed when Bayantel filed its petition on May 27, 2005.
It contends that Bayantel’s Manifestation and Motion for Clarification dated December
15, 2004 was in truth a motion for reconsideration which is a prohibited pleading under
Section 1,57 Rule 3 of the Interim Rules. Petitioner concludes that such pleadings did not
toll the period for filing a petition and, therefore, the Rehabilitation Court’s decision had
become final.
In its Consolidated Memorandum dated May 21, 2009, Bayantel counters that Section 23,
Rule 4 of the Interim Rules should be understood as delineating the purpose of the court’s
orders and processes to mere implementation and monitoring of the plan. Respondent
opposes any interpretation of said provision which authorizes the Committee to substitute
its judgment for those of the Board or vest it with powers greater than those of the
Receiver. It argues that vesting the Committee with veto power over certain decisions of
the Board would effectively give it control and management over Bayantel’s operations.
The necessary effect, according to Bayantel, is that every disagreement between the
Committee and the Board would have to be settled in court. Respondent points out that
petitioner failed to cite proof of its claim that it is customary among Asian countries to
allow the Monitoring Committee active participation during rehabilitation.
Bayantel perceive the instant petition as an underhanded attempt by petitioner to create a
Management Committee without satisfying the requisites therefor. It reiterates that the
functions of the Monitoring Committee are confined to ensuring that Bayantel meets the
debt reduction milestones under the plan. Respondent avers that even without a
Monitoring Committee, it is obliged under the Plan to comply with certain information
covenants and reportorial requirements. It adds that the Plan provides a mechanism for
dispute resolution through which creditors can enforce compliance.
Penultimately, respondent assails the validity of the Order dated November 9, 2004 for
lack of notice. Allegedly, Bayantel learned of said Order only after petitioner furnished it
a copy of its Compliance to which the same was made an attachment. Thus, respondent
insists that the reglementary period to file an appeal or a petition for certiorari did not run
against it.
The Court’s Ruling
In G.R. Nos. 174457-59
Rehabilitation is an attempt to conserve and administer the assets of an insolvent
corporation in the hope of its eventual return from financial stress to solvency.58 It
contemplates the continuance of corporate life and activities in an effort to restore and
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reinstate the corporation to its former position of successful operation and liquidity. The
purpose of rehabilitation proceedings is precisely to enable the company to gain a new
lease on life and thereby allow creditors to be paid their claims from its earnings.59
Rehabilitation shall be undertaken when it is shown that the continued operation of the
corporation is economically feasible and its creditors can recover, by way of the present
value of payments projected in the plan, more, if the corporation continues as a going
concern than if it is immediately liquidated.60
The law governing rehabilitation and suspension of actions for claims against
corporations is PD 902-A, as amended. On December 15, 2000, the Court promulgated
A.M. No. 00-8-10-SC or the Interim Rules of Procedure on Corporate Rehabilitation,
which applies to petitions for rehabilitation filed by corporations, partnerships and
associations pursuant to PD 902-A.
In January 2004, Republic Act No. 8799 (RA 8799), otherwise known as the Securities
Regulation Code, amended Section 5 of PD 902-A, and transferred to the Regional Trial
Courts the jurisdiction of the Securities and Exchange Commission (SEC) over petitions
of corporations, partnerships or associations to be declared in the state of suspension of
payments in cases where the corporation, partnership or association possesses property to
cover all its debts but foresees the impossibility of meeting them when they respectively
fall due or in cases where the corporation, partnership or association has no sufficient
assets to cover its liabilities, but is under the management of a rehabilitation receiver or a
management committee.
In order to effectively exercise such jurisdiction, Section 6(c), PD 902-A empowers the
Regional Trial Court to appoint one or more receivers of the property, real and personal,
which is the subject of the pending action before the Commission whenever necessary in
order to preserve the rights of the parties-litigants and/or protect the interest of the
investing public and creditors.
Under Section 6, Rule 4 of the Interim Rules, if the court finds the petition to be
sufficient in form and substance, it shall issue, not later than five (5) days from the filing
of the petition, an Order with the following pertinent effects:
(a) appointing a Rehabilitation Receiver and fixing his bond;
(b) staying enforcement of all claims, whether for money or otherwise and whether
such enforcement is by court action or otherwise, against the debtor, its guarantors
and sureties not solidarily liable with the debtor;
(c) prohibiting the debtor from selling, encumbering, transferring, or disposing in any
manner any of its properties except in the ordinary course of business;
(d) prohibiting the debtor from making any payment of its liabilities outstanding as at the
date of filing of the petition; x x x
(Emphasis supplied)
The stay order shall be effective from the date of its issuance until the dismissal of the
petition or the termination of the rehabilitation proceedings.61 Under the Interim Rules,
the petition shall be dismissed if no rehabilitation plan is approved by the court upon the
lapse of 180 days from the date of the initial hearing. The court may grant an extension
beyond this period only if it appears by convincing and compelling evidence that the
debtor may successfully be rehabilitated. In no instance, however, shall the period for
approving or disapproving a rehabilitation plan exceed 18 months from the date of filing
of the petition.62
On the other hand, Section 27, Rule 4 of the Interim Rules provides when the
rehabilitation proceedings is deemed terminated:
SEC. 27. Termination of Proceedings. – In case of the failure of the debtor to submit the
rehabilitation plan, or the disapproval thereof by the court, or the failure of the
rehabilitation of the debtor because of failure to achieve the desired targets or goals as set
forth therein, or the failure of the said debtor to perform its obligations under the said
plan, or a determination that the rehabilitation plan may no longer be implemented in
accordance with its terms, conditions, restrictions, or assumptions, the court shall upon
motion, motu proprio, or upon the recommendation of the Rehabilitation Receiver,
terminate the proceedings. The proceedings shall also terminate upon the successful
implementation of the rehabilitation plan. (Emphasis supplied)
Hence, unless the petition is dismissed for any reason, the stay order shall be effective
until the rehabilitation plan has been successfully implemented. In the meantime, the
debtor is prohibited from paying any of its outstanding liabilities as of the date of the
filing of the petition except those authorized in the plan under Section 24(c), Rule 4 of
the Interim Rules.
In this case, in an Order dated April 19, 2004, the Rehabilitation Court held that "[t]he
creditors of Bayantel, whether secured or unsecured, should be treated equally and on the
same footing or pari passu until the rehabilitation proceedings is terminated in
accordance with the Interim Rules."63 The court reiterated this pronouncement in its
Decision dated June 28, 2004.
Before us, petitioners contend that such pari passu treatment of claims violates not only
the "due regard" provision in the Interim Rules but also the Contract Clause in the 1987
Constitution. Petitioners assert precedence in the payment of claims during rehabilitation
by virtue of the Assignment Agreement dated September 19, 1995. Under said
Agreement, Bayantel assigned, charged, conveyed and transferred to a Collateral Agent,
the following properties as collateral for the prompt and complete payment of its
obligations to secured creditors:
(i) All land, buildings, machinery and equipment currently owned, and to be acquired in
the future by Bayantel;
(ii) All monies payable to Bayantel under the Project Documents (as the term is defined
by the Omnibus Agreement);
(iii) All Project Documents and all Contract Rights arising thereunder;
(iv) All receivables;
(v) Each of the Accounts (as the term is defined by the Omnibus Agreement);
(vi) All amounts maintained in the Accounts and all monies, securities and instruments
deposited or required to be deposited in the Accounts;
(vii) All other Chattel Paper and Documents;
(viii) All other property, assets and revenues of Bayantel, whether tangible or intangible;
(ix) All General Intangibles; and
(x) All proceeds and products of any and all of the foregoing.64
In particular, petitioners refer to Section 4.02 of the Assignment Agreement as basis for
demanding full payment, ahead of other creditors, out of respondent’s revenue from
operations during rehabilitation. The relevant provision reads:
Section 4.02. Payments Under Contracts and Receivables.
If during the continuance of a Trigger Event the Company shall receive directly from any
party to any Assigned Agreement or from any account debtor or other obligor under any
Receivable, any payments under such agreements or the Receivables, the Company
shall receive such payments in a constructive trust for the benefit of the Secured
Parties, shall segregate such payments from its other funds, and shall forthwith transmit
and deliver such payments to the Collateral Agent in the same form as so received (with
141
any necessary endorsement) along with a description of the sources of such payments. All
amounts received by the Collateral Agent pursuant to this Section 4.02 shall be applied as
set forth in Part L and in the [Inter-creditor] Agreement.65(Underscoring in the original;
emphasis supplied)
The resolution of the issue at hand rests on a determination of whether secured creditors
may enforce preference in payment during rehabilitation by virtue of a contractual
agreement.
Section 6(c), PD 902-A provides that upon the appointment of a management committee,
rehabilitation receiver, board or body, all actions for claims against corporations,
partnerships or associations under management or receivership pending before any court,
tribunal, board or body shall be suspended accordingly.66 The suspension of action for
claims against the corporation under a rehabilitation receiver or management committee
embraces all phases of the suit, be it before the trial court or any tribunal or before this
Court.67
The justification for suspension of actions for claims is to enable the management
committee or rehabilitation receiver to effectively exercise its/his powers free from any
judicial or extrajudicial interference that might unduly hinder or prevent the "rescue" of
the debtor company. 68 It is intended to give enough breathing space for the management
committee or rehabilitation receiver to make the business viable again without having to
divert attention and resources to litigation in various fora.69
In the 1990 case of Alemar’s Sibal & Sons, Inc. v. Judge Elbinias,70 the Court first
enunciated the prevailing principle which governs the relationship among creditors
during rehabilitation. In said case, G.A. Yupangco sought the issuance of a writ of
execution to implement a final and executory default judgment in its favor and after
Alemar’s Sibal & Sons, Inc. was placed under rehabilitation. In ordering the stay of
execution, the Court held:
During rehabilitation receivership, the assets are held in trust for the equal benefit
of all creditors to preclude one from obtaining an advantage or preference over
another by the expediency of an attachment, execution or otherwise. For what would
prevent an alert creditor, upon learning of the receivership, from rushing posthaste to the
courts to secure judgments for the satisfaction of its claims to the prejudice of the less
alert creditors.
As between the creditors, the key phrase is "equality is equity." When a corporation
threatened by bankruptcy is taken over by a receiver, all the creditors should stand
on equal footing. Not anyone of them should be given any preference by paying one
or some of them ahead of the others. This is precisely the reason for the suspension of
all pending claims against the corporation under receivership. Instead of creditors vexing
the courts with suits against the distressed firm, they are directed to file their claims with
the receiver who is a duly appointed officer of the SEC.71 (Emphasis supplied)
Since then, the principle of equality in equity has been cited as the basis for placing
secured and unsecured creditors in equal footing or in pari passu with each other during
rehabilitation. In legal parlance, pari passu is used especially of creditors who, in
marshaling assets, are entitled to receive out of the same fund without any precedence
over each other.72
In Rizal Commercial Banking Corporation v. Intermediate Appellate Court, 73 the Court
disallowed the foreclosure of the debtor company’s property after the latter had filed a
Petition for Rehabilitation and Declaration of Suspension of Payments with the SEC. We
ruled that whenever a distressed corporation asks the SEC for rehabilitation and
suspension of payments, preferred creditors may no longer assert preference but shall
stand on equal footing with other creditors. Foreclosure shall be disallowed so as not to
prejudice other creditors, or cause discrimination among them. In 1999, the Court
qualified this ruling by stating that preferred creditors of distressed corporations shall
stand on equal footing with all other creditors only after a rehabilitation receiver or
management committee has been appointed. 74 More importantly, the Court laid the
guidelines for the treatment of claims against corporations undergoing rehabilitation:
1. All claims against corporations, partnerships, or associations that are pending before
any court, tribunal, or board, without distinction as to whether or not a creditor is secured
or unsecured, shall be suspended effective upon the appointment of a management
committee, rehabilitation receiver, board, or body in accordance with the provisions of
Presidential Decree No. 902-A.
2. Secured creditors retain their preference over unsecured creditors, but
enforcement of such preference is equally suspended upon the appointment of a
management committee, rehabilitation receiver, board, or body. In the event that the
assets of the corporation, partnership, or association are finally liquidated, however,
secured and preferred credits under the applicable provisions of the Civil Code will
definitely have preference over unsecured ones.75 (Emphasis supplied)
Basically, once a management committee or rehabilitation receiver has been appointed in
accordance with PD 902-A, no action for claims may be initiated against a distressed
corporation and those already pending in court shall be suspended in whatever stage they
may be. Notwithstanding, secured creditors shall continue to have preferred status but the
enforcement thereof is likewise held in abeyance. However, if the court later determines
that the rehabilitation of the distressed corporation is no longer feasible and its assets are
liquidated, secured claims shall enjoy priority in payment.
We perceive no good reason to depart from established jurisprudence. While Section
24(d), Rule 4 of the Interim Rules states that contracts and other arrangements between
the debtor and its creditors shall be interpreted as continuing to apply, this holds true only
to the extent that they do not conflict with the provisions of the plan.
Here, the stipulation in the Assignment Agreement to the effect that respondent Bayantel
shall pay petitioners in full and ahead of other creditors out of its cash flow during
rehabilitation directly impinges on the provision of the approved Rehabilitation Plan that
"[t]he creditors of Bayantel, whether secured or unsecured, should be treated equally and
on the same footing or pari passu until the rehabilitation proceedings is terminated in
accordance with the Interim Rules."
During rehabilitation, the only payments sanctioned by the Interim Rules are those made
to creditors in accordance with the provisions of the plan. Pertinent to this is Section 5(b),
Rule 4 of the Interim Rules which states that the terms and conditions of the
rehabilitation plan shall include the manner of its implementation, giving due regard to
the interests of secured creditors. This very phrase is what petitioners invoke as basis for
demanding priority in payment out of respondent’s cash flow.
But petitioners’ reliance thereon is misplaced.
By definition, due regard means consideration in a degree appropriate to the demands of
a particular case.76 On the other hand, security interest is a form of interest in property
which provides that the property may be sold on default in order to satisfy the obligation
for which the security interest is given. Often, the term "lien" is used as a synonym,
although lien most commonly refers only to interests providing security that are created
by operation of law, not through agreement of the debtor and creditor. In contrast, the
term "security interest" means any interest in property acquired by contract for the
142
purpose of securing payment or performance of an obligation or indemnifying against
loss or liability.77
Under the Interim Rules, the only pertinent reference to creditor security is found in
Section 12, Rule 4 on relief from, modification or termination of stay order. Said
provision states that the creditor is regarded as lacking adequate protection if it can be
shown that: (a) the debtor fails or refuses to honor a pre-existing agreement with the
creditor to keep the property insured; (b) the debtor fails or refuses to take commercially
reasonable steps to maintain the property; or (c) the property has depreciated to an extent
that the creditor is undersecured.
Upon a showing that the creditor is lacking in protection, the court shall order the
rehabilitation receiver to take steps to ensure that the property is insured or maintained or
to make payment or provide replacement security such that the obligation is fully
secured. If such arrangements are not feasible, the court may allow the secured creditor to
enforce its claim against the debtor. Nonetheless, the court may deny the creditor the
foregoing remedies if allowing so would prevent the continuation of the debtor as a going
concern or otherwise prevent the approval and implementation of a rehabilitation plan.78
In the context of the foregoing provisions, "giving due regard to the interests of secured
creditors" primarily entails ensuring that the property comprising the collateral is insured,
maintained or replacement security is provided such that the obligation is fully secured.
The reason for this rule is simple, in the event that the court terminates the proceedings
for reasons other than the successful implementation of the plan, the secured creditors
may foreclose the securities and the proceeds thereof applied to the satisfaction of their
preferred claims.
When the Rules of Procedure on Corporate Rehabilitation took effect on January 16,
2009, the "due regard" provision was amended to read:
SEC. 18. Rehabilitation Plan. – The rehabilitation plan shall include (a) the desired
business targets or goals and the duration and coverage of the rehabilitation; (b) the terms
and conditions of such rehabilitation which shall include the manner of its
implementation, giving due regard to the interests of secured creditors such as, but not
limited, to the non-impairment of their security liens or interests; x x x. (Emphasis
supplied)
Despite the additional phrase, however, it is our view that the amendment simply
amplifies the meaning of the "due regard provision" in the Interim Rules. First, the
amendment exemplifies what giving "due regard to the interests of secured creditors"
contemplates, mainly, the nonimpairment of securities. At the same time, the specific
reference to "security liens" and "interests," separated by the disjunctive "or," describes
what "the interests of secured creditors" consist of. Again, lien pertains only to interests
providing security that are created by operation of law while security interests include
those acquired by contract for the purpose of securing payment or performance of an
obligation or indemnifying against loss or liability. Lastly, the addition of the phrase "but
not limited" in the amendment shuns a rigid application of the provision by recognizing
that "giving due regard to the interest of secured creditors" may be rendered in other ways
than taking care that the security liens and interests of secured creditors are adequately
protected.
In this case, petitioners Express Investments III Private Ltd. And Export Development
Canada are concerned, not so much with the adequacy of the securities offered by
respondent, but with the devaluation of such securities over time. Petitioners fear that the
proceeds of respondent’s collateral would be insufficient to cover their claims in the
event of liquidation.
On this point, suffice it to state that petitioners are not without any remedy to address a
deficiency in securities, if and when it comes about. Under Section 12, Rule 4 of the
Interim Rules, a secured creditor may file a motion with the Rehabilitation Court for the
modification or termination of the stay order. If petitioners can show that arrangements to
insure or maintain the property or to make payment or provide additional security
therefor is not feasible, the court shall modify the stay order to allow petitioners to
enforce their claim − that is, to foreclose the mortgage and apply the proceeds thereof to
their claims. Be that as it may, the court may deny the creditor this remedy if allowing so
would prevent the continuation of the debtor as a going concern or otherwise prevent the
approval and implementation of a rehabilitation plan.
Indeed, neither the "due regard provision" nor contractual arrangements can shackle the
Rehabilitation Court in determining the best means of rehabilitating a distressed
corporation. Truth be told, the Rehabilitation Court may approve a rehabilitation plan
even over the opposition of creditors holding a majority of the total liabilities of the
debtor if, in its judgment, the rehabilitation of the debtor is feasible and the opposition of
the creditors is manifestly unreasonable. In determining whether or not the opposition of
the creditors is manifestly unreasonable, the court shall consider the following: (a) That
the plan would likely provide the objecting class of creditors with compensation greater
than that which they would have received if the assets of the debtor were sold by a
liquidator within a three-month period; (b) That the shareholders or owners of the debtor
lose at least their controlling interest as a result of the plan; and (c) The Rehabilitation
Receiver has recommended approval of the plan.79
According to the Liquidation Analysis80 prepared by KPMG at the request of the
Receiver, the Fair Market Value of respondent’s fixed assets is P18.7 billion while its
Forced Liquidation Value is P9.3 billion. Together with cash and receivables in the
amount of P911 million, respondent’s total liquidation assets are valued at P10.2 billion.
From this amount, the estimated liquidation return to the Omnibus Creditors is
P6,102,150,000 or approximately 52.9% of their claims in the amount of
P11,539,776,000. Meanwhile, Chattel Creditors can recoup 61% of its claims. As regards
the Unsecured Creditors, they will share in the pool of assets that respondents have
acquired since 1998, which were not specifically registered under the Omnibus
Agreement Mortgage Supplements. Said assets are estimated to have a value of P3.5
Billion. This accounts for 10.7% of the Unsecured Creditors’ claims.
Reckoned from these figures, the Receiver concluded that the shareholders shall receive
nothing on respondent’s liquidation while the latter’s creditors can expect significantly
less than full repayment. Moreover, regardless of whether the shareholders will lose at
least their controlling interest as a result of the plan, petitioners, in their Memorandum
dated April 30, 2009, have signified their conformity with the Court of Appeals decision
to limit the conversion of the unsustainable debt to a maximum of 40% of the fully-paid
up capital of respondent corporation. Lastly, the Receiver not only recommended the
approval of the Plan by the Rehabilitation Court, he, himself, prepared it. The
concurrence of these conditions renders the opposition of petitioners manifestly
unreasonable.
As regards the second issue, petitioners submit that the pari passu treatment of claims
offends the Contract Clause under the 1987 Constitution. Article III, Section 10 of the
Constitution mandates that no law impairing the obligation of contracts shall be passed.
Any law which enlarges, abridges, or in any manner changes the intention of the parties,
necessarily impairs the contract itself. And even when the change in the contract is done
by indirection, there is impairment nonetheless.81
143
At this point, it bears stressing that the non-impairment clause is a limitation on the
exercise of legislative power and not of judicial or quasijudicial power. In Lim, Sr. v.
Secretary of Agriculture & Natural Resources, et al.,82 we held:
x x x. For it is well-settled that a law within the meaning of this constitutional provision
has reference primarily to statutes and ordinances of municipal corporations. Executive
orders issued by the President whether derived from his constitutional powers or valid
statutes may likewise be considered as such. It does not cover, therefore, the exercise of
the quasi-judicial power of a department head even if affirmed by the President. The
administrative process in such a case partakes more of an adjudicatory character. It is
bereft of any legislative significance. It falls outside the scope of the non-impairment
clause. x x x.83
The prohibition embraces enactments of a governmental law-making body pertaining to
its legislative functions. Strictly speaking, it does not cover the exercise by such law-
making body of quasi-judicial power.
Verily, the Decision dated June 28, 2004 of the Rehabilitation Court is not a proper
subject of the Non-impairment Clause.
In view of the foregoing, we find no need to discuss the third issue posed in this petition
In G.R. Nos. 175418-20
Prefatorily, we restate the time honored principle that in a petition for review
on certiorari under Rule 45 of the Rules of Court, only questions of law may be raised.
Thus, in a petition for review on certiorari, the scope of the Supreme Court's judicial
review is limited to reviewing only errors of law, not of fact.84 It is not our function to
weigh all over again evidence already considered in the proceedings below, our
jurisdiction is limited to reviewing only errors of law that may have been committed by
the lower court.85
Before us, petitioners Bank of New York and Avenue Asia Capital Group raise a
question of fact which is not proper in a petition for review on certiorari. A question of
law arises when there is doubt as to what the law is on a certain state of facts, while there
is a question of fact when the doubt arises as to the truth or falsity of the alleged facts.
For a question to be one of law, the same must not involve an examination of the
probative value of the evidence presented by the litigants or any of them. The resolution
of the issue must rest solely on what the law provides on the given set of circumstances.
Once it is clear that the issue invites a review of the evidence presented, the question
posed is one of fact.86
Whether the Court of Appeals erred in affirming the sustainable debt fixed by the
Rehabilitation Court is a question of fact that calls for a recalibration of the evidence
presented by the parties before the trial court. In order to resolve said issue, petitioners
would have this Court reassess the state of respondent Bayantel’s finances at the onset of
rehabilitation and gauge the practical value of the plans submitted by the parties vis-à-vis
the financial models prepared by the experts engaged by them. These tasks are certainly
not for this Court to accomplish. The resolution of factual issues is the function of lower
courts, whose findings on these matters are received with respect.87 This is especially
true in rehabilitation proceedings where certain courts are designated to hear the case on
account of their expertise and specialized knowledge on the subject matter. Though this
doctrine admits of several exceptions,88none is applicable in the case at bar
Notably, the Interim Rules is silent on the manner by which the sustainable debt of the
debtor shall be determined. Yet, Section 2 of the Interim Rules prescribe that the Rules
shall be liberally construed to carry out the objectives of Sections 5(d),89 6(c)90 and
6(d)91 of PD 902-A.
Section 5(d), PD 902-A vested jurisdiction upon the SEC over petitions for rehabilitation.
Later, RA 8799 or the Securities Regulation Code, amended Section 5(d) of PD 902-A by
transferring SEC’s jurisdiction over said petitions to the RTC. Meanwhile, Section 6(c) of
PD 902-A provides for the appointment of a receiver of the subject property whenever
necessary in order to preserve the rights of the parties and to protect the interest of the
investing public and the creditors. Upon the appointment of such receiver, all actions for
claims against the corporation pending before any court, tribunal, board or body shall be
suspended accordingly. On the other hand, Section 5(d), PD 902-A expands the power of
the Commission to allow the creation and appointment of a management committee to
undertake the management of the corporation when there is imminent danger of
dissipation, loss, wastage or destruction of assets or other properties or paralyzation of
the business of the corporation which may be prejudicial to the interest of minority
stockholders, parties-litigants or the general public.
The underlying objective behind these provisions is to foster the rehabilitation of the
debtor by insulating it against claims, preserving its assets and taking steps to ensure that
the rights of all parties concerned are adequately protected.
This Court is convinced that the Court of Appeals ruled in accord with this policy when it
upheld the Rehabilitation Court’s determination of respondent’s sustainable debt. We
find the sustainable debt of US$325 million, spread over 19 years, to be a more
realistically achievable amount considering respondent’s modest revenue projections.
Bayantel projected a constant rise in its revenues at the range of 1.16%-4.91% with
periodic reverses every two years.92 On the other hand, petitioner’s proposal of a
sustainable debt of US$471 million to be paid in 12 years and the Receiver’s proposal of
US$370 million to be paid in 15 years betray an over optimism that could leave Bayantel
with nothing to spend for its operations.
Next, petitioners contest the admission of respondent’s rehabilitation plan for being filed
in violation of the Interim Rules. It is petitioner’s view that in a creditor-initiated petition
for rehabilitation, the debtor may only submit either a comment or opposition but not its
own rehabilitation plan.
We cannot agree.
Rule 4 of the Interim Rules treats of rehabilitation in general, without distinction as to
who between the debtor and the creditor initiated the petition. Nowhere in said Rule is
there any provision that prohibits the debtor in a creditor-initiated petition to file its own
rehabilitation plan for consideration by the court. Quite the reverse, one of the functions
and powers of the rehabilitation receiver under Section 14(m) of said Rule is to study the
rehabilitation plan proposed by the debtor or any rehabilitation plan submitted during the
proceedings, together with any comments made thereon. This provision makes particular
reference to a debtor-initiated proceeding in which the debtor principally files a
rehabilitation plan. In such case, the receiver is tasked, among other things, to study the
rehabilitation plan presented by the debtor along with any rehabilitation plan submitted
during the proceedings. This implies that the creditors of the distressed corporation, and
even the receiver, may file their respective rehabilitation plans. We perceive no good
reason why the same option should not be available, by analogy, to a debtor in creditor-
initiated proceedings, which is also found in Rule 4 of the Interim Rules.
Third, petitioners fault the Court of Appeals for ruling that the debt-toequity conversion
rate of 77.7%, as proposed by The Bank of New York, violates the Filipinization
provision of the Constitution. Petitioners explain that the acquisition of shares by foreign
Omnibus and Financial Creditors shall be done, both directly and indirectly in order to
meet the control test principle under RA 704293 or the Foreign Investments Act of 1991.
144
Under the proposed structure, said creditors shall own 40% of the outstanding capital
stock of the telecommunications company on a direct basis, while the remaining 40% of
shares shall be registered to a holding company that shall retain, on a direct basis, the
other 60% equity reserved for Filipino citizens.
Moreover, petitioners maintain that it is only fair to impose upon the Omnibus and
Financial Creditors a bigger equity conversion in Bayantel considering that petitioners
will bear the bulk of the accrued interests and penalties to be written off. Initially, the
Rehabilitation Court approved the Receiver’s recommendation to write-off interests and
penalties in the amount of US$34,044,553.00. The Rehabilitation Court likewise ordered
a re-computation of past due interest in accordance with the rate proposed by the
Receiver. Following this, petitioners estimate the total unpaid accrued interest of
Bayantel as of July 30, 2003 to be at US$140,098,750.66 while the Rehabilitation Court
arrived at the total amount of past due interest and penalties of US$114,855,369.59 upon
recomputation. This makes for a difference of US$25,243,381.07 which, petitioners
claim, represents an additional write-off to be borne by them for a total write-off of
US$59,287,934.07.
The provision adverted to is Article XII, Section 11 of the 1987 Constitution which
states:
SEC. 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.
This provision explicitly reserves to Filipino citizens control over public utilities,
pursuant to an overriding economic goal of the 1987 Constitution: to "conserve and
develop our patrimony" and ensure "a selfreliant and independent national
economy effectively controlled by Filipinos."94
In the recent case of Gamboa v. Teves,95 the Court settled once and for all the meaning
of "capital" in the above-quoted Constitutional provision limiting foreign ownership in
public utilities. In said case, we held that 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.
Applying this, two steps must be followed in order to determine whether the conversion
of debt to equity in excess of 40% of the outstanding capital stock violates the
constitutional limit on foreign ownership of a public utility: First, identify into which
class of shares the debt shall be converted, whether common shares, preferred shares that
have the right to vote in the election of directors or non-voting preferred
shares; Second, determine the number of shares with voting right held by foreign entities
prior to conversion. If upon conversion, the total number of shares held by foreign
entities exceeds 40% of the capital stock with voting rights, the constitutional limit on
foreign ownership is violated. Otherwise, the conversion shall be respected.
In its Rehabilitation Plan,96 among the material financial commitments made by
respondent Bayantel is that its shareholders shall "relinquish the agreed-upon amount of
common stock[s] as payment to Unsecured Creditors as per the Term
Sheet." 97 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.
As to the fourth issue, petitioners insist that the write-off of the default interest and
penalties along with the re-computation of past due interest violate the pari
passu treatment of creditors.
Petitioner’s argument lacks merit.
Section 5(d), Rule 4 of the Interim Rules provides that the rehabilitation plan shall
include the means for the execution of the rehabilitation plan, which may include
conversion of the debts or any portion thereof to equity, restructuring of the debts, dacion
en pago, or sale of assets or of the controlling interest.
Debt restructuring may involve conversion of the debt or any portion thereof to equity,
sale of the assets of the distressed company and application of the proceeds to the
obligation, dacion en pago, debt relief or reduction, modification of the terms of the loan
or a combination of these schemes.
In this case, the approved Rehabilitation Plan provided for a longer period of payment,
the conversion of debt to 40% equity in respondent company, modification of interest
rates on the restructured debt and accrued interest and a write-off or relief from penalties
and default interest. These recommendations by the Receiver are perfectly within the
powers of the Rehabilitation Court to adopt and approve, as it did adopt and approve. In
so doing, no reversible error can be attributed to the Rehabilitation Court.
The pertinent portion of the fallo of said court’s Decision dated June 28, 2004 states:
1. The ruling on the pari passu treatment of all creditors whose claims are subject to
restructuring shall be maintained and shall extend to all payment terms and treatment
of past due interest.[98 (Emphasis supplied)
Thus, the court a quo provided for a uniform application of the pari passu principle
among creditor claims and the terms by which they shall be paid, including past due
interest. This is consistent with the interpretation accorded by jurisprudence to the pari
passu principle that during rehabilitation, the assets of the distressed corporation are held
in trust for the equal benefit of all creditors to preclude one from obtaining an advantage
or preference over another. All creditors should stand on equal footing. Not any one of
them should be given preference by paying one or some of them ahead of the others.99
As applied to this case, the pari passu treatment of claims during rehabilitation entitles all
creditors, whether secured or unsecured, to receive payment out of Bayantel’s cash flow.
Despite their preferred position, therefore, the secured creditors shall not be paid ahead of
the unsecured creditors but shall receive payment only in the proportion owing to them.
In any event, the debt restructuring schemes complained of shall be implemented among
all creditors regardless of class. Both secured and unsecured creditors shall suffer a write-
145
off of penalties and default interest and the escalating interest rates shall be equally
imposed on them. We repeat, the commitment embodied in the pari passu principle only
goes so far as to ensure that the assets of the distressed corporation are held in trust for
the equal benefit of all creditors. It does not espouse absolute equality in all aspects of
debt restructuring.
As regards petitioners’ claims for costs, petitioner Bank of New York filed before the
Rehabilitation Court a Notice of Claim100 dated February 19, 2004 for the payment of
US$1,255,851.30, representing filing fee, deposit for expenses and the professional fees
of its counsels and financial advisers. Earlier, said bank had filed a claim for the payment
of US$863,829.98 for professional fees of its counsels and professional advisers and
P2,850,305.00 for docket fees and publication expenses. On its end, the Avenue Asia
Capital Group claims a total of US$535,075.64 to defray the professional fees of its
financial adviser, Price Waterhouse & Cooper and the Bondholder Communications
Group.
In an Order101 dated March 15, 2005, the Rehabilitation Court approved the claims for
costs of petitioner Bank of New York as follows:
i. filing fees of P2,701,750.00 as evidenced by O.R. Nos. 18463998, 18466286 and
0480246 all dated August 13, 2003 of the Regional Trial Court (of Pasig City);
ii. costs of publication of the Stay Order in the amount of P47,550.00 as evidenced by
O.R. No. 86384 dated August 13, 2003 of the Peoples Independent Media, Inc., the same
being judicial costs authorized under Sec. 1, Rule 142 of the Rules of Court;
iii. payments of professional fees to its Philippine Counsel, Belo Gozon Elma Parel
Asuncion & Lucila, in the total amount of US$152,784.32 as evidenced by the Affidavit
of Atty. Roberto Rafael V. Lucila and the Statements of Account attached thereto;
which the Court considers to be reasonable and finds authorized under Sec. 6.11 and 6.12
of the Indenture attached as Annex "E" to the Petition;
The Receiver is hereby directed to cause the settlement of payment of the accounts within
a period of sixteen (16) months from receipt of this Order.102
The trial court made no pronouncement on the claims for cost of petitioner Avenue Asia
Capital Group, either in the same Order or in a subsequent order.
Before us, petitioners reiterate their claims for costs based on Sections 6.11103 and
6.12104 of the Indenture105 dated July 22, 1999, which was executed by respondent in
their favor.
It bears stressing at this point that the subject of petitioners’ appeal before the Court of
Appeals was the Rehabilitation Court’s Decision dated June 28, 2004. Said Decision,
however, bore no discussion on either petitioners’ claim for costs from which they may
appeal. Notably, the assailed Order of the Rehabilitation Court was promulgated on
March 15, 2005 or four (4) months after petitioners had appealed the Decision dated June
28, 2004 to the Court of Appeals on November 16, 2004. Evidently, the appellate court
could not have acquired jurisdiction to review said Order.
Nonetheless, we doubt the propriety of the Rehabilitation Court’s award for costs. A
perusal of the Order dated March 15, 2005 reveals that the award to petitioner Bank of
New York was made pursuant to Section 1, Rule 142 of the Rules of Court, which states:
SECTION 1. Costs ordinarily follow results of suit.- Unless otherwise provided in these
Rules, costs shall be allowed to the prevailing party as a matter of course, but the court
shall have power, for special reasons, to adjudge that either party shall pay the costs of an
action, or that the same be divided, as may be equitable. No costs shall be allowed against
the Republic of the Philippines unless otherwise provided by law. (Emphasis supplied)
However, there is no prevailing party in rehabilitation proceedings which is non-
adversarial in nature.106 Unlike in adversarial proceedings, the court in rehabilitation
proceedings appoints a receiver to study the best means to revive the debtor and to ensure
that the value of the debtor’s property is reasonably maintained pending the
determination of whether or not the debtor should be rehabilitated, as well as implement
the rehabilitation plan after its approval.107 The main thrust of rehabilitation is not to
adjudicate opposing claims but to restore the debtor to a position of successful operation
and solvency. Under the Interim Rules, reasonable fees and expenses are allowed the
Receiver and the persons hired by him,108 for those expenses incurred in the ordinary
course of business of the debtor after the issuance of the stay order but excluding interest
to creditors.109
Moreover, while it is true that the Indenture between petitioners and respondent
corporation authorizes the Trustee to file proofs of claim for the payment of reasonable
expenses and disbursements of the Trustee, its agents and counsel, accountants and
experts, such remedy is available only in cases where the Trustee files a collection suit
against respondent company. Indubitably, the rehabilitation proceedings in the case at bar
is not a collection suit, which is adversarial in nature.
In G.R. No. 177270
At issue in this petition for review on certiorari is the extent of power that the Monitoring
Committee can exercise.
The pertinent portion of the fallo of the Decision dated June 28, 2004 provides:
6. A Monitoring Committee shall be formed composed of representatives from all classes
of the restructured debt. The Rehabilitation Receiver’s role shall be limited to the powers
of monitoring and oversight as provided in the Interim Rules. All powers provided for in
the Report and Recommendations, which exceed the monitoring and oversight functions
mandated by the Interim Rules shall be amended accordingly.110
On October 15, 2004, petitioner Bank of New York filed a Manifestation with the
Rehabilitation Court for the creation of a monitoring committee in accordance with the
aforequoted pronouncement. Petitioner espouses the view that it is essential to "provide
for a strong and effective Monitoring Committee x x x which gives the Financial
Creditors meaningful and substantial participation in Bayantel."111 It went on to propose
the powers that the Monitoring Committee should possess, specifically:
The role of the Monitoring Committee shall be to work with the Receiver (on precise
terms to be agreed as discussed below) to Oversee the actions of the BTI New Board of
Directors, making key Decisions and approving, amongst other things,
(i) Any proposed Events of Rescheduling;
(ii) Any other proposed actions by the receiver on a payment default;
(iii) Operating Expenses Budgets;
(iv) Capital Expenditure Budgets;
(v) Asset Sales Programs; and
(vi) Terms of Incentive Scheme for New Management and Management Targets.112
Subsequently, in an Order113 dated November 9, 2004, the Rehabilitation Court adopted
petitioner’s proposal by constituting a Monitoring Committee that
shall participate with the Receiver in monitoring and overseeing the actions of the Board
of Directors of Bayantel and may, by majority vote, adopt, modify, revise or
substitute any of the following items:
(1) any proposed Annual OPEX Budgets;
(2) any proposed Annual CAPEX Budgets;
(3) any proposed Reschedule;
146
(4) any proposed actions by the Receiver on a payment default;
(5) terms of Management Incentivisation Scheme and Management Targets;
(6) the EBITDA/Revenue ratios set by the Bayantel Board of Directors; and,
(7) any other proposed actions by the Bayantel Board of Directors including,
without limitation, issuance of new shares, sale of core and non-core assets, change
of business, etc. that will materially affect the terms and conditions of the
rehabilitation plan and its implementation.114 (Emphasis supplied)
From said Order, respondent Bayantel filed a Manifestation and Motion for Clarification
while the secured creditors moved for an increase in the membership of the monitoring
committee from three to five members. For his part, the Receiver submitted a
Compliance and Manifestation dated January 10, 2005.
In an Order115 dated March 15, 2005, the Rehabilitation Court affirmed the creation of a
monitoring committee but denied the motion for the appointment of additional members
therein. It also made the following dispositions relative to the functions of the Monitoring
Committee:
(d) to approve the Implementing Term Sheet submitted by the Receiver subject to the
following conditions:
xxxx
ii. the Receiver shall design and formulate with the participation of the Monitoring
Committee and Bayantel the convertible debt instrument, as directed of him in the
earlier Order of November 9, 2004, for the unsustainable portion of the restructured debt
of Bayantel and submit the same to the Court within thirty (30) days from receipt of this
Order. Costs, expenses and taxes that may be due on the execution of the convertible debt
instrument shall be charged to Bayantel as costs of the rehabilitation proceedings;
xxxx
iv. the Receiver shall devise a mode or procedure whereby the Monitoring Committee
can have immediate and direct access to any information that the Receiver has
obtained or received from Bayantel or the Monitoring Accountant in regard to the
management and business operations of Bayantel;
v. the trading of debt mentioned in the Implementing Term Sheet shall be governed by
the pre-petition documents which do not conflict with the Decision of this Court and
provided that no transfer shall be made to the Bayantel Group Companies, or any
controlling shareholders thereof including Bayan Telecommunications Holdings
Corporation ("BTHC"); however, any "buy back" scheme as may be approved by the
Monitoring Committee and Bayantel shall be open to all creditors whether secured or
unsecured;116 (Emphasis supplied)
On appeal, the Court of Appeals nullified the Orders dated November 9, 2004 and March
15, 2005 insofar as they defined the powers and functions of the Monitoring Committee.
The appellate court ruled that the Rehabilitation Court committed grave abuse of
discretion in vesting the Monitoring Committee with powers beyond monitoring and
overseeing Bayantel’s operations.
Before us, petitioner contends that the Rehabilitation Court intended for the Monitoring
Committee to exercise powers greater than those of the Receiver.
We find no merit in petitioner’s argument.
In the Decision dated June 28, 2004, the Rehabilitation Court discussed the circumstances
surrounding the creation of the monitoring committee, thus:
Both Bayantel and the Opposing Creditors contend that the Rehabilitation Receiver,
under his Report and Recommendations, appear to be vested with too much discretion in
the implementation of his proposed rehabilitation plan. Bayantel and the Opposing
Creditors for one, argue against the power of the Rehabilitation Receiver to be able to
further restructure Restructured Debt as well as the Rehabilitation Receiver's power
relating to matters of Bayantel’s budget.
The [c]ourt wishes to stress that the Interim Rules prohibit the Rehabilitation Receiver
from taking over the management and control of the company under rehabilitation, and
limit his role to merely overseeing and monitoring the operations of the company
(Section 14, Rule 4, Interim Rules). However, the [c]ourt also appreciates that the
Rehabilitation Receiver must oversee the implementation of the rehabilitation plan as
approved by the [c]ourt. In line with petitioner’s proposal, the creation of a Monitoring
Committee composed of representatives from all classes of the restructured debt
addresses the concerns raised by the creditors.117 (Emphasis supplied)
It can be gleaned from the foregoing that the Rehabilitation Court’s decision to form a
monitoring committee was borne out of creditors’ concerns over the possession of vast
powers by the Receiver. While the Rehabilitation Court was quick to delineate the
Receiver’s authority, it nevertheless, underscored the value of his role in overseeing the
implementation of the Plan. It was on this premise that the Rehabilitation Court appointed
the Monitoring Committee - to "[address] the concerns raised by the creditors." Yet, in its
Orders dated November 9, 2004 and March 15, 2005, the Rehabilitation Court equipped
the Monitoring Committee with powers well beyond those of the Receiver’s. Apart from
control over respondent’s budget, the Monitoring Committee may also adopt, modify,
revise or even substitute any other proposed actions by respondent’s Board of Directors,
including, without limitation issuance of new shares, sale of core and non-core assets,
change of business and others that will materially affect the terms and conditions of the
rehabilitation plan and its implementation. Ironically, the court a quo diluted the seeming
concentration of power in the hands of the Receiver but appointed a Committee
possessed of even wider discretion over respondent’s operations.
From all indications, however, the tenor of the Rehabilitation Court’s Decision dated
June 28, 2004 does not contemplate the creation of a Monitoring Committee with broader
powers than the Receiver. As the name of the Monitoring Committee itself suggests, its
job is "to watch, observe or check especially for a special purpose."118 In the context of
the Decision dated June 28, 2004, the fundamental task of the Monitoring Committee
herein is to oversee the implementation of the rehabilitation plan as approved by the
court. This should not be confused with the functions of the Receiver under the Interim
Rules or a management committee under PD 902-A.
Under Section 14, Rule 4 of the Interim Rules, the Receiver shall not take over the
management and control of the debtor but shall closely oversee and monitor its
operations during the pendency of the rehabilitation proceeding. The Rehabilitation
Receiver shall be considered an officer of the court and his core duty is to assess how
best to rehabilitate the debtor and to preserve its assets pending the determination of
whether or not it should be rehabilitated and to implement the approved plan.
It is a basic precept in Corporation Law that the corporate powers of all corporations
formed under Batas Pambansa Blg. 68 or the Corporation Code shall be exercised, all
business conducted and all property of such corporations controlled and held by the board
of directors or trustees. Nonetheless, PD 902-A presents an exception to this rule.
Section 6(d)119 of PD 902-A empowers the Rehabilitation Court to create and appoint a
management committee to undertake the management of corporations when there is
imminent danger of dissipation, loss, wastage or destruction of assets or other properties
or paralyzation of business operations of such corporations which may be prejudicial to
the interest of minority stockholders, parties-litigants or the general public. In the case of
147
corporations supervised or regulated by government agencies, such as banks and
insurance companies, the appointment shall be made upon the request of the government
agency concerned. Otherwise, the Rehabilitation Court may, upon petition or motu
proprio, appoint such management committee.
The management committee or rehabilitation receiver, board or body shall have the
following powers: (1) to take custody of, and control over, all the existing assets and
property of the distressed corporation; (2) to evaluate the existing assets and liabilities,
earnings and operations of the corporation; (3) to determine the best way to salvage and
protect the interest of the investors and creditors; (4) to study, review and evaluate the
feasibility of continuing operations and restructure and rehabilitate such entities if
determined to be feasible by the Rehabilitation Court; and (5) it may overrule or revoke
the actions of the previous management and board of directors of the entity or entities
under management notwithstanding any provision of law, articles of incorporation or by-
laws to the contrary.1âwphi1
In this case, petitioner neither filed a petition for the appointment of a management
committee nor presented evidence to show that there is imminent danger of dissipation,
loss, wastage or destruction of assets or other properties or paralyzation of business
operations of respondent corporation which may be prejudicial to the interest of the
minority stockholders, the creditors or the public. Unless petitioner satisfies these
requisites, we cannot sanction the exercise by the Monitoring Committee of powers that
will amount to management of respondent’s operations.
WHEREFORE, the Court hereby RESOLVES to dispose of these consolidated
petitions, as follows:
(1) The petition for review on certiorari in G.R. Nos. 174457-59 is DENIED. The
Decision dated August 18, 2006 of the Court of Appeals in CA-G.R. SP No. 87203
is AFFIRMED;
(2) The petition for review on certiorari in G.R. Nos. 175418-20 is DENIED. The
Decision dated August 18, 2006 and Resolution dated November 8, 2006 of the Court of
Appeals in CA-G.R. SP Nos. 87100 and 87111 are AFFIRMED; and
(3) The petition for review on certiorari in G.R. No. 177270 is DENIED. The Decision
dated October 27, 2006 and Resolution dated March 23, 2007 of the Court of Appeals in
CA-G.R. SP No. 89894 are AFFIRMED.
No pronouncement as to costs.
SO ORDERED.
EN BANC (2) Defendant is a duly organized and existing government entity with office at 1117
Oregon Street, Manila;
G.R. No. L-26094 August 18, 1972 (3) Pursuant to Section 16(a) of our Public Service Act, public utility corporations, such
LUZON STEVEDORING CORPORATION, plaintiff- appellant, as plaintiff, may be organized provided that at least 60% of the subscribed or paid-up
vs. capital stock thereof belongs entirely to citizens of the Philippines or of the United States,
ANTI-DUMMY BOARD, defendant-appellee. and the remaining 40% of the said subscribed or paid-up capital stock may belong to non-
Jalandoni & Jamir for plaintiff-appellant. American aliens;
Office of the Solicitor General for defendant-appelle . (4) Defendant is charged by Republic Act No. 1130 with the duty of enforcing the
provisions of our Constitution and our laws which require Philippine and/or United States
MAKASIAR, J.:p citizenship for the exercise or enjoyment of a right, franchise or privilege, property or
Plaintiff-appellant Luzon Stevedoring Corporation appealed on February 25, 1966 (p. 86, business;
rec. on appeal) from the decision of the Court of First Instance of Manila dated February (5) Defendant is likewise charged with the duty of enforcing and implementing the
3, 1966 and holding that under the provision of Section 16 (a) of the Public Service Act provisions of Commonwealth Act No. 108, as amended, commonly known as the Anti-
(Commonwealth Act No. 146) in relation to Section 2-A of the Anti-Dummy Law Dummy Law;
(Commonwealth Act No. 108, as amended by Republic Act No. 134), a public utility (6) Plaintiff has, as of the date of this stipulation, the following non-American aliens in
corporation "is prohibited from keeping non-American aliens in its employ", copy of its employ:
which it received on February 5, 1966 (p, 78, rec. on appeal).
NAMES NATIONALITY DATE OF EMPLOYMENT
On March 13, 1963, plaintiff-appellant Luzon Stevedoring Corporation filed a complaint
for declaratory relief alleging among others that it has nine (9) non-American aliens
under its employ since long before the decision on March 31, 1962 in G.R. No. L-24850,
entitled "Macario King, et al. vs. Pedro S. Hernaez, etc., et al.", which ruled that aliens Leopold Henry Austrian March 5, 1951 Vice President
other than Americans may not be employed in whatever capacity in any retail business in
the Philippine because of Section 1 of Republic Act No. 1180 otherwise known as the Winternitz for
Retail Trade Law, in conjunction with Section 2-A of Commonwealth Act No. 108, as
amended by Republic Act No. 134; and that defendant-appellee Anti-Dummy Board in a Special Services.
letter dated February 27, 1963 advised plaintiff-appellant that the Secretary of Justice
rendered an opinion to the effect that the employment of non-American aliens in public Rafael A. Spaniard March, 1947 Vice President
utility corporations is prohibited by Section 2-A of the Anti-Dummy Law; and prays for a
judicial construction of the provisions of Section 16(a) of the Public Service Act in Xaudaro for Operations
relation to Section 2-A of the Anti-Dummy Law, as amended with particular reference to
the right of public utility corporations to keep non-American aliens in their employ (pp. Andres L. Spaniard April, 1961 Manager, Davao
1-8, rec. on appeal).
On April 5, 1963, the defendant-appellee Anti-Dummy Board, through the Solicitor Muñoz Jr. Branch.
General, filed its answer and interposed therein the special defenses: .
(1) that the complaint states no cause of action; Jens Jorgensen Danish 1939 Stevedore
(2) that according to the opinion of the Secretary of Justice, plaintiff-appellant cannot
employ non-American aliens in accordance with Section 2-A of the Anti-Dummy Law; Supervisor
and
(3) that plaintiff-appellant, having in its employ nine (9) non-American aliens since Thomas Edge-cock Australian May, 1946 Stevedore
before 1962, had already violated Section 2-A of Commonwealth Act No. 108, as Supervisor
amended by Republic Act No. 134, in relation to Section 16(a) of Commonwealth Act
(7) Within a reasonable time after our Supreme Court denied the last motion for
No. 146 and Section 8 of Article XIV of the Constitution, and therefore cannot avail of a
reconsideration filed by petitioner in the case of "Macario King, et. al., vs. Pedro S.
petition for declaratory relief for the determination of its rights or duties under the
Hernaez, etc., et. al.," SC-G.R. No. L-14850, plaintiff wrote defendant a letter, requesting
aforementioned laws and constitutional provision (pp. 36-38, rec. on appeal).
the latter's opinion as to whether or not the employment of plaintiff's non-American
On October 8, 1965, the parties, assisted by their respective counsels, prayed for
aliens was within the prohibition stated in Section 2-A of the Anti-Dummy Law;
judgment on the basis of the following stipulation of facts:
(8) On February 27, 1963, defendant wrote plaintiff a letter to the effect that, according to
(1) Plaintiff Luzon Stevedoring Corporation is a public utility corporation organized and
the Secretary of Justice, the employment of non-American aliens even in public utility
existing under the laws of the Philippines, with principal office at Manila;
corporations is prohibited by said provision. (pp. 45-48, rec. on appeal; pp. 30-31, rec.).

148
The pivotal issue is: whether the prohibition against the employment of non-American
aliens in public utility corporations refers only to business, right, franchise or privilege
which is completely nationalized.
I Law, provides that "certificates of public convenience and necessity will be granted only
However, WE have to rule first on the procedural question whether the petition for
declaratory relief is the proper remedy despite the fact that herein plaintiff-appellant
admittedly had already committed a breach of the law since it has been employing non-
American aliens long before the decision in King, et al. vs. Hernaez, et al. of March 31,
1962.1 The same issue was raised in the aforesaid King case. Therein, WE ruled that
petition for declaratory relief was the appropriate remedy on the ground that the other
petitioners therein were already employed, when petitioner acquired on January 1, 1957
the grocery wholesale and retail business previously owned by the Philippine Cold
Stores, Inc.; that three weeks after his acquisition thereof, King sought permission from
the President of the Philippines thru the Secretary of Commerce and Industry to retain the
three Chinese employees as technical personnel pursuant to Section 2-A of
Commonwealth Act No. 108, as amended; and that his request was disapproved because
said Chinese employees were not occupying technical positions within the meaning of the
aforesaid Section 2-A of Commonwealth Act No. 108, as amended by Republic Act No.
134. But the foregoing circumstances of the King case do not obtain in the case at bar;
because plaintiff appellant has been operating as a public utility since long before the
Second World War, has not been transferred to a new owner, and has been employing
non-American aliens, the remaining five of whom are — one (1) Danish since 1939, one
(1) Australian since May, 1946, one (1) Spaniard since March, 1947, an Austrian since
May, 1951, and another Spaniard since April, 1961 — long before the enactment of
Republic Act No. 134 on June 14, 1947 and prior to the decision in the King case on
March 31, 1962.
And Republic Act No. 1130 enacted on June 16, 1954, created the Anti-Dummy Board
"to insure the implementation of all the provisions of the Constitution,
nationalization2 laws, and other legal provisions which require Philippine citizenship or
citizenship of any other specific country for the exercise or enjoyment of a right,
franchise or privilege, property or business, and further, to coordinate as far as practicable
all government agencies charged with the enforcement of the said provisions of the
Constitution and laws and, in particular, Commonwealth Act Number One Hundred
Eight, as amended, ... ."3
Consequently, this petition for declaratory relief could be outrightly dismissed.
II
But because the main issue raised by the present case is of transcendental importance,
involving as it does the exercise or enjoyment of rights, franchises, privileges, properties
and businesses which only Filipino citizens and qualified corporations can exercise or
enjoy under the Constitution and the statutes, and because the same question can be
raised by herein plaintiff-appellant in an appropriate action, WE deem it wise and
expedient that WE grapple with and resolve the question in the instant case for the
guidance of all concerned.
Under the stipulation of facts approved by the trial court, plaintiff-appellant admits that it
is a "public utility corporation recognized and existing under the laws of the Philippines.
... ."
Section 8 of Article XIV of the Constitution enjoins that "no franchise, certificate, or any
other form of authorization for the operation of public utility shall be granted except to
citizens of the Philippines or to corporations or other entities organized under the laws of
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the Philippines, sixty per centum of the capital of which is owned by citizens of the
Philippines, ... ."
Section 16(a) of Commonwealth Act No. 146, otherwise known as the Public Service
to citizens of the Philippines or of the United States or to corporations, co-partnerships,
associations or joint-stock companies constituted and organized under the laws of the
Philippines: provided, That sixty per centum of the stock or paid-up capital of any such
stock corporation, co-partnership, association or joint-stock company must belong
entirely to citizens of the Philippines or of the United States: ... ."
It should be recalled that the first Anti-Dummy Law, Commonwealth Act No. 108, which
was approved on October 30, 1936, provides:
SECTION 1. In all cases in which any constitutional or legal provision requires
Philippine or United States citizenship as a requisite for the exercise or enjoyment of a
right, franchise or privilege, any citizen of the Philippines or the United States who
allows his name or citizenship to be used for the purpose of evading such provision, and
any alien or foreigner profiting thereby, shall be punished by imprisonment for not less
than two nor more than ten years, and by a fine of not less than two thousand nor more
than ten thousand pesos.
The fact that the citizen of the Philippines or of the United States charged with a violation
of this Act had, at the time of the acquisition of his holdings in the corporations or
associations referred to in section two of this Act, no real or personal property, credit or
other assets the value of which shall at least be equivalent to said holdings shall be
admissible as circumstantial evidence of a violation of this Act.
SEC. 2. In all cases in which a constitutional or legal provision requires that, in order that
a corporation or association may exercise or enjoy a right, franchise or privilege, not less
than a certain per centum of its capital must be owned by citizens of the Philippines or
the United States, or both, it shall be unlawful to falsely simulate the existence of such
minimum of stock or capital as owned by such citizens of the Philippines or the United
States or both, for the purpose of evading said provision. The president or manager and
directors or trustees of corporations or associations convicted of a violation of this section
shall be punished by imprisonment for not less than two nor more than ten years, and by a
fine of not less than two thousand nor more than ten thousand pesos.
SEC. 3. Any corporation or association violating any of the provisions of this Act shall,
upon proper court proceedings, be dissolved.
Commonwealth Act No. 421, approved on May 31, 1939, amended Commonwealth Act
No. 108 by inserting the following Section 2-A and Section 2-B:
SEC. 2-A. Any person, corporation or association which, having in its name or under its
control, a right, franchise, privilege, property or business, the exercise or enjoyment of
which is expressly reserved by the Constitution or the laws of Philippines to citizens of
the Philippines or of the United States, or to corporations or associations at least sixty
percentum of the capital of which is owned by such Citizens, permits or all the use,
exploitation or enjoyment thereof by a person, corporation or association not possessing
the requisites prescribed by the Constitution or the laws of the Philippines; or leases, or in
any other way transfer or conveys said right, franchise privilege, property or business to a
person, corporation or association not otherwise qualified under the Constitution, or
provision of the existing Acts, and any person who knowingly aids, assists, or abets in the
planning, consummation or perpetration of any of the acts herein above enumerated, shall
be punished by imprisonment for not less than two nor more than ten years, and by a fine
of not less than two thousand nor more than ten thousand pesos: Provided, however, That
presidents, managers, or persons in charge of corporations, associations, partnerships
violating the provisions of this section shall criminally liable in lieu thereof.
SEC 2-B. Any violation of the provisions of this by the spouse of any public official, if
both live together, shall be cause for the dismissal of such public official.
And Republic Act No. 134, approved on June 14, 1947, further amended Sections 1, 2
and 2-A of Commonwealth Act No. 108 and inserted Section 3-A therein.
SECTION 1. In all cases in which any constitutional or legal provision requires
Philippine or any other specific citizenship as a requisite for the exercise or enjoyment of
a franchise or privilege, any citizen of the Philippines or of any other specific country
who allows his name or citizenship to used for the purpose of evading such provision,
and any alien or foreigner profiting thereby, shall be punished by imprisonment for not
less than five nor more than fifteen years, and a fine of not less than the value of the right,
franchise or privilege, which is enjoyed or acquired in violation of the provisions hereof
but in no case less than five thousand pesos.
The fact that the citizen of the Philippines or of any specific country charged with a
violation of this Act had, at the time of the acquisition of his holdings in the corporations
or associations referred to in section two of this Act, no real or personal property, credit
or other assets the value of which shall at least be equivalent to said holdings, shall be
evidence of a violation of this Act.
SEC. 2. In all cases in which a constitutional or legal provision requires that, in order that
a corporation or association may exercise or enjoy a right, franchise or privilege, not less
than a certain per centum of its capital must be owned by citizens of the Philippines or of
any other specific country, it shall be unlawful to falsely simulate the existence of such
minimum of stock or capital as owned by such citizens, for the purpose of evading said
provision. The president or managers and directors or trustees of corporations or
associations convicted of a violation of this section shall be punished by imprisonment of
not less than five nor more than fifteen years, and by a fine of not less than the value of
the right, franchise or privilege, enjoyed or acquired in violation of the provisions hereof
but in no case less than five thousand pesos.
SEC 2 Section two-A of Commonwealth Act Numbered One hundred and eight, as
inserted by Commonwealth Act Numbered Four hundred and twenty-one, is amended to
read as follows:
SEC. 2-A. Any person, corporation, or association which, having in its name or under its
control, a right, franchise, privilege, property or business, the exercise or enjoyment of
which is expressly reserved by the Constitution or the laws to citizens of the Philippines
or of any other specific country, or to corporations or associations at least sixty per
centum of the capital of which is owned by such citizens, permits or allows the use,
exploitation or enjoyment thereof by a person, corporation or association not possessing
the requisites prescribed by the Constitution or the laws of the Philippines; or leases, or in
any other way transfers or conveys said right, franchise, privilege, property or business to
a person, corporation or association not otherwise qualified under the Constitution, or the
provisions of the existing laws; or in any manner permits or allows any person not
possessing the qualifications required by the Constitution or existing laws to acquire, use,
exploit or enjoy a right, franchise, privilege, property or business, the exercise and
enjoyment of which are expressly reserved by the Constitution or existing laws to citizens
of the Philippines or of any other specific country, intervene in the management,
operation, administration or control thereof, whether as an officer, employee or laborer
therein with or without remuneration except technical personnel whose employment may
be specifically authorized by the President of the Philippines upon recommendation of
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the Department Heads concerned, if any, and any person who knowingly aids, assists or
abets in the planning, consummation or perpetration of the acts hereinabove enumerated
shall be punished by imprisonment for not less than five nor more than fifteen years, a by
a fine of not less than the value of the right, franchise, privilege enjoyed or acquired in
violation of the provisions here but in no case less than five thousand pesos: Provided,
however That the president, managers, or persons in charge of corporations, association,
or partnerships violating the provisions this section shall be criminally liable in lieu
thereof: Provided, further, That any person, corporation or association shall, addition to
the penalty imposed herein, forfeit such right, franchise, privilege, and the property or
business enjoyed or acquired in violation of the provisions of this Act.
SEC. 3. Commonwealth Act Numbered One hundred eight, as amended, is further
amended by inserting between section three and four thereof, a new section to be known
as section three-A, which shall read as follows:
SEC. 3-A. In case of conviction under the provisions of this Act, twenty-five per centum
of any fine imposed shall accrue to the benefit of the informer who furnishes to the
Government original information leading to said conviction and who shall be ascertained
and named in the judgment of the court. If the informer is a dummy; who shall
voluntarily take the initiation of reporting to the proper authorities any violation of the
provisions of this Act and assist in the prosecution, resulting in the conviction of any
person or corporation profiting thereby or involved therein, he shall be entitled to the
reward hereof in the sum equivalent to twenty-five per centum of the fine actually paid to
or received by the Government, and shall be exempted from the penal liabilities provided
for in this Act.
Aside from increasing the penalties prescribed in Commonwealth Act No. 421, Republic
Act No. 134 added the portion which states: "or in any manner permits or allow any
person not possessing the qualifications required by the Constitution or existing laws to
acquire, use, exploit or enjoy a right, franchise, privilege, property or business the
exercise and enjoyment of which are expressly reserved by the Constitution or existing
laws to citizens of the Philippines or of any other specific country, to intervene in the
management, operation, administration or control thereof, whether as an officer,
employee or laborer therein, with or without remuneration except technical personnel
whose employment may be specifically authorized by the President of the Philippines
upon recommendation of the Department Head concerned, if any, ... ."
The aforequoted Section 2-A penalizes (a) any person, corporation or association having
in its name or under its control a right, franchise, privilege, property or business, the
exercise or enjoyment of which is expressly reserved by the Constitution or the laws to
the citizens of the Philippines or of any other specific country, or to corporations or
associations at least sixty per centum of which is owned by such citizens, if such person,
corporation or association.
(1) "permits or allows the use, exploitation or enjoyment thereof by a person, corporation,
or association not possessing the requisites prescribed by the Constitution or the laws of
the Philippines";
(2) "or leases or in any other way transfers or conveys said right, franchise, privilege,
property or business to a person, corporation or association not otherwise qualified under
the Constitution or the provisions of existing laws";
(3) "or in any manner permits or allows any person, not possessing the qualifications
required by the Constitution or existing laws to acquire, use, exploit or enjoy a right,
franchise, privilege, property or business, the exercise and enjoyment of which are
expressly reserved by the Constitution or existing laws to citizens of the Philippines or of
any other specific country, to intervene in the management, operation, administration or
control thereof, whether as an officer, employee or laborer therein in with or without
remuneration except technical personnel whose employment may be specifically
authorized by the President of the Philippines upon the recommendation of the
department head concerned, if any, ... ."
WE ruled in the King case that Section 2-A applies to the employment by Macario King,
a naturalized Filipino citizen, of three Chinese citizens as non-technical personnel in his
retail business.4 However, in the King case, Macario King was a natural person, unlike
the herein plaintiff appellant which is an artificial person. This difference in personality is
seized upon by plaintiff-appellant in launching its main argument that the third predicate
in Section 2-A of Commonwealth Act No. 108 as amended by Republic Act No. 134
comprehends only wholly nationalized businesses and excludes those partly nationalized.
Plaintiff-appellant further argues that the trend of our laws towards the nationalization of
business in the Philippines for economic protection follows two different patterns: (1) for
complete or absolute nationalization, as typified by Act No. 776, which requires that only
Filipino citizens or corporations or associations wholly owned by Philippine citizens can
engage in domestic air commerce and/or air transportation, and Republic Act No. 1180
which completely nationalized the retail trade; and (2) partial nationalization, exemplified
by Commonwealth Act No. 141, otherwise known as the Public Land Law, Republic Act
No. 1407 or the Shipping Act of 1955, Commonwealth Act No. 146 otherwise known as
the Public Service Law, and Commonwealth Act No. 137 otherwise known as the Mining
Law, which authorize aliens to own or control up to 40% of the capital stock of
corporations or associations respectively engaged in the acquisition of public lands, in
public utilities including shipping, and in mining.
Plaintiff-appellant further contends that because, unlike in the first two dependent
clauses, of the absence of the phrase "or to qualified corporations or associations"
immediately after the phrase "citizens of the Philippines or of any other specific country"
in Clause 3 of Section 2-A of the Anti-Dummy Law, Congress by such omission intended
to limit the prohibition against the employment of non-American aliens in the operation
of public utilities to such public utilities as are owned wholly by citizens of the
Philippines or of any other specific country.
This position of plaintiff-appellant is not supported by the phraseology of the law as well
as by the intendment of the legislature as hereinafter demonstrated.
( l ) The policy or purpose of the amendatory law, Republic Act No. 134, in inserting
Clause 3 in Section 2-A of Commonwealth Act No. 108, as amended by Commonwealth
Act No. 421, was to plug all loopholes that may be utilized by designing foreigners to
circumvent the nationalization laws of the country, regardless of whether such laws
provide for complete or only partial nationalization of the right, franchise, privilege,
property or business covered thereby.
This is stressed by the explanatory note of House Bill No. 1027:
The existing law is full of loopholes, and the penalties provided for therein are not severe
enough. Persons who aid, assist, or abet in the evasion of the provisions of the
Constitution and of our laws by citizens of the Philippines or of the United States who
permit the use of their name or citizenship in the enjoyment of a right, franchise, or
privilege which is granted only to such citizens, are not penalized under existing laws.
There is also no penalty imposed on persons who assist, aid or abet in the evasion of the
provisions of the Constitution and of our laws requiring the ownership of a certain per
centum of the capital of a corporation or association for the enjoyment of certain rights,
franchises, or privileges. No provision in the existing law orders the deportation of aliens,
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who, abusing the hospitality of the country where they reside, violate our nationalization
laws.
This bill not only plugs such and other loopholes but also provides severer penalties to
prevent departure from the clearly enunciated policies of the state.5
To the same effect is the explanatory note of Senate Bill No. 207, which contains similar
provisions as House Bill No. 1027, thus:
Commonwealth Act No. 108, as amended, is liberal against those who may traffic with
Philippine citizenship. There is a need of enacting a stiffer law. Hence, the proposed
measure. The salient features of the proposed amendment are as follows:
1. Penalizing those who, in any manner, permits or allows any person, not possessing the
qualifications required by the Constitution or existing laws to acquire, use, exploit or
enjoy a right, franchise, privilege, property or business, the exercise and enjoyment of
which are expressly reserved by the Constitution or existing laws to citizens of the
Philippines or of any other specify country, to intervene in the management, operation,
administration or control thereof, whether as an officer, employee or laborer therein, with
or without remuneration; ... .6
Although the conference committee of both Houses agree that the explanatory note, the
title of the Act and the body of the Act shall be those appearing in Senate Bill No. 207,
the explanatory notes of both bills should be considered jointly; because, aside from the
fact that the same conference committee report states that the conference agreed to
recommend to the respective Houses that the bill shall be known as House Bill No. 1027
and Senate Bill No. 207, the members of Congress, in voting for the measure, intended to
give effect to the policy and purpose of the same as expressed in both explanatory
notes.7 The absence of any debate on the questioned clause 3, underscores the complete
agreement of the legislators on the matter.
Neither the law nor the explanatory note distinguish between wholly and partly
nationalized businesses. It is axiomatic that where the law does not distinguish, WE
should not make any distinction.
Once the policy or purpose of the law is ascertained, the Judiciary has the imperative duty
to give it effect, even if the policy goes beyond the letter or words of the statute.8 Thus
WE ruled thru Mr. Justice Fernando:
3. Moreover, any other view would be to betray lack of fidelity to the purpose so manifest
in the controlling legal provision. It is fundamental that once the policy or purpose of the
law has been ascertained, effect should be given to it by the judiciary. From Ty Sue v.
Hord, decided in 1909, it has been our constant holding that the choice between
conflicting theories falls on that which best accords with the letter of the law and with its
purpose. The next year, in an equally leading decision, United States v. Toribio, there was
a caveat against a construction that would tend "to defeat the purpose and object of the
legislator." Then came the admonition in Riera v. Palmaroli against an application so
narrow "as to defeat the manifest purpose of the legislator." This was repeated in the
latest case, Commissioner of Customs v. Caltex, in almost identical language.
So it is in the United States. Thus, in an 1898 decision, the then Justice, later Chief
Justice, White, minimized reliance on the subtle signification of words and the niceties of
verbal distinction stressing the fundamental rule of carrying out the purpose and objective
of legislation. As succinctly put by the then Justice, later Chief Justice, Stone: "All
statutes must be construed in the light of their purpose." The same thought has been
phrased differently. Thus: "The purpose of Congress is a dominant factor in determining
meaning." For, to paraphrase Frankfurter, legislative words are not inert but derive
vitality from the obvious purposes at which they are aimed. The same jurist likewise had
occasion to state: "Regard for [its] purposes should infuse the construction of the
legislation if it is to be treated as a working instrument of government and not merely as a
collection of English words." In the sixth annual Benjamin Nathan Cardozo lecture
delivered by him, entitled "Some Reflections on the Reading of Statutes," he developed
the theme further: The generating consideration is that legislation is more than
composition. It is an active instrument of government which, for purposes of
interpretation, means that laws have ends to be achieved. It is in this connection that
Holmes said, "words are flexible." Again it was Holmes, the last judge to give quarter to
loose thinking or vague yearning, who said that "the general purpose is a more important
aid to the meaning than any rule which grammar or formal logic may lay down." And it
was Holmes who chided courts for being "apt to err by sticking too closely to the words
of a law where those words import a policy that goes beyond them." Note, however, that
he found the policy in "those words."
It may be noted parenthetically that earlier, the United States Supreme Court was partial
more to the term "objective" or "policy" rather than "purpose." So it was in the first
decision where this fundamental principle of construction was relied upon, the opinion
coming from Chief Justice Marshall. Thus: "The two subjects were equally within the
province of the legislature, equally demanded their attention, and were brought together
to their view. If then, the words making provision for each, fairly admit of an equally
extensive interpretation, and of one of which will effect the object that seems to have
been in contemplation, and which was certainly desirable, they ought to receive that
interpretation."
So, too, with his successor, Chief Justice Taney. Thus: "This construction cannot be
maintained. In expounding a statute, we must not be guided by a single sentence or
member of a sentence but look to the whole law, and to its object and policy." It should
not escape attention that the above excerpt was quoted with approval by the present Chief
Justice Warren as late as 1957.9
Aside from employing dummies, the stockholders who own 40% of the capital stock of a
public utility, may effectively control its operation by employing aliens to implement
their plan to subvert our territorial integrity and our economic stability. Shipping lines,
whether for passengers alone, for cargo only, or for both passengers and cargo, are the
vital arteries of commerce, perhaps more vital to our security and independence than the
nationalization of the retail trade. Alien control of inter-island navigation mean economic
control and political domination of our country by alien hands. It should be stressed that
the interest of Filipino stockholders may be nullified by the employment of hostile aliens
who actually man and operate the ships. In times of peace, such vessels may be utilized
for smuggling not only of prohibited or dutiable goods but also on hostile human cargo as
well as for gun-running. In times of war, the peril to the State is greater because the
officer and employees manning the ships or directing their open rations may be enemy
aliens. And even if they are nationals of a neutral country, they may operate the ship in
violation of the laws of war to embarrass our government and alienate the sympathy or
support of other nations and thus weaken our position vis-a-vis the enemy.
Republic Act No. 134 not only seeks to prevent all possible schemes to evade such
nationalization laws, but also provides more severe penalties for, in order to discourage
violations of Sections 2-A and 3-A which impose now an imprisonment of not less than
five (5) or not more that fifteen (15) years and a fine not less than P5,000.00, instead of
previously an imprisonment of from two to ten years and a fine of P2,000.00 to
P10,000.00, aside from the forfeiture of the right, franchise, privilege, property or
business enjoyed or acquired in violation of the Anti-Dummy Law and the grant of
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rewards to informers and of exemption from criminal liability, in addition to the reward,
if the informer is a dummy, provided that the information results in criminal conviction.
(2) Under plaintiff-appellant's contention, a partially nationalized corporation or
association will not be liable under the questioned provision of Section 2-A of
Commonwealth Act No. 108, as amended, for employing non-American aliens in the
management, operation, administration or control of the business; whereas a Filipino
citizen or a wholly nationalized corporation or association operating the same business is
subject to the penal provision of the law if he or it maintains in his or its employ non-
American aliens. This would grant more rights and greater immunities to a partially
nationalized corporation or association, a mere creature of the law, than to a Filipino
citizen or a completely nationalized corporation or association. This theory offends all
logic or reason, which could not have been intended by Congress in enacting Republic
Act No. 134 purposely fashioned to implement and strengthen the provisions of
Commonwealth Act No. 108, as amended by Commonwealth Act No. 421.
(3) The correct construction should be that all the three clauses including clause 3 of
Section 2-A of the Anti-Dummy Law are dependent on and are subordinate to its
principal and only opening clause. Tested by the rules of grammar, the three dependent
clauses are merely the three different predicates of the same subject, the sole opening
clause; because the questioned clause 3, like the first two preceding clauses, cannot stand
by itself and is meaningless without, and unless read together with, said opening clause.
The three dependent clauses or predicates are three separate criminal acts for which a
person, corporation or association mentioned in the opening clause, whether completely
or partially nationalized, is liable; because the opening clause includes corporations or
associations at least 60 per centum of the capital stock of which is owned by Filipino
citizens or of any other specific country.
(4) Then again, the term "citizens of the Philippines" as employed in the questioned
clause of Section 2-A of the Anti- Dummy Law includes both natural and juridical
persons in much the same manner that the term "person" in the due process clause of the
Bill of Rights comprehends both human beings and artificial persons. 10
(5) Generally, under the Corporation Law, aliens may be employed in domestic
corporations and alien stockholders therein can vote to elect alien directors, for the simple
reason that the Corporation Law does not prohibit the same. But the Corporation Law
with respect to the operation of public utilities — which under the Constitution can be
operated only by Filipino citizens or corporations or associations at least 60 per centum
of the capital stock of which is owned by Filipino citizens or corporations or associations
wholly owned by Filipino citizens (Section 8 of Article XIV of the Constitution) — must
be subject to and conditioned by the Anti-Dummy Law which was enacted subsequent to
the Corporation Law, otherwise known as Act No. 1459 which took effect April 1, 1906.
Consequently, the alien stockholders who own 40% of the capital stock of a public utility
corporation or association cannot elect an alien director, much less demand the
employment of aliens in the management, operation, administration or control of the
corporation or business whether as officer, employee, or laborer, with or without
compensation. If the Corporation Law can be invoked to justify the employment of non-
American aliens in public utilities, then the Anti-Dummy Law, as amended, would be a
useless attempt to penalize violations of the nationalization laws and the constitutional
provision reserving the operation of public utilities to Filipino citizens or Filipino-
dominated corporations or associations would be nullified as a consequence.
At any time, Congress can modify Republic Act No. 776 and Republic Act No. 1180 so
as to partially nationalize air commerce and air transportation and the retail trade. If that
happens, then clause 3 of Section 2-A of Commonwealth Act No. 108, as amended, will
no longer apply to air transportation or air commerce, and the retail trade, if the theory of
plaintiff-appellant were to be sustained. Such eventuality will aggravate the peril to our
economy and territorial integrity. Such a dire result could not be desired by Congress.
III
Plaintiff-appellant erred in drawing the conclusion that tugboats and lighters were
withdrawn from the coverage of the nationalization provision of Section 16 of
Commonwealth Act No. 146, as amended, otherwise known as the Public Service Law,
from the mere fact that Republic Act No. 2031 of 1957 amended Section 14 of the Public
Service Law by exempting from the provision of Section 13 of the said law tugboats and
lighters, obviously the vessels operated by plaintiff-appellant.
The reason why Congress amended the aforesaid Section 14 by exempting tugboats and
lighters from the provision of Section 13 of the Public Service Law, is to make it
consistent with Section 1139 (a) and (b) and Sections 1167 and 1169 of the Revised
Administrative Code which confer on the Bureau of Customs general supervision, control
and regulation of the coastwise trade and in the carrying or towing of passengers and
freight on the bays and rivers in the Philippines as well as the registration and licensing of
vessels, particularly of more than three tons gross used in Philippine waters. 11 The
amendatory law, Republic Act No. 2031, does not authorize non-American aliens to
operate tugboats and lighters within the territorial waters of the Philippines; for such
tugboats and lighters do not cease to be public utilities as long as they are for hire. As
heretofore intimated, they pose as much danger to the economy and security of the State
as ordinary passenger vessels.
The amendment only removed the tugboats and light from the jurisdiction of the Public
Service Commission over public service which is defined in Section 13 of Public Service
Law, as amended.
Parenthetically, Republic Act No. 5173, approved on August 4, 1967, appears to have
transferred such jurisdiction to the Philippine Coast Guard.
WHEREFORE, the appealed judgment is hereby affirmed, with costs against plaintiff-
appellant.

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