BANKING LAWS

Atty. Anabelle S. Palic, Phd

Deadline: February 23, 2019

1. Teodoro Banas, et al vs. Asia Pacific Finance Corporation GR. No.

128703, October 18, 2003
2. Phil. Commercial International Bank vs Balmaceda, 658 SCRA 33
(2011)
3. Simex International Inc. vs Court of Appeals, GR. No. 880313,
March 19, 1990
4. Development Bank of the Philippines vs. Gaurina Agricultural and
Realty Development Corporation, GR. No. 160758, January 15,
2014
5. China Banking Corporation vs Court of Appeals, GR. No. 140687,
December 18, 2006
6. Bank of the Philippine Islands vs Court of Appeals, GR. No.
156940, December 14, 2004
7. Spouses Serfino vs. Far East Bank & Trust Company, GR. No.
171845, October 10, 2012
8. Phil. National Bank vs Chea Chee Chong, GR. No. 170865 &
170892, April 25, 2012
9. Bataan Cigar and Cigarettes Factory, Inc. vs Court of Appeals GR.
No. 93048, March 3, 1994
10. People of the Philippines vs Alona Reye, GR. No. 154159,
March 31, 2005
11. Republic vs Eugenio, Jr. 545 SCRA 384 (2008)
12. New Sampaguita Builders Construction, et al vs PNB, GR No.
148753, July 30, 2004
13. Prudential Bank and Trust Company Abasolo GR No. 186738,
September 27, 2010
 14. Banco-De Oro – EPCI, inc vs JAPRL Development Corporation
GR No. 179901, April 14, 2008
15. Premier Development Bank vs Court of Appeals, et al GR No.
159352, April 14, 2004
16. Restituta M. Imperial vs Alex A. Jaucion GR No. 149004, April
14, 2004
17. Gloria Ocampo, et al vs. Land Ban of the Philippines, et al GR
No. 164968, July 3, 2009
18. Republic of the Philippines vs. Sandigan Bayan (1st Division),
et al GR. NO. 166859, April 12, 2011
19. Jose C. Go vs. Bangko Sentral ng Pilipinas GR. No. 178429,
October 23, 2009
20. Zulueta vs. Asia Brewery, Inc. GR No. 138137, March 8, 2001
21. Metro Concast Street Corp, et al vs. Allied Bank Corporation
GR No. 177921, December 2013
22. Golden Merchandising Corporation vs. Equitable PCI Bank
GR No. 195540, March 13, 2013
23. Gateway Electronics Corporation vs. Land Bank of the
Philippines GR. NO. 155217 and 156393, July 30, 2003
24. UCPB Sps Beluso GR No. 159912, August 17, 2007
25. BPI Employees Union-Davao City FUBU vs. Bank of the
Philippine Islands GR. No. 174912, July 24, 2013

G.R. 156940..Associated Bank vs Tan

1. Teodoro Banas, et al vs. Asia Pacific Finance Corporation GR. No.

128703, October 18, 2003
G.R. No. 128703 October 18, 2000

TEODORO BAÑAS,*C. G. DIZON CONSTRUCTION, INC., and CENEN

DIZON, petitioners,
vs.
ASIA PACIFIC FINANCE CORPORATION,1 substituted by
INTERNATIONAL CORPORATE BANK now known as UNION BANK
OF THE PHILIPPINES, respondent.

DECISION

BELLOSILLO, J.:

C. G. DIZON CONSTRUCTION INC. and CENEN DIZON in this petition for

review seek the reversal of the 24 July 1996 Decision of the Court of
Appeals dismissing their appeal for lack of merit and affirming in toto the
decision of the trial court holding them liable to Asia Pacific Finance
Corporation in the amount of ₱87,637.50 at 14% interest per annum in
addition to attorney's fees and costs of suit, as well as its 21 March 1997
Resolution denying reconsideration thereof.2

On 20 March 1981 Asia Pacific Finance Corporation (ASIA PACIFIC for

short) filed a complaint for a sum of money with prayer for a writ of replevin
against Teodoro Bañas, C. G. Dizon Construction and Cenen Dizon.
Sometime in August 1980 Teodoro Bañas executed a Promissory Note in
favor of C. G. Dizon Construction whereby for value received he promised
to pay to the order of C. G. Dizon Construction the sum of ₱390,000.00 in
installments of "₱32,500.00 every 25th day of the month starting from
September 25, 1980 up to August 25, 1981."3

Later, C. G. Dizon Construction endorsed with recourse the Promissory

Note to ASIA PACIFIC, and to secure payment thereof, C. G. Dizon
Construction, through its corporate officers, Cenen Dizon, President, and
Juliette B. Dizon, Vice President and Treasurer, executed a Deed of
Chattel Mortgage covering three (3) heavy equipment units of Caterpillar
Bulldozer Crawler Tractors with Model Nos. D8-14A, D8-2U and D8H in
favor of ASIA PACIFIC.4Moreover, Cenen Dizon executed on 25 August
1980 a Continuing Undertaking wherein he bound himself to pay the
obligation jointly and severally with C. G. Dizon Construction.5
In compliance with the provisions of the Promissory Note, C. G. Dizon
Construction made the following installment payments to ASIA PACIFIC:
₱32,500.00 on 25 September 1980, ₱32,500.00 on 27 October 1980 and
₱65,000.00 on 27 February 1981, or a total of ₱130,000.00. Thereafter,
however, C. G. Dizon Construction defaulted in the payment of the
remaining installments, prompting ASIA PACIFIC to send a Statement of
Account to Cenen Dizon for the unpaid balance of ₱267,737.50 inclusive of
interests and charges, and ₱66,909.38 representing attorney's fees. As the
demand was unheeded, ASIA PACIFIC sued Teodoro Bañas, C. G. Dizon
Construction and Cenen Dizon.

While defendants (herein petitioners) admitted the genuineness and due

execution of the Promissory Note, the Deed of Chattel Mortgage and
the Continuing Undertaking, they nevertheless maintained that these
documents were never intended by the parties to be legal, valid and
binding but a mere subterfuge to conceal the loan of ₱390,000.00 with
usurious interests.

Defendants claimed that since ASIA PACIFIC could not directly engage in
banking business, it proposed to them a scheme wherein plaintiff ASIA
PACIFIC could extend a loan to them without violating banking laws: first,
Cenen Dizon would secure a promissory note from Teodoro Bañas with a
face value of ₱390,000.00 payable in installments; second, ASIA PACIFIC
would then make it appear that the promissory note was sold to it by Cenen
Dizon with the 14% usurious interest on the loan or ₱54,000.00 discounted
and collected in advance by ASIA PACIFIC; and, lastly, Cenen Dizon would
provide sufficient collateral to answer for the loan in case of default in
payment and execute a continuing guaranty to assure continuous and
prompt payment of the loan. Defendants also alleged that out of the loan of
₱390,000.00 defendants actually received only ₱329,185.00 after ASIA
PACIFIC deducted the discounted interest, service handling charges,
insurance premium, registration and notarial fees.

Sometime in October 1980 Cenen Dizon informed ASIA PACIFIC that he

would be delayed in meeting his monthly amortization on account of
business reverses and promised to pay instead in February 1981. Cenen
Dizon made good his promise and tendered payment to ASIA PACIFIC in
an amount equivalent to two (2) monthly amortizations. But ASIA PACIFIC
attempted to impose a 3% interest for every month of delay, which he flatly
refused to pay for being usurious.
Afterwards, ASIA PACIFIC allegedly made a verbal proposal to Cenen
Dizon to surrender to it the ownership of the two (2) bulldozer crawler
tractors and, in turn, the latter would treat the former's account as closed
and the loan fully paid. Cenen Dizon supposedly agreed and accepted the
offer. Defendants averred that the value of the bulldozer crawler tractors
was more than adequate to cover their obligation to ASIA PACIFIC.

Meanwhile, on 21 April 1981 the trial court issued a writ of replevin against
defendant C. G. Dizon Construction for the surrender of the bulldozer
crawler tractors subject of the Deed of Chattel Mortgage. Of the three (3)
bulldozer crawler tractors, only two (2) were actually turned over by
defendants - D8-14A and D8-2U - which units were subsequently
foreclosed by ASIA PACIFIC to satisfy the obligation. D8-14A was sold for
₱120,000.00 and D8-2U for ₱60,000.00 both to ASIA PACIFIC as the
highest bidder.

During the pendency of the case, defendant Teodoro Bañas passed away,
and on motion of the remaining defendants, the trial court dismissed the
case against him. On the other hand, ASIA PACIFIC was substituted as
party plaintiff by International Corporate Bank after the disputed Promissory
Note was assigned and/or transferred by ASIA PACIFIC to International
Corporate Bank. Later, International Corporate Bank merged with Union
Bank of the Philippines. As the surviving entity after the merger, and having
succeeded to all the rights and interests of International Corporate Bank in
this case, Union Bank of the Philippines was substituted as a party in lieu of
International Corporate Bank.6

On 25 September 1992 the Regional Trial Court ruled in favor of ASIA

PACIFIC holding the defendants jointly and severally liable for the unpaid
balance of the obligation under the Promissory Note in the amount of
₱87,637.50 at 14% interest per annum, and attorney's fees equivalent to
25% of the monetary award.7

On 24 July 1996 the Court of Appeals affirmed in toto the decision of the
trial court thus -

Defendant-appellants' contention that the instruments were executed

merely as a subterfuge to skirt banking laws is an untenable defense. If that
were so then they too were parties to the illegal scheme. Why should they
now be allowed to take advantage of their own knavery to escape the
liabilities that their own chicanery created?

Defendant-appellants also want us to believe their story that there was an

agreement between them and the plaintiff-appellee that if the former would
deliver their 2 bulldozer crawler tractors to the latter, the defendant-
appellants' obligation would fully be extinguished. Again, nothing but the
word that comes out between the teeth supports such story. Why did they
not write down such an important agreement? Is it believable that
seasoned businessmen such as the defendant-appellant Cenen G. Dizon
and the other officers of the appellant corporation would deliver the
bulldozers without a receipt of acquittance from the plaintiff-appellee x x x x
In our book, that is not credible.

The pivotal issues raised are: (a) Whether the disputed transaction
between petitioners and ASIA PACIFIC violated banking laws, hence, null
and void; and (b) Whether the surrender of the bulldozer crawler tractors to
respondent resulted in the extinguishment of petitioners' obligation.

On the first issue, petitioners insist that ASIA PACIFIC was organized as an
investment house which could not engage in the lending of funds obtained
from the public through receipt of deposits. The disputed Promissory
Note,Deed of Chattel Mortgage and Continuing Undertaking were not
intended to be valid and binding on the parties as they were merely devices
to conceal their real intention which was to enter into a contract of loan in
violation of banking laws.

We reject the argument. An investment company refers to any issuer which

is or holds itself out as being engaged or proposes to engage primarily in
the business of investing, reinvesting or trading in securities.8 As defined in
Sec. 2, par. (a), of the Revised Securities Act,9 securities "shall include x x x
x commercial papers evidencing indebtedness of any person, financial or
non-financial entity, irrespective of maturity, issued, endorsed, sold,
transferred or in any manner conveyed to another with or without recourse,
such as promissory notes x x x x" Clearly, the transaction between
petitioners and respondent was one involving not a loan but purchase
of receivables at a discount, well within the purview of "investing,
reinvesting or trading in securities" which an investment company, like
ASIA PACIFIC, is authorized to perform and does not constitute a violation
of the General Banking Act.10 Moreover, Sec. 2 of the General Banking
Act provides in part -

Sec. 2. Only entities duly authorized by the Monetary Board of the Central
Bank may engage in the lending of funds obtained from the public through
the receipt of deposits of any kind, and all entities regularly conducting
such 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 (underscoring supplied).

Indubitably, what is prohibited by law is for investment companies to lend

funds obtained from the public through receipts of deposit, which is a
function of banking institutions. But here, the funds supposedly "lent" to
petitioners have not been shown to have been obtained from the public by
way of deposits, hence, the inapplicability of banking laws.

On petitioners' submission that the true intention of the parties was to enter
into a contract of loan, we have examined the Promissory Note and failed
to discern anything therein that would support such theory. On the contrary,
we find the terms and conditions of the instrument clear, free from any
ambiguity, and expressive of the real intent and agreement of the parties.
We quote the pertinent portions of the Promissory Note -

FOR VALUE RECEIVED, I/We, hereby promise to pay to the order of C.G.
Dizon Construction, Inc. the sum of THREE HUNDRED NINETY
THOUSAND ONLY (₱390,000.00), Philippine Currency in the following
manner:

₱32,500.00 due every 25th of the month starting from September 25, 1980
up to August 25, 1981.

I/We agree that if any of the said installments is not paid as and when it
respectively falls due, all the installments covered hereby and not paid as
yet shall forthwith become due and payable at the option of the holder of
this note with interest at the rate of 14% per annum on each unpaid
installment until fully paid.

If any amount due on this note is not paid at its maturity and this note is
placed in the hands of an attorney for collection, I/We agree to pay in
addition to the aggregate of the principal amount and interest due, a sum
equivalent to TEN PERCENT (10%) thereof as Attorney's fees, in case no
action is filed, otherwise, the sum will be equivalent to TWENTY FIVE
(25%) of the said principal amount and interest due x x x x

Makati, Metro Manila, August 25, 1980.

(Sgd) Teodoro Bañas

ENDORSED TO ASIA PACIFIC FINANCE CORPORATION WITH

RECOURSE, C.G. DIZON CONSTRUCTION, INC.

By: (Sgd.) Cenen Dizon (Sgd.) Juliette B. Dizon

President VP/Treasurer

Likewise, the Deed of Chattel Mortgage and Continuing Undertaking were

duly acknowledged before a notary public and, as such, have in their favor
the presumption of regularity. To contradict them there must be clear,
convincing and more than merely preponderant evidence. In the instant
case, the records do not show even a preponderance of evidence in favor
of petitioners' claim that the Deed of Chattel Mortgage and Continuing
Undertaking were never intended by the parties to be legal, valid and
binding. Notarial documents are evidence of the facts in clear and
unequivocal manner therein expressed.11

Interestingly, petitioners' assertions were based mainly on the self-serving

testimony of Cenen Dizon, and not on any other independent evidence. His
testimony is not only unconvincing, as found by the trial court and the Court
of Appeals, but also self-defeating in light of the documents presented by
respondent, i.e., Promissory Note, Deed of Chattel
Mortgage and Continuing Undertaking, the accuracy, correctness and due
execution of which were admitted by petitioners. Oral evidence certainly
cannot prevail over the written agreements of the parties. The courts need
only rely on the faces of the written contracts to determine their true
intention on the principle that when the parties have reduced their
agreements in writing, it is presumed that they have made the writings the
only repositories and memorials of their true agreement.

The second issue deals with a question of fact. We have ruled often
enough that it is not the function of this Court to analyze and weigh the
evidence all over again, its jurisdiction being limited to reviewing errors of
law that might have been committed by the lower court.12 At any rate, while
we are not a trier of facts, hence, not required as a rule to look into the
factual bases of the assailed decision of the Court of Appeals, we did so
just the same in this case if only to satisfy petitioners that we have carefully
studied and evaluated the case, all too mindful of the tenacity and vigor
with which the parties, through their respective counsel, have pursued this
case for nineteen (19) years.

Petitioners contend that the parties already had a verbal understanding

wherein ASIA PACIFIC actually agreed to consider petitioners' account
closed and the principal obligation fully paid in exchange for the ownership
of the two (2) bulldozer crawler tractors.

We are not persuaded. Again, other than the bare allegations of petitioners,
the records are bereft of any evidence of the supposed agreement. As
correctly observed by the Court of Appeals, it is unbelievable that the
parties entirely neglected to write down such an important agreement.
Equally incredulous is the fact that petitioner Cenen Dizon, a seasoned
businessman, readily consented to deliver the bulldozers to respondent
without a corresponding receipt of acquittance. Indeed, even the testimony
of petitioner Cenen Dizon himself negates the supposed verbal
understanding between the parties -

Q: You said and is it not a fact that you surrendered the bulldozers to
APCOR by virtue of the seizure order?

A: There was no seizure order. Atty. Carag during that time said if I
surrender the two equipment, we might finally close a deal if the equipment
would come up to the balance of the loan. So I voluntarily surrendered, I
pulled them from the job site and returned them to APCOR x x x x

Q: You mentioned a certain Atty. Carag, who is he?

A: He was the former legal counsel of APCOR. They were handling

cases. In fact, I talked with Atty. Carag, we have a verbal agreement if I
1âwphi1

surrender the equipment it might suffice to pay off the debt so I did just that
(underscoring ours).13

In other words, there was no binding and perfected contract between

petitioners and respondent regarding the settlement of the obligation, but
only a conditional one, a mere conjecture in fact, depending on whether the
value of the tractors to be surrendered would equal the balance of the loan
plus interests. And since the bulldozer crawler tractors were sold at the
foreclosure sale for only ₱180,000.00,14 which was not enough to cover the
unpaid balance of ₱267,637.50, petitioners are still liable for the deficiency.

Barring therefore a showing that the findings complained of are totally

devoid of support in the records, or that they are so glaringly erroneous as
to constitute serious abuse of discretion, we see no valid reason to discard
them. More so in this case where the findings of both the trial court and the
appellate court coincide with each other on the matter.

With regard to the computation of petitioners' liability, the records show that
petitioners actually paid to respondent a total sum of ₱130,000.00 in
addition to the ₱180,000.00 proceeds realized from the sale of the
bulldozer crawler tractors at public auction. Deducting these amounts from
the principal obligation of ₱390,000.00 leaves a balance of ₱80,000.00, to
which must be added ₱7,637.50 accrued interests and charges as of 20
March 1981, or a total unpaid balance of ₱87,637.50 for which petitioners
are jointly and severally liable. Furthermore, the unpaid balance should
earn 14% interest per annum as stipulated in the Promissory Note,
computed from 20 March 1981 until fully paid.

On the amount of attorney's fees which under the Promissory Note is

equivalent to 25% of the principal obligation and interests due, it is not,
strictly speaking, the attorney's fees recoverable as between the attorney
and his client regulated by the Rules of Court. Rather, the attorney's fees
here are in the nature of liquidated damages and the stipulation therefor is
aptly called a penal clause. It has been said that so long as such stipulation
does not contravene the law, morals and public order, it is strictly binding
upon the obligor. It is the litigant, not the counsel, who is the judgment
creditor entitled to enforce the judgment by execution.15

Nevertheless, it appears that petitioners' failure to fully comply with their

part of the bargain was not motivated by ill will or malice, but due to
financial distress occasioned by legitimate business reverses. Petitioners in
fact paid a total of ₱130,000.00 in three (3) installments, and even went to
the extent of voluntarily turning over to respondent their heavy equipment
consisting of two (2) bulldozer crawler tractors, all in a bona fide effort to
settle their indebtedness in full. Article 1229 of the New Civil Code
specifically empowers the judge to equitably reduce the civil penalty when
the principal obligation has been partly or irregularly complied with. Upon
the foregoing premise, we hold that the reduction of the attorney's fees
from 25% to 15% of the unpaid principal plus interests is in order.

Finally, while we empathize with petitioners, we cannot close our eyes to

the overriding considerations of the law on obligations and contracts which
must be upheld and honored at all times. Petitioners have undoubtedly
benefited from the transaction; they cannot now be allowed to impugn its
validity and legality to escape the fulfillment of a valid and binding
obligation.

WHEREFORE, no reversible error having been committed by the Court of

Appeals, its assailed Decision of 24 July 1996 and its Resolution of 21
March 1997 are AFFIRMED. Accordingly, petitioners C.G. Construction Inc.
and Cenen Dizon are ordered jointly and severally to pay respondent Asia
Pacific Finance Corporation, substituted by International Corporate Bank
(now known as Union Bank of the Philippines), ₱87,637.50 representing
the unpaid balance on the Promissory Note, with interest at fourteen
percent (14%) per annum computed from 20 March 1981 until fully paid,
and fifteen percent (15%) of the principal obligation and interests due by
way of attorney's fees. Costs against petitioners.

SO ORDERED.

Mendoza, Quisumbing, Buena and De Leon, Jr., JJ., concur.

Banas vs. Asia Pacific

Finance Corporation G.R.
No. 128703, October
18, 2000
MARCH 16, 2014LEAVE A COMMENT
An investment company refers to any issuer which is or holds itself out as being
engaged or proposes to engage primarily in the business of investing,
reinvesting or trading in securities. As defined in Revised Securities Act,
securities “shall include commercial papers evidencing indebtedness of any
person, financial or non-financial entity, irrespective of maturity, issued,
endorsed, sold, transferred or in any manner conveyed to another with or
without recourse, such as promissory notes. Clearly, the transaction between
petitioners and respondent was one involving not a loan but purchase of
receivables at a discount, well within the purview of “investing, reinvesting or
trading in securities” which an investment company, like ASIA PACIFIC, is
authorized to perform and does not constitute a violation of the General
Banking Act.
Facts: Teodoro Bañas executed a Promissory Note in favor of C.
G. Dizon Construction whereby for value received he promised to
pay to the order of C. G. Dizon Construction the sum
of P390,000.00 in installments of “P32,500.00 every 25th day of the
month starting from September 25, 1980 up to August 25,
1981.”Later, C. G. Dizon Construction endorsed with recourse the
Promissory Note to ASIA PACIFIC, and to secure payment thereof,
C. G. Dizon Construction, through its corporate officers, Cenen
Dizon, President, and Juliette B. Dizon, Vice President and
Treasurer, executed a Deed of Chattel Mortgage covering three
heavy equipment units of Caterpillar Bulldozer Crawler
Tractors Moreover, Cenen Dizon executed a Continuing
Undertaking wherein he bound himself to pay the obligation jointly
and severally with C. G. Dizon Construction.

In compliance thereof, C. G. Dizon Construction made three

installment payments to ASIA PACIFIC for a total of P130,000.00.
Thereafter, however, C. G. Dizon Construction defaulted in the
payment of the remaining installments, prompting ASIA PACIFIC
to send a Statement of Account to Cenen Dizon for the unpaid
balance of P267,737.50 inclusive of interests and charges,
and P66,909.38 representing attorney’s fees. As the demand was
unheeded, ASIA PACIFIC filed a complaint for a sum of money with
prayer for a writ of replevin against Teodoro Bañas, C. G. Dizon
Construction and Cenen Dizon. The trial court issued a writ of
replevin against defendant C. G. Dizon Construction for the
surrender of the bulldozer crawler tractors. Of the three bulldozer
crawler tractors, only two were actually turned over by defendants
which units were subsequently foreclosed by ASIA PACIFIC to
satisfy the obligation. The two bulldozers were sold both to ASIA
PACIFIC as the highest bidder.
Petitioners insist that ASIA PACIFIC was organized as an
investment house which could not engage in the lending of funds
obtained from the public through receipt of deposits. The disputed
Promissory Note, Deed of Chattel Mortgage and Continuing
Undertaking were not intended to be valid and binding on the
parties as they were merely devices to conceal their real intention
which was to enter into a contract of loan in violation of banking
laws. The Regional Trial Court ruled in favor of ASIA PACIFIC
holding the defendants jointly and severally liable for the unpaid
balance of the obligation under the Promissory Note. The Court of
Appeals affirmed the decision of the trial court

Issues: Whether the disputed transaction between ASIA PACIFIC

was engaged in banking activities.

Held: An investment company refers to any issuer which is or

holds itself out as being engaged or proposes to engage primarily
in the business of investing, reinvesting or trading in securities. As
defined in Revised Securities Act, securities “shall include
commercial papers evidencing indebtedness of any person,
financial or non-financial entity, irrespective of maturity, issued,
endorsed, sold, transferred or in any manner conveyed to another
with or without recourse, such as promissory notes” Clearly, the
transaction between petitioners and respondent was one involving
not a loan but purchase of receivables at a discount, well within the
purview of “investing, reinvesting or trading in securities” which an
investment company, like ASIA PACIFIC, is authorized to perform
and does not constitute a violation of the General Banking Act.

What is prohibited by law is for investment companies to lend

funds obtained from the public through receipts of deposit, which is
a function of banking institutions. But here, the funds supposedly
“lent” to petitioners have not been shown to have been obtained
from the public by way of deposits, hence, the inapplicability of
banking laws. Wherefore, the assailed decision of the Court of
Appeals was affirmed.

2. Phil. Commercial International Bank vs Balmaceda, 658 SCRA 33

(2011)

G.R. No. 158143 September 21, 2011

PHILIPPINE COMMERCIAL INTERNATIONAL BANK, Petitioner,

vs.
ANTONIO B. BALMACEDA and ROLANDO N. RAMOS, Respondents.

DECISION

BRION, J.:

Before us is a petition for review on certiorari,1 filed by the Philippine

Commercial International Bank2 (Bank or PCIB), to reverse and set aside
the decision3 dated April 29, 2003 of the Court of Appeals (CA) in CA-G.R.
CV No. 69955. The CA overturned the September 22, 2000 decision of the
Regional Trial Court (RTC) of Makati City, Branch 148, in Civil Case No.
93-3181, which held respondent Rolando Ramos liable to PCIB for the
amount of ₱895,000.00.

FACTUAL ANTECEDENTS

On September 10, 1993, PCIB filed an action for recovery of sum of money
with damages before the RTC against Antonio Balmaceda, the Branch
Manager of its Sta. Cruz, Manila branch. In its complaint, PCIB alleged that
between 1991 and 1993, Balmaceda, by taking advantage of his position
as branch manager, fraudulently obtained and encashed 31 Manager’s
checks in the total amount of Ten Million Seven Hundred Eighty Two
Thousand One Hundred Fifty Pesos (₱10,782,150.00).

On February 28, 1994, PCIB moved to be allowed to file an amended

complaint to implead Rolando Ramos as one of the recipients of a portion
of the proceeds from Balmaceda’s alleged fraud. PCIB also increased the
number of fraudulently obtained and encashed Manager’s checks to 34, in
the total amount of Eleven Million Nine Hundred Thirty Seven Thousand
One Hundred Fifty Pesos (₱11,937,150.00). The RTC granted this motion.

Since Balmaceda did not file an Answer, he was declared in default. On the
other hand, Ramos filed an Answer denying any knowledge of
Balmaceda’s scheme. According to Ramos, he is a reputable businessman
engaged in the business of buying and selling fighting cocks, and
Balmaceda was one of his clients. Ramos admitted receiving money from
Balmaceda as payment for the fighting cocks that he sold to Balmaceda,
but maintained that he had no knowledge of the source of Balmaceda’s
money.

THE RTC DECISION

On September 22, 2000, the RTC issued a decision in favor of PCIB, with
the following dispositive portion:

WHEREFORE, premises considered, judgment is hereby rendered in favor

of the plaintiff and against the defendants as follows:

1. Ordering defendant Antonio Balmaceda to pay the amount of

₱11,042,150.00 with interest thereon at the legal rate from [the] date
of his misappropriation of the said amount until full restitution shall
have been made[.]
 2. Ordering defendant Rolando Ramos to pay the amount of
₱895,000.00 with interest at the legal rate from the date of
misappropriation of the said amount until full restitution shall have
been made[.]

3. Ordering the defendants to pay plaintiff moral damages in the sum

of ₱500,000.00 and attorney’s fees in the amount of ten (10%)
percent of the total misappropriated amounts sought to be recovered.

4. Plus costs of suit.

SO ORDERED.4

From the evidence presented, the RTC found that Balmaceda, by taking
undue advantage of his position and authority as branch manager of the
Sta. Cruz, Manila branch of PCIB, successfully obtained and
misappropriated the bank’s funds by falsifying several commercial
documents. He accomplished this by claiming that he had been instructed
by one of the Bank’s corporate clients to purchase Manager’s checks on its
behalf, with the value of the checks to be debited from the client’s corporate
bank account. First, he would instruct the Bank staff to prepare the
application forms for the purchase of Manager’s checks, payable to several
persons. Then, he would forge the signature of the client’s authorized
representative on these forms and sign the forms as PCIB’s approving
officer. Finally, he would have an authorized officer of PCIB issue the
Manager’s checks. Balmaceda would subsequently ask his subordinates to
release the Manager’s checks to him, claiming that the client had requested
that he deliver the checks.5 After receiving the Manager’s checks, he
encashed them by forging the signatures of the payees on the checks.

In ruling that Ramos acted in collusion with Balmaceda, the RTC noted that
although the Manager’s checks payable to Ramos were crossed checks,
Balmaceda was still able to encash the checks.6 After Balmaceda
encashed three of these Manager’s checks, he deposited most of the
money into Ramos’ account.7 The RTC concluded that from the
₱11,937,150.00 that Balmaceda misappropriated from PCIB, ₱895,000.00
actually went to Ramos. Since the RTC disbelieved Ramos’ allegation that
the sum of money deposited into his Savings Account (PCIB, Pasig branch)
were proceeds from the sale of fighting cocks, it held Ramos liable to pay
PCIB the amount of ₱895,000.00.
 THE COURT OF APPEALS DECISION

On appeal, the CA dismissed the complaint against Ramos, holding that no

sufficient evidence existed to prove that Ramos colluded with Balmaceda in
the latter’s fraudulent manipulations.8

According to the CA, the mere fact that Balmaceda made Ramos the payee
in some of the Manager’s checks does not suffice to prove that Ramos was
complicit in Balmaceda’s fraudulent scheme. It observed that other persons
were also named as payees in the checks that Balmaceda acquired and
encashed, and PCIB only chose to go after Ramos. With PCIB’s failure to
prove Ramos’ actual participation in Balmaceda’s fraud, no legal and
factual basis exists to hold him liable.

The CA also found that PCIB acted illegally in freezing and debiting
₱251,910.96 from Ramos’ bank account. The CA thus decreed:

WHEREFORE, the appeal is granted. The Decision of the trial court

rendered on September 22, 2000[,] insofar as appellant Ramos is
concerned, is SET ASIDE, and the complaint below against him is
DISMISSED.

Appellee is hereby ordered to release the amount of ₱251,910.96 to

appellant Ramos plus interest at [the] legal rate computed from September
30, 1993 until appellee shall have fully complied therewith.

Appellee is likewise ordered to pay appellant Ramos the following:

a) ₱50,000.00 as moral damages

b) ₱50,000.00 as exemplary damages, and

c) ₱20,000.00 as attorney’s fees.

No costs.

SO ORDERED.9

THE PETITION

In the present petition, PCIB avers that:

 I

THE APPELLATE COURT ERRED IN HOLDING THAT THERE IS

NO EVIDENCE TO HOLD THAT RESPONDENT RAMOS ACTED IN
COMPLICITY WITH RESPONDENT BALMACEDA

II

THE APPELLATE COURT ERRED IN ORDERING THE

PETITIONER TO RELEASE THE AMOUNT OF ₱251,910.96 TO
RESPONDENT RAMOS AND TO PAY THE LATTER MORAL AND
EXEMPLARY DAMAGES AND ATTORNEY’S FEES10

PCIB contends that the circumstantial evidence shows that Ramos had
knowledge of, and acted in complicity with Balmaceda in, the perpetuation
of the fraud. Ramos’ explanation that he is a businessman and that he
received the Manager’s checks as payment for the fighting cocks he sold to
Balmaceda is unconvincing, given the large sum of money involved. While
Ramos presented evidence that he is a reputable businessman, this
evidence does not explain why the Manager’s checks were made payable
to him in the first place.

PCIB maintains that it had the right to freeze and debit the amount of
₱251,910.96 from Ramos’ bank account, even without his consent, since
legal compensation had taken place between them by operation of law.
PCIB debited Ramos’ bank account, believing in good faith that Ramos
was not entitled to the proceeds of the Manager’s checks and was actually
privy to the fraud perpetrated by Balmaceda. PCIB cannot thus be held
liable for moral and exemplary damages.

OUR RULING

We partly grant the petition.

At the outset, we observe that the petition raises mainly questions of fact
whose resolution requires the re-examination of the evidence on record. As
a general rule, petitions for review on certiorari only involve questions of
law.11 By way of exception, however, we can delve into evidence and the
factual circumstance of the case when the findings of fact in the tribunals
below (in this case between those of the CA and of the RTC) are
conflicting. When the exception applies, we are given latitude to review the
evidence on record to decide the case with finality.12

Ramos’ participation in Balmaceda’s scheme not proven

From the testimonial and documentary evidence presented, we find it

beyond question that Balmaceda, by taking advantage of his position as
branch manager of PCIB’s Sta. Cruz, Manila branch, was able to apply for
and obtain Manager’s checks drawn against the bank account of one of
PCIB’s clients. The unsettled question is whether Ramos, who received a
portion of the money that Balmaceda took from PCIB, should also be held
liable for the return of this money to the Bank.

PCIB insists that it presented sufficient evidence to establish that Ramos

colluded with Balmaceda in the scheme to fraudulently secure Manager’s
checks and to misappropriate their proceeds. Since Ramos’ defense –
anchored on mere denial of any participation in Balmaceda’s wrongdoing –
is an intrinsically weak defense, it was error for the CA to exonerate Ramos
from any liability.

In civil cases, the party carrying the burden of proof must establish his case
by a preponderance of evidence, or evidence which, to the court, is more
worthy of belief than the evidence offered in opposition.13 This Court,
in Encinas v. National Bookstore, Inc.,14 defined "preponderance of
evidence" in the following manner:

"Preponderance of evidence" is the weight, credit, and value of the

aggregate evidence on either side and is usually considered to be
synonymous with the term "greater weight of the evidence" or "greater
weight of the credible evidence." Preponderance of evidence is a phrase
which, in the last analysis, means probability of the truth. It is evidence
which is more convincing to the court as worthy of belief than that which is
offered in opposition thereto.

The party, whether the plaintiff or the defendant, who asserts the
affirmative of an issue has the onus to prove his assertion in order to obtain
a favorable judgment, subject to the overriding rule that the burden to prove
his cause of action never leaves the plaintiff. For the defendant, an
affirmative defense is one that is not merely a denial of an essential
ingredient in the plaintiff's cause of action, but one which, if established, will
constitute an "avoidance" of the claim.15
Thus, PCIB, as plaintiff, had to prove, by preponderance of evidence, its
positive assertion that Ramos conspired with Balmaceda in perpetrating the
latter’s scheme to defraud the Bank. In PCIB’s estimation, it successfully
accomplished this through the submission of the following evidence:

[1] Exhibits "A," "D," "PPPP," "QQQQ," and "RRRR" and their
submarkings, the application forms for MCs, show that [these MCs
were applied for in favor of Ramos;]

[2] Exhibits "K," "N," "SSSS," "TTTT," and "UUUU" and their
submarkings prove that the MCs were issued in favor of x x x
Ramos[; and]

[3] [T]estimonies of the witness for [PCIB].16

We cannot accept these submitted pieces of evidence as sufficient to

satisfy the burden of proof that PCIB carries as plaintiff.

On its face, all that PCIB’s evidence proves is that Balmaceda used
Ramos’ name as a payee when he filled up the application forms for the
Manager’s checks. But, as the CA correctly observed, the mere fact that
Balmaceda made Ramos the payee on some of the Manager’s checks is
not enough basis to conclude that Ramos was complicit in Balmaceda’s
fraud; a number of other people were made payees on the other Manager’s
checks yet PCIB never alleged them to be liable, nor did the Bank adduce
any other evidence pointing to Ramos’ participation that would justify his
separate treatment from the others. Also, while Ramos is Balmaceda’s
brother-in-law, their relationship is not sufficient, by itself, to render Ramos
liable, absent concrete proof of his actual participation in the fraudulent
scheme.

Moreover, the evidence on record clearly shows that Balmaceda acted on

his own when he applied for the Manager’s checks against the bank
account of one of PCIB’s clients, as well as when he encashed the
fraudulently acquired Manager’s checks.

Mrs. Elizabeth Costes, the Area Manager of PCIB at the time of the
relevant events, testified that Balmaceda committed all the acts necessary
to obtain the unauthorized Manager’s checks – from filling up the
application form by forging the signature of the client’s representative, to
forging the signatures of the payees in order to encash the checks. As Mrs.
Costes stated in her testimony:

Q: I am going into [these] particular instances where you said that Mr.
Balmaceda [has] been making unauthorized withdrawals from particular
account of a client or a client of yours at Sta. Cruz branch. Would you tell
us how he effected his unauthorized withdrawals?

A: He prevailed upon the domestic remittance clerk to prepare the

application of a Manager’s check which [has] been debited to a client’s
account. This particular Manager’s check will be payable to a certain
individual thru his account as the instruction of the client.

Q: What was your findings in so far as the particular alleged instruction of a

client is concerned?

A: We found out that he forged the signature of the client.

Q: On that particular application?

A: Yes sir.

Q: Showing to you several applications for Manager’s Check previously

attached as Annexes "A, B, C, D and E["] of the complaint. Could you
please tell us where is that particular alleged signature of a client applying
for the Manager’s check which you claimed to have been forged by Mr.
Balmaceda?

A: Here sir.

xxxx

Q: After the accomplishment of this application form as you stated Mrs.

witness, do you know what happened to the application form?

A: Before that application form is processed it goes to several stages. Here

for example this was signed supposed to be by the client and his signature
representing that, he certified the signature based on their records to be
authentic.

Q: When you said he to whom are you referring to?

A: Mr. Balmaceda. And at the same time he approved the transaction.

xxxx

Q: Do you know if the corresponding checks applied for in the application

forms were issued?

A: Yes sir.

Q: Could you please show us where these checks are now, the one applied
for in Exhibit "A" which is in the amount of ₱150,000.00, where is the
corresponding check?

A: Rolando Ramos dated December 26, 1991 and one of the signatories
with higher authority, this is Mr. Balmaceda’s signature.

Q: In other words he is likewise approving signatory to the Manager’s

check?

A: Yes sir. This is an authority that the check [has] been encashed.

Q: In other words this check issued to Rolando Ramos dated December

26, 1991 is a cross check but nonetheless he allowed to encash by
granting it.

Could you please show us?

ATTY. PACES: Witness pointing to an initial of the defendant Antonio

Balmaceda, the notation cross check.

A: And this is his signature.

xxxx

Q: How about the check corresponding to Exhibit E-2 which is an

application for ₱125,000.00 for a certain Rolando Ramos. Do you have the
check?

A: Yes sir.

ATTY. PACES: Witness producing a check dated December 19, 1991 the
amount of ₱125,000.00 payable to certain Rolando Ramos.
Q: Can you tell us whether the same modus operandi was ad[o]pted by Mr.
Balmaceda in so far as he is concerned?

A: Yes sir he is also the right signer and he authorized the cancellation of
the cross check.17 (emphasis ours)

xxxx

Q: These particular checks [Mrs.] witness in your findings, do you know if

Mr. Balmaceda [has] again any participation in these checks?

A: He is also the right signer and approved officer and he was authorized to
debit on file.

xxxx

Q: And do you know if these particular checks marked as Exhibit G-2 to

triple FFF were subsequently encashed?

A: Yes sir.

Q: Were you able to find out who encashed?

A: Mr. Balmaceda himself and besides he approved the encashment

because of the signature that he allowed the encashment of the check.

xxxx

Q: Do you know if this particular person having in fact withdraw of received

the proceeds of [these] particular checks, the payee?

A: No sir.

Q: It was all Mr. Balmaceda dealing with you?

A: Yes sir.

Q: In other words it would be possible that Mr. Balmaceda himself gotten

the proceeds of the checks by forging the payees signature?

A: Yes sir.18 (emphases ours)

Mrs. Nilda Laforteza, the Commercial Account Officer of PCIB’s Sta. Cruz,
Manila branch at the time the events of this case occurred, confirmed Mrs.
Costes’ testimony by stating that it was Balmaceda who forged Ramos’
signature on the Manager’s checks where Ramos was the payee, so as to
encash the amounts indicated on the checks.19Mrs. Laforteza also testified
that Ramos never went to the PCIB, Sta. Cruz, Manila branch to encash
the checks since Balmaceda was the one who deposited the checks into
Ramos’ bank account. As revealed during Mrs. Laforteza’s cross-
examination:

Q: Mrs. Laforteza, these checks that were applied for by Mr. Balmaceda,
did you ever see my client go to the bank to encash these checks?

A: No it is Balmaceda who is depositing in his behalf.

Q: Did my client ever call up the bank concerning this amount?

A: Yes he is not going to call PCIBank Sta. Cruz branch because his
account is maintained at Pasig.

Q: So Mr. Balmaceda was the one who just remitted or transmitted the
amount that you claimed [was sent] to the account of my client?

A: Yes.20 (emphases ours)

Even Mrs. Rodelia Nario, presented by PCIB as its rebuttal witness to

prove that Ramos encashed a Manager’s check for ₱480,000.00, could
only testify that the money was deposited into Ramos’ PCIB bank account.
She could not attest that Ramos himself presented the Manager’s check for
deposit in his bank account.21 These testimonies clearly dispute PCIB’s
theory that Ramos was instrumental in the encashment of the Manager’s
checks.

We also find no reason to doubt Ramos’ claim that Balmaceda deposited

these large sums of money into his bank account as payment for the
fighting cocks that Balmaceda purchased from him. Ramos presented two
witnesses – Vicente Cosculluela and Crispin Gadapan – who testified that
Ramos previously engaged in the business of buying and selling fighting
cocks, and that Balmaceda was one of Ramos’ biggest clients.
Quoting from the RTC decision, PCIB stresses that Ramos’ own witness
and business partner, Cosculluela, testified that the biggest net profit he
and Ramos earned from a single transaction with Balmaceda amounted to
no more than ₱100,000.00, for the sale of approximately 45 fighting
cocks.22 In PCIB’s view, this testimony directly contradicts Ramos’ assertion
that he received approximately ₱400,000.00 from his biggest transaction
with Balmaceda. To PCIB, the testimony also renders questionable Ramos’
assertion that Balmaceda deposited large amounts of money into his bank
account as payment for the fighting cocks.

On this point, we find that PCIB misunderstood Cosculluela’s testimony. A

review of the testimony shows that Cosculluela specifically referred to the
net profit that they earned from the sale of the fighting cocks;23 PCIB
apparently did not take into account the capital, transportation and other
expenses that are components of these transactions. Obviously, in sales
transactions, the buyer has to pay not only for the value of the thing sold,
but also for the shipping costs and other incidental costs that accompany
the acquisition of the thing sold. Thus, while the biggest net profit that
Ramos and Cosculluela earned in a single transaction amounted to no
more than ₱100,000.00,24 the inclusion of the actual acquisition costs of the
fighting cocks, the transportation expenses (i.e., airplane tickets from
Bacolod or Zamboanga to Manila) and other attendant expenses could
account for the ₱400,000.00 that Balmaceda deposited into Ramos’ bank
account.

Given that PCIB failed to establish Ramos’ participation in Balmaceda’s

scheme, it was not even necessary for Ramos to provide an explanation for
the money he received from Balmaceda. Even if the evidence adduced by
the plaintiff appears stronger than that presented by the defendant, a
judgment cannot be entered in the plaintiff’s favor if his evidence still does
not suffice to sustain his cause of action;25 to reiterate, a preponderance of
evidence as defined must be established to achieve this result.

PCIB itself at fault as employer

In considering this case, one point that cannot be disregarded is the

significant role that PCIB played which contributed to the perpetration of the
fraud. We cannot ignore that Balmaceda managed to carry out his
fraudulent scheme primarily because other PCIB employees failed to carry
out their assigned tasks – flaws imputable to PCIB itself as the employer.
Ms. Analiza Vega, an accounting clerk, teller and domestic remittance clerk
working at the PCIB, Sta. Cruz, Manila branch at the time of the incident,
testified that Balmaceda broke the Bank’s protocol when he ordered the
Bank’s employees to fill up the application forms for the Manager’s checks,
to be debited from the bank account of one of the bank’s clients, without
providing the necessary Authority to Debit from the client.26 PCIB also
admitted that these Manager’s checks were subsequently released to
Balmaceda, and not to the client’s representative, based solely on
Balmaceda’s word that the client had tasked him to deliver these checks.27

Despite Balmaceda’s gross violations of bank procedures – mainly in the

processing of the applications for Manager’s checks and in the releasing of
the Manager’s checks – Balmaceda’s co-employees not only turned a blind
eye to his actions, but actually complied with his instructions. In this way,
PCIB’s own employees were unwitting accomplices in Balmaceda’s
fraud.

Another telling indicator of PCIB’s negligence is the fact that it allowed

Balmaceda to encash the Manager’s checks that were plainly crossed
checks. A crossed check is one where two parallel lines are drawn across
its face or across its corner.28 Based on jurisprudence, the crossing of a
check has the following effects: (a) the check may not be encashed but
only deposited in the bank; (b) the check may be negotiated only once — to
the one who has an account with the bank; and (c) the act of crossing the
check serves as a warning to the holder that the check has been issued for
a definite purpose and he must inquire if he received the check pursuant to
this purpose; otherwise, he is not a holder in due course.29 In other words,
the crossing of a check is a warning that the check should be deposited
only in the account of the payee. When a check is crossed, it is the duty of
the collecting bank to ascertain that the check is only deposited to the
payee’s account.30 In complete disregard of this duty, PCIB’s systems
allowed Balmaceda to encash 26 Manager’s checks which were all crossed
checks, or checks payable to the "payee’s account only."

The General Banking Law of 200031 requires of banks the highest

standards of integrity and performance. The banking business is impressed
with public interest. Of paramount importance is the trust and confidence of
the public in general in the banking industry. Consequently, the diligence
required of banks is more than that of a Roman pater familias or a good
father of a family.32 The highest degree of diligence is expected.33
While we appreciate that Balmaceda took advantage of his authority and
position as the branch manager to commit these acts, this circumstance
cannot be used to excuse the manner the Bank – through its employees –
handled its clients’ bank accounts and thereby ignored established bank
procedures at the branch manager’s mere order. This lapse is made all the
more glaring by Balmaceda’s repetition of his modus operandi 33 more
times in a period of over one year by the Bank’s own estimation. With this
kind of record, blame must be imputed on the Bank itself and its systems,
not solely on the weakness or lapses of individual employees.

Principle of unjust enrichment not applicable

PCIB maintains that even if Ramos did not collude with Balmaceda, it still
has the right to recover the amounts unjustly received by Ramos pursuant
to the principle of unjust enrichment. This principle is embodied in Article 22
of the Civil Code which provides:

Article 22. Every person who through an act of performance by another, or

any other means, acquires or comes into possession of something at the
expense of the latter without just or legal ground, shall return the same to
him.

To have a cause of action based on unjust enrichment, we explained in

University of the Philippines v. Philab Industries, Inc.34 that:

Unjust enrichment claims do not lie simply because one party benefits from
the efforts or obligations of others, but instead it must be shown that a party
was unjustly enriched in the sense that the term unjustly could mean
illegally or unlawfully.

Moreover, to substantiate a claim for unjust enrichment, the claimant must

unequivocally prove that another party knowingly received something
of value to which he was not entitled and that the state of affairs are
such that it would be unjust for the person to keep the benefit. Unjust
enrichment is a term used to depict result or effect of failure to make
remuneration of or for property or benefits received under circumstances
that give rise to legal or equitable obligation to account for them; to be
entitled to remuneration, one must confer benefit by mistake, fraud,
coercion, or request. Unjust enrichment is not itself a theory of reconvey.
Rather, it is a prerequisite for the enforcement of the doctrine of
restitution.35 (emphasis ours)
Ramos cannot be held liable to PCIB on account of unjust enrichment
simply because he received payments out of money secured by fraud from
PCIB. To hold Ramos accountable, it is necessary to prove that he
received the money from Balmaceda, knowing that he (Ramos) was not
entitled to it. PCIB must also prove that Ramos, at the time that he received
the money from Balmaceda, knew that the money was acquired through
fraud. Knowledge of the fraud is the link between Ramos and PCIB that
would obligate Ramos to return the money based on the principle of unjust
enrichment.

However, as the evidence on record indicates, Ramos accepted the

deposits that Balmaceda made directly into his bank account, believing that
these deposits were payments for the fighting cocks that Balmaceda had
purchased. Significantly, PCIB has not presented any evidence proving that
Ramos participated in, or that he even knew of, the fraudulent sources of
Balmaceda’s funds.

PCIB illegally froze and debited Ramos’ assets

We also find that PCIB acted illegally in freezing and debiting Ramos’ bank
account. In BPI Family Bank v. Franco,36 we cautioned against the
unilateral freezing of bank accounts by banks, noting that:

More importantly, [BPI Family Bank] does not have a unilateral right to
freeze the accounts of Franco based on its mere suspicion that the funds
therein were proceeds of the multi-million peso scam Franco was allegedly
involved in. To grant [BPI Family Bank], or any bank for that matter, the
right to take whatever action it pleases on deposits which it supposes are
derived from shady transactions, would open the floodgates of public
distrust in the banking industry.37

We see no legal merit in PCIB’s claim that legal compensation took place
between it and Ramos, thereby warranting the automatic deduction from
Ramos’ bank account. For legal compensation to take place, two persons,
in their own right, must first be creditors and debtors of each other.38 While
PCIB, as the depositary bank, is Ramos’ debtor in the amount of his
deposits, Ramos is not PCIB’s debtor under the evidence the PCIB
adduced. PCIB thus had no basis, in fact or in law, to automatically debit
from Ramos’ bank account.

On the award of damages

Although PCIB’s act of freezing and debiting Ramos’ account is unlawful,
we cannot hold PCIB liable for moral and exemplary damages. Since a
contractual relationship existed between Ramos and PCIB as the depositor
and the depositary bank, respectively, the award of moral damages
depends on the applicability of Article 2220 of the Civil Code, which
provides:

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

Bad faith does not simply connote bad judgment or negligence; it imports a
dishonest purpose or some moral obliquity and conscious commission of a
wrong; it partakes of the nature of fraud.39

As the facts of this case bear out, PCIB did not act out of malice or bad
faith when it froze Ramos’ bank account and subsequently debited the
amount of ₱251,910.96 therefrom. While PCIB may have acted hastily and
without regard to its primary duty to treat the accounts of its depositors with
meticulous care and utmost fidelity,40 we find that its actions were propelled
more by the need to protect itself, and not out of malevolence or ill will. One
may err, but error alone is not a ground for granting moral damages.41

We also disallow the award of exemplary damages. Article 2234 of the Civil
Code requires a party to first prove that he is entitled to moral, temperate or
compensatory damages before he can be awarded exemplary
damages. Since no reason exists to award moral damages, so too can
1âwphi1

there be no reason to award exemplary damages.

We deem it just and equitable, however, to uphold the award of attorney’s

fees in Ramos’ favor. Taking into consideration the time and efforts
involved that went into this case, we increase the award of attorney’s fees
from ₱20,000.00 to ₱75,000.00.

WHEREFORE, the petition is PARTIALLY GRANTED. We AFFIRM the

decision of the Court of Appeals dated April 29, 2003 in CA-G.R. CV No.
69955 with the MODIFICATION that the award of moral and exemplary
damages in favor of Rolando N. Ramos is DELETED, while the award of
attorney’s fees is INCREASED to ₱75,000.00. Costs against the Philippine
Commercial International Bank.
SO ORDERED.

ARTURO D. BRION
Associate Justice

WE CONCUR:

G.R. No. 158143 September 21, 2011

PHILIPPINE COMMERCIAL INTERNATIONAL BANK,

Petitioner,vs.
ANTONIO B. BALMACEDA and ROLANDO N. RAMOS,
Respondents.
FACTS:
PCIB filed an action for recovery of sum of money with damages before
the RTC against Antonio Balmaceda, the Branch Manager of its Sta.
Cruz, Manila branch. In its complaint, PCIB alleged that between 1991
and 1993, Balmaceda, by taking advantage of his position as branch
manager, fraudulently obtained and encashed 31 Manager’s checks.
PCIB then moved to be allowed to file an amended complaint to
implead Rolando Ramos as one of the recipients of a portion of the
proceeds from Balmaceda’s alleged fraud. PCIB also increased the
number of fraudulently obtained and encased Manager’s checks to 34
in which the RTC granted.
Since Balmaceda did not file an Answer, he was declared in default. On
the other hand, Ramos filed an Answer denying any knowledge of
Balmace
da’s scheme. The RTC then issued a decision in favor of
PCIB, where the RTC found that Balmaceda, took undue advantage of
his position and authority as branch manager and Ramos acted in
collusion with Balmaceda. On appeal, the CA dismissed thecomplaint
against Ramos, holding that no sufficient evidence existed to prove that
Ramos colluded with Balmaceda in the latter’s fraudulent
manipulations and thus CA SET ASIDE the Decision of the trial court
insofar as Ramos is concerned. Hence this petition for review on
certiorari, filed by the PhilippineCommercial International Bank.

ISSUE:
Whether or not Ramos who received a portion of the money that
Balmaceda took from PCIB, shouldalso be held liable for the return of
this money to the Bank.

RULING:
No, Ramos is not liable.The Supreme Court
PARTIALLY GRANTED the petition and
AFFIRMED the decision of the Court of Appeals dated with the
MODIFICATION that the award of moral and exemplary damages in
favor of Rolando N. Ramos is
DELETED.
PCIB, as plaintiff, had to prove, by preponderance of evidence, its
positive assertion that Ramos conspired with Balmaceda in
perpetrating the latter’s scheme to defraud the Bank. All that
PCIB’sevidence proves is that Balmaceda used Ramos’ name as a payee
when he filled up the ap plication forms for the Manager’s checks. But,
as the CA correctly observed, the mere fact that Balmaceda
madeRamos the payee on some of the Manager’s checks is not enough
basis to conclude that Ramos wascomplicit in Balmaceda’s fraud; a
number of other people were made payees on the other Manager’s
checks yet PCIB never alleged them to be liable, nor did the Bank
adduce any other evidence pointing
to Ramos’ participation that would justify his separate treatment from
the others. Also, while Ramos is
Balm
aceda’s brother
-in-law, their relationship is not sufficient, by itself, to render Ramos
liable, absentconcrete proof of his actual participation in the fraudulent
scheme.The party carrying the burden of proof must establish his case
by a
preponderance of evidence
, or evidence which, to the court, is more worthy of belief than the
evidence offered in opposition. In
Encinas v. National Bookstore, Inc.
,
defined "preponderance of evidence" in the following
manner:"Preponderance of evidence" is the weight, credit, and value of
the aggregate evidence on either sideand is usually considered to be
synonymous with the term "greater weight of the evidence" or "greater
weight of the credible evidence." Preponderance of evidence is a
phrase which, in the last analysis,means probability of the truth. It is
evidence which is more convincing to the court as worthy of belief than
that which is offered in opposition thereto.
Ramos’ participation in Balmaceda’s
scheme was not proven by PCIB by preponderance of evidence.
Given that PCIB failed to establish Ramos’ participation in Balmaceda’s
scheme, it was not even
necessary for Ramos to provide an explanation for the money he
received from Balmaceda. Even if theevidence adduced by the plaintiff
appears stronger than that presented by the defendant, a judgment
cannot be entered in the plaintiff’s favor if his evidence still does not
suffice to sustain his cause of
action;
25
to reiterate, a preponderance of evidence as defined must be
established to achieve thisresult.
 3. Simex International Inc. vs Court of Appeals, GR. No. 880313,
March 19, 1990

G.R. No. 88013 March 19, 1990

SIMEX INTERNATIONAL (MANILA), INCORPORATED, petitioner,

vs.
THE HONORABLE COURT OF APPEALS and TRADERS ROYAL
BANK, respondents.

Don P. Porcuincula for petitioner.

San Juan, Gonzalez, San Agustin & Sinense for private respondent.

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

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, 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.

Simex International (Manila) Inc. vs. Court of Appeals G.R. No. 88013,
March 19, 1990
MARCH 16, 2014 LEAVE A COMMENT
A bank may be held liable for damages by reason of its unjustified
dishonor of a check, which caused damage to its client’s credit
standing. 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. The bank is a fiduciary of the
depositor’s money.

Facts: Simex International is a private corporation engaged in the

exportation of food products. It buys these products from various local
suppliers and then sells them abroad to the Middle East and the United
States. Most of its exports are purchased by the petitioner on credit.
Simex was a depositor of the Far East Savings Bank and maintained a
checking account in its branch in Cubao, Quezon City which issued
several checks against its deposit but was surprised to learn later that
they had been dishonored for insufficient funds. As a consequence,
several suppliers sent a letter of demand to the petitioner, threatening
prosecution if the dishonored check issued to it was not made good and
also withheld delivery of the order made by the petitioner. One
supplier also cancelled the petitioner’s credit line and demanded that
future payments be made by it in cash or certified check. The petitioner
complained to the respondent bank. 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 only a month after, and
the dishonored checks were paid after they were re-deposited. The
petitioner then filed a complaint in the then Court of First Instance of
Rizal against the bank for its gross and wanton negligence.

Issue: Whether or not the bank can be held liable for negligence by
reason of its unjustified dishonor of a check
 Held: 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 dishonour 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.

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.
 4. Development Bank of the Philippines vs. Gaurina Agricultural and
Realty Development Corporation, GR. No. 160758, January 15,
2014

G.R. No. 160758 January 15, 2014

DEVELOPMENT BANK OF THE PHILIPPINES, Petitioner,

vs.
GUARIÑA AGRICULTURAL AND REALTY DEVELOPMENT
CORPORATION, Respondent.

DECISION

BERSAMIN, J.:

The foreclosure of a mortgage prior to the mortgagor's default on the

principal obligation is premature, and should be undone for being void and
ineffectual. The mortgagee who has been meanwhile given possession of
the mortgaged property by virtue of a writ of possession issued to it as the
purchaser at the foreclosure sale may be required to restore the
possession of the property to the mortgagor and to pay reasonable rent for
the use of the property during the intervening period.

The Case

In this appeal, Development Bank of the Philippines (DBP) seeks the

reversal of the adverse decision promulgated on March 26, 2003 in C.A.-
G.R. CV No. 59491,1 whereby the Court of Appeals (CA) upheld the
judgment rendered on January 6, 19982 by the Regional Trial Court, Branch
25, in Iloilo City (RTC) annulling the extra-judicial foreclosure of the real
estate and chattel mortgages at the instance of DBP because the debtor-
mortgagor, Guariña Agricultural and Realty Development Corporation
(Guariña Corporation), had not yet defaulted on its obligations in favor of
DBP.

Antecedents
In July 1976, Guariña Corporation applied for a loan from DBP to finance
the development of its resort complex situated in Trapiche, Oton, Iloilo. The
loan, in the amount of ₱3,387,000.00, was approved on August 5,
1976.3Guariña Corporation executed a promissory note that would be due
on November 3, 1988.4 On October 5, 1976, Guariña Corporation executed
a real estate mortgage over several real properties in favor of DBP as
security for the repayment of the loan. On May 17, 1977, Guariña
Corporation executed a chattel mortgage over the personal properties
existing at the resort complex and those yet to be acquired out of the
proceeds of the loan, also to secure the performance of the
obligation.5 Prior to the release of the loan, DBP required Guariña
Corporation to put up a cash equity of ₱1,470,951.00 for the construction of
the buildings and other improvements on the resort complex.

The loan was released in several instalments, and Guariña Corporation

used the proceeds to defray the cost of additional improvements in the
resort complex. In all, the amount released totalled ₱3,003,617.49, from
which DBP withheld ₱148,102.98 as interest.6

Guariña Corporation demanded the release of the balance of the loan, but
DBP refused. Instead, DBP directly paid some suppliers of Guariña
Corporation over the latter's objection. DBP found upon inspection of the
resort project, its developments and improvements that Guariña
Corporation had not completed the construction works.7 In a letter dated
February 27, 1978,8 and a telegram dated June 9, 1978,9 DBP thus
demanded that Guariña Corporation expedite the completion of the project,
and warned that it would initiate foreclosure proceedings should Guariña
Corporation not do so.10

Unsatisfied with the non-action and objection of Guariña Corporation, DBP

initiated extrajudicial foreclosure proceedings. A notice of foreclosure sale
was sent to Guariña Corporation. The notice was eventually published,
leading the clients and patrons of Guariña Corporation to think that its
business operation had slowed down, and that its resort had already
closed.11

On January 6, 1979, Guariña Corporation sued DBP in the RTC to demand

specific performance of the latter's obligations under the loan agreement,
and to stop the foreclosure of the mortgages (Civil Case No.
12707).12However, DBP moved for the dismissal of the complaint, stating
that the mortgaged properties had already been sold to satisfy the
obligation of Guariña Corporation at a public auction held on January 15,
1979 at the Costa Mario Resort Beach Resort in Oton, Iloilo.13 Due to this,
Guariña Corporation amended the complaint on February 6, 197914 to seek
the nullification of the foreclosure proceedings and the cancellation of the
certificate of sale. DBP filed its answer on December 17, 1979,15 and trial
followed upon the termination of the pre-trial without any agreement being
reached by the parties.16

In the meantime, DBP applied for the issuance of a writ of possession by

the RTC. At first, the RTC denied the application but later granted it upon
DBP's motion for reconsideration. Aggrieved, Guariña Corporation assailed
the granting of the application before the CA on certiorari (C.A.-G.R. No.
12670-SP entitled Guariña Agricultural and Realty Development
Corporation v. Development Bank of the Philippines). After the CA
dismissed the petition for certiorari, DBP sought the implementation of the
order for the issuance of the writ of possession. Over Guariña
Corporation's opposition, the RTC issued the writ of possession on June
16, 1982.17

Judgment of the RTC

On January 6, 1998, the RTC rendered its judgment in Civil Case No.
12707, disposing as follows:

WHEREFORE, premises considered, the court hereby resolves that the

extra-judicial sales of the mortgaged properties of the plaintiff by the Office
of the Provincial Sheriff of Iloilo on January 15, 1979 are null and void, so
with the consequent issuance of certificates of sale to the defendant of said
properties, the registration thereof with the Registry of Deeds and the
issuance of the transfer certificates of title involving the real property in its
name.

It is also resolved that defendant give back to the plaintiff or its

representative the actual possession and enjoyment of all the properties
foreclosed and possessed by it. To pay the plaintiff the reasonable rental
for the use of its beach resort during the period starting from the time it
(defendant) took over its occupation and use up to the time possession is
actually restored to the plaintiff.
And, on the part of the plaintiff, to pay the defendant the loan it obtained as
soon as it takes possession and management of the beach resort and
resume its business operation.

Furthermore, defendant is ordered to pay plaintiff's attorney's fee of

₱50,000.00.

So ORDERED.18

Decision of the CA

On appeal (C.A.-G.R. CV No. 59491), DBP challenged the judgment of the

RTC, and insisted that:

THE TRIAL COURT ERRED AND COMMITTED REVERSIBLE ERROR IN

DECLARING DBP'S FORECLOSURE OF THE MORTGAGED
PROPERTIES AS INVALID AND UNCALLED FOR.

II

THE TRIAL COURT GRIEVOUSLY ERRED IN HOLDING THE GROUNDS

INVOKED BY DBP TO JUSTIFY FORECLOSURE AS "NOT
SUFFICIENT." ON THE CONTRARY, THE MORTGAGE WAS
FORECLOSED BY EXPRESS AUTHORITY OF PARAGRAPH NO. 4 OF
THE MORTGAGE CONTRACT AND SECTION 2 OF P.D. 385 IN
ADDITION TO THE QUESTIONED PAR. NO. 26 PRINTED AT THE BACK
OF THE FIRST PAGE OF THE MORTGAGE CONRACT.

III

THE TRIAL COURT ERRED IN HOLDING THE SALES OF THE

MORTGAGED PROPERTIES TO DBP AS INVALID UNDER ARTICLES
2113 AND 2141 OF THE CIVIL CODE.

IV

THE TRIAL COURT GRAVELY ERRED AND COMMITTED

[REVERSIBLE] ERROR IN ORDERING DBP TO RETURN TO PLAINTIFF
THE ACTUAL POSSESSION AND ENJOYMENT OF ALL THE
FORECLOSED PROPERTIES AND TO PAY PLAINTIFF REASONABLE
RENTAL FOR THE USE OF THE FORECLOSED BEACH RESORT.

THE TRIAL COURT ERRED IN AWARDING ATTORNEY'S FEES

AGAINST DBP WHICH MERELY EXERCISED ITS RIGHTS UNDER THE
MORTGAGE CONTRACT.19

In its decision promulgated on March 26, 2003,20 however, the CA

sustained the RTC's judgment but deleted the award of attorney's fees,
decreeing:

WHEREFORE, in view of the foregoing, the Decision dated January 6,

1998, rendered by the Regional Trial Court of Iloilo City, Branch 25 in Civil
Case No. 12707 for Specific Performance with Preliminary Injunction is
hereby AFFIRMED with MODIFICATION, in that the award for attorney's
fees is deleted.

SO ORDERED.21

DBP timely filed a motion for reconsideration, but the CA denied its motion
on October 9, 2003.

Hence, this appeal by DBP.

Issues

DBP submits the following issues for consideration, namely:

WHETHER OR NOT THE DECISION OF THE COURT OF APPEALS

DATED MARCH 26, 2003 AND ITS RESOLUTION DATED OCTOBER 9,
DENYING PETITIONER'S MOTION FOR RECONSIDERATION WERE
ISSUED IN ACCORDANCE WITH LAW, PREVAILING
JURISPRUDENTIAL DECISION AND SUPPORTED BY EVIDENCE;

WHETHER OR NOT THE HONORABLE COURT OF APPEALS

ADHERED TO THE USUAL COURSE OF JUDICIAL PROCEEDINGS IN
DECIDING C.A.-G.R. CV NO. 59491 AND THEREFORE IN
ACCORDANCE WITH THE "LAW OF THE CASE DOCTRINE."22
 Ruling

The appeal lacks merit.

1.
Findings of the CA were supported by the
evidence as well as by law and jurisprudence

DBP submits that the loan had been granted under its supervised credit
financing scheme for the development of a beach resort, and the releases
of the proceeds would be subject to conditions that included the verification
of the progress of works in the project to forestall diversion of the loan
proceeds; and that under Stipulation No. 26 of the mortgage contract,
further loan releases would be terminated and the account would be
considered due and demandable in the event of a deviation from the
purpose of the loan,23 including the failure to put up the required equity and
the diversion of the loan proceeds to other purposes.24 It assails the
declaration by the CA that Guariña Corporation had not yet been in default
in its obligations despite violations of the terms of the mortgage contract
securing the promissory note.

Guariña Corporation counters that it did not violate the terms of the
promissory note and the mortgage contracts because DBP had fully
collected the interest notwithstanding that the principal obligation did not
yet fall due and become demandable.25

The submissions of DBP lack merit and substance.

The agreement between DBP and Guariña Corporation was a loan. Under
the law, a loan requires the delivery of money or any other consumable
object by one party to another who acquires ownership thereof, on the
condition that the same amount or quality shall be paid.26 Loan is a
reciprocal obligation, as it arises from the same cause where one party is
the creditor, and the other the debtor.27 The obligation of one party in a
reciprocal obligation is dependent upon the obligation of the other, and the
performance should ideally be simultaneous. This means that in a loan, the
creditor should release the full loan amount and the debtor repays it when it
becomes due and demandable.28

In its assailed decision, the CA found and held thusly:

 xxxx

x x x It is undisputed that appellee obtained a loan from appellant, and as

security, executed real estate and chattel mortgages. However, it was
never established that appellee was already in default. Appellant, in a
telegram to the appellee reminded the latter to make good on its
construction works, otherwise, it would foreclose the mortgage it executed.
It did not mention that appellee was already in default. The records show
that appellant did not make any demand for payment of the promissory
note. It appears that the basis of the foreclosure was not a default on the
loan but appellee's failure to complete the project in accordance with
appellant's standards. In fact, appellant refused to release the remaining
balance of the approved loan after it found that the improvements
introduced by appellee were below appellant's expectations.

The loan agreement between the parties is a reciprocal obligation.

Appellant in the instant case bound itself to grant appellee the loan amount
of ₱3,387,000.00 condition on appellee's payment of the amount when it
falls due. Furthermore, the loan was evidenced by the promissory note
which was secured by real estate mortgage over several properties and
additional chattel mortgage. Reciprocal obligations are those which arise
from the same cause, and in which each party is a debtor and a creditor of
the other, such that the obligation of one is dependent upon the obligation
of the other (Areola vs. Court of Appeals, 236 SCRA 643). They are to be
performed simultaneously such that the performance of one is conditioned
upon the simultaneous fulfilment of the other (Jaime Ong vs. Court of
Appeals, 310 SCRA 1). The promise of appellee to pay the loan upon due
date as well as to execute sufficient security for said loan by way of
mortgage gave rise to a reciprocal obligation on the part of appellant to
release the entire approved loan amount. Thus, appellees are entitled to
receive the total loan amount as agreed upon and not an incomplete
amount.

The appellant did not release the total amount of the approved loan.
Appellant therefore could not have made a demand for payment of the loan
since it had yet to fulfil its own obligation. Moreover, the fact that appellee
was not yet in default rendered the foreclosure proceedings premature and
improper.
The properties which stood as security for the loan were foreclosed without
any demand having been made on the principal obligation. For an
obligation to become due, there must generally be a demand. Default
generally begins from the moment the creditor demands the performance
of the obligation. Without such demand, judicial or extrajudicial, the effects
of default will not arise (Namarco vs. Federation of United Namarco
Distributors, Inc., 49 SCRA 238; Borje vs. CFI of Misamis Occidental, 88
SCRA 576).

xxxx

Appellant also admitted in its brief that it indeed failed to release the full
amount of the approved loan. As a consequence, the real estate mortgage
of appellee becomes unenforceable, as it cannot be entirely foreclosed to
satisfy appellee's total debt to appellant (Central Bank of the Philippines vs.
Court of Appeals, 139 SCRA 46).

Since the foreclosure proceedings were premature and unenforceable, it

only follows that appellee is still entitled to possession of the foreclosed
properties. However, appellant took possession of the same by virtue of a
writ of possession issued in its favor during the pendency of the case.
Thus, the trial court correctly ruled when it ordered appellant to return
actual possession of the subject properties to appellee or its representative
and to pay appellee reasonable rents.

However, the award for attorney's fees is deleted. As a rule, the award of
attorney's fees is the exception rather than the rule and counsel's fees are
not to be awarded every time a party wins a suit. Attorney's fees cannot be
recovered as part of damages because of the policy that no premium
should be placed on the right to litigate (Pimentel vs. Court of Appeals, et
al., 307 SCRA 38).29

xxxx

We uphold the CA.

To start with, considering that the CA thereby affirmed the factual findings
of the RTC, the Court is bound to uphold such findings, for it is axiomatic
that the trial court's factual findings as affirmed by the CA are binding on
appeal due to the Court not being a trier of facts.
Secondly, by its failure to release the proceeds of the loan in their entirety,
DBP had no right yet to exact on Guariña Corporation the latter's
compliance with its own obligation under the loan. Indeed, if a party in a
reciprocal contract like a loan does not perform its obligation, the other
party cannot be obliged to perform what is expected of it while the other's
obligation remains unfulfilled.30 In other words, the latter party does not
incur delay.31

Still, DBP called upon Guariña Corporation to make good on the

construction works pursuant to the acceleration clause written in the
mortgage contract (i.e., Stipulation No. 26),32 or else it would foreclose the
mortgages.

DBP's actuations were legally unfounded. It is true that loans are often
secured by a mortgage constituted on real or personal property to protect
the creditor's interest in case of the default of the debtor. By its nature,
however, a mortgage remains an accessory contract dependent on the
principal obligation,33 such that enforcement of the mortgage contract will
depend on whether or not there has been a violation of the principal
obligation. While a creditor and a debtor could regulate the order in which
they should comply with their reciprocal obligations, it is presupposed that
in a loan the lender should perform its obligation - the release of the full
loan amount - before it could demand that the borrower repay the loaned
amount. In other words, Guariña Corporation would not incur in delay
before DBP fully performed its reciprocal obligation.34

Considering that it had yet to release the entire proceeds of the loan, DBP
could not yet make an effective demand for payment upon Guariña
Corporation to perform its obligation under the loan. According to
Development Bank of the Philippines v. Licuanan,35 it would only be when a
demand to pay had been made and was subsequently refused that a
borrower could be considered in default, and the lender could obtain the
right to collect the debt or to foreclose the mortgage. Hence, Guariña
1âwphi1

Corporation would not be in default without the demand.

Assuming that DBP could already exact from the latter its compliance with
the loan agreement, the letter dated February 27, 1978 that DBP sent
would still not be regarded as a demand to render Guariña Corporation in
default under the principal contract because DBP was only thereby
requesting the latter "to put up the deficiency in the value of
improvements."36

Under the circumstances, DBP's foreclosure of the mortgage and the sale
of the mortgaged properties at its instance were premature, and, therefore,
void and ineffectual.37

Being a banking institution, DBP owed it to Guariña Corporation to exercise

the highest degree of diligence, as well as to observe the high standards of
integrity and performance in all its transactions because its business was
imbued with public interest.38 The high standards were also necessary to
ensure public confidence in the banking system, for, according to Philippine
National Bank v. Pike:39 "The stability of banks largely depends on the
confidence of the people in the honesty and efficiency of banks." Thus,
DBP had to act with great care in applying the stipulations of its agreement
with Guariña Corporation, lest it erodes such public confidence. Yet, DBP
failed in its duty to exercise the highest degree of diligence by prematurely
foreclosing the mortgages and unwarrantedly causing the foreclosure sale
of the mortgaged properties despite Guariña Corporation not being yet in
default. DBP wrongly relied on Stipulation No. 26 as its basis to accelerate
the obligation of Guariña Corporation, for the stipulation was relevant to an
Omnibus Agricultural Loan, to Guariña Corporation's loan which was
intended for a project other than agricultural in nature.

Even so, Guariña Corporation did not elevate the actionability of DBP's
negligence to the CA, and did not also appeal the CA's deletion of the
award of attorney's fees allowed by the RTC. With the decision of the CA
1âwphi1

consequently becoming final and immutable as to Guariña Corporation, we

will not delve any further on DBP's actionable actuations.

2.
The doctrine of law of the case
did not apply herein

DBP insists that the decision of the CA in C.A.-G.R. No. 12670-SP already
constituted the law of the case. Hence, the CA could not decide the appeal
in C.A.-G.R. CV No. 59491 differently.

Guariña Corporation counters that the ruling in C.A.-G.R. No. 12670-SP did
not constitute the law of the case because C.A.-G.R. No. 12670-SP
concerned the issue of possession by DBP as the winning bidder in the
foreclosure sale, and had no bearing whatsoever to the legal issues
presented in C.A.-G.R. CV No. 59491.

Law of the case has been defined as the opinion delivered on a former
appeal, and means, more specifically, that whatever is once irrevocably
established as the controlling legal rule of decision between the same
parties in the same case continues to be the law of the case, whether
correct on general principles or not, so long as the facts on which such
decision was predicated continue to be the facts of the case before the
court.40

The concept of law of the case is well explained in Mangold v. Bacon,41 an

American case, thusly:

The general rule, nakedly and boldly put, is that legal conclusions
announced on a first appeal, whether on the general law or the law as
applied to the concrete facts, not only prescribe the duty and limit the
power of the trial court to strict obedience and conformity thereto, but they
become and remain the law of the case in all other steps below or above
on subsequent appeal. The rule is grounded on convenience, experience,
and reason. Without the rule there would be no end to criticism, reagitation,
reexamination, and reformulation. In short, there would be endless
litigation. It would be intolerable if parties litigants were allowed to
speculate on changes in the personnel of a court, or on the chance of our
rewriting propositions once gravely ruled on solemn argument and handed
down as the law of a given case. An itch to reopen questions foreclosed on
a first appeal would result in the foolishness of the inquisitive youth who
pulled up his corn to see how it grew. Courts are allowed, if they so choose,
to act like ordinary sensible persons. The administration of justice is a
practical affair. The rule is a practical and a good one of frequent and
beneficial use.

The doctrine of law of the case simply means, therefore, that when an
appellate court has once declared the law in a case, its declaration
continues to be the law of that case even on a subsequent appeal,
notwithstanding that the rule thus laid down may have been reversed in
other cases.42 For practical considerations, indeed, once the appellate court
has issued a pronouncement on a point that was presented to it with full
opportunity to be heard having been accorded to the parties, the
pronouncement should be regarded as the law of the case and should not
be reopened on remand of the case to determine other issues of the case,
like damages.43 But the law of the case, as the name implies, concerns only
legal questions or issues thereby adjudicated in the former appeal.

The foregoing understanding of the concept of the law of the case exposes
DBP's insistence to be unwarranted.

To start with, the ex parte proceeding on DBP's application for the issuance
of the writ of possession was entirely independent from the judicial demand
for specific performance herein. In fact, C.A.-G.R. No. 12670-SP, being the
interlocutory appeal concerning the issuance of the writ of possession while
the main case was pending, was not at all intertwined with any legal issue
properly raised and litigated in C.A.-G.R. CV No. 59491, which was the
appeal to determine whether or not DBP's foreclosure was valid and
effectual. And, secondly, the ruling in C.A.-G.R. No. 12670-SP did not
settle any question of law involved herein because this case for specific
performance was not a continuation of C.A.-G.R. No. 12670-SP (which was
limited to the propriety of the issuance of the writ of possession in favor of
DBP), and vice versa.

3.
Guarifia Corporation is legally entitled to the
restoration of the possession of the resort complex
and payment of reasonable rentals by DBP

Having found and pronounced that the extrajudicial foreclosure by DBP

was premature, and that the ensuing foreclosure sale was void and
ineffectual, the Court affirms the order for the restoration of possession to
Guarifia Corporation and the payment of reasonable rentals for the use of
the resort. The CA properly held that the premature and invalid foreclosure
had unjustly dispossessed Guarifia Corporation of its properties.
Consequently, the restoration of possession and the payment of
reasonable rentals were in accordance with Article 561 of the Civil Code,
which expressly states that one who recovers, according to law,
possession unjustly lost shall be deemed for all purposes which may
redound to his benefit to have enjoyed it without interruption.

WHEREFORE, the Court AFFIRMS the decision promulgated on March 26,

2003; and ORDERS the petitioner to pay the costs of suit.
 DEVELOPMENT BANK OF THE PHILIPPINES,
Petitioner,
vs.
GUARIÑA AGRICULTURAL AND REALTY
DEVELOPMENT CORPORATION, Respondent.
G.R. No. 160758 January 15, 2014

PONENTE: Bersamin, J.
TOPIC: Contracts, Delay
FACTS:
In July 1976, Guariña Corporation applied for a
loan from DBP to finance the development of its resort
complex. The loan, in the amount of P3,387,000.00, was
approved on August 5, 1976. Guariña Corporation executed
a promissory note that would be due on November 3, 1988.
On October 5, 1976, Guariña Corporation executed a real
estate mortgage over several real properties in favor of DBP
as security for the repayment of the loan. On May 17, 1977,
Guariña Corporation executed a chattelmortgage over the
personal properties existing at the resort complex and those
yet to be acquired out of the proceeds of the loan, also to
secure the performance of the obligation. Prior to the
release of the loan, DBP required Guariña Corporation to
put up a cash equity of P1,470,951.00 for the construction
of the buildings and other improvements on the resort
complex.
The loan was released in several installments, and
Guariña Corporation used the proceeds to defray the cost of
additional improvements in the resort complex. In all, the
amount released totaled P3,003,617.49, from which DBP
withheld P148,102.98 as interest.
Guariña Corporation demanded the release of the
balance of the loan, but DBP refused. Instead, DBP directly
paid some suppliers of Guariña Corporation over the latter’s
objection. DBP found upon inspection of the resort project,
its developments and improvements that Guariña
Corporation had not completed the construction works. In
a letter dated February 27, 1978, and a telegram dated June
9, 1978, DBP thus demanded that Guariña Corporation
expedite the completion of the project, and warned that it
would initiate foreclosure proceedings should Guariña
Corporation not do so.10
Unsatisfied with the non-action and objection of
Guariña Corporation, DBP initiated extrajudicial
foreclosure proceedings
ISSUE:
Whether or not Guarina was in delay in
performing its obligation making DBP’s action to foreclose
the mortgage proper.
HELD:
 NO. The Court held that the foreclosure of a
mortgage prior to the mortgagor’s default on the principal
obligation is premature, and should be undone for being
void and ineffectual. The mortgagee who has been
meanwhile given possession of the mortgaged property by
virtue of a writ of possession issued to it as the purchaser at
the foreclosure sale may be required to restore the
possession of the property to the mortgagor and to pay
reasonable rent for the use of the property during the
intervening period.
The agreement between DBP and Guariña
Corporation was a loan. Under the law, a loan requires the
delivery of money or any other consumable object by one
party to another who acquires ownership thereof, on the
condition that the same amount or quality shall be paid.
Loan is a reciprocal obligation, as it arises from the same
cause where one party is the creditor, and the other
the debtor. The obligation of one party in a reciprocal
obligation is dependent upon the obligation of the other,
and the performance should ideally be simultaneous. This
means that in a loan, the creditor should release the full
loan amount and the debtor repays it when it becomes due
and demandable.
The loan agreement between the parties is a
reciprocal obligation. Appellant in the instant case bound
itself to grant appellee the loan amount of P3,387,000.00
condition on appellee’s payment of the amount when it falls
due. The appellant did not release the total amount of the
approved loan. Appellant therefore could not have made a
demand for payment of the loan since it had yet to fulfil its
own obligation. Moreover, the fact that appellee was not yet
in default rendered the foreclosure proceedings premature
and improper.
By its failure to release the proceeds of the loan in
their entirety, DBP had no right yet to exact on Guariña
Corporation the latter’s compliance with its own obligation
under the loan. Indeed, if a party in a reciprocal contract
like a loan does not perform its obligation, the other party
cannot be obliged to perform what is expected of it while the
other’s obligation remains unfulfilled. In other words, the
latter party does not incur delay.

5. China Banking Corporation vs Court of Appeals, GR. No. 140687,

December 18, 2006

G.R. No. 140687 December 18, 2006

CHINA BANKING CORPORATION, petitioner,

vs.
THE HONORABLE COURT OF APPEALS and JOSE "JOSEPH"
GOTIANUY as substituted by ELIZABETH GOTIANUY LO, respondents.

DECISION
CHICO-NAZARIO, J.:

A Complaint for recovery of sums of money and annulment of sales of real

properties and shares of stock docketed as CEB-21445 was filed by Jose
"Joseph" Gotianuy against his son-in-law, George Dee, and his daughter,
Mary Margaret Dee, before the Regional Trial Court (RTC) of Cebu City,
Branch 58.

Jose Gotianuy accused his daughter Mary Margaret Dee of stealing,

among his other properties, US dollar deposits with Citibank N.A.
amounting to not less than P35,000,000.00 and US$864,000.00. Mary
Margaret Dee received these amounts from Citibank N.A. through checks
which she allegedly deposited at China Banking Corporation (China Bank).
He likewise accused his son-in-law, George Dee, husband of his daughter,
Mary Margaret, of transferring his real properties and shares of stock in
George Dee's name without any consideration. Jose Gotianuy, died during
the pendency of the case before the trial court.1 He was substituted by his
daughter, Elizabeth Gotianuy Lo. The latter presented the US Dollar checks
withdrawn by Mary Margaret Dee from his US dollar placement with
Citibank. The details of the said checks are:

1) CITIBANK CHECK NO. 69003194405412 dated September 29

1997 in the amount of US$5,937.52 payable to GOTIANUY: JOSE
AND/OR DEE: MARY MARGARET;

2) CITIBANK CHECK NO. 69003194405296 dated September 29

1997 in the amount of US$7,197.59 payable to GOTIANUY: JOSE
AND/OR DEE: MARY MARGARET;

3) CITIBANK CHECK NO. 69003194405414 dated September 29

1997 in the amount of US$1,198.94 payable to GOTIANUY: JOSE
AND/OR DEE: MARY MARGARET;

4) CITIBANK CHECK NO. 69003194405413 dated September 29

1997 in the amount of US$989.04 payable to GOTIANUY: JOSE
AND/OR DEE: MARY MARGARET;
 5) CITIBANK CHECK NO. 69003194405297 dated October 01 1997
in the amount of US$766,011.97 payable to GOTIANUY: JOSE
AND/OR DEE: MARY MARGARET; and

6) CITIBANK CHECK NO. 69003194405339 dated October 09 1997

in the amount of US$83,053.10 payable to GOTIANUY: JOSE
AND/OR DEE: MARY MARGARET.2

Upon motion of Elizabeth Gotianuy Lo, the trial court3 issued a subpoena to
Cristota Labios and Isabel Yap, employees of China Bank, to testify on the
case. The Order of the trial court dated 23 February 1999, states:

Issue a subpoena ad testificandum requiring MS. ISABEL YAP and

CRISTOTA LABIOS of China Banking Corporation, Cebu Main
Branch, corner Magallanes and D. Jakosalem Sts., Cebu City, to
appear in person and to testify in the hearing of the above entitled
case on March 1, 1999 at 8:30 in the morning, with regards to
Citibank Checks (Exhs. "AAA" to "AAA-5") and other matters material
and relevant to the issues of this case.4

China Bank moved for a reconsideration. Resolving the motion, the trial
court issued an Order dated 16 April 1999 and held:

The Court is of the view that as the foreign currency fund (Exhs.
"AAA" to "AAA-5") is deposited with the movant China Banking
Corporation, Cebu Main Branch, Cebu City, the disclosure only as to
the name or in whose name the said fund is deposited is not violative
of the law. Justice will be better served if the name or names of the
depositor of said fund shall be disclosed because such a disclosure is
material and important to the issues between the parties in the case
at bar.

Premises considered, the motion for reconsideration is denied partly

and granted partly, in the sense that Isabel Yap and/or Cristuta
Labios are directed to appear before this Court and to testify at the
trial of this case on April 20, 1999, May 6 & 7, 1999 at 10:00 o'clock
in the morning and only for the purpose of disclosing in whose name
or names is the foreign currency fund (Exhs. "AAA" to "AAA-5")
deposited with the movant Bank and not to other matters material and
relevant to the issues in the case at bar.5
From this Order, China Bank filed a Petition for Certiorari6 with the Court of
Appeals. In a Decision7 dated 29 October 1999, the Court of Appeals
denied the petition of China Bank and affirmed the Order of the RTC.

In justifying its conclusion, the Court of Appeals ratiocinated:

From the foregoing, it is pristinely clear the law specifically

encompasses only the money or funds in foreign currency deposited
in a bank. Thus, the coverage of the law extends only to the foreign
currency deposit in the CBC account where Mary Margaret Dee
deposited the Citibank checks in question and nothing more.

It has to be pointed out that the April 16, 1999 Order of the court of
origin modified its previous February 23, 1999 Order such that the
CBC representatives are directed solely to divulge "in whose name or
names is the foreign currency fund (Exhs. "AAA" to "AAA-5")
deposited with the movant bank." It precluded inquiry on "other
materials and relevant to the issues in the case at bar." We find that
the directive of the court below does not contravene the plain
language of RA 6426 as amended by P.D. No. 1246.

The contention of petitioner that the [prescription] on absolute

confidentiality under the law in question covers even the name of the
depositor and is beyond the compulsive process of the courts is
palpably untenable as the law protects only the deposits itself but not
the name of the depositor. To uphold the theory of petitioner CBC is
reading into the statute "something that is not within the manifest
intention of the legislature as gathered from the statute itself, for to
depart from the meaning expressed by the words, is to alter the
statute, to legislate and not to interpret, and judicial legislation should
be avoided. Maledicta expositio quae corrumpit textum – It is a
dangerous construction which is against the words. Expressing the
same principle is the maxim: Ubi lex non distinguit nec nos
distinguere debemos, which simply means that where the law does
not distinguish, we should not make any distinction." (Gonzaga,
Statutes and their Construction, p. 75.)8

From the Decision of the Court of Appeals, China Bank elevated the case
to this Court based on the following issues:

I
 THE HONORABLE COURT OF APPEALS HAS INTERPRETED THE
PROVISION OF SECTION 8 OF R.A. 6426, AS AMENDED,
OTHERWISE KNOWN AS THE FOREIGN CURRENCY DEPOSIT
ACT, IN A MANNER CONTRARY TO THE LEGISLATIVE
PURPOSE, THAT IS, TO PROVIDE ABSOLUTE CONFIDENTIALITY
OF WHATEVER INFORMATION RELATIVE TO THE FOREIGN
CURRENCY DEPOSIT.

II

PRIVATE RESPONDENT IS NOT THE OWNER OF THE

QUESTIONED FOREIGN CURRENCY DEPOSIT. THUS, HE
CANNOT INVOKE THE AID OF THE COURT IN COMPELLING THE
DISCLOSURE OF SOMEONE ELSE'S FOREIGN CURRENCY
DEPOSIT ON THE FLIMSY PRETEXT THAT THE CHECKS (IN
FOREIGN CURRENCY) HE HAD ISSUED MAY HAVE ENDED UP
THEREIN.

III

PETITIONER CAN RIGHTLY INVOKE THE PROVISION OF SEC. 8,

R.A. 6426, IN BEHALF OF THE FOREIGN CURRENCY
DEPOSITOR, OWING TO ITS SOLEMN OBLIGATION TO ITS
CLIENT TO EXERCISE EXTRAORDINARY DILIGENCE IN THE
HANDLING OF THE ACCOUNT.9

As amended by Presidential Decree No. 1246, the law reads:

SEC. 8. Secrecy of Foreign Currency Deposits. – All foreign currency

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

Under the above provision, the law provides that all foreign currency
deposits authorized under Republic Act No. 6426, as amended by Sec. 8,
Presidential Decree No. 1246, Presidential Decree No. 1035, as well as
foreign currency deposits authorized under Presidential Decree No. 1034
are considered absolutely confidential in nature and may not be inquired
into. There is only one exception to the secrecy of foreign currency
deposits, that is, disclosure is allowed upon the written permission of the
depositor.

This much was pronounced in the case of Intengan v. Court of

Appeals,10 where it was held that the only exception to the secrecy of
foreign currency deposits is in the case of a written permission of the
depositor.

It must be remembered that under the whereas clause of Presidential

Decree No. 1246 which amended Sec. 8 of Republic Act No. 6426, the
Foreign Currency Deposit System including the Offshore Banking System
under Presidential Decree 1034 were intended to draw deposits from
foreign lenders and investors, and we quote:

Whereas, in order to assure the development and speedy growth of

the Foreign Currency Deposit System and the Offshore Banking
System in the Philippines, certain incentives were provided for under
the two Systems such as confidentiality of deposits subject to certain
exceptions and tax exemptions on the interest income of depositors
who are nonresidents and are not engaged in trade or business in the
Philippines;

Whereas, making absolute the protective cloak of confidentiality over

such foreign currency deposits, exempting such deposits from tax,
and guaranteeing the vested rights of depositors would better
encourage the inflow of foreign currency deposits into the banking
institutions authorized to accept such deposits in the Philippines
thereby placing such institutions more in a position to properly
channel the same to loans and investments in the Philippines, thus
directly contributing to the economic development of the country.
As to the deposit in foreign currencies entitled to be protected under the
confidentiality rule, Presidential Decree No. 1034,11 defines deposits to
mean funds in foreign currencies which are accepted and held by an
offshore banking unit in the regular course of business, with the obligation
to return an equivalent amount to the owner thereof, with or without
interest.12

It is in this light that the court in the case of Salvacion v. Central Bank of the
Philippines,13 allowed the inquiry of the foreign currency deposit in question
mainly due to the peculiar circumstances of the case such that a strict
interpretation of the letter of the law would result to rank injustice. Therein,
Greg Bartelli y Northcott, an American tourist, was charged with criminal
cases for serious illegal detention and rape committed against then 12
year-old Karen Salvacion. A separate civil case for damages with
preliminary attachment was filed against Greg Bartelli. The trial court
issued an Order granting the Salvacions' application for the issuance of a
writ of preliminary attachment. A notice of garnishment was then served on
China Bank where Bartelli held a dollar account. China Bank refused,
invoking the secrecy of bank deposits. The Supreme Court ruled: "In fine,
the application of the law depends on the extent of its justice x x x It would
be unthinkable, that the questioned law exempting foreign currency
deposits from attachment, garnishment, or any other order or process of
any court, legislative body, government agency or any administrative body
whatsoever would be used as a device by an accused x x x for wrongdoing,
and in so doing, acquitting the guilty at the expense of the innocent.14

With the foregoing, we are now tasked to determine the single material
issue of whether or not petitioner China Bank is correct in its submission
that the Citibank dollar checks with both Jose Gotianuy and/or Mary
Margaret Dee as payees, deposited with China Bank, may not be looked
into under the law on secrecy of foreign currency deposits. As a corollary
issue, sought to be resolved is whether Jose Gotianuy may be considered
a depositor who is entitled to seek an inquiry over the said deposits.

The Court of Appeals, in allowing the inquiry, considered Jose Gotianuy, a

co-depositor of Mary Margaret Dee. It reasoned that since Jose Gotianuy is
the named co-payee of the latter in the subject checks, which checks were
deposited in China Bank, then, Jose Gotianuy is likewise a depositor
thereof. On that basis, no written consent from Mary Margaret Dee is
necessitated.
We agree in the conclusion arrived at by the Court of Appeals.

The following facts are established: (1) Jose Gotianuy and Mary Margaret
Dee are co-payees of various Citibank checks;15 (2) Mary Margaret Dee
withdrew these checks from Citibank;16 (3) Mary Margaret Dee admitted in
her Answer to the Request for Admissions by the Adverse Party sent to her
by Jose Gotianuy17 that she withdrew the funds from Citibank upon the
instruction of her father Jose Gotianuy and that the funds belonged
exclusively to the latter; (4) these checks were endorsed by Mary Margaret
Dee at the dorsal portion; and (5) Jose Gotianuy discovered that these
checks were deposited with China Bank as shown by the stamp of China
Bank at the dorsal side of the checks.

Thus, with this, there is no issue as to the source of the funds. Mary
Margaret Dee declared the source to be Jose Gotianuy. There is likewise
no dispute that these funds in the form of Citibank US dollar Checks are
now deposited with China Bank.

As the owner of the funds unlawfully taken and which are undisputably now
deposited with China Bank, Jose Gotianuy has the right to inquire into the
said deposits.

A depositor, in cases of bank deposits, is one who pays money into the
bank in the usual course of business, to be placed to his credit and subject
to his check or the beneficiary of the funds held by the bank as trustee.18

On this score, the observations of the Court of Appeals are worth

reiterating:

Furthermore, it is indubitable that the Citibank checks were drawn

against the foreign currency account with Citibank, NA. The monies
subject of said checks originally came from the late Jose Gotianuy,
the owner of the account. Thus, he also has legal rights and interests
in the CBC account where said monies were deposited. More
importantly, the Citibank checks (Exhibits "AAA" to "AAA-5") readily
demonstrate (sic) that the late Jose Gotianuy is one of the payees of
said checks. Being a co-payee thereof, then he or his estate can be
considered as a co-depositor of said checks. Ergo, since the late
Jose Gotianuy is a co-depositor of the CBC account, then his request
for the assailed subpoena is tantamount to an express permission of
a depositor for the disclosure of the name of the account holder. The
 April 16, 1999 Order perforce must be sustained.19(Emphasis
supplied.)

One more point. It must be remembered that in the complaint of Jose

Gotianuy, he alleged that his US dollar deposits with Citibank were illegally
taken from him. On the other hand, China Bank employee Cristuta Labios
testified that Mary Margaret Dee came to China Bank and deposited the
money of Jose Gotianuy in Citibank US dollar checks to the dollar account
of her sister Adrienne Chu.20 This fortifies our conclusion that an inquiry into
the said deposit at China Bank is justified. At the very least, Jose Gotianuy
as the owner of these funds is entitled to a hearing on the whereabouts of
these funds.

All things considered and in view of the distinctive circumstances attendant

to the present case, we are constrained to render a limited pro hac vice
ruling.21 Clearly it was not the intent of the legislature when it enacted the
law on secrecy on foreign currency deposits to perpetuate injustice. This
Court is of the view that the allowance of the inquiry would be in accord
with the rudiments of fair play,22 the upholding of fairness in our judicial
system and would be an avoidance of delay and time-wasteful and
circuitous way of administering justice.23

WHEREFORE, premises considered, the Petition is DENIED. The Decision

of the Court of Appeals dated 29 October 1999 affirming the Order of the
RTC, Branch 58, Cebu City dated 16 April 1999 is AFFIRMED and this
case is ordered REMANDED to the trial court for continuation of hearing
with utmost dispatch consistent with the above disquisition. No costs.

SO ORDERED.

Ynares-Santiago, (Working Chairperson), Austria-Martinez, and Callejo Sr.,

JJ., concur.
Panganiban, C.J., Retired as of December 7, 2006.
China Banking Corporation v. CA, G.R. No. 140687,
December 18, 2006
DECISION
(1st Division)

CHICO-NAZARIO, J.:

I. THE FACTS

A complaint for recovery of sums of money and annulment of sales of

real properties and shares of stock was filed by Jose Gotianuy against his
son-in-law, George Dee, and his daughter, Mary Margaret Dee. Jose
Gotianuy accused his daughter Mary Margaret Dee of stealing, among his
other properties, US dollar deposits with Citibank N.A. amounting to not less
than P35,000,000.00 and US$864,000.00. Mary Margaret Dee received
these amounts from Citibank N.A. through checks which she allegedly
deposited at China Banking Corporation (China Bank).

Jose Gotianuy died during the pendency of the case before the trial
court. He was substituted by his other daughter, Elizabeth Gotianuy Lo. The
latter presented six US Dollar checks withdrawn by Mary Margaret Dee from
Jose Gotianuy’s US dollar placement with Citibank. In the course of the trial,
the lower court ordered two employees of petitioner China Bank to testify
and disclose in whose name the dollar fund was deposited. The CA affirmed
the trial court’s order; thus, China Bank appealed to the Supreme Court.

II. THE ISSUE

May the Citibank dollar checks with Jose Gotianuy and/or Mary
Margaret Dee as payees, which were deposited with petitioner China Bank,
be looked into notwithstanding the law on secrecy of foreign currency
deposits? Corollarily, may Jose Gotianuy be considered a depositor who is
entitled to seek an inquiry over the said foreign currency deposits?

III. THE RULING

[The Supreme Court DENIED the petition, AFFIRMED the decision of

the CA pro hac vice, and REMANDED the case to the trial court for
continuation of hearing with utmost dispatch consistent with this ruling.]

YES, the Citibank dollar checks with Jose Gotianuy and/or Mary
Margaret Dee as payees, which were deposited with petitioner China
Bank, may be looked into notwithstanding the law on secrecy of foreign
currency deposits.

Sec. 8 of R.A. 6426, the Foreign Currency Deposit Act, provides that
all authorized foreign currency deposits are considered absolutely
confidential in natureand may not be inquired into. Under the same
provision, there is only one exception to this rule, that is, when disclosure
is allowed upon the written permission of the depositor.

In this case, Jose Gotianuy was considered by the Court as a co-

depositor of Mary Margaret Dee. The Court reasoned that since Jose
Gotianuy is the named co-payee of Mary Margaret Dee in the subject checks,
which were deposited in China Bank, then Jose Gotianuy is likewise a
depositor thereof. On that basis, no written consent from Mary Margaret Dee
is necessary for the examination of the foreign currency deposits. As the
owner of the funds unlawfully taken and which are undisputably now
deposited with China Bank, Jose Gotianuy has the right to inquire into the
said deposits.
 A depositor, in cases of bank deposits, is one who pays money into the
bank in the usual course of business, to be placed to his credit and subject
to his check or the beneficiary of the funds held by the bank as trustee. On
this score, the observations of the Court of Appeals are worth reiterating:

Furthermore, it is indubitable that the Citibank checks were drawn

against the foreign currency account with Citibank, NA. The monies subject
of said checks originally came from the late Jose Gotianuy, the owner of the
account. Thus, he also has legal rights and interests in the CBC account
where said monies were deposited. More importantly, the Citibank checks
(Exhibits "AAA" to "AAA-5") readily demonstrate (sic) that the late Jose
Gotianuy is one of the payees of said checks. Being a co-payee thereof, then
he or his estate can be considered as a co-depositor of said checks.
Ergo, since the late Jose Gotianuy is a co-depositor of the CBC account,
then his request for the assailed subpoena is tantamount to an express
permission of a depositor for the disclosure of the name of the account
holder. The April 16, 1999 Order perforce must be sustained. (Emphasis
supplied.)

In the complaint of Jose Gotianuy, he alleged that his US dollar

deposits with Citibank were illegally taken from him. On the other hand,
China Bank employee Cristuta Labios testified that Mary Margaret Dee came
to China Bank and deposited the money of Jose Gotianuy in Citibank US
dollar checks to the dollar account of her sister Adrienne Chu. This fortifies
the Court’s conclusion that an inquiry into the said deposit at China Bank is
justified. At the very least, Jose Gotianuy as the owner of these funds is
entitled to a hearing on the whereabouts of these funds.

All things considered and in view of the distinctive circumstances

attendant to the present case, the Court was constrained to render a
limited pro hac vice ruling. Clearly it was not the intent of the legislature when
it enacted the law on secrecy on foreign currency deposits to perpetuate
injustice. This Court is of the view that the allowance of the inquiry would be
in accord with the rudiments of fair play, the upholding of fairness in our
judicial system and would be an avoidance of delay and time-wasteful and
circuitous way of administering justice.

6. Bank of the Philippine Islands vs Court of Appeals, GR. No.

156940, December 14, 2004

G.R. No. 156940 December 14, 2004

ASSOCIATED BANK (Now WESTMONT BANK), petitioner,

vs.
VICENTE HENRY TAN, respondent.

DECISION

PANGANIBAN, J.:

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

The Case

Before us is a Petition for Review1 under Rule 45 of the Rules of Court,

assailing the January 27, 2003 Decision2 of the Court of Appeals (CA) in
CA-GR CV No. 56292. The CA disposed as follows:
 "WHEREFORE, premises considered, the Decision dated December
3, 1996, of the Regional Trial Court of Cabanatuan City, Third Judicial
Region, Branch 26, in Civil Case No. 892-AF is hereby AFFIRMED.
Costs against the [petitioner]."3

The Facts

The CA narrated the antecedents as follows:

"Vicente Henry Tan (hereafter TAN) is a businessman and a regular

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

CHECK DATE AMOUNT

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

"However, his suppliers and business partners went back to him

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

"In his [C]omplaint, [respondent] maintained that he ha[d] sufficient

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

"Meanwhile, [petitioner] filed a Motion to Dismiss on February 7,

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

"By way of affirmative defense, [petitioner] averred that [respondent]

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

"Considering that Westmont Bank has taken over the management of

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

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

Petitioner appealed to the CA on the issues of whether it was within its

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

Ruling of the Court of Appeals

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

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

Because of the bank’s negligence, the CA awarded respondent moral

damages of P100,000. It also granted him exemplary damages of P75,000
and attorney’s fees of P25,000.

Hence this Petition.5

Issue

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

The Court’s Ruling

The Petition has no merit.

 Sole Issue:

Debit of Depositor’s Account

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

In particular, petitioner argues that the check deposit slip accomplished by

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

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

Right of Setoff

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

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

"(1) That each one of the obligors be bound principally, and that he
be at the same time a principal creditor of the other;
 (2) That both debts consist in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same quality if
the latter has been stated;

(3) That the two debts be due;

(4) That they be liquidated and demandable;

(5) That over neither of them there be any retention or controversy,

commenced by third persons and communicated in due time to the
debtor."12

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

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

Obligation as
Depositary Bank

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

Also affirming this long standing doctrine, Philippine Bank of Commerce v.

Court of Appeals16 has held that "the degree of diligence required of banks
is more than that of a good father of a family where the fiduciary nature of
their relationship with their depositors is concerned."17 Indeed, the banking
business is vested with the trust and confidence of the public; hence the
"appropriate standard of diligence must be very high, if not the highest,
degree of diligence."18 The standard applies, regardless of whether the
account consists of only a few hundred pesos or of millions.19
The fiduciary nature of banking, previously imposed by case law,20 is now
enshrined in Republic Act No. 8791 or the General Banking Law of 2000.
Section 2 of the law specifically says that the State recognizes the
"fiduciary nature of banking that requires high standards of integrity and
performance."

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

It is undisputed -- nay, even admitted -- that purportedly as an act of

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

Under ordinary banking practice, after receiving a check deposit, a

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

Reasonable business practice and prudence, moreover, dictated that

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

Obligation as
Collecting Agent

Indeed, the bank deposit slip expressed this reservation:

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

However, this reservation is not enough to insulate the bank from any
liability. In the past, we have expressed doubt about the binding force of
such conditions unilaterally imposed by a bank without the consent of the
depositor.26 It is indeed arguable that "in signing the deposit slip, the
depositor does so only to identify himself and not to agree to the conditions
set forth at the back of the deposit slip."27

Further, by the express terms of the stipulation, petitioner took upon itself
certain obligations as respondent’s agent, consonant with the well-settled
rule that the relationship between the payee or holder of a commercial
paper and the collecting bank is that of principal and agent.28 Under Article
190929 of the Civil Code, such bank could be held liable not only for fraud,
but also for negligence.

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

The manager of the bank’s Cabanatuan branch, Consorcia Santiago,

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

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

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

"x x x [T]he depositor x x x withdrew his money upon the advice by

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

"To emphasize, it is beyond cavil that [respondent] had sufficient

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

Aggravating matters, petitioner failed to show that it had immediately and

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

First, notice was proper and ought to be expected. By the bank manager’s
account, respondent was considered a "valued client" whose checks had
always been sufficiently funded from 1987 to 1990,36 until the October
imbroglio. Thus, he deserved nothing less than an official notice of the
precarious condition of his account.

Second, under the provisions of the Negotiable Instruments Law regarding

the liability of a general indorser37 and the procedure for a notice of
dishonor,38 it was incumbent on the bank to give proper notice to
respondent. In Gullas v. National Bank,39 the Court emphasized:
 "x x x [A] general indorser of a negotiable instrument engages that if
the instrument – the check in this case – is dishonored and the
necessary proceedings for its dishonor are duly taken, he will pay the
amount thereof to the holder (Sec. 66) It has been held by a long line
of authorities that notice of dishonor is necessary to charge an
indorser and that the right of action against him does not accrue until
the notice is given.

"x x x. The fact we believe is undeniable that prior to the mailing of

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

Third, regarding the deposit of P50,000 made by respondent on October 2,

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

Damages

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

WHEREFORE, the Petition is DENIED and the assailed Decision

AFFIRMED. Costs against petitioner.

SO ORDERED.
G.R. No. 156940 December 14, 2004ASSOCIATED BANK (Now
WESTMONT BANK)
vs.
TANFACTS:
Respondent Tan is a businessman and a regular depositor-creditor of
the petitioner, AssociatedBank. Sometime in September 1990, he
deposited a postdated check with the petitioner in the amountof
P101,000 issued to him by a certain Willy Cheng from Tarlac. The check
was duly entered in his bankrecord. Allegedly, upon advice and
instruction of petitioner that theP101,000 check was already
clearedand backed up by sufficient funds, respondent, on the same
date, withdrew the sum of P240,000 from hisaccount leaving a balance
of P57,793.45. A day after, TAN deposited the amount of P50,000
making hisexisting balance in the amount of P107,793.45, because he
has issued several checks to his businesspartners. However, his
suppliers and business partners went back to him alleging that the
checks heissued bounced for insufficiency of funds. Thereafter,
respondent informed petitioner to take positivesteps regarding the
matter for he has adequate and sufficient funds to pay the amount of
the subjectchecks. Nonetheless, petitioner did not bother nor offer any
apology regarding the incident. RespondentTan filed a Complaint for
Damages on December 19, 1990, with the RTC against petitioner. The
trialcourt rendered a decision in favor of respondent and ordered
petitioner to pay damages and attorney’sfees. Appellate court affirmed
the lower court’s decision. CA ruled that the bank should not
haveauthorized the withdrawal of the value of the deposited check
prior to its clearing. Petitioner filed aPetition for Review before the
Supreme Court.
ISSUE:
W/N petitioner has the right to debit the amount of the dishonored
check from the account of respondenton the ground that the check was
withdrawn by respondent prior to its clearing
HELD:
The Petition has no merit.The real issue here is not so much the right of
petitioner to debit respondent’s account but, rather, themanner in
which it exercised such right. Banks are granted by law the right to
debit the value of adishonored check from a depositor’s account but
they must do so with the highest degree of care, so asnot to prejudice
the depositor unduly. The degree of diligence required of banks is more
than that of agood father of a family where the fiduciary nature of their
relationship with their depositors is concerned.In this case, petitioner
did not treat respondent’s account with the highest degree of care.
Respondentwithdrew his money upon the advice of petitioner that his
money was already cleared. It is petitioner’spremature authorization of
the withdrawal that caused the respondent’s account balance to fall
toinsufficient levels, and the subsequent dishonor of his own checks for
lack of funds.
7. Spouses Serfino vs. Far East Bank & Trust Company, GR. No.
171845, October 10, 2012

G.R. No. 171845 October 10, 2012

SPOUSES GODFREY and GERARDINA SERFINO, Petitioners,

vs.
FAR EAST BANK AND TRUST COMPANY, INC., now BANK OF THE
PHILIPPINE ISLANDS, Respondent.

DECISION

BRION, J.:
Before the Court is a petition for review on certiorari, 1 filed under Rule 45 of
the Rules of Court, assailing the decision2 dated February 23, 2006 of the
Regional Trial Court (RTC) of Bacolod City, Branch 41, in Civil Case No.
95-9344.

FACTUAL ANTECEDENTS

The present case traces its roots to the compromise judgment dated
October 24, 19953 of the RTC of Bacolod City, Branch 47, in Civil Case No.
95-9880. Civil Case No. 95-9880 was an action for collection of sum of
money instituted by the petitioner spouses Godfrey and Gerardina Serfino
(collectively, spouses Serfino) against the spouses Domingo and
Magdalena Cortez (collectively, spouses Cortez). By way of settlement, the
spouses Serfino and the spouses Cortez executed a compromise
agreement on October 20, 1995, in which the spouses Cortez
acknowledged their indebtedness to the spouses Serfino in the amount of
₱ 108,245.71. To satisfy the debt, Magdalena bound herself "to pay in full
the judgment debt out of her retirement benefits[.]"4 Payment of the debt
shall be made one (1) week after Magdalena has received her retirement
benefits from the Government Service Insurance System (GSIS). In case of
default, the debt may be executed against any of the properties of the
spouses Cortez that is subject to execution, upon motion of the spouses
Serfino.5 After finding that the compromise agreement was not contrary to
law, morals, good custom, public order or public policy, the RTC approved
the entirety of the parties’ agreement and issued a compromise judgment
based thereon.6 The debt was later reduced to ₱ 155,000.00 from ₱
197,000.00 (including interest), with the promise that the spouses Cortez
would pay in full the judgment debt not later than April 23, 1996.7

No payment was made as promised. Instead, Godfrey discovered that

Magdalena deposited her retirement benefits in the savings account of her
daughter-in-law, Grace Cortez, with the respondent, Far East Bank and
Trust Company, Inc. (FEBTC). As of April 23, 1996, Grace’s savings
account with FEBTC amounted to ₱ 245,830.37, the entire deposit coming
from Magdalena’s retirement benefits.8 That same day, the spouses
Serfino’s counsel sent two letters to FEBTC informing the bank that
the deposit in Grace’s name was owned by the spouses Serfino by
virtue of an assignment made in their favor by the spouses
Cortez. The letter requested FEBTC to prevent the delivery of the deposit
to either Grace or the spouses Cortez until its actual ownership has been
resolved in court.

On April 25, 1996, the spouses Serfino instituted Civil Case No. 95- 9344
against the spouses Cortez, Grace and her husband, Dante Cortez, and
FEBTC for the recovery of money on deposit and the payment of
damages, with a prayer for preliminary attachment.

On April 26, 1996, Grace withdrew ₱ 150,000.00 from her savings

account with FEBTC. On the same day, the spouses Serfino sent another
letter to FEBTC informing it of the pending action; attached to the letter was
a copy of the complaint filed as Civil Case No. 95-9344.

During the pendency of Civil Case No. 95-9344, the spouses Cortez
manifested that they were turning over the balance of the deposit in FEBTC
(amounting to ₱ 54,534.00) to the spouses Serfino as partial payment of
their obligation under the compromise judgment. The RTC issued an order
dated July 30, 1997, authorizing FEBTC to turn over the balance of the
deposit to the spouses Serfino.

On February 23, 2006, the RTC issued the assailed decision (a) finding the
spouses Cortez, Grace and Dante liable for fraudulently diverting the
amount due the spouses Serfino, but (b) absolving FEBTC from any
liability for allowing Grace to withdraw the deposit. The RTC declared
that FEBTC was not a party to the compromise judgment; FEBTC was thus
not chargeable with notice of the parties’ agreement, as there was no valid
court order or processes requiring it to withhold payment of the deposit.
Given the nature of bank deposits, FEBTC was primarily bound by its
contract of loan with Grace. There was, therefore, no legal justification for
the bank to refuse payment of the account, notwithstanding the claim of the
spouses Serfino as stated in their three letters.

THE PARTIES’ ARGUMENTS

The spouses Serfino appealed the RTC’s ruling absolving FEBTC

from liability for allowing the withdrawal of the deposit. They allege
that the RTC cited no legal basis for declaring that only a court order or
process can justify the withholding of the deposit in Grace’s name. Since
FEBTC was informed of their adverse claim after they sent three letters,
they claim that:
Upon receipt of a notice of adverse claim in proper form, it becomes the
duty of the bank to: 1. Withhold payment of the deposit until there is a
reasonable opportunity to institute legal proceedings to contest ownership;
and 2) give prompt notice of the adverse claim to the depositor. The bank
may be held liable to the adverse claimant if it disregards the notice of
adverse claim and pays the depositor.

When the bank has reasonable notice of a bona fide claim that money
deposited with it is the property of another than the depositor, it
should withhold payment until there is reasonable opportunity to institute
legal proceedings to contest the ownership.9(emphases and underscoring
supplied)

Aside from the three letters, FEBTC should be deemed bound by the
compromise judgment, since Article 1625 of the Civil Code states that an
assignment of credit binds third persons if it appears in a public
instrument.10 They conclude that FEBTC, having been notified of their
adverse claim, should not have allowed Grace to withdraw the deposit.

While they acknowledged that bank deposits are governed by the Civil
Code provisions on loan, the spouses Serfino allege that the provisions on
voluntary deposits should apply by analogy in this case, particularly Article
1988 of the Civil Code, which states:

Article 1988. The thing deposited must be returned to the depositor upon
demand, even though a specified period or time for such return may have
been fixed.

This provision shall not apply when the thing is judicially attached while
in the depositary’s possession, or should he have been notified of the
opposition of a third person to the return or the removal of the thing
deposited. In these cases, the depositary must immediately inform the
depositor of the attachment or opposition.

Based on Article 1988 of the Civil Code, the depository is not obliged to
return the thing to the depositor if notified of a third party’s adverse claim.

By allowing Grace to withdraw the deposit that is due them under the
compromise judgment, the spouses Serfino claim that FEBTC
committed an actionable wrong that entitles them to the payment of
actual and moral damages.
FEBTC, on the other hand, insists on the correctness of the RTC ruling. It
claims that it is not bound by the compromise judgment, but only by its
contract of loan with its depositor. As a loan, the bank deposit is owned by
the bank; hence, the spouses Serfino’s claim of ownership over it is
erroneous.

Based on these arguments, the case essentially involves a determination

of the obligation of banks to a third party who claims rights over a
bank deposit standing in the name of another.

THE COURT’S RULING

We find the petition unmeritorious and see no reason to reverse the RTC’s
ruling.

Claim for actual damages not

meritorious because there could be
no pecuniary loss that should be
compensated if there was no
assignment of credit

The spouses Serfino’s claim for damages against FEBTC is premised on

their claim of ownership of the deposit with FEBTC. The deposit consists of
Magdalena’s retirement benefits, which the spouses Serfino claim to have
been assigned to them under the compromise judgment. That the
retirement benefits were deposited in Grace’s savings account with FEBTC
supposedly did not divest them of ownership of the amount, as "the money
already belongs to the [spouses Serfino] having been absolutely assigned
to them and constructively delivered by virtue of the x x x public
instrument[.]"11 By virtue of the assignment of credit, the spouses Serfino
claim ownership of the deposit, and they posit that FEBTC was duty bound
to protect their right by preventing the withdrawal of the deposit since the
bank had been notified of the assignment and of their claim.

We find no basis to support the spouses Serfino’s claim of ownership

of the deposit.

"An assignment of credit is an agreement by virtue of which the owner of a

credit, known as the assignor, by a legal cause, such as sale, dation in
payment, exchange or donation, and without the consent of the debtor,
transfers his credit and accessory rights to another, known as the assignee,
who acquires the power to enforce it to the same extent as the assignor
could enforce it against the debtor. It may be in the form of sale, but at
times it may constitute a dation in payment, such as when a debtor, in
order to obtain a release from his debt, assigns to his creditor a credit
he has against a third person."12 As a dation in payment, the assignment
of credit operates as a mode of extinguishing the obligation;13 the
delivery and transmission of ownership of a thing (in this case, the credit
due from a third person) by the debtor to the creditor is accepted as the
equivalent of the performance of the obligation.14

The terms of the compromise judgment, however, did not convey an intent
to equate the assignment of Magdalena’s retirement benefits (the credit) as
the equivalent of the payment of the debt due the spouses Serfino (the
obligation). There was actually no assignment of credit; if at all, the
compromise judgment merely identified the fund from which payment
for the judgment debt would be sourced:

(c) That before the plaintiffs file a motion for execution of the decision or
order based [on this] Compromise Agreement, the defendant, Magdalena
Cortez undertake[s] and bind[s] herself to pay in full the judgment
debt out of her retirement benefits as Local [T]reasury Operation Officer
in the City of Bacolod, Philippines, upon which full payment, the plaintiffs
waive, abandon and relinquish absolutely any of their claims for attorney’s
fees stipulated in the Promissory Note (Annex "A" to the
Complaint).15 [emphasis ours]

Only when Magdalena has received and turned over to the spouses Serfino
the portion of her retirement benefits corresponding to the debt due would
the debt be deemed paid.

In Aquitey v. Tibong,16 the issue raised was whether the obligation to pay
the loan was extinguished by the execution of the deeds of assignment.
The Court ruled in the affirmative, given that, in the deeds involved, the
respondent (the debtor) assigned to the petitioner (the creditor) her credits
"to make good" the balance of her obligation; the parties agreed to relieve
the respondent of her obligation to pay the balance of her account, and for
the petitioner to collect the same from the respondent’s debtors.17 The Court
concluded that the respondent’s obligation to pay the balance of her
accounts with the petitioner was extinguished, pro tanto, by the deeds of
assignment of credit executed by the respondent in favor of the petitioner.18
In the present case, the judgment debt was not extinguished by the mere
designation in the compromise judgment of Magdalena’s retirement
benefits as the fund from which payment shall be sourced. That the
compromise agreement authorizes recourse in case of default on other
executable properties of the spouses Cortez, to satisfy the judgment debt,
further supports our conclusion that there was no assignment of
Magdalena’s credit with the GSIS that would have extinguished the
obligation.

The compromise judgment in this case also did not give the supposed
assignees, the spouses Serfino, the power to enforce Magdalena’s credit
against the GSIS. In fact, the spouses Serfino are prohibited from enforcing
their claim until after the lapse of one (1) week from Magdalena’s receipt of
her retirement benefits:

(d) That the plaintiffs shall refrain from having the judgment based upon
this Compromise Agreement executed until after one (1) week from receipt
by the defendant, Magdalena Cortez of her retirement benefits from the
[GSIS] but fails to pay within the said period the defendants’ judgment debt
in this case, in which case [this] Compromise Agreement [may be]
executed upon any property of the defendants that are subject to execution
upon motion by the plaintiffs.19

An assignment of credit not only entitles the assignee to the credit itself, but
also gives him the power to enforce it as against the debtor of the assignor.

Since no valid assignment of credit took place, the spouses Serfino cannot
validly claim ownership of the retirement benefits that were deposited with
FEBTC. Without ownership rights over the amount, they suffered no
pecuniary loss that has to be compensated by actual damages. The
grant of actual damages presupposes that the claimant suffered a duly
proven pecuniary loss.20

Claim for moral damages not

meritorious because no duty exists
on the part of the bank to protect
interest of third person claiming
deposit in the name of another

Under Article 2219 of the Civil Code, moral damages are recoverable for
acts referred to in Article 21 of the Civil Code.21 Article 21 of the Civil Code,
in conjunction with Article 19 of the Civil Code, is part of the cause of action
known in this jurisdiction as "abuse of rights." The elements of abuse of
rights are: (a) there is a legal right or duty; (b) exercised in bad faith; and
(c) for the sole intent of prejudicing or injuring another.
1âwphi1

The spouses Serfino invoke American common law that imposes a duty
upon a bank receiving a notice of adverse claim to the fund in a
depositor’s account to freeze the account for a reasonable length of
time, sufficient to allow the adverse claimant to institute legal
proceedings to enforce his right to the fund.22 In other words, the bank
has a duty not to release the deposits unreasonably early after a third party
makes known his adverse claim to the bank deposit. Acknowledging that
no such duty is imposed by law in this jurisdiction, the spouses Serfino ask
the Court to adopt this foreign rule.23

To adopt the foreign rule, however, goes beyond the power of this Court to
promulgate rules governing pleading, practice and procedure in all
courts.24 The rule reflects a matter of policy that is better addressed by
the other branches of government, particularly, the Bangko Sentral ng
Pilipinas, which is the agency that supervises the operations and activities
of banks, and which has the power to issue "rules of conduct or the
establishment of standards of operation for uniform application to all
institutions or functions covered[.]"25 To adopt this rule will have significant
implications on the banking industry and practices, as the American
experience has shown. Recognizing that the rule imposing duty on banks
to freeze the deposit upon notice of adverse claim adopts a policy adverse
to the bank and its functions, and opens it to liability to both the depositor
and the adverse claimant,26 many American states have since adopted
adverse claim statutes that shifted or, at least, equalized the burden.
Essentially, these statutes do not impose a duty on banks to freeze the
deposit upon a mere notice of adverse claim; they first require either a
court order or an indemnity bond.27

In the absence of a law or a rule binding on the Court, it has no option but
to uphold the existing policy that recognizes the fiduciary nature of banking.
It likewise rejects the adoption of a judicially-imposed rule giving third
parties with unverified claims against the deposit of another a better right
over the deposit. As current laws provide, the bank’s contractual relations
are with its depositor, not with the third party;28 "a bank is under obligation to
treat the accounts of its depositors with meticulous care and always to have
in mind the fiduciary nature of its relationship with them."29 In the absence of
any positive duty of the bank to an adverse claimant, there could be no
breach that entitles the latter to moral damages.

WHEREFORE, in view of the foregoing, the petition for review

on certiorari is DENIED, and the decision dated February 23, 2006 of the
Regional Trial Court of Bacolod City, Branch 41, in Civil Case No. 95-9344
is AFFIRMED. Costs against the petitioners.

SO ORDERED.

ARTURO D. BRION
Associate Justice

WE CONCUR:

ANTONIO T. CARPIO
Associate Justice
Chairperson

MARIANO C. DEL CASTILLO JOSE PORTUGAL PEREZ

Associate Justice Associate Justice

ESTELA M. PERLAS-BERNABE
Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision had been reached in
consultation before the case was assigned to the writer of the opinion of the
Court's Division.

ANTONIO T. CARPIO
Associate Justice
Chairperson, Second Division

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, and the Division
Chairperson's Attestation, I certify that the conclusions in the above
Decision had been reached in consultation before the case was assigned
to the writer of the opinion of the Court’s Division.

MARIA LOURDES P.A. SERENO

Chief Justice

Footnotes

G.R. No. 171845 October 10, 2012

SPOUSES GODFREY and GERARDINA SERFINO vs. FAR EAST BANK AND
TRUST COMPANY, INC., now BPI
FACTS:By way of settlement approved by the RTC Bacolod, the Spouses
Serfino and Spouses Cortez executed a compromiseagreement where
the spouses Cortez, acknowledged their debt of P 108,245.71,
eventually reduced to P155,000 with thepromise that they would pay in
full the judgment debt not later than April 23, 1996. To satisfy their
debt, MagdalenaCortez bound herself to pay the debt in full out of her
retirement benefits from the GSIS. In case of default, the debt maybe
executed against any of their properties.No payment was made on that
date, and Godfrey Serfino discovered that Magdalena deposited her
retirement benefits
in the FEBTC savings account of her daughter in law, Grace Cortez. That
same day, spouses Serfino’s counsel sent 2 letters
to FEBTC informing them that
the deposit in Grace’s name
was owned by the spouses by virtue of an assignment made intheir
favor by the spouses Cortez. They asked that the bank prevent the
deliver y of the said amount to either Grace orthe spouses Cortez until
its actual ownership has been resolved in court.An action to recover the
money on deposit and payment for damages was filed by Serfino, with
a prayer for preliminaryattachment, but the next day, Grace withdrew
P150,000 from her account. RTC ruled that the spouses Cortez and
Graceliable for fraudulently diverting the amount due, but absolved
FEBTC from any liability, declaring that the bank was notparty to the
compromise judgement. The spouses Serfino contend this ruling, on
the grounds of the virtue of the
assignment of credit
, they claim ownership of the deposit, and that FEBTC was duty bound
to protect their right bypreventing the withdrawal of the deposit since
the bank had been notified of the assignment and of their claim.ISSUE:
Whether or not FEBTC is obligated to a third party who claims rights
over a bank deposit standing in the name of another person who is
their depositor
RULING:No it is not. The terms of the compromise judgment between
them did not convey an intent to equate the assignment of
Magdalena’s retirement benefits (the credit) as the equivalent of th
e payment of the debt due the spouses Serfino (theobligation). There
was actually no assignment of credit as the compromise judgment
merely identified the fund fromwhich payment for the judgment debt
would be sourced. That the compromise agreement authorizes
recourse in case of default on other executable properties of the
spouses Cortez, to satisfy the judgment debt, further supports our
conclusion that there was no assignment of Magdalena’s credit with
the GSIS that would have extinguished the
obligation.The Bank is also not liable for damages as there is no law or
legal right abused by it. Absent a law or a legal ruling of theCourt, it has
no option but to uphold the existing policy that recognizes the fiduciary
nature of banking. It likewise rejectsthe adoption of a judicially-
imposed rule giving third parties with unverified claims against the
deposit of another a better
right over the deposit. As current laws provide, the bank’s contractual
relations are with its depositor, not with the third
party. In the absence of any positive duty of the bank to an adverse
claimant, there could be no breach that entitles thelatter to moral
damages.Petition DENIED. RTC Ruling is AFFIRMED.

8. Phil. National Bank vs Chea Chee Chong, GR. No. 170865 &
170892, April 25, 2012

G.R. No. 170865 April 25, 2012

PHILIPPINE NATIONAL BANK, Petitioner,

vs.
SPOUSES CHEAH CHEE CHONG and OFELIA CAMACHO
CHEAH, Respondents.

x-----------------------x

G.R. No. 170892

SPOUSES CHEAH CHEE CHONG and OFELIA CAMACHO
CHEAH, Petitioners,
vs.
PHILIPPINE NATIONAL BANK, Respondent.

DECISION

DEL CASTILLO, J.:

Law favoreth diligence, and therefore, hateth folly and negligence.—

Wingate’s Maxim.

In doing a friend a favor to help the latter’s friend collect the proceeds of a
foreign check, a woman deposited the check in her and her husband’s
dollar account. The local bank accepted the check for collection and
immediately credited the proceeds thereof to said spouses’ account even
before the lapse of the clearing period. And just when the money had been
withdrawn and distributed among different beneficiaries, it was discovered
that all along, to the horror of the woman whose intention to accommodate
a friend’s friend backfired, she and her

bank had dealt with a rubber check.

These consolidated1 Petitions for Review on Certiorari filed by the Philippine

National Bank (PNB)2 and by the spouses Cheah Chee Chong and Ofelia
Camacho Cheah (spouses Cheah)3 both assail the August 22, 2005
Decision4 and December 21, 2005 Resolution5 of the Court of Appeals (CA)
in CA-G.R. CV No. 63948 which declared both parties equally negligent
and, hence, should equally suffer the resulting loss. For its part, PNB
questions why it was declared blameworthy together with its depositors,
spouses Cheah, for the amount wrongfully paid the latter, while the
spouses Cheah plead that they be declared entirely faultless.

Factual Antecedents

On November 4, 1992, Ofelia Cheah (Ofelia) and her friend Adelina Guarin
(Adelina) were having a conversation in the latter’s office when Adelina’s
friend, Filipina Tuazon (Filipina), approached her to ask if she could have
Filipina’s check cleared and encashed for a service fee of 2.5%. The check
is Bank of America Check No. 1906 under the account of Alejandria Pineda
and Eduardo Rosales and drawn by Atty. Eduardo Rosales against Bank of
America Alhambra Branch in California, USA, with a face amount of
$300,000.00, payable to cash. Because Adelina does not have a dollar
account in which to deposit the check, she asked Ofelia if she could
accommodate Filipina’s request since she has a joint dollar savings
account with her Malaysian husband Cheah Chee Chong (Chee Chong)
under Account No. 265-705612-2 with PNB Buendia Branch.

Ofelia agreed.

That same day, Ofelia and Adelina went to PNB Buendia Branch. They met
with Perfecto Mendiola of the Loans Department who referred them to PNB
Division Chief Alberto Garin (Garin). Garin discussed with them the process
of clearing the subject check and they were told that it normally takes 15
days.7 Assured that the deposit and subsequent clearance of the check is a
normal transaction, Ofelia deposited Filipina’s check. PNB then sent it for
clearing through its correspondent bank, Philadelphia National Bank. Five
days later, PNB received a credit advice8from Philadelphia National Bank
that the proceeds of the subject check had been temporarily credited to
PNB’s account as of November 6, 1992. On November 16, 1992, Garin
called up Ofelia to inform her that the check had already been cleared.9 The
following day, PNB Buendia Branch, after deducting the bank charges,
credited $299,248.37 to the account of the spouses Cheah.10 Acting on
Adelina’s instruction to withdraw the credited amount, Ofelia that day
personally withdrew $180,000.00.11 Adelina was able to withdraw the
remaining amount the next day after having been authorized by
Ofelia.12 Filipina received all the proceeds.

In the meantime, the Cable Division of PNB Head Office in Escolta, Manila
received on November 16, 1992 a SWIFT13 message from Philadelphia
National Bank dated November 13, 1992 with Transaction Reference
Number (TRN) 46506218, informing PNB of the return of the subject check
for insufficient funds.14 However, the PNB Head Office could not ascertain to
which branch/office it should forward the same for proper action.
Eventually, PNB Head Office sent Philadelphia National Bank a SWIFT
message informing the latter that SWIFT message with TRN 46506218 has
been relayed to PNB’s various divisions/departments but was returned to
PNB Head Office as it seemed misrouted. PNB Head Office thus requested
for Philadelphia National Bank’s advice on said SWIFT message’s proper
disposition.15 After a few days, PNB Head Office ascertained that the
SWIFT message was intended for PNB Buendia Branch.
PNB Buendia Branch learned about the bounced check when it received on
November 20, 1992 a debit advice,16followed by a letter17 on November 24,
1992, from Philadelphia National Bank to which the November 13, 1992
SWIFT message was attached. Informed about the bounced check and
upon demand by PNB Buendia Branch to return the money withdrawn,
Ofelia immediately contacted Filipina to get the money back. But the latter
told her that all the money had already been given to several people who
asked for the check’s encashment. In their effort to recover the money,
spouses Cheah then sought the help of the National Bureau of
Investigation. Said agency’s Anti-Fraud and Action Division was later able
to apprehend some of the beneficiaries of the proceeds of the check and
recover from them $20,000.00. Criminal charges were then filed against
these suspect beneficiaries.18

Meanwhile, the spouses Cheah have been constantly meeting with the
bank officials to discuss matters regarding the incident and the recovery of
the value of the check while the cases against the alleged perpetrators
remain pending. Chee Chong in the end signed a PNB
drafted19 letter20 which states that the spouses Cheah are offering their
condominium units as collaterals for the amount withdrawn. Under this
setup, the amount withdrawn would be treated as a loan account with
deferred interest while the spouses try to recover the money from those
who defrauded them. Apparently, Chee Chong signed the letter after the
Vice President and Manager of PNB Buendia Branch, Erwin Asperilla
(Asperilla), asked the spouses Cheah to help him and the other bank
officers as they were in danger of losing their jobs because of the incident.
Asperilla likewise assured the spouses Cheah that the letter was a mere
formality and that the mortgage will be disregarded once PNB receives its
claim for indemnity from Philadelphia National Bank.

Although some of the officers of PNB were amenable to the proposal,21 the
same did not materialize. Subsequently, PNB sent a demand letter to
spouses Cheah for the return of the amount of the check,22 froze their peso
and dollar deposits in the amounts of ₱275,166.80 and $893.46,23 and filed
a complaint24 against them for Sum of Money with Branch 50 of the
Regional Trial Court (RTC) of Manila, docketed as Civil Case No. 94-
71022. In said complaint, PNB demanded payment of around
₱8,202,220.44, plus interests25 and attorney’s fees, from the spouses
Cheah.
As their main defense, the spouses Cheah claimed that the proximate
cause of PNB’s injury was its own negligence of paying a US dollar
denominated check without waiting for the 15-day clearing period, in
violation of its bank practice as mandated by its own bank circular, i.e.,
PNB General Circular No. 52-101/88.26 Because of this, spouses Cheah
averred that PNB is barred from claiming what it had lost. They further
averred that it is unjust for them to pay back the amount disbursed as they
never really benefited therefrom. As counterclaim, they prayed for the
return of their frozen deposits, the recoupment of ₱400,000.00 representing
the amount they had so far spent in recovering the value of the check, and
payment of moral and exemplary damages, as well as attorney’s fees.

Ruling of the Regional Trial Court

The RTC ruled in PNB’s favor. The dispositive portion of its Decision27 dated
May 20, 1999 reads:

WHEREFORE, premises considered, judgment is hereby rendered in favor

of the plaintiff Philippine National Bank [and] against defendants Mr. Cheah
Chee Chong and Ms. Ofelia Camacho Cheah, ordering the latter to pay
jointly and severally the herein plaintiffs’ bank the amount:

1. of US$298,950.25 or its peso equivalent based on Central Bank

Exchange Rate prevailing at the time the proceeds of the BA Check No.
190 were withdrawn or the prevailing Central Bank Rate at the time the
amount is to be reimbursed by the defendants to plaintiff or whatever is
lower. This is without prejudice however, to the rights of the defendants
(accommodating parties) to go against the group of Adelina Guarin, Atty.
Eduardo Rosales, Filipina Tuazon, etc., (Beneficiaries- accommodated
parties) who are privy to the defendants.

No pronouncement as to costs.

No other award of damages for non[e] has been proven.

SO ORDERED.28

The RTC held that spouses Cheah were guilty of contributory negligence.

Because Ofelia trusted a friend’s friend whom she did not know and
considering the amount of the check made payable to cash, the RTC
opined that Ofelia showed lack of vigilance in her dealings. She should
have exercised due care by investigating the negotiability of the check and
the identity of the drawer. While the court found that the proximate cause of
the wrongful payment of the check was PNB’s negligence in not observing
the 15-day guarantee period rule, it ruled that spouses Cheah still cannot
escape liability to reimburse PNB the value of the check as an
accommodation party pursuant to Section 29 of the Negotiable Instruments
Law.29 It likewise applied the principle of solutio indebiti under the Civil
Code. With regard to the award of other forms of damages, the RTC held
that each party must suffer the consequences of their own acts and thus
left both parties as they are.

Unwilling to accept the judgment, the spouses Cheah appealed to the CA.

Ruling of the Court of Appeals

While the CA recognized the spouses Cheah as victims of a scam who

nevertheless have to suffer the consequences of Ofelia’s lack of care and
prudence in immediately trusting a stranger, the appellate court did not hold
PNB scot-free. It ruled in its August 22, 2005 Decision,30 viz:

As both parties were equally negligent, it is but right and just that both
parties should equally suffer and shoulder the loss. The scam would not
have been possible without the negligence of both parties. As earlier
stated, the complaint of PNB cannot be dismissed because the Cheah
spouses were negligent and Ms. Cheah took an active part in the deposit of
the check and the withdrawal of the subject amounts. On the other hand,
the Cheah spouses cannot entirely bear the loss because PNB allowed her
to withdraw without waiting for the clearance of the check. The remedy of
the parties is to go after those who perpetrated, and benefited from, the
scam.

WHEREFORE, the May 20, 1999 Decision of the Regional Trial Court,
Branch 5, Manila, in Civil Case No. 94-71022, is hereby REVERSED and
SET ASIDE and another one entered DECLARING both parties equally
negligent and should suffer and shoulder the loss.

Accordingly, PNB is hereby ordered to credit to the peso and dollar

accounts of the Cheah spouses the amount due to them.

SO ORDERED.31
In so ruling, the CA ratiocinated that PNB Buendia Branch’s non-receipt of
the SWIFT message from Philadelphia National Bank within the 15-day
clearing period is not an acceptable excuse. Applying the last clear chance
doctrine, the CA held that PNB had the last clear opportunity to avoid the
impending loss of the money and yet, it glaringly exhibited its negligence in
allowing the withdrawal of funds without exhausting the 15-day clearing
period which has always been a standard banking practice as testified to by
PNB’s own officers, and as provided in its own General Circular No.
52/101/88. To the CA, PNB cannot claim from spouses Cheah even if the
latter are accommodation parties under the law as the bank’s own
negligence is the proximate cause of the damage it sustained.
Nevertheless, it also found Ofelia guilty of contributory negligence. Thus,
both parties should be made equally responsible for the resulting loss.

Both parties filed their respective Motions for Reconsideration32 but same
were denied in a Resolution33 dated December 21, 2005.

Hence, these Petitions for Review on Certiorari.

Our Ruling

The petitions for review lack merit. Hence, we affirm the ruling of the CA.

PNB’s act of releasing the proceeds of the check prior to the lapse of the
15-day clearing period was the proximate cause of the loss. 1âwphi1

"Proximate cause is ‘that cause, which, in natural and continuous

sequence, unbroken by any efficient intervening cause, produces the injury
and without which the result would not have occurred.’ x x x To determine
the proximate cause of a controversy, the question that needs to be asked
is: If the event did not happen, would the injury have resulted? If the
answer is no, then the event is the proximate cause."34

Here, while PNB highlights Ofelia’s fault in accommodating a stranger’s

check and depositing it to the bank, it remains mum in its release of the
proceeds thereof without exhausting the 15-day clearing period, an act
which contravened established banking rules and practice.

It is worthy of notice that the 15-day clearing period alluded to is construed

as 15 banking days. As declared by Josephine Estella, the Administrative
Service Officer who was the bank’s Remittance Examiner, what was
unusual in the processing of the check was that the "lapse of 15 banking
days was not observed."35 Even PNB’s agreement with Philadelphia
National Bank36 regarding the rules on the collection of the proceeds of US
dollar checks refers to "business/ banking days." Ofelia deposited the
subject check on November 4, 1992. Hence, the 15th banking day from the
date of said deposit should fall on November 25, 1992. However, what
happened was that PNB Buendia Branch, upon calling up Ofelia that the
check had been cleared, allowed the proceeds thereof to be withdrawn on
November 17 and 18, 1992, a week before the lapse of the standard 15-
day clearing period.

This Court already held that the payment of the amounts of checks without
previously clearing them with the drawee bank especially so where the
drawee bank is a foreign bank and the amounts involved were large is
contrary to normal or ordinary banking practice.37 Also, in Associated Bank
v. Tan,38 wherein the bank allowed the withdrawal of the value of a check
prior to its clearing, we said that "[b]efore the check shall have been
cleared for deposit, the collecting bank can only ‘assume’ at its own risk x x
x that the check would be cleared and paid out." The delay in the receipt by
PNB Buendia Branch of the November 13, 1992 SWIFT message notifying
it of the dishonor of the subject check is of no moment, because had PNB
Buendia Branch waited for the expiration of the clearing period and had
never released during that time the proceeds of the check, it would have
already been duly notified of its dishonor. Clearly, PNB’s disregard of its
preventive and protective measure against the possibility of being
victimized by bad checks had brought upon itself the injury of losing a
significant amount of money.

It bears stressing that "the diligence required of banks is more than that of
a Roman pater familias or a good father of a family. The highest degree of
diligence is expected."39 PNB miserably failed to do its duty of exercising
extraordinary diligence and reasonable business prudence. The disregard
of its own banking policy amounts to gross negligence, which the law
defines as "negligence characterized by the want of even slight care, acting
or omitting to act in a situation where there is duty to act, not inadvertently
but wilfully and intentionally with a conscious indifference to consequences
in so far as other persons may be affected."40 With regard to collection or
encashment of checks, suffice it to say that the law imposes on the
collecting bank the duty to scrutinize diligently the checks deposited with it
for the purpose of determining their genuineness and regularity. "The
collecting bank, being primarily engaged in banking, holds itself out to the
public as the expert on this field, and the law thus holds it to a high
standard of conduct."41 A bank is expected to be an expert in banking
procedures and it has the necessary means to ascertain whether a check,
local or foreign, is sufficiently funded.

Incidentally, PNB obliges the spouses Cheah to return the withdrawn

money under the principle of solutio indebiti, which is laid down in Article
2154 of the Civil Code:42

Art. 2154. If something is received when there is no right to demand it, and
it was unduly delivered through mistake, the obligation to return it arises.

"[T]he indispensable requisites of the juridical relation known as solutio

indebiti, are, (a) that he who paid was not under obligation to do so; and (b)
that the payment was made by reason of an essential mistake of fact.43

In the case at bench, PNB cannot recover the proceeds of the check under
the principle it invokes. In the first place, the gross negligence of PNB, as
earlier discussed, can never be equated with a mere mistake of fact, which
must be something excusable and which requires the exercise of prudence.
No recovery is due if the mistake done is one of gross negligence.

The spouses Cheah are guilty of contributory negligence and are bound to
share the loss with the bank

"Contributory negligence is conduct on the part of the injured party,

contributing as a legal cause to the harm he has suffered, which falls below
the standard to which he is required to conform for his own protection."44

The CA found Ofelia’s credulousness blameworthy. We agree. Indeed,

Ofelia failed to observe caution in giving her full trust in accommodating a
complete stranger and this led her and her husband to be swindled.
Considering that Filipina was not personally known to her and the amount
of the foreign check to be encashed was $300,000.00, a higher degree of
care is expected of Ofelia which she, however, failed to exercise under the
circumstances. Another circumstance which should have goaded Ofelia to
be more circumspect in her dealings was when a bank officer called her up
to inform that the Bank of America check has already been cleared way
earlier than the 15-day clearing period. The fact that the check was cleared
after only eight banking days from the time it was deposited or contrary to
what Garin told her that clearing takes 15 days should have already put
Ofelia on guard. She should have first verified the regularity of such hasty
clearance considering that if something goes wrong with the transaction, it
is she and her husband who would be put at risk and not the
accommodated party. However, Ofelia chose to ignore the same and
instead actively participated in immediately withdrawing the proceeds of the
check.Thus, we are one with the CA in ruling that Ofelia’s prior consultation
with PNB officers is not enough to totally absolve her of any liability. In the
first place, she should have shunned any participation in that palpably
shady transaction.

In any case, the complaint against the spouses Cheah could not be
dismissed. As PNB’s client, Ofelia was the one who dealt with PNB and
negotiated the check such that its value was credited in her and her
husband’s account. Being the ones in privity with PNB, the spouses Cheah
are therefore the persons who should return to PNB the money released to
them.

All told, the Court concurs with the findings of the CA that PNB and the
spouses Cheah are equally negligent and should therefore equally suffer
the loss. The two must both bear the consequences of their mistakes.

WHEREFORE, premises considered, the Petitions for Review on Certiorari

in G.R. No. 170865 and in G.R. No. 170892 are both DENIED. The
assailed August 22, 2005 Decision and December 21, 2005 Resolution of
the Court of Appeals in CA-G.R. CV No. 63948 are hereby AFFIRMED in
toto.

SO ORDERED.

MARIANO C. DEL CASTILLO

Associate Justice

WE CONCUR:

RENATO C. CORONA
Chief Justice
Chairperson
 TERESITA J. LEONARDO-DE
LUCAS P. BERSAMIN
CASTRO
Associate Justice
Associate Justice

MARTIN S. VILLARAMA, JR.

Associate Justice

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, it is hereby certified

that the conclusions in the above Decision had been reached in
consultation before the case was assigned to the writer of the opinion of the
Court’s Division.

RENATO C. CORONA
Chief Justice

9. Bataan Cigar and Cigarettes Factory, Inc. vs Court of Appeals GR.

No. 93048, March 3, 1994

G.R. No. 93048 March 3, 1994

BATAAN CIGAR AND CIGARETTE FACTORY, INC., petitioner,

vs.
THE COURT OF APPEALS and STATE INVESTMENT HOUSE,
INC., respondents.

Teresita Gandiongco Oledan for petitioner.

Acaban & Sabado for private respondent.

NOCON, J.:
For our review is the decision of the Court of Appeals in the case entitled
"State Investment House, Inc. v. Bataan Cigar & Cigarette Factory
Inc.,"1 affirming the decision of the Regional Trial Court2 in a complaint filed
by the State Investment House, Inc. (hereinafter referred to as SIHI) for
collection on three unpaid checks issued by Bataan Cigar & Cigarette
Factory, Inc. (hereinafter referred to as BCCFI). The foregoing decisions
unanimously ruled in favor of SIHI, the private respondent in this case.

Emanating from the records are the following facts. Petitioner, Bataan
Cigar & Cigarette Factory, Inc. (BCCFI), a corporation involved in the
manufacturing of cigarettes, engaged one of its suppliers, King Tim Pua
George (herein after referred to as George King), to deliver 2,000 bales of
tobacco leaf starting October 1978. In consideration thereof, BCCFI, on
July 13, 1978 issued crossed checks post dated sometime in March 1979
in the total amount of P820,000.00.3

Relying on the supplier's representation that he would complete delivery

within three months from December 5, 1978, petitioner agreed to purchase
additional 2,500 bales of tobacco leaves, despite the supplier's failure to
deliver in accordance with their earlier agreement. Again petitioner issued
post dated crossed checks in the total amount of P1,100,000.00, payable
sometime in September 1979.4

During these times, George King was simultaneously dealing with private
respondent SIHI. On July 19, 1978, he sold at a discount check TCBT
5518265 bearing an amount of P164,000.00, post dated March 31, 1979,
drawn by petitioner, naming George King as payee to SIHI. On December
19 and 26, 1978, he again sold to respondent checks TCBT Nos. 608967 &
608968,6 both in the amount of P100,000.00, post dated September 15 &
30, 1979 respectively, drawn by petitioner in favor of George King.

In as much as George King failed to deliver the bales of tobacco leaf as

agreed despite petitioner's demand, BCCFI issued on March 30, 1979, a
stop payment order on all checks payable to George King, including check
TCBT 551826. Subsequently, stop payment was also ordered on checks
TCBT Nos. 608967 & 608968 on September 14 & 28, 1979, respectively,
due to George King's failure to deliver the tobacco leaves.

Efforts of SIHI to collect from BCCFI having failed, it instituted the present
case, naming only BCCFI as party defendant. The trial court pronounced
SIHI as having a valid claim being a holder in due course. It further said
that the non-inclusion of King Tim Pua George as party defendant is
immaterial in this case, since he, as payee, is not an indispensable party.

The main issue then is whether SIHI, a second indorser, a holder of

crossed checks, is a holder in due course, to be able to collect from the
drawer, BCCFI.

The Negotiable Instruments Law states what constitutes a holder in due

course, thus:

Sec. 52 — A holder in due course is a holder who has taken the

instrument under the following conditions:

(a) That it is complete and regular upon its face;

(b) That he became the holder of it before it was overdue, and

without notice that it had been previously dishonored, if such
was the fact;

(c) That he took it in good faith and for value;

(d) That at the time it was negotiated to him he had no notice of

any infirmity in the instrument or defect in the title of the person
negotiating it.

Section 59 of the NIL further states that every holder is deemed prima
facie a holder in due course. However, when it is shown that the title of any
person who has negotiated the instrument was defective, the burden is on
the holder to prove that he or some person under whom he claims,
acquired the title as holder in due course.

The facts in this present case are on all fours to the case of State
Investment House, Inc. (the very respondent in this case) v. Intermediate
Appellate Court 7 wherein we made a discourse on the effects of crossing
of checks.

As preliminary, a check is defined by law as a bill of exchange drawn on a

bank payable on demand. 8 There are a variety of checks, the more popular
of which are the memorandum check, cashier's check, traveler's check and
crossed check. Crossed check is one where two parallel lines are drawn
across its face or across a corner thereof. It may be crossed generally or
specially.

A check is crossed specially when the name of a particular banker or a

company is written between the parallel lines drawn. It is crossed generally
when only the words "and company" are written or nothing is written at all
between the parallel lines. It may be issued so that the presentment can be
made only by a bank. Veritably the Negotiable Instruments Law (NIL) does
not mention "crossed checks," although Article 541 9 of the Code of
Commerce refers to such instruments.

According to commentators, the negotiability of a check is not affected by

its being crossed, whether specially or generally. It may legally be
negotiated from one person to another as long as the one who encashes
the check with the drawee bank is another bank, or if it is specially crossed,
by the bank mentioned between the parallel lines. 10This is specially true in
England where the Negotiable Instrument Law originated.

In the Philippine business setting, however, we used to be beset with

bouncing checks, forging of checks, and so forth that banks have become
quite guarded in encashing checks, particularly those which name a
specific payee. Unless one is a valued client, a bank will not even accept
second indorsements on checks.

In order to preserve the credit worthiness of checks, jurisprudence has

pronounced that crossing of a check should have the following effects: (a)
the check may not be encashed but only deposited in the bank; (b) the
check may be negotiated only once — to one who has an account with a
bank; (c) and the act of crossing the check serves as warning to the holder
that the check has been issued for a definite purpose so that he must
inquire if he has received the check pursuant to that purpose, otherwise, he
is not a holder in due course. 11

The foregoing was adopted in the case of SIHI v. IAC, supra. In that case,
New Sikatuna Wood Industries, Inc. also sold at a discount to SIHI three
post dated crossed checks, issued by Anita Peña Chua naming as payee
New Sikatuna Wood Industries, Inc. Ruling that SIHI was not a holder in
due course, we then said:

The three checks in the case at bar had been crossed generally
and issued payable to New Sikatuna Wood Industries, Inc.
 which could only mean that the drawer had intended the same
for deposit only by the rightful person, i.e. the payee named
therein. Apparently, it was not the payee who presented the
same for payment and therefore, there was no proper
presentment, and the liability did not attach to the drawer. Thus,
in the absence of due presentment, the drawer did not become
liable. Consequently, no right of recourse is available to
petitioner (SIHI) against the drawer of the subject checks,
private respondent wife (Anita), considering that petitioner is not
the proper party authorized to make presentment of the checks
in question.

xxx xxx xxx

That the subject checks had been issued subject to the

condition that private respondents (Anita and her husband) on
due date would make the back up deposit for said checks but
which condition apparently was not made, thus resulting in the
non-consummation of the loan intended to be granted by
private respondents to New Sikatuna Wood Industries, Inc.,
constitutes a good defense against petitioner who is not a
holder in due course. 12

It is then settled that crossing of checks should put the holder on inquiry
and upon him devolves the duty to ascertain the indorser's title to the check
or the nature of his possession. Failing in this respect, the holder is
declared guilty of gross negligence amounting to legal absence of good
faith, contrary to Sec. 52(c) of the Negotiable Instruments Law, 13 and as
such the consensus of authority is to the effect that the holder of the check
is not a holder in due course.

In the present case, BCCFI's defense in stopping payment is as good to

SIHI as it is to George King. Because, really, the checks were issued with
the intention that George King would supply BCCFI with the bales of
tobacco leaf. There being failure of consideration, SIHI is not a holder in
due course. Consequently, BCCFI cannot be obliged to pay the checks.

The foregoing does not mean, however, that respondent could not recover
from the checks. The only disadvantage of a holder who is not a holder in
due course is that the instrument is subject to defenses as if it were
non-negotiable. 14 Hence, respondent can collect from the immediate
indorser, in this case, George King.

WHEREFORE, finding that the court a quo erred in the application of law,
the instant petition is hereby GRANTED. The decision of the Regional Trial
Court as affirmed by the Court of Appeals is hereby REVERSED. Cost
against private respondent.

SO ORDERED.

Narvasa, C.J., Regalado and Puno, JJ., concur.

Padilla, J., took no part.

BATAAN CIGAR AND CIGARETTE FACTORY, INC. v.

THE COURT OF APPEALS. G.R. No. 93048. March 3,
1994.
FACTS:

Bataan Cigar & Cigarette Factory, Inc. (BCCFI), engaged with King Tim Pua
George, to deliver 2,000 bales of tobacco leaf. BCCFI issued post dated
crossed checks in exchange. Trusting King's words, BCCFI issued another
post-dated cross check for another purchase of tobacco leaves.

During these time, King was dealing with State Investment House Inc.. On
two separate occasions King sold the post-dated cross checks to SIHI, that
was drawn by BCCFI in favor of King.

Because King failed to deliver the leaves, BCFI issued a stop payment to all
the checks, including those sold to SIHI.

The RTC held that SIHI had a valid claim of being a holder in due course and
to collect the
checks issued by BCCFI.

ISSUE: Whether SIHI is a holder in due course.

RULING:
The SC held that SIHI is not a holder in due course thus granting the petition
of BCCFI. The purpose of cross checks is to avoid those bouncing or
encashing of forged checks. Cross checks have the following effects: it cannot
be encashed but only deposited in a bank; it can only be negotiated on its
respective bank once; it serves as a warning to the hiolder that it has been
issued for a defienite purpose thus making SIHI not a holder in due course.

Still, SIHI can collect from the immediate indorser, in this case, George King.

G.R. No. 93048 March 3, 1994BATAAN CIGAR AND CIGARETTE

FACTORY, INC., petitioner,vs.THE COURT OF APPEALS and STATE
INVESTMENT HOUSE, INC.,respondents.FactsBataan Cigar & Cigarette
Factory, Inc. engaged one of its suppliers, King Tim PuaGeorge to
deliver 2,000 bales of tobacco leaf starting October 1978. BCCFI, on
July13, 1978 issued crossed checks post dated sometime in March 1979
in the totalamount of P820,000.00.Relying on the supplier's
representation that he would complete delivery within threemonths
from December 5, 1978, petitioner agreed to purchase additional 2,500
balesof tobacco leaves, despite the supplier's failure to deliver in
accordance with their earlier agreement. Again petitioner issued post
dated crossed checks in the totalamount of P1,100,000.00, payable
sometime in September 1979. George King failedto deliver the bales of
tobacco leaf as agreed despite petitioner's demand, BCCFIissued on
March 30, 1979, a stop payment order on all checks payable to George
KingEfforts of SIHI to collect from BCCFI failed, the trial court
pronounced SIHI ashaving a valid claim being a holder in due course.
Which was affirmed by the CAIssue whether or not SIHI, a second
indorser, a holder of crossed checks, is a holder indue course, to be
able to collect from the drawer, BCCFI?Held: NoRatiocrossing of a check
should have the following effects: (a) the check may not beencashed
but only deposited in the bank; (b) the check may be negotiated only
once — to one who has an account with a bank; (c) and the act of
crossing the check servesas warning to the holder that the check has
been issued for a definite purpose so thathe must inquire if he has
received the check pursuant to that purpose, otherwise, he isnot a
holder in due courseBCCFI's defense in stopping payment is as good to
SIHI as it is to George King.Because, really, the checks were issued with
the intention that George King wouldsupply BCCFI with the bales of
tobacco leaf. There being failure of consideration,SIHI is not a holder in
due course.

10. People of the Philippines vs Alona Reye, GR. No. 154159,

March 31, 2005

G.R. No. 154159. March 31, 2005

PEOPLE OF THE PHILIPPINES, Appellee,

vs.
aloma reyes and trichia mae reyes (AT LARGE), accused. ALOMA
REYES, Appellant.

DECISION

PUNO, J.:

This is a direct appeal1 from the Sentence2 of the Regional Trial Court of
Davao City, Branch 11, finding appellant Alamo Reyes guilty beyond
reasonable doubt of estafa by postdating a bouncing check under Article
315, paragraph 2(d) of the Revised Penal Code, as amended by
Presidential Decree No. 818, and sentencing her to an indeterminate
penalty of six (6) years and one (1) day to twelve (12) years of prision
mayor as minimum to thirty (30) years of reclusion perpetua as maximum.3
Appellant claims that she issued the subject check in payment of a pre-
existing obligation. Thus, her liability must be civil, not criminal. Private
complainant Jules-Berne Alabastro counters that appellant, together with
her daughter and co-accused Trichia Mae Reyes, issued him the check for
rediscounting. He was allegedly lured to part with his money due to their
seeming honest representations that the check was good and would never
bounce.

The following information dated May 26, 1999 was filed against the
appellant and Trichia Mae Reyes:

That sometime in February 1998, in the City of Davao, Philippines, and

within the jurisdiction of this Honorable Court, the above-mentioned
accused, conspiring and confederating together, by means of false
pretense and with intent to defraud, willfully, unlawfully and feloniously
issued to JULES-BERNE I. ALABASTRO, Allied Bank, Toril Branch[,]
Davao City Check No. 066815 – A dated March 31, 1998 in the amount of
₱280,000.00 in payment of an obligation, which the accused was able to
obtain by reason of and simultaneously with the issuance of the said check,
that when said check was presented to the drawee bank for encashment,
the same was dishonored for the reason "ACCOUNT CLOSED" and after
having been notified by such dishonor said accused failed and refused to
redeem said check despite repeated demands, to the damage and
prejudice of the complainant in the aforesaid amount.

CONTRARY TO LAW.4

A Warrant5 for their arrest was subsequently issued. However, only

appellant was arrested. She posted a cash bond for her provisional
liberty.6 Her co-accused had flown to Australia before her arrest warrant
could be served. She remains at large.

Appellant pleaded not guilty upon arraignment.7 Trial ensued.

Danilo Go, acting Branch Head of Allied Bank, Toril Branch, Davao City,
testified for the prosecution. He presented an account ledger card8 dated
December 31, 1997. The account ledger card contained the transaction
records of Allied Bank NOW (Negotiable Order of Withdrawal) Account No.
1333-00033-8 under the name Aloma Reyes and Trichia Mae
Reyes9 which was opened on January 27, 1997 and closed on March 26,
1997.10 He explained that a NOW Account is a savings account where the
drawer may issue checks payable only to a specific payee. A NOW check
cannot be issued payable to "BEARER." Hence, it cannot be further
negotiated.

Go identified the subject check as a NOW check issued under appellant’s

NOW Account. It was presented for payment with Allied Bank, the drawee
bank of appellant, on April 2, 1998 but was returned to Metrobank, the
depository bank of private complainant, on April 3, 1998 for the reason
"account closed."11

On cross-examination, Go explained the other entries in the account ledger

card. He reiterated that appellant only had a two-month transaction with
Allied Bank under the NOW Account. On re-direct examination, he
identified another document12 containing "referral items." The document
showed a list of NOW checks (the "referral items") presented to Allied Bank
for clearing after the NOW Account had been closed.13 These "referral
items" were not listed in the account ledger card which he previously
presented because once an account is closed, no further entries are
entered in the account ledger card.

Private complainant Jules-Berne I. Alabastro was also presented by the

prosecution. He testified that he was first introduced by Estrella Paulino to
appellant and her daughter sometime in 1996 at his office in Davao City.
The latter allegedly begged to have their personal checks discounted. Upon
the assurance that their checks were good and considering that appellant
and her sister used to be province mates of private complainant’s parents,
he allegedly discounted more or less five or six checks. When asked to
present the checks, he explained that he had returned the checks each
time they bounce. Upon return, appellant replaced them with cash. He only
had in his possession the subject check -- the only check that appellant has
not replaced with cash.14

He further testified that like the other checks which he previously

discounted, he gave them cash for the subject check. When he deposited it
to his account on its due date, it was dishonored by the drawee bank upon
presentment for the reason "account closed."15 He immediately notified
appellant but the latter allegedly refused to replace it with cash. 16 He sent a
demand letter by registered mail but appellant did not heed his demand. He
thus filed the instant case.
On cross-examination, private complainant recounted that when he met
appellant in 1996, she applied for a loan. He had also previously
discounted five or six checks of appellant at varying amounts on different
occasions. He, however, said that he was not a moneylender; he helped
his wife in the flower shop business. He also refused to disclose the source
of the money he used in allegedly discounting the subject ₱280,000.00-
check. He said the source was "quite personal."17

To strengthen his rediscounting theory, private complainant averred that

the subject check was complete when it was issued to him: his name, the
signatures of appellant and her daughter, the date, and the amount of the
subject check were already written on the instrument. He denied that he
was the one who filled in the date and the amount of the subject check.18

The defense presented the sole testimony of appellant. She admitted that
she started borrowing money from private complainant in 1996 when she
was still engaged in the wholesale of softdrinks. Whenever she borrowed
money, she replaced it with checks. However, she suffered business
reverses and closed shop.

To pay her outstanding obligations with private complainant, the latter

allegedly made her issue, in one and the same occasion, sixteen (16) NOW
checks as installment payments. The first installment payment was to start
at ₱6,000.00; the succeeding fifteen payments were to be at ₱13,000.00
each. The last installment was to fall on March 31, 1998.

Appellant explained that the subject check was one of the sixteen (16)
checks. Four (4) of these checks were offered in evidence and marked as
exhibits.19 None of the checks was supposed to exceed the amount of
₱13,000.00. Hence, during her arrest, she was surprised to learn for the
first time about the ₱280,000.00-check. She got confused that there were
two (2) NOW checks dated March 31, 1998: the subject check (Check No.
066815) with the amount of ₱280,000.00, and the other check (Check No.
066816),20 with the amount of ₱13,000.00.21

On cross-examination, she said that she could not produce the other
eleven (11) of the sixteen (16) checks. She admitted signing the checks
with her daughter but maintained that the maximum amount she agreed to
pay for her obligation was ₱13,000.00 per check. When asked about a
₱2,000.0022 check she issued as recorded in her account ledger card, she
said that she probably issued it when her business was still good. 23 She
also claimed that she was not able to receive the demand letter sent to her
home address. Most of the times, she was in the farm.24

On re-direct examination, appellant claimed that it was private complainant

who wrote the date and the amount in the subject check. She alleged that
he was also the one who filled in the dates and the amounts on the other
checks on exhibit. She allegedly authorized private complainant to fill in the
blank entries for the dates and the amounts because she was grateful that
the latter assented to the payment arrangement of ₱13,000.00 per
installment. Furthermore, it was private complainant who would schedule
the payment dates.25

Appellant’s outstanding obligation was allegedly ₱232,000.00 when she

delivered the instruments. She placed all sixteen (16) checks on the office
table of private complainant. They were already signed by her and her
daughter. Private complainant thereafter wrote the dates and the amounts.
She did not examine the checks after private complainant filled in the dates
and the amounts. She was also not aware if private complainant wrote
"₱280,000.00" on the subject check. She allegedly only saw him write
"₱13,000.00" on the checks.26

On rebuttal, private complainant maintained that the subject check was

complete when it was handed to him for rediscounting. He did not know
who filled in the date and the amount. He countered that it was appellant’s
and her daughter’s signatures that were missing. They signed the checks in
his presence. He speculated that appellant probably needed a big amount
for their softdrinks business at that time. When asked to explain why there
were two checks similarly dated March 31, 1998, he merely stated that
"there was one check that bounced, Check No. 066815, in the amount of
₱280,000.00[,] dated March 31, 1998."27

The court a quo convicted appellant upon finding that the prosecution had
sufficiently proven the essential elements of estafa. Hence, this appeal.

Appellant raises the following Assignment of Errors:

The trial court seriously erred in treating the NOW Instrument as a cheCk
within the meaning of Article 315 Paragraph 2(D) of the Revised Penal
Code, considerING that it is a non-negotiable instrument, the same being
payable only to the person specified therein and cannot be made payable
to bearer or casH or be indorsed to a third person.

II

Assuming arguendo that the NOW Instrument is a check within the ambit of
Article 315 Paragraph 2(D) of the Revised Penal Code, the trial court
seriously erred in finding that fraud and/or deceit attended the issuance of
the NOW instrument. From the prosecution’s as welL as the defense’S
evidence glare (sic) the fact that:

A. The NOW instrument, together with the other NOW Instruments, was
issued in payment of a pre-existing debt.

B. The NOW instrument was a mere evidence of a loan or security thereof

serving The same purpose as a promissory note.

III

The trial court seriously erred in concluding that the prosecution sufficiently
proved the essential elements of the crime charged. To be sure, the
prosecution’s evidence fell short of the degree of proof, that is proof beyond
reasonable doubt, required by law to be established in order to overcome
the constitutionally enshrined presumption of innocence in favor of
accused-appellant. Verily:

A. The prosecution’s evidence are severely flawed, and, by themselves,

insufficient and unreliable.

B. The inconsistencies in the testimony of the defense’s lone witness are

harmless and should not have prejudiced the defense in light of the
principle of law that the prosecution must establish the guilt of the accused
by the strength of its own evidence and not on the weakness of the
defense’s evidence or lack of it.

C. The prosecution’s evidence does not fulfill the test of moral certainty and
therefore is insufficient to support a judgment of conviction.28
We shall resolve the appeal by determining the pivotal issue: whether all
the elements of estafa under Article 315, paragraph 2(d) of the Revised
Penal Code were sufficiently established in the case at bar.

Under Article 315, paragraph 2(d) of the Revised Penal Code, estafa is
committed by any person who shall defraud another by false pretenses or
fraudulent acts executed prior to or simultaneously with the commission of
the fraud. It is committed with the following essential elements which must
be proved to sustain a conviction:

1. postdating or issuance of a check in payment of an obligation contracted

at the time the check was issued;

2. lack of sufficiency of funds to cover the check; and

3. damage to the payee thereof.29

Appellant avers that the subject check does not fall within the meaning of
Section 185 of the Negotiable Instruments Law which defines a "check" as
a "bill of exchange drawn on a bank payable on demand." First, the NOW
check is drawn against the savings, not the current account, of appellant.
Second, it is payable only to a specific person or the "payee" and is not
valid when made payable to "bearer" or to "cash." 30 Appellant quotes the
restriction written on the face of a NOW check:

"NOW" shall be payable only to a specific person, natural or juridical. It is

not valid when made payable to "BEARER" or to "CASH" or when
[i]ndorsed by the payee to another person. Only the payee can encash this
"NOW" with the drawee bank or deposit it in his account with the drawee
bank or with any other bank.

Appellant posits that this condition strips the subject check the character of
negotiability. Hence, it is not a negotiable instrument under the Negotiable
Instruments Law, and not the "check" contemplated in Criminal Law.31

We disagree.

Section X223 of the Manual of Regulations for Banks defines Negotiable

Order of Withdrawal (NOW) Accounts as interest-bearing deposit
accounts that combine the payable on demand feature of checks and
the investment feature of savings accounts.
The fact that a NOW check shall be payable only to a specific person, and
not valid when made payable to "BEARER" or to "CASH" or when indorsed
by the payee to another person, is inconsequential. The same restriction is
produced when a check is crossed: only the payee named in the check
may deposit it in his bank account. If a third person accepts a cross check
and pays cash for its value despite the warning of the crossing, he cannot
be considered in good faith and thus not a holder in due course. The
purpose of the crossing is to ensure that the check will be encashed by the
rightful payee only.32 Yet, despite the restriction on the negotiability of cross
checks, we held that they are negotiable instruments.33

To be sure, negotiability is not the gravamen of the crime of estafa through

bouncing checks. It is the fraud or deceit employed by the accused in
issuing a worthless check that is penalized.

Deceit, to constitute estafa, should be the efficient cause of defraudation. It

must have been committed either prior or simultaneous with the
defraudation complained of.34 There must be concomitance: the issuance
of a check should be the means to obtain money or property from the
payee. Hence, a check issued in payment of a pre-existing obligation does
not constitute estafa even if there is no fund in the bank to cover the
amount of the check.35

Appellant maintains that the subject check was one of the sixteen (16)
checks she issued at once to private complainant in payment of a pre-
existing obligation.36 The court a quo however upheld private complainant’s
theory that appellant issued him the subject check for rediscounting in
February 1998, long after her account was closed on March 26, 1997.

We reverse.

While findings of fact of trial courts are accorded not only respect, but at
times, finality, this rule admits of exceptions, as when there is a
misappreciation of facts.

The evidence on record debunks the rediscounting theory of private

complainant. He did not part with his money out of the fraudulent
assurances of appellant that the subject check was good and would never
bounce.
A careful examination of the records establishes that appellant issued him
the subject check in payment of a pre-existing obligation. Both private
complainant and appellant concur in their testimonies that they met
sometime in 1996. Both parties also admit that at this point, appellant
started borrowing money from private complainant.

It cannot be denied that the subject check, like the four other NOW checks
on exhibit, was issued and signed by the same persons and charged to the
same NOW Account at Allied Bank. Private complainant’s theory that these
checks were previously issued to him for rediscounting at different times is
incredulous:

Atty. Zamora- The question is, how many checks were discounted for the
accused. More or less 5 or 6 checks[?]

xxx

Witness- There were previous checks discounted but on different

occasions.37

Atty. Zamora- xxx You said there were 5 or six checks discounted. You
have list of those?

Atty. Alabastro- Already answered. No list.38

It puzzles the Court that after the NOW check dated August 31, 1997
bounced on September 3, 1997 for the reason "ACCOUNT CLOSED,"
private complainant would still discount appellant’s checks in succession. It
baffles us more that private complainant would discount a ₱280,000.00-
check in February 1998 despite knowledge of the closure of appellant’s
NOW Account.

We held in Pacheco v. Court of Appeals39 that there is no estafa through

bouncing checks when it is shown that private complainant knew that the
drawer did not have sufficient funds in the bank at the time the check was
issued to him. Such knowledge negates the element of deceit and
constitutes a defense in estafa through bouncing checks.

In the case at bar, private complainant knew that appellant did not only
have insufficient funds; he knew her NOW Account was closed at the time
he allegedly discounted the subject check. This is proven by the following
undisputed facts:

First. Appellant presented four (4) NOW checks, each bearing the amount
of ₱13,000.00, and respectively dated August 31, 1997, January 31, 1998,
March 1, 1998 and March 31, 1998.

The evidence on record shows that private complainant deposited the

NOW check dated August 31, 1997 to his Metrobank account on
September 1, 1997. On September 2, 1997, Metrobank returned the
instrument to Allied Bank with the notation "ACCOUNT CLOSED." Hence,
as early as September 2, 1997, private complainant already knew that
appellant’s NOW Account had been closed.40

Second. Fatal to private complainant’s case are his own admissions as to

when he received the subject check. In his Affidavit-Complaint41 dated
February 25, 1999, private complainant stated, viz.:

x x x That sometime in Feb. 1998, a certain ALOMA REYES AND

TRICHIA MAE REYES x x x came to me and begged to have their personal
check discounted with earnest representations that their check was good
check and would never bounce and because of their seeming honest
representations I was lured to discount their check which is ---

ALLIED BANK CHECK NO. 066815-A DATED MAR. 31, 1998

AMOUNTING TO ₱280,000.00.

They handed the check to me and I simultaneously gave them the

money;42 (emphasis supplied)

In the Information filed, it was stated, viz.:

That sometime in February 1998, in the City of Davao, Philippines, and

within the jurisdiction of this Honorable Court, the above-mentioned
accused, conspiring and confederating together, by means of false
pretense and with intent to defraud, willfully, unlawfully and feloniously
issued to JULES-BERNE I. ALABASTRO, Allied Bank, Toril Branch[,]
Davao City Check No. 066815 – A dated March 31, 1998 in the amount of
₱280,000.00 x x x43 (emphasis supplied)
If the subject check was issued to him in February 1998, as he alleges, at
that time he already knew that the NOW Account where the subject NOW
check is charged was closed. The NOW checks on record are irrefragable
pieces of evidence that private complainant knew the NOW Account was
closed.

In light of the established facts, private complainant’s rediscounting theory

must fail. Appellant issued the subject check in payment of a pre-existing
obligation. When the NOW Account was closed on March 26, 1997, private
complainant already had in his possession the NOW check in question. It
was one of the sixteen (16) NOW checks previously issued by private
complainant before the closure of the NOW Account. No deceit or damage
attended the transaction. There being none in the case at bar, there can be
no estafa through bouncing checks.

Despite the inconsistencies44 in the testimony of appellant, these were

minor and did not destroy her credibility nor shatter the theory of the
defense. To be sure, the prosecution failed to prove the guilt of appellant
beyond reasonable doubt. As a matter of right, the constitutional
presumption of innocence of appellant must be favored regardless of the
inconsistencies in her testimony or the weakness of her own defense.

Appellant, however, is not without liability. An accused acquitted of estafa

may be held civilly liable in the same case where the facts established by
the evidence so warrant. In the case at bar, the records lack sufficient
evidence to determine the amount of her remaining obligation.

This Court is not a trier of facts and where the evidence on record is not
sufficient to warrant a conclusion, the case should be remanded to the
court a quo for reception of further evidence.

IN VIEW WHEREOF, appellant Aloma Reyes is ACQUITTED of estafa

under Article 315, paragraph 2(d) of the Revised Penal Code, as amended.
The assailed Sentence of the Regional Trial Court of Davao City, Branch
11, dated March 13, 2002 is REVERSED and SET ASIDE. The case is
REMANDED to the court a quo for the determination of appellant’s civil
liability. The Director of the Bureau of Corrections is DIRECTED to release
her IMMEDIATELY unless she is being lawfully held for another offense.

SO ORDERED.
Austria-Martinez, Callejo, Sr., Tinga, and Chico-Nazario, JJ., concur.

11. Republic vs Eugenio, Jr. 545 SCRA 384 (2008)

G.R. No. 174629 February 14, 2008

REPUBLIC OF THE PHILIPPINES, Represented by THE ANTI-MONEY

LAUNDERING COUNCIL (AMLC),petitioner,
vs.
HON. ANTONIO M. EUGENIO, JR., AS PRESIDING JUDGE OF RTC,
MANILA, BRANCH 34, PANTALEON ALVAREZ and LILIA
CHENG, respondents.

DECISION

TINGA, J.:

The present petition for certiorari and prohibition under Rule 65 assails the
orders and resolutions issued by two different courts in two different cases.
The courts and cases in question are the Regional Trial Court of Manila,
Branch 24, which heard SP Case No. 06-1142001 and the Court of
Appeals, Tenth Division, which heared CA-G.R. SP No. 95198.2 Both cases
arose as part of the aftermath of the ruling of this Court in Agan v.
PIATCO3 nullifying the concession agreement awarded to the Philippine
International Airport Terminal Corporation (PIATCO) over the Ninoy Aquino
International Airport – International Passenger Terminal 3 (NAIA 3) Project.

I.

Following the promulgation of Agan, a series of investigations concerning

the award of the NAIA 3 contracts to PIATCO were undertaken by the
Ombudsman and the Compliance and Investigation Staff (CIS) of petitioner
Anti-Money Laundering Council (AMLC). On 24 May 2005, the Office of the
Solicitor General (OSG) wrote the AMLC requesting the latter’s assistance
"in obtaining more evidence to completely reveal the financial trail of
corruption surrounding the [NAIA 3] Project," and also noting that petitioner
Republic of the Philippines was presently defending itself in two
international arbitration cases filed in relation to the NAIA 3 Project.4 The
CIS conducted an intelligence database search on the financial
transactions of certain individuals involved in the award, including
respondent Pantaleon Alvarez (Alvarez) who had been the Chairman of the
PBAC Technical Committee, NAIA-IPT3 Project.5 By this time, Alvarez had
already been charged by the Ombudsman with violation of Section 3(j) of
R.A. No. 3019.6 The search revealed that Alvarez maintained eight (8) bank
accounts with six (6) different banks.7

On 27 June 2005, the AMLC issued Resolution No. 75, Series of

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

Under the authority granted by the Resolution, the AMLC filed an

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

Meanwhile, the Special Prosecutor of the Office of the Ombudsman,

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

In response to the letter of the Special Prosecutor, the AMLC promulgated

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

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

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

On 25 January 2006, Alvarez, through counsel, entered his

appearance23 before the Manila RTC in SP Case No. 06-114200 and filed
an Urgent Motion to Stay Enforcement of Order of January 12,
2006.24 Alvarez alleged that he fortuitously learned of the bank inquiry
order, which was issued following an ex parte application, and he argued
that nothing in R.A. No. 9160 authorized the AMLC to seek the authority to
inquire into bank accounts ex parte.25 The day after Alvarez filed his
motion, 26 January 2006, the Manila RTC issued an Order26 staying the
enforcement of its bank inquiry order and giving the Republic five (5) days
to respond to Alvarez’s motion.

The Republic filed an Omnibus Motion for Reconsideration27 of the 26

January 2006 Manila RTC Order and likewise sought to strike out Alvarez’s
motion that led to the issuance of said order. For his part, Alvarez filed a
Reply and Motion to Dismiss28 the application for bank inquiry order. On 2
May 2006, the Manila RTC issued an Omnibus Order29 granting the
Republic’s Motion for Reconsideration, denying Alvarez’s motion to dismiss
and reinstating "in full force and effect" the Order dated 12 January 2006.
In the omnibus order, the Manila RTC reiterated that the material
allegations in the application for bank inquiry order filed by the Republic
stood as "the probable cause for the investigation and examination of the
bank accounts and investments of the respondents."30

Alvarez filed on 10 May 2006 an Urgent Motion31 expressing his

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

On 11 July 2006, Alvarez filed an Urgent Motion and

Manifestation35 wherein he manifested having received reliable information
that the AMLC was about to implement the Manila RTC bank inquiry order
even though he was intending to appeal from it. On the premise that only a
final and executory judgment or order could be executed or implemented,
Alvarez sought that the AMLC be immediately ordered to refrain from
enforcing the Manila RTC bank inquiry order.

On 12 July 2006, the Manila RTC, acting on Alvarez’s latest motion, issued
an Order36 directing the AMLC "to refrain from enforcing the order dated
January 12, 2006 until the expiration of the period to appeal, without any
appeal having been filed." On the same day, Alvarez filed a Notice of
Appeal37 with the Manila RTC.

On 24 July 2006, Alvarez filed an Urgent Ex Parte Motion for

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

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

In response, the Republic filed an Urgent Omnibus Motion for

Reconsideration44 dated 27 July 2006, urging that it be allowed to
immediately enforce the bank inquiry order against Alvarez and that
Alvarez’s notice of appeal be expunged from the records since appeal from
an order of inquiry is disallowed under the Anti money Laundering Act
(AMLA).

Meanwhile, respondent Lilia Cheng filed with the Court of Appeals a

Petition for Certiorari, Prohibition and Mandamus with Application for TRO
and/or Writ of Preliminary Injunction45 dated 10 July 2006, directed against
the Republic of the Philippines through the AMLC, Manila RTC Judge
Eugenio, Jr. and Makati RTC Judge Marella, Jr.. She identified herself as
the wife of Cheng Yong46 with whom she jointly owns a conjugal bank
account with Citibank that is covered by the Makati RTC bank inquiry order,
and two conjugal bank accounts with Metrobank that are covered by the
Manila RTC bank inquiry order. Lilia Cheng imputed grave abuse of
discretion on the part of the Makati and Manila RTCs in granting AMLC’s ex
parte applications for a bank inquiry order, arguing among others that
the ex parte applications violated her constitutional right to due process,
that the bank inquiry order under the AMLA can only be granted in
connection with violations of the AMLA and that the AMLA can not apply to
bank accounts opened and transactions entered into prior to the effectivity
of the AMLA or to bank accounts located outside the Philippines.47

On 1 August 2006, the Court of Appeals, acting on Lilia Cheng’s petition,

issued a Temporary Restraining Order48enjoining the Manila and Makati
trial courts from implementing, enforcing or executing the respective bank
inquiry orders previously issued, and the AMLC from enforcing and
implementing such orders. On even date, the Manila RTC issued an
Order49 resolving to hold in abeyance the resolution of the urgent omnibus
motion for reconsideration then pending before it until the resolution of Lilia
Cheng’s petition for certiorari with the Court of Appeals. The Court of
Appeals Resolution directing the issuance of the temporary restraining
order is the second of the four rulings assailed in the present petition.

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

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

The Court had initially granted a Temporary Restraining Order59 dated 6

October 2006 and later on a Supplemental Temporary Restraining
Order60 dated 13 October 2006 in petitioner’s favor, enjoining the
implementation of the assailed rulings of the Manila RTC and the Court of
Appeals. However, on respondents’ motion, the Court, through a
Resolution61 dated 11 December 2006, suspended the implementation of
the restraining orders it had earlier issued.

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

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

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

(b) What legal procedures and standards should be observed in

the conduct of the proceedings for the issuance of said order?

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

review?

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

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

II.

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

Petitioner raises particular arguments questioning Lilia Cheng’s right to

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

Ostensibly, the proximate question before the Court is whether a bank

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

III.

A brief overview of the AMLA is called for.

Money laundering has been generally defined by the International Criminal

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

Section 4 of the AMLA states that "[m]oney laundering is a crime whereby

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

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

Respondents posit that a bank inquiry order under Section 11 may be

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

We are unconvinced by this proposition, and agree instead with the then
Solicitor General who conceded that the use of the phrase "in cases of"
was unfortunate, yet submitted that it should be interpreted to mean "in the
event there are violations" of the AMLA, and not that there are already
cases pending in court concerning such violations.69 If the contrary position
is adopted, then the bank inquiry order would be limited in purpose as a
tool in aid of litigation of live cases, and wholly inutile as a means for the
government to ascertain whether there is sufficient evidence to sustain an
intended prosecution of the account holder for violation of the AMLA.
Should that be the situation, in all likelihood the AMLC would be virtually
deprived of its character as a discovery tool, and thus would become less
circumspect in filing complaints against suspect account holders. After all,
under such set-up the preferred strategy would be to allow or even
encourage the indiscriminate filing of complaints under the AMLA with the
hope or expectation that the evidence of money laundering would
somehow surface during the trial. Since the AMLC could not make use of
the bank inquiry order to determine whether there is evidentiary basis to
prosecute the suspected malefactors, not filing any case at all would not be
an alternative. Such unwholesome set-up should not come to pass. Thus
Section 11 cannot be interpreted in a way that would emasculate the
remedy it has established and encourage the unfounded initiation of
complaints for money laundering.

Still, even if the bank inquiry order may be availed of without need of a pre-
existing case under the AMLA, it does not follow that such order may be
availed of ex parte. There are several reasons why the AMLA does not
generally sanction ex parte applications and issuances of the bank inquiry
order.

IV.

It is evident that Section 11 does not specifically authorize, as a general

rule, the issuance ex parte of the bank inquiry order. We quote the
provision in full:

SEC. 11. Authority to Inquire into Bank Deposits. ―

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

To ensure compliance with this Act, the Bangko Sentral ng Pilipinas

(BSP) may inquire into or examine any deposit of investment with any
banking institution or non bank financial institution when the
examination is made in the course of a periodic or special
 examination, in accordance with the rules of examination of the
BSP.70 (Emphasis supplied)

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

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

SEC. 10. Freezing of Monetary Instrument or Property. ― The

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

Although oriented towards different purposes, the freeze order under

Section 10 and the bank inquiry order under Section 11 are similar in that
they are extraordinary provisional reliefs which the AMLC may avail of to
effectively combat and prosecute money laundering offenses. Crucially,
Section 10 uses specific language to authorize an ex parte application for
the provisional relief therein, a circumstance absent in Section 11. If indeed
the legislature had intended to authorize ex parte proceedings for the
issuance of the bank inquiry order, then it could have easily expressed
such intent in the law, as it did with the freeze order under Section 10.
Even more tellingly, the current language of Sections 10 and 11 of the
AMLA was crafted at the same time, through the passage of R.A. No. 9194.
Prior to the amendatory law, it was the AMLC, not the Court of Appeals,
which had authority to issue a freeze order, whereas a bank inquiry order
always then required, without exception, an order from a competent
court.74 It was through the same enactment that ex parte proceedings were
introduced for the first time into the AMLA, in the case of the freeze order
which now can only be issued by the Court of Appeals. It certainly would
have been convenient, through the same amendatory law, to allow a
similar ex parte procedure in the case of a bank inquiry order had Congress
been so minded. Yet nothing in the provision itself, or even the available
legislative record, explicitly points to an ex parte judicial procedure in the
application for a bank inquiry order, unlike in the case of the freeze order.

That the AMLA does not contemplate ex parte proceedings in applications

for bank inquiry orders is confirmed by the present implementing rules and
regulations of the AMLA, promulgated upon the passage of R.A. No. 9194.
With respect to freeze orders under Section 10, the implementing rules do
expressly provide that the applications for freeze orders be filed ex
parte,75 but no similar clearance is granted in the case of inquiry orders
under Section 11.76 These implementing rules were promulgated by the
Bangko Sentral ng Pilipinas, the Insurance Commission and the Securities
and Exchange Commission,77 and if it was the true belief of these
institutions that inquiry orders could be issued ex parte similar to freeze
orders, language to that effect would have been incorporated in the said
Rules. This is stressed not because the implementing rules could
authorize ex parte applications for inquiry orders despite the absence of
statutory basis, but rather because the framers of the law had no intention
to allow such ex parte applications.

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

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

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

Interestingly, petitioner’s memorandum does not attempt to demonstrate

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

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

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

There certainly is fertile ground to contest the issuance of an ex

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

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

own determinative function in order to be convinced of such fact. The

account holder would be certainly capable of contesting such probable
cause if given the opportunity to be apprised of the pending application to
inquire into his account; hence a notice requirement would not be an empty
spectacle. It may be so that the process of obtaining the inquiry order may
become more cumbersome or prolonged because of the notice
requirement, yet we fail to see any unreasonable burden cast by such
circumstance. After all, as earlier stated, requiring notice to the account
holder should not, in any way, compromise the integrity of the bank records
subject of the inquiry which remain in the possession and control of the
bank.
Petitioner argues that a bank inquiry order necessitates a finding of
probable cause, a characteristic similar to a search warrant which is
applied to and heard ex parte. We have examined the supposed analogy
between a search warrant and a bank inquiry order yet we remain to be
unconvinced by petitioner.

The Constitution and the Rules of Court prescribe particular requirements

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

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

VI.

The Court’s construction of Section 11 of the AMLA is undoubtedly

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

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

However, sufficient for our purposes, we can assert there is a right to

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

SECTION 2. All deposits of whatever nature with banks or

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

Because of the Bank Secrecy Act, the confidentiality of bank deposits

remains a basic state policy in the Philippines.87 Subsequent laws,
including the AMLA, may have added exceptions to the Bank Secrecy Act,
yet the secrecy of bank deposits still lies as the general rule. It falls within
the zones of privacy recognized by our laws.88The framers of the 1987
Constitution likewise recognized that bank accounts are not covered by
either the right to information89 under Section 7, Article III or under the
requirement of full public disclosure90 under Section 28, Article II.91 Unless
the Bank Secrecy Act is repealed or
amended, the legal order is obliged to conserve the absolutely confidential
nature of Philippine bank deposits.

Any exception to the rule of absolute confidentiality must be specifically

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

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

It cannot be successfully argued the proceedings relating to the bank

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

Nevertheless, just because the AMLA establishes additional exceptions to

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

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

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

VII.

There is a final point of concern which needs to be addressed. Lilia Cheng

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

No ex post facto law may be enacted,99 and no law may be construed in

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

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

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

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

committed;

(3) changes the punishment and inflicts a greater punishment than

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

(5) assuming to regulate civil rights and remedies only, in effect

imposes penalty or deprivation of a right for something which when
done was lawful; and

(6) deprives a person accused of a crime of some lawful

protection to which he has become entitled, such as the
protection of a former conviction or acquittal, or a proclamation
of amnesty. (Emphasis supplied)100

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

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

Besides, nowhere in the legislative record cited by Lilia Cheng does it

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

IX.

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

WHEREFORE, the PETITION is DISMISSED. No pronouncement as to

costs.

SO ORDERED.

REPUBLIC OF THE PHILIPPINES vs. EUGENIO

 G.R. No. 174629 February 14, 2008

Petitioner: REPUBLIC OF THE PHILIPPINES represented

by
THE ANTI-MONEY LAUNDERING COUNCIL
Respondents: AUSTRIA MARTINEZ, CARPIO MORALES,
TINGA, and HON. ANTONIO M. EUGENIO,
VELASCO, JR., AS PRESIDING JUDGE OF RTC,
MANILA, BRANCH 34, PANTALEON ALVAREZ
and LILIA CHENG
Ponente: TINGA, J.

Statement of the Case:

This is a petition for certiorari and prohibition under Rule 65

assailing the orders and resolutions issued by the Regional Trial
Court of Manila and the Court of Appeals on two different cases
which arose as part of the aftermath of the ruling of the Supreme
Court in Agan v. PIATCO nullifying the concession agreement
awarded to the Philippine International Airport Terminal
Corporation (PIATCO) over the Ninoy Aquino International Airport
International Passenger Terminal 3 (NAIA 3) Project.

Facts:

In relation to the series of investigations concerning the award

of the NAIA 3 contracts to PIATCO undertaken by the Ombudsman
and the Compliance and Investigation Staff (CIS) of petitioner Anti-
Money Laundering Council (AMLC), Pantaleon Alvarez (Alvarez)
was charged with violation of RA No. 3019. The CIS conducted an
intelligence database search on the financial transactions of certain
individuals involved in the award, including Alvarez, which revealed
that the latter maintained eight (8) bank accounts with six (6)
different banks.

Under the authority granted by the Resolution, the AMLC filed

an application to inquire into or examine the deposits or
investments of Alvarez, Trinidad, Liongson and Cheng Yong before
the RTC of Makati. The RTC granted application being satisfied
that there existed probable cause to believe that the deposits in
various bank accounts are related to the offense of violation of Anti-
Graft and Corrupt Practices Act now the subject of criminal
prosecution before the Sandiganbayan. The CIS proceeded to
inquire and examine the deposits, investments and related web
accounts of the four.

Meanwhile, the Special Prosecutor of the Office of the

Ombudsman requested the AMLC to investigate the accounts of
Alvarez, PIATCO, and several other entities involved in the nullified
contract adverting to probable cause to believe that the bank
accounts were used in the commission of unlawful activities that
were committed in relation to the criminal cases then pending
before the Sandiganbayan. In response, the AMLC authorized the
executive director of the AMLC to inquire into and examine the
accounts named in the letter, including one maintained by Alvarez
with DBS Bank and two other accounts in the name of Cheng Yong
with Metrobank.
 Following the AMLC Resolution, the Republic, through the
AMLC, filed an application before the Manila RTC to inquire into
and/or examine thirteen (13) accounts and two (2) related web of
accounts alleged as having been used to facilitate corruption in the
NAIA 3 Project. Among said accounts were the DBS Bank account
of Alvarez and the Metrobank accounts of Cheng Yong. The
Manila RTC issued an Order granted the Ex Parte Application

Alvarez, through counsel, filed an Urgent Motion to Stay

Enforcement of the said Order arguing that nothing in R.A. No.
9160 authorized the AMLC to seek the authority to inquire into bank
accounts ex parte. The Manila RTC issued an Order staying the
enforcement of its bank inquiry order and giving the Republic five
(5) days to respond to Alvarez’ motion.

The Republic filed an Omnibus Motion for Reconsideration

which was granted by the Manila RTC denying Alvarez’s motion to
dismiss and reinstating in full force and effect the stayed order.

Acting on Alvarez’s latest motion, the Manila RTC issued an

Order directing the AMLC to refrain from enforcing the order until
the expiration of the period to appeal, without any appeal having
been filed. On the same day, Alvarez filed a Notice of Appeal. The
Republic filed an Urgent Omnibus Motion for Reconsideration
urging that it be allowed to immediately enforce the bank inquiry
order against Alvarez and that Alvarezs notice of appeal be
expunged from the records since appeal from an order of inquiry is
disallowed under the Anti money Laundering Act (AMLA).
 Meanwhile, respondent Lilia Cheng filed with the Court of
Appeals a Petition for Certiorari, Prohibition and Mandamus with
Application for TRO and/or Writ of Preliminary Injunction directed
against the Republic of the Philippines through the AMLC, Manila
RTC Judge Eugenio, Jr. and Makati RTC Judge Marella, Jr.
imputing grave abuse of discretion on the part of the Makati and
Manila RTCs in granting AMLCs ex parte applications for a bank
inquiry order, arguing among others that the ex parte applications
violated her constitutional right to due process, that the bank inquiry
order under the AMLA can only be granted in connection with
violations of the AMLA and that the AMLA can not apply to bank
accounts opened and transactions entered into prior to the
effectivity of the AMLA or to bank accounts located outside the
Philippines.

The Court of Appeals, acting on Lilia Chengs petition, issued a

Temporary Restraining Order. On even date, the Manila RTC
issued an Order resolving to hold in abeyance the resolution of the
urgent omnibus motion for reconsideration then pending before it
until the resolution of Lilia Cheng’s petition for certiorari with the
Court of Appeals.

Issue:

Whether or not the bank inquiry orders issued are valid and
enforceable.

Ruling:
 Because of the Bank Secrecy Act, the confidentiality of bank
deposits remains a basic state policy in the Philippines.
Subsequent laws, including the AMLA, may have added exceptions
to the Bank Secrecy Act, yet the secrecy of bank deposits still lies
as the general rule. It falls within the zones of privacy recognized
by our laws. The framers of the 1987 Constitution likewise
recognized that bank accounts are not covered by either the right
to information or under the requirement of full public disclosure.
Unless the Bank Secrecy Act is repealed or amended, the legal
order is obliged to conserve the absolutely confidential nature of
Philippine bank deposits.

Any exception to the rule of absolute confidentiality must be

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

The AMLA also provides exceptions to the Bank Secrecy

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

It cannot be successfully argued the proceedings relating to

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

Nevertheless, just because the AMLA establishes additional

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

While petitioner would premise that the inquiry into Lilia

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

Petition is dismissed.

REPUBLIC V. JUDGE EUGENIO G.R. NO. 174629, 14 FEBRUARY 2008

FACTS: After the Agan v. PIATCO ruling, a series of investigations
concerning the award of the NAIA 3 contracts to PIATCO were
undertaken by the Ombudsman and the Compliance and Investigation
Staff (“CIS”) of the Anti-Money Laundering Council (“AMLC”). The OSG
wrote AMLC requesting AMLC’s assistance “in obtaining more evidence
to completely reveal the financial trail of corruption surrounding the
NAIA 3 Project,” and also noting that the Republic was presently
defending itself in two international arbitration cases. The CIS
conducted an intelligence database search on the financial transactions
of certain individuals involved in the award, including Alvarez
(Chairman of the Pre-Qualification Bids and Awards Technical
Committee). By this time, Alvarez had already been charged by the
Ombudsman with violation of Section 3(J) of the Anti Graft and Corrupt
Practices Act.1 The search revealed that Alvarez maintained 8 bank
accounts with 6 different banks The AMLC issued a resolution
authorizing its Executive Director to sign and verify an application to
inquire into the deposits or investments of Alvarez et al. and to
authorize the AMLC Secretariat to conduct an inquiry once the RTC
grants the application. The rationale for the resolution was founded on
the findings of the CIS that amounts were transferred from a Hong
Kong bank account to bank accounts in the Philippines maintained by
respondents. The Resolution also noted that by awarding the contract
to PIATCO (despite its lack of financial capacity) Alvarez violated Section
3(E) of the Anti Graft and Corrupt Practices Act.2 The MAKATI RTC
rendered an Order granting the AMLC the authority to inquire and
examine the subject bank accounts of Alvarez et al. In response to a
letter of Special Prosecutor Villa-Ignacio, AMLC issued a Resolution
authorizing its Executive Director to inquire into and examine the
accounts of Alvarez, PIATCO, and several other entities involved in the
nullified contract. AMLC filed an application before the MANILA RTC to
inquire into the accounts alleged as having been used to facilitate
corruption in the NAIA 3 Project. The ex parte application was granted
and the MANILA RTC issued a bank inquiry order. Alvarez alleged that
he fortuitously learned of the bank inquiry order, which was issued
following an ex parte application, and he argued that nothing in the
AntiMoney Laundering Act (“AMLA”) authorized the AMLC to seek the
authority to inquire into bank accounts ex parte. After several motions,
manifestations, orders and resolutions the case went up to the SC.
Alvarez et al.’s position: The AMLA, being a substantive penal statute,
has no retroactive effect and the bank inquiry order could not apply to
deposits or investments opened prior to the effectivity of the AMLA (17
October 2001). The subject bank accounts, opened in 1989 to 1990,
could not be the subject of the bank inquiry order without violating the
constitutional prohibition against ex post facto laws.3 ISSUE: Whether
or not the proscription against ex post facto laws applies to Section 11
of the AMLA (a provision which does not provide a penal sanction BUT
which merely authorizes the inspection of suspect accounts and
deposits).4 HELD: YES. It is clear that no person may be prosecuted
under the PENAL provisions of the AMLA for acts committed prior to
the enactment of the law (17 October 2001). With respect to the
AUTHORITY TO INSPECT, it should be noted that an ex post facto law is
one that (among others) deprives a person accused of a crime of some
lawful protection to which he has become entitled, such as the
protection of a former conviction or acquittal, or a proclamation of
amnesty. PRIOR to the AMLA: (1) The fact that bank accounts were
involved in activities later on enumerated in the law did not, by itself,
remove such accounts from the shelter of absolute confidentiality. (2)
In order that bank accounts could be examined, there was need to
secure either the written permission of the depositor OR a court order
authorizing such examination, assuming that they were involved in
cases of bribery or dereliction of duty of public officials, or in a case
where the money deposited or invested was itself the subject matter of
the litigation.
The passage of the AMLA stripped another layer off the rule on
absolute confidentiality that provided a measure of lawful protection to
the account holder. The application of the bank inquiry order as a
means of inquiring into transactions entered into prior to the passage
of the AMLA would be constitutionally infirm, offensive as to the ex
post facto clause. NEVERTHELESS, the argument that the prohibition
against ex post facto laws goes as far as to prohibit any inquiry into
deposits in bank accounts OPENED prior to the effectivity of the AMLA
even if the TRANSACTIONS were entered into when the law had already
taken effect cannot be sustained. This argument will create a loophole
in the AMLA that would result to further money laundering. It is hard to
presume that Congress intended to enact a self-defeating law in the
first place, and the courts are inhibited from such a construction by the
cardinal rule that “a law should be interpreted with a view to upholding
rather than destroying it.”

12. New Sampaguita Builders Construction, et al vs PNB, GR No.

148753, July 30, 2004

THIRD DIVISION

NEW SAMPAGUITA BUILDERS G.R. No. 148753

CONSTRUCTION, INC. (NSBCI)
and Spouses EDUARDO R. DEE Present:
and ARCELITA M. DEE,
Petitioners
versus
PHILIPPINE NATIONAL BANK,Respondent.

July 30, 2004

DECISION

PANGANIBAN, J.:
Courts have the authority to strike down or to modify provisions in promissory
notes that grant the lenders unrestrained power to increase interest rates,
penalties and other charges at the latters sole discretion and without giving prior
notice to and securing the consent of the borrowers. This unilateral

* On leave.
authority is anathema to the mutuality of contracts and enable lenders to take
undue advantage of borrowers. Although the Usury Law has been effectively
repealed, courts may still reduce iniquitous or unconscionable rates charged for the
use of money. Furthermore, excessive interests, penalties and other charges not
revealed in disclosure statements issued by banks, even if stipulated in the promissory
notes, cannot be given effect under the Truth in Lending Act.

The Case

Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, seeking to
nullify the June 20, 2001 Decision[2] of the Court of Appeals[3] (CA) in CA-GR CV No.
55231. The decretal portion of the assailed Decision reads as follows:

WHEREFORE, the decision of the Regional Trial Court of Dagupan City,

Branch 40 dated December 28, 1995 is REVERSED and SET ASIDE. The
foreclosure proceedings of the mortgaged properties of defendants-
appellees[4] and the February 26, 1992 auction sale are declared legal
and valid and said defendants-appellees are ordered to pay plaintiff-
appellant PNB,[5] jointly and severally[,] the amount of deficiency that
will be computed by the trial court based on the original penalty of 6%
per annum as explicitly stated in the loan documents and to pay
attorneys fees in an amount equivalent to x x x 1% of the total amount
due and the costs of suit and expenses of litigation.[6]
 The Facts

The facts are narrated by the CA as follows:

On February 11, 1989, Board Resolution No. 05, Series of 1989 was
approved by [Petitioner] NSBCI [1)] authorizing the company to x x x
apply for or secure a commercial loan with the PNB in an aggregate
amount of P8.0M, under such terms agreed by the Bank and the
NSBCI, using or mortgaging the real estate properties registered in the
name of its President and Chairman of the Board [Petitioner] Eduardo
R. Dee as collateral; [and] 2) authorizing [petitioner-spouses] to secure
the loan and to sign any [and all] documents which may be required
by [Respondent] PNB[,] and that [petitioner-spouses] shall act as
sureties or co-obligors who shall be jointly and severally liable with
[Petitioner] NSBCI for the payment of any [and all] obligations.

On August 15, 1989, Resolution No. 77 was approved by granting the

request of [Respondent] PNB thru its Board NSBCI for an P8 Million
loan broken down into a revolving credit line of P7.7M and an
unadvised line of P0.3M for additional operating and working
capital[7] to mobilize its various construction projects, namely:

1) MWSS Watermain;
2) NEA-Liberty farm;
3) Olongapo City Pag-Asa Public Market;
4) Renovation of COA-NCR Buildings 1, 2 and 9;
5) Dupels, Inc., Extensive prawn farm development project;
6) Banawe Hotel Phase II;
7) Clark Air Base -- Barracks and Buildings; and
8) Others: EDSA Lighting, Roxas Blvd. Painting NEA Sapang Palay
and Angeles City.

The loan of [Petitioner] NSBCI was secured by a first mortgage on the

following: a) three (3) parcels of residential land located at Mangaldan,
Pangasinan with total land area of 1,214 square meters[,] including
improvements thereon and registered under TCT Nos. 128449,
 126071, and 126072 of the Registry of Deeds of Pangasinan; b) six (6)
parcels of residential land situated at San Fabian, Pangasinan with
total area of 1,767 square meters[,] including improvements thereon
and covered by TCT Nos. 144006, 144005, 120458, 120890, 144161[,]
and 121127 of the Registry of Deeds of Pangasinan; and c) a residential
lot and improvements thereon located at Mangaldan, Pangasinan with
an area of 4,437 square meters and covered by TCT No. 140378 of the
Registry of Deeds of Pangasinan.

The loan was further secured by the joint and several signatures of
[Petitioners] Eduardo Dee and Arcelita Marquez Dee, who signed as
accommodation-mortgagors since all the collaterals were owned by
them and registered in their names.

Moreover [Petitioner] NSBCI executed the following documents, viz:

a) promissory note dated June 29, 1989 in the amount
of P5,000,000.00 with due date on October 27, 1989; [b)] promissory
note dated September 1, 1989 in the amount of P2,700,000.00 with
due date on December 30, 1989; and c) promissory note dated
September 6, 1989 in the amount of P300,000.00 with maturity date
on January 4, 1990.

In addition, [petitioner] corporation also signed the Credit Agreement

dated August 31, 1989 relating to the revolving credit line of P7.7
Million x x x and the Credit Agreement dated September 5, 1989 to
support the unadvised line of P300,000.00.

On August 31, 1989, [petitioner-spouses] executed a Joint and Solidary

Agreement (JSA) in favor of [Respondent] PNB unconditionally and
irrevocably binding themselves to be jointly and severally liable with
the borrower for the payment of all sums due and payable to the Bank
under the Credit Document.

Later on, [Petitioner] NSBCI failed to comply with its obligations under
the promissory notes.
On June 18, 1991, [Petitioner] Eduardo R. Dee on behalf of [Petitioner]
NSBCI sent a letter to the Branch Manager of the PNB Dagupan Branch
requesting for a 90-day extension for the payment of interests and
restructuring of its loan for another term.

Subsequently, NSBCI tendered payment to [Respondent] PNB [of]

three (3) checks aggregating P1,000,000.00, namely 1) check no.
316004 dated August 8, 1991 in the amount of P200,000.00; 2) check
no. 03499997 dated August 8, 1991 in the amount of P650,000.00; and
3) check no. 03499998 dated August 15, 1991 in the amount
of P150,000.00.[8]

In a meeting held on August 12, 1991, [Respondent] PNBs

representative[,] Mr. Rolly Cruzabra, was informed by [Petitioner]
Eduardo Dee of his intention to remit to [Respondent] PNB post-dated
checks covering interests, penalties and part of the loan principals of
his due account.

On August 22, 1991, [Respondent] banks Crispin Carcamo wrote

[Petitioner] Eduardo Dee[,] informing him that [Petitioner] NSBCIs
proposal [was] acceptable[,] provided the total payment should
be P4,128,968.29 that [would] cover the amount of P1,019,231.33 as
principal, P3,056,058.03 as interests and penalties[,] and P53,678.93
for insurance[,] with the issuance of post-dated checks to be dated not
later than November 29, 1991.

On September 6, 1991, [Petitioner] Eduardo Dee wrote the PNB

Branch Manager reiterating his proposals for the settlement of
[Petitioner] NSBCIs past due loan account amounting
to P7,019,231.33.

[Petitioner] Eduardo Dee later tendered four (4) post-dated Interbank

checks aggregating P1,111,306.67 in favor of [Respondent] PNB, viz:

Upon presentment[,] however, x x x check nos. 03500087 and

03500088 dated September 29 and October 29, 1991 were dishonored
by the drawee bank and returned due [to] a stop payment order from
[petitioners].

On November 12, 1991, PNBs Mr. Carcamo wrote [Petitioner] Eduardo

Dee informing him that unless the dishonored checks [were] made
good, said PNB branch shall recall its recommendation to the Head
Office for the restructuring of the loan account and refer the matter
to its legal counsel for legal action.[] [Petitioners] did not heed
[respondents] warning and as a result[,] the PNB Dagupan Branch sent
demand letters to [Petitioner] NSBCI at its office address at 1611 ERDC
Building, E. Rodriguez Sr. Avenue, Quezon City[,] asking it to settle its
past due loan account.

[Petitioners] nevertheless failed to pay their loan obligations within

the [timeframe] given them and as a result, [Respondent]
PNB filed with the Provincial Sheriff of Pangasinan at Lingayen a
Petition for Sale under Act 3135, as amended[,] and Presidential
Decree No. 385 dated January 30, 1992.

The notice of extra-judicial sale of the mortgaged properties relating

to said PNBs [P]etition for [S]ale was published in the February 8, 15
and 22, 1992 issues of the Weekly Guardian, allegedly a newspaper of
general circulation in the Province of Pangasinan, including the cities
of Dagupan and San Carlos. In addition[,] copies of the notice were
posted in three (3) public places[,] and copies thereof furnished
[Petitioner] NSBCI at 1611 [ERDC Building,] E. Rodriguez Sr. Avenue,
Quezon City, [and at] 555 Shaw Blvd., Mandaluyong[, Metro Manila;]
and [Petitioner] Sps. Eduardo and Arcelita Dee at 213 Wilson St., San
Juan, Metro Manila.

On February 26, 1992, the Provincial Deputy Sheriff Cresencio F. Ferrer

of Lingayen, Pangasinan foreclosed the real estate mortgage and sold
at public auction the mortgaged properties of [petitioner-spouses,]
with [Respondent] PNB being declared the highest bidder for the
amount of P10,334,000.00.
On March 2, 1992, copies of the Sheriffs Certificate of Sale were sent
by registered mail to [petitioner] corporations address at 1611 [ERDC
Building,] E. Rodriguez Sr. Avenue, Quezon City and [petitioner-
spouses] address at 213 Wilson St., San Juan, Metro Manila.

On April 6, 1992, the PNB Dagupan Branch Manager sent a letter to

[petitioners] at their address at 1611 [ERDC Building,] E. Rodriguez Sr.
Avenue, Quezon City[,] informing them that the properties securing
their loan account [had] been sold at public auction, that the Sheriffs
Certificate of Sale had been registered with the Registry of Deeds of
Pangasinan on March 13, 1992[,] and that a period of one (1) year
therefrom [was] granted to them within which to redeem their
properties.

[Petitioners] failed to redeem their properties within the one-year

redemption period[,] and so [Respondent] PNB executed a [D]eed of
[A]bsolute [S]ale consolidating title to the properties in its name. TCT
Nos. 189935 to 189944 were later issued to [Petitioner] PNB by the
Registry of Deeds of Pangasinan.

On August 4, 1992, [Respondent] PNB informed [Petitioner] NSBCI that

the proceeds of the sale conducted on February 26, 1992 were not
sufficient to cover its total claim amounting to P12,506,476.43[,] and
thus demanded from the latter the deficiency of P2,172,476.43 plus
interest and other charges[,] until the amount [was] fully paid.

[Petitioners] refused to pay the above deficiency claim which

compelled [Respondent] PNB to institute the instant [C]omplaint for
the collection of its deficiency claim.

Finding that the PNB debt relief package automatically [granted] to

[Petitioner] NSBCI the benefits under the program, the court a quo
ruled in favor of [petitioners] in its Decision dated December 28, 1995,
the fallo of which reads:
 In view of the foregoing, the Court believes and so holds that
the [respondent] has no cause of action against the
[petitioners].

WHEREFORE, the case is hereby DISMISSED, without costs.[9]

On appeal, respondent assailed the trial courts Decision dismissing its deficiency
claim on the mortgage debt. It also challenged the ruling of the lower court that
Petitioner NSBCIs loan account was bloated, and that the inadequacy of the bid
price was sufficient to set aside the auction sale.

Ruling of the Court of Appeals

Reversing the trial court, the CA held that Petitioner NSBCI did not avail itself of
respondents debt relief package (DRP) or take steps to comply with the conditions
for qualifying under the program. The appellate court also ruled that entitlement
to the program was not a matter of right, because such entitlement was still subject
to the approval of higher bank authorities, based on their assessment of the
borrowers repayment capability and satisfaction of other requirements.

As to the misapplication of loan payments, the CA held that the subsidiary ledgers
of NSBCIs loan accounts with respondent reflected all the loan proceeds as well as
the partial payments that had been applied either to the principal or to the
interests, penalties and other charges. Having been made in the ordinary and usual
course of the banking business of respondent, its entries were presumed accurate,
regular and fair under Section 5(q) of Rule 131 of the Rules of Court. Petitioners
failed to rebut this presumption.

The increases in the interest rates on NSBCIs loan were also held to be authorized
by law and the Monetary Board and -- like the increases in penalty rates --
voluntarily and freely agreed upon by the parties in the Credit Agreements they
executed. Thus, these increases were binding upon petitioners.

However, after considering that two to three of Petitioner NSBCIs projects covered
by the loan were affected by the economic slowdown in the areas near the military
bases in the cities of Angeles and Olongapo, the appellate court annulled and
deleted the adjustment in penalty from 6 percent to 36 percent per annum. Not
only did respondent fail to demonstrate the existence of market forces and
economic conditions that would justify such increases; it could also have treated
petitioners request for restructuring as a request for availment of the
DRP. Consequently, the original penalty rate of 6 percent per annum was used to
compute the deficiency claim.

The auction sale could not be set aside on the basis of the inadequacy of the auction
price, because in sales made at public auction, the owner is given the right to
redeem the mortgaged properties; the lower the bid price, the easier it is to effect
redemption or to sell such right. The bid price of P10,334,000.00 vis--vis
respondents claim of P12,506,476.43 was found to be neither shocking nor
unconscionable.

The attorneys fees were also reduced by the appellate court from 10 percent to 1
percent of the total indebtedness. First, there was no extreme difficulty in an
extrajudicial foreclosure of a real estate mortgage, as this proceeding was merely
administrative in nature and did not involve a court litigation contesting the
proceedings prior to the auction sale. Second, the attorneys fees were exclusive of
all stipulated costs and fees. Third, such fees were in the nature of liquidated
damages that did not inure to respondents salaried counsel.

Respondent was also declared to have the unquestioned right to foreclose the Real
Estate Mortgage. It was allowed to recover any deficiency in the mortgage account
not realized in the foreclosure sale, since petitioner-spouses had agreed to be
solidarily liable for all sums due and payable to respondent.

Finally, the appellate court concluded that the extrajudicial foreclosure

proceedings and auction sale were valid for the following reasons: (1) personal
notice to the mortgagors, although unnecessary, was actually made; (2) the notice
of extrajudicial sale was duly published and posted; (3) the extrajudicial sale was
conducted through the deputy sheriff, under the direction of the clerk of court who
was concurrently the ex-oficio provincial sheriff and acting as agent of respondent;
(4) the sale was conducted within the province where the mortgaged properties
were located; and (5) such sale was not shown to have been attended by fraud.

Hence this Petition.[10]

 Issues

Petitioners submit the following issues for our consideration:

I. Whether or not the Honorable Court of Appeals correctly ruled

that petitioners did not avail of PNBs debt relief package and were
not entitled thereto as a matter of right.

II. Whether or not petitioners have adduced sufficient and convincing

evidence to overthrow the presumption of regularity and correctness
of the PNB entries in the subsidiary ledgers of the loan accounts of
petitioners.

III. Whether or not the Honorable Court of Appeals seriously erred in

not holding that the Respondent PNB bloated the loan account of
petitioner corporation by imposing interests, penalties and attorneys
fees without legal, valid and equitable justification.

IV. Whether or not the auction price at which the mortgaged

properties was sold was disproportionate to their actual fair
mortgage value.

V. Whether or not Respondent PNB is not entitled to recover the

deficiency in the mortgage account not realized in the foreclosure
sale, considering that:

A. Petitioners are merely guarantors of the mortgage

debt of petitioner corporation which has a separate
personality from the [petitioner-spouses].

B. The joint and solidary agreement executed by

[petitioner- spouses] are contracts of adhesion not
binding on them;

C. The NSBCI Board Resolution is not valid and binding

on [petitioner-spouses] because they were compelled
 to execute the said Resolution[;] otherwise[,]
Respondent PNB would not grant petitioner
corporation the loan;

D. The Respondent PNB had already in its possession

the properties of the [petitioner-spouses] which
served as a collateral to the loan obligation of
petitioner corporation[,] and to still allow Respondent
PNB to recover the deficiency claim amounting to a
very substantial amount of P2.1 million would
constitute unjust enrichment on the part of
Respondent PNB.

VI. Whether or not the extrajudicial foreclosure proceedings and

auction sale, including all subsequent proceedings[,] are null and void
for non-compliance with jurisdictional and other mandatory
requirements; whether or not the petition for extrajudicial
foreclosure of mortgage was filed prematurely; and whether or not
the finding of fraud by the trial court is amply supported by the
evidence on record.[11]

The foregoing may be summed up into two main issues: first, whether the loan
accounts are bloated; and second, whether the extrajudicial foreclosure and
subsequent claim for deficiency are valid and proper.

The Courts Ruling

The Petition is partly meritorious.

First Main Issue:

Bloated Loan Accounts

At the outset, it must be stressed that only questions of law[12] may be raised in a
petition for review on certiorari under Rule 45 of the Rules of Court. As a rule,
questions of fact cannot be the subject of this mode of appeal,[13] for [t]he Supreme
Court is not a trier of facts.[14] As exceptions to this rule, however, factual findings
of the CA may be reviewed on appeal[15] when, inter alia, the factual inferences are
manifestly mistaken;[16] the judgment is based on a misapprehension of facts;[17] or
the CA manifestly overlooked certain relevant and undisputed facts that, if properly
considered, would justify a different legal conclusion.[18] In the present case, these
exceptions exist in various instances, thus prompting us to take cognizance of
factual issues and to decide upon them in the interest of justice and in the exercise
of our sound discretion.[19]

Indeed, Petitioner NSBCIs loan accounts with respondent appear to be bloated with
some iniquitous imposition of interests, penalties, other charges and attorneys
fees. To demonstrate this point, the Court shall take up one by one the promissory
notes, the credit agreements and the disclosure statements.

Increases in Interest Baseless

Promissory Notes. In each drawdown, the Promissory Notes specified the interest
rate to be charged: 19.5 percent in the first, and 21.5 percent in the second and
again in the third. However, a uniform clause therein permitted respondent to
increase the rate within the limits allowed by law at any time depending on
whatever policy it may adopt in the future x x x,[20] without even giving prior notice
to petitioners. The Court holds that petitioners accessory duty to pay interest[21] did
not give respondent unrestrained freedom to charge any rate other than that which
was agreed upon. No interest shall be due, unless expressly stipulated in
writing.[22] It would be the zenith of farcicality to specify and agree upon rates that
could be subsequently upgraded at whim by only one party to the agreement.

The unilateral determination and imposition[23] of increased rates is violative of the

principle of mutuality of contracts ordained in Article 1308[24] of the Civil
Code.[25] One-sided impositions do not have the force of law between the parties,
because such impositions are not based on the parties essential equality.

Although escalation clauses[26] are valid in maintaining fiscal stability and retaining
the value of money on long-term contracts,[27] giving respondent an unbridled right
to adjust the interest independently and upwardly would completely take away
from petitioners the right to assent to an important modification in their
agreement[28] and would also negate the element of mutuality in their
contracts. The clause cited earlier made the fulfillment of the contracts dependent
exclusively upon the uncontrolled will[29] of respondent and was therefore
void. Besides, the pro forma promissory notes have the character of a contract
dadhsion,[30]where the parties do not bargain on equal footing, the weaker partys
[the debtors] participation being reduced to the alternative to take it or leave it.[31]

While the Usury Law[32] ceiling on interest rates was lifted by [Central Bank] Circular
No. 905,[33] nothing in the said 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.[34] In fact, we have declared nearly ten years ago that
neither this Circular nor PD 1684, which further amended the Usury
Law, authorized either party to unilaterally raise the interest rate without the
others consent.[35]

Moreover, a similar case eight years ago pointed out to the same respondent
(PNB) that borrowing signified a capital transfusion from lending institutions to
businesses and industries and was done for the purpose of stimulating their
growth; yet respondents continued unilateral and lopsided policy[36] of increasing
interest rates without the prior assent[37] of the borrower not only defeats this
purpose, but also deviates from this pronouncement. Although such increases are
not usurious, since the Usury Law is now legally inexistent[38] -- the interest
ranging from 26 percent to 35 percent in the statements of account[39] -- must be
equitably reduced for being iniquitous, unconscionable and exorbitant.[40] Rates
found to be iniquitous or unconscionable are void, as if it there were no express
contract thereon.[41] Above all, it is undoubtedly against public policy to charge
excessively for the use of money.[42]

It cannot be argued that assent to the increases can be implied either from the June
18, 1991 request of petitioners for loan restructuring or from their lack of response
to the statements of account sent by respondent. Such request does not indicate
any agreement to an interest increase; there can be no implied waiver of a right
when there is no clear, unequivocal and decisive act showing such
purpose.[43] Besides, the statements were not letters of information sent to secure
their conformity; and even if we were to presume these as an offer, there was no
acceptance. No one receiving a proposal to modify a loan contract, especially
interest -- a vital component -- is obliged to answer the proposal.[44]
Furthermore, respondent did not follow the stipulation in the Promissory Notes
providing for the automatic conversion of the portion that remained unpaid after
730 days -- or two years from date of original release -- into a medium-term loan,
subject to the applicable interest rate to be applied from the dates of original
release.[45]

In the first,[46] second[47] and third[48] Promissory Notes, the amount that remained
unpaid as of October 27, 1989, December 1989 and January 4, 1990 -- their
respective due dates -- should have been automatically converted by respondent
into medium-term loans on June 30, 1991, September 2, 1991, and September 7,
1991, respectively. And on this unpaid amount should have been imposed the same
interest rate charged by respondent on other medium-term loans; and the rate
applied from June 29, 1989, September 1, 1989 and September 6, 1989 -- their
respective original release -- until paid. But these steps were not taken. Aside from
sending demand letters, respondent did not at all exercise its option to enforce
collection as of these Notes due dates. Neither did it renew or extend the account.

In these three Promissory Notes, evidently, no complaint for collection was filed
with the courts. It was not until January 30, 1992 that a Petition for Sale of the
mortgaged properties was filed -- with the provincial sheriff, instead.[49] Moreover,
respondent did not supply the interest rate to be charged on medium-term loans
granted by automatic conversion. Because of this deficiency, we shall use the legal
rate of 12 percent per annum on loans and forbearance of money, as provided for
by CB Circular 416.[50]

Credit Agreements. Aside from the promissory notes, another main document
involved in the principal obligation is the set of credit agreements executed and
their annexes.
The first Credit Agreement[51] dated June 19, 1989 -- although offered and admitted
in evidence, and even referred to in the first Promissory Note -- cannot be given
weight.

First, it was not signed by respondent through its branch manager.[52] Apparently it
was surreptitiously acknowledged before respondents counsel, who unflinchingly
declared that it had been signed by the parties on every page, although
respondents signature does not appear thereon.[53]

Second, it was objected to by petitioners,[54] contrary to the trial courts

findings.[55] However, it was not the Agreement, but the revolving credit
line[56] of P5,000,000, that expired one year from the Agreements date of
implementation.[57]

Third, there was no attached annex that contained the General Conditions.[58] Even
the Acknowledgment did not allude to its existence.[59] Thus, no terms or conditions
could be added to the Agreement other than those already stated therein.

Since the first Credit Agreement cannot be given weight, the interest rate on the
first availment pegged at 3 percent over and above respondents prime rate[60] on
the date of such availment[61] has no bearing at all on the loan. After the first Notes
due date, the rate of 19 percent agreed upon should continue to be applied on the
availment, until its automatic conversion to a medium-term loan.

The second Credit Agreement[62] dated August 31, 1989, provided for interest --
respondents prime rate, plus the applicable spread[63] in effect as of the date of
each availment,[64] on a revolving credit line of P7,700,000[65] -- but did not state
any provision on its increase or decrease.[66] Consequently, petitioners could not be
made to bear interest more than such prime rate plus spread. The Court gives
weight to this second Credit Agreement for the following reasons.

First, this document submitted by respondent was admitted by

petitioners.[67] Again, contrary to their assertion, it was not the Agreement -- but
the credit line -- that expired one year from the Agreements date of
implementation.[68] Thus, the terms and conditions continued to apply, even if
drawdowns could no longer be made.

Second, there was no 7-page annex[69] offered in evidence that contained the
General Conditions,[70] notwithstanding the Acknowledgment of its existence by
respondents counsel. Thus, no terms or conditions could be appended to the
Agreement other than those specified therein.

Third, the 12-page General Conditions[71] offered and admitted in evidence had no
probative value. There was no reference to it in the Acknowledgment of the
Agreement; neither was respondents signature on any of the pages thereof. Thus,
the General Conditions stipulations on interest adjustment,[72] whether on a fixed
or a floating scheme, had no effect whatsoever on the Agreement. Contrary to the
trial courts findings,[73] the General Condition were correctly objected to by
petitioners.[74] The rate of 21.5 percent agreed upon in the second Note thus
continued to apply to the second availment, until its automatic conversion into a
medium-term loan.

The third Credit Agreement[75] dated September 5, 1989, provided for the same
rate of interest as that in the second Agreement. This rate was to be applied to
availments of an unadvised line of P300,000. Since there was no mention in the
third Agreement, either, of any stipulation on increases or decreases[76] in interest,
there would be no basis for imposing amounts higher than the prime rate plus
spread. Again, the 21.5 percent rate agreed upon would continue to apply to the
third availment indicated in the third Note, until such amount was automatically
converted into a medium-term loan.

The Court also finds that, first, although this document was admitted by
petitioners,[77] it was the credit line that expired one year from the implementation
of the Agreement.[78] The terms and conditions therein continued to apply, even if
availments could no longer be drawn after expiry.

Second, there was again no 7-page annex[79] offered that contained the General
Conditions,[80] regardless of the Acknowledgment by the same respondents counsel
affirming its existence. Thus, the terms and conditions in this Agreement relating
to interest cannot be expanded beyond that which was already laid down by the
parties.

Disclosure Statements. In the present case, the Disclosure Statements[81] furnished

by respondent set forth the same interest rates as those respectively indicated in
the Promissory Notes. Although no method of computation was provided showing
how such rates were arrived at, we will nevertheless take up the
Statementsseriatim in order to determine the applicable rates clearly.

As to the first Disclosure Statement on Loan/Credit Transaction[82] dated June 13,

1989, we hold that the 19.5 percent effective interest rate per annum[83] would
indeed apply to the first availment or drawdown evidenced by the first Promissory
Note. Not only was this Statement issued prior to the consummation of such
availment or drawdown, but the rate shown therein can also be considered
equivalent to 3 percent over and above respondents prime rate in effect. Besides,
respondent mentioned no other rate that it considered to be the prime rate
chargeable to petitioners. Even if we disregarded the related Credit Agreement, we
assume that this private transaction between the parties was fair and
regular,[84] and that the ordinary course of business was followed.[85]

As to the second Disclosure Statement on Loan/Credit Transaction[86] dated

September 2, 1989, we hold that the 21.5 percent effective interest rate per
annum[87] would definitely apply to the second availment or drawdown evidenced
by the second Promissory Note. Incidentally, this Statement was issued only after
the consummation of its related availment or drawdown, yet such rate can be
deemed equivalent to the prime rate plus spread, as stipulated in the
corresponding Credit Agreement. Again, we presume that this private transaction
was fair and regular, and that the ordinary course of business was followed. That
the related Promissory Note was pre-signed would also bolster petitioners claim
although, under cross-examination Efren Pozon -- Assistant Department Manager
I[88] of PNB, Dagupan Branch -- testified that the Disclosure Statements were the
basis for preparing the Notes.[89]

As to the third Disclosure Statement on Loan/Credit Transaction[90] dated

September 6, 1989, we hold that the same 21.5 percent effective interest rate per
annum[91] would apply to the third availment or drawdown evidenced by the third
Promissory Note. This Statement was made available to petitioner-spouses, only
after the related Credit Agreement had been executed, but simultaneously with the
consummation of the Statements related availment or drawdown. Nonetheless,
the rate herein should still be regarded as equivalent to the prime rate plus spread,
under the similar presumption that this private transaction was fair and regular and
that the ordinary course of business was followed.

In sum, the three disclosure statements, as well as the two credit agreements
considered by this Court, did not provide for any increase in the specified interest
rates. Thus, none would now be permitted. When cross-examined, Julia Ang-Lopez,
Finance Account Analyst II of PNB, Dagupan Branch, even testified that the bases
for computing such rates were those sent by the head office from time to time, and
not those indicated in the notes or disclosure statements.[92]

In addition to the preceding discussion, it is then useless to labor the point that the
increase in rates violates the impairment[93] clause of the Constitution,[94] because
the sole purpose of this provision is to safeguard the integrity of valid contractual
agreements against unwarranted interference by the State[95] in the form of
laws. Private individuals intrusions on interest rates is governed by statutory
enactments like the Civil Code.

Penalty, or Increases
Thereof, Unjustified

No penalty charges or increases thereof appear either in the Disclosure

Statements[96] or in any of the clauses in the second and the third Credit
Agreements[97] earlier discussed. While a standard penalty charge of 6 percent per
annum has been imposed on the amounts stated in all three Promissory Notes still
remaining unpaid or unrenewed when they fell due,[98] there is no stipulation
therein that would justify any increase in that charges. The effect, therefore, when
the borrower is not clearly informed of the Disclosure Statements -- prior to the
consummation of the availment or drawdown -- is that the lender will have no right
to collect upon such charge[99] or increases thereof, even if stipulated in the
Notes. The time is now ripe to give teeth to the often ignored forty-one-year old
Truth in Lending Act[100] and thus transform it from a snivelling paper tiger to a
growling financial watchdog of hapless borrowers.

Besides, we have earlier said that the Notes are contracts of adhesion; although
not invalid per se, any apparent ambiguity in the loan contracts -- taken as a whole
-- shall be strictly construed against respondent who caused it.[101] Worse, in the
statements of account, the penalty rate has again been unilaterally increased by
respondent to 36 percent without petitioners consent. As a result of its move,
such liquidated damages intended as a penalty shall be equitably reduced by the
Court to zilch[102] for being iniquitous or unconscionable.[103]

Although the first Disclosure Statement was furnished Petitioner NSBCI prior to the
execution of the transaction, it is not a contract that can be modified by the related
Promissory Note, but a mere statement in writing that reflects the true and
effective cost of loans from respondent. Novation can never be presumed,[104]and
the animus novandi must appear by express agreement of the parties, or by their
acts that are too clear and unequivocal to be mistaken.[105] To allow novation will
surely flout the policy of the State to protect its citizens from a lack of awareness
of the true cost of credit.[106]
With greater reason should such penalty charges be indicated in the second and
third Disclosure Statements, yet none can be found therein. While the charges are
issued after the respective availment or drawdown, the disclosure statements are
given simultaneously therewith. Obviously, novation still does not apply.

Other Charges Unwarranted

In like manner, the other charges imposed by respondent are not warranted. No
particular values or rates of service charge are indicated in the Promissory Notes or
Credit Agreements, and no total value or even the breakdown figures of such non-
finance charge are specified in the Disclosure Statements. Moreover, the provision
in the Mortgage that requires the payment of insurance and other charges is
neither made part of nor reflected in such Notes, Agreements, or Statements.[107]

Attorneys Fees Equitably Reduced

We affirm the equitable reduction in attorneys fees.[108] These are not an integral
part of the cost of borrowing, but arise only when collecting upon the Notes
becomes necessary. The purpose of these fees is not to give respondent a larger
compensation for the loan than the law already allows, but to protect it against any
future loss or damage by being compelled to retain counsel in-house or not -- to
institute judicial proceedings for the collection of its credit.[109] Courts have has the
power[110] to determine their reasonableness[111] based on quantum meruit[112] and
to reduce[113] the amount thereof if excessive.[114]

In addition, the disqualification argument in the Affidavit of Publication raised by

petitioners no longer holds water, inasmuch as Act 496[115] has repealed the
Spanish Notarial Law.[116] In the same vein, their engagement of their counsel in
another capacity concurrent with the practice of law is not prohibited, so long as
the roles being assumed by such counsel is made clear to the client.[117] The only
reason for this clarification requirement is that certain ethical considerations
operative in one profession may not be so in the other.[118]

Debt Relief Package

Not Availed Of

We also affirm the CAs disquisition on the debt relief package (DRP).
Respondents Circular is not an outright grant of assistance or extension of
payment,[119] but a mere offer subject to specific terms and conditions.
Petitioner NSBCI failed to establish satisfactorily that it had been seriously and
directly affected by the economic slowdown in the peripheral areas of the then US
military bases. Its allegations, devoid of any verification, cannot lead to a
supportable conclusion. In fact, for short-term loans, there is still a need to conduct
a thorough review of the borrowers repayment possibilities.[120]

Neither has Petitioner NSBCI shown enough margin of equity,[121] based on the
latest loan value of hard collaterals,[122] to be eligible for the package. Additional
accommodations on an unsecured basis may be granted only when regular
payment amortizations have been established, or when the merits of the credit
application would so justify.[123]

The branch managers recommendation to restructure or extend a total

outstanding loan not exceeding P8,000,000 is not final, but subject to the approval
of respondents Branches Department Credit Committee, chaired by its executive
vice-president.[124] Aside from being further conditioned on other pertinent policies
of respondent,[125] such approval nevertheless needs to be reported to its Board of
Directors for confirmation.[126] In fact, under the General Banking Law of
2000,[127] banks shall grant loans and other credit accommodations only in amounts
and for periods of time essential to the effective completion of operations to be
financed, consistent with safe and sound banking practices.[128] The Monetary
Board -- then and now -- still prescribes, by regulation, the conditions and
limitations under which banks may grant extensions or renewals of their loans and
other credit accommodations.[129]
Entries in Subsidiary Ledgers
Regular and Correct

Contrary to petitioners assertions, the subsidiary ledgers of respondent properly

reflected all entries pertaining to Petitioner NSBCIs loan accounts. In accordance
with the Generally Accepted Accounting Principles (GAAP) for the Banking
Industry,[130] all interests accrued or earned on such loans, except those that were
restructured and non-accruing,[131] have been periodically taken into
income.[132] Without a doubt, the subsidiary ledgers in a manual accounting system
are mere private documents[133] that support and are controlled by the general
ledger.[134] Such ledgers are neither foolproof nor standard in format, but are
periodically subject to audit. Besides, we go by the presumption that the recording
of private transactions has been fair and regular, and that the ordinary course of
business has been followed.

Second Main Issue:

Extrajudicial Foreclosure Valid, But
Deficiency Claims Excessive

Respondent aptly exercised its option to foreclose the mortgage,[135] after

petitioners had failed to pay all the Notes in full when they fell due. [136] The
extrajudicial sale and subsequent proceedings are therefore valid, but the alleged
deficiency claim cannot be recovered.
Auction Price Adequate

In the accessory contract[137] of real mortgage,[138] in which immovable property or

real rights thereto are used as security[139] for the fulfillment of the principal loan
obligation,[140] the bid price may be lower than the propertys fair market
value.[141] In fact, the loan value itself is only 70 percent of the appraised
value.[142] As correctly emphasized by the appellate court, a low bid price will make
it easier[143] for the owner to effect redemption[144] by subsequently reacquiring the
property or by selling the right to redeem and thus recover alleged losses. Besides,
the public auction sale has been regularly and fairly conducted,[145] there has been
ample authority to effect the sale,[146] and the Certificates of Title can be relied
upon. No personal notice[147] is even required,[148] because an extrajudicial
foreclosure is an action in rem, requiring only notice by publication and posting, in
order to bind parties interested in the foreclosed property.[149]

As no redemption[150] was exercised within one year after the date of registration
of the Certificate of Sale with the Registry of Deeds,[151] respondent -- being the
highest bidder -- has the right to a writ of possession, the final process that will
consummate the extrajudicial foreclosure. On the other hand, petitioner-spouses,
who are mortgagors herein, shall lose all their rights to the property.[152]

No Deficiency Claim Receivable

After the foreclosure and sale of the mortgaged property, the Real Estate Mortgage
is extinguished. Although the mortgagors, being third persons, are not liable for any
deficiency in the absence of a contrary stipulation,[153] the action for recovery of
such amount -- being clearly sureties to the principal obligation -- may still be
directed against them.[154] However, respondent may impose only the stipulated
interest rates of 19.5 percent and 21.5 percent on the respective availments --
subject to the 12 percent legal rate revision upon automatic conversion into
medium-term loans - plus 1 percent attorneys fees, without additional charges on
penalty, insurance or any increases thereof.

Accordingly, the excessive interest rates in the Statements of Account sent to

petitioners are reduced to 19.5 percent and 21.5 percent, as stipulated in the
Promissory Notes; upon loan conversion, these rates are further reduced to the
legal rate of 12 percent. Payments made by petitioners are pro-rated, the charges
on penalty and insurance eliminated, and the resulting total unpaid principal and
interest of P6,582,077.70 as of the date of public auction is then subjected to 1
percent attorneys fees. The total outstanding obligation is compared to the bid
price. On the basis of these rates and the comparison made, the deficiency claim
receivable amounting to P2,172,476.43 in fact vanishes. Instead, there is an
overpayment by more than P3 million, as shown in the following Schedules:
In the preparation of the above-mentioned schedules, these basic legal principles
were followed:

First, the payments were applied to debts that were already due.[155] Thus, when
the first payment was made and applied on January 5, 1990, all Promissory Notes
were already due.

Second, payments of the principal were not made until the interests had been
covered.[156] For instance, the first payment on January 15, 1990 had initially been
applied to all interests due on the notes, before deductions were made from their
respective principal amounts. The resulting decrease in interest balances served as
the bases for subsequent pro-ratings.

Third, payments were proportionately applied to all interests that were due and of
the same nature and burden.[157] This legal principle was the rationale for the pro-
rated computations shown on Schedule 4.
Fourth, since there was no stipulation on capitalization, no interests due and unpaid
were added to the principal; hence, such interests did not earn any additional
interest.[158] The simple -- not compounded -- method of interest
calculation[159] was used on all Notes until the date of public auction.

In fine, under solutio indebiti[160] or payment by mistake,[161] there is no deficiency

receivable in favor of PNB, but rather an excess claim or surplus[162] payable by
respondent; this excess should immediately be returned to petitioner-spouses or
their assigns -- not to mention the buildings and improvements[163] on and the fruits
of the property -- to the end that no one may be unjustly enriched or benefited
at the expense of another.[164] Such surplus is in the amount of P3,686,101.52,
computed as follows:

Joint and Solidary Agreement. Contrary to the contention of the petitioner-

spouses, their Joint and Solidary Agreement (JSA)[165] was indubitably a surety, not
a guaranty.[166] They consented to be jointly and severally liable with Petitioner
NSBCI -- the borrower -- not only for the payment of all sums due and payable in
favor of respondent, but also for the faithful and prompt performance of all the
terms and conditions thereof.[167] Additionally, the corporate secretary of
Petitioner NSBCI certified as early as February 23, 1989, that the spouses should
act as such surety.[168] But, their solidary liability should be carefully studied, not
sweepingly assumed to cover all availments instantly.

First, the JSA was executed on August 31, 1989. As correctly adverted to by
petitioners,[169] it covered only the Promissory Notes of P2,700,000 and P300,000
made after that date. The terms of a contract of suretyship undeniably determine
the suretys liability[170] and cannot extend beyond what is stipulated
therein.[171]Yet, the total amount petitioner-spouses agreed to be held liable for
was P7,700,000; by the time the JSA was executed, the first Promissory Note was
still unpaid and was thus brought within the JSAs ambit.[172]
Second, while the JSA included all costs, charges and expenses that respondent
might incur or sustain in connection with the credit documents,[173] only the
interest was imposed under the pertinent Credit Agreements. Moreover, the
relevant Promissory Notes had to be resorted to for proper valuation of the
interests charged.
Third, although the JSA, as a contract of adhesion, should be taken contra
proferentum against the party who may have caused any ambiguity therein, no
such ambiguity was found. Petitioner-spouses, who agreed to be accommodation
mortgagors,[174] can no longer be held individually liable for the entire onerous
obligation[175] because, as it turned out, it was respondent that still owed them.

To summarize, to give full force to the Truth in Lending Act, only the interest rates
of 19.5 percent and 21.5 percent stipulated in the Promissory Notes may be
imposed by respondent on the respective availments. After 730 days, the portions
remaining unpaid are automatically converted into medium-term loans at the legal
rate of 12 percent. In all instances, the simple method of interest computation is
followed. Payments made by petitioners are applied and pro-rated according to
basic legal principles. Charges on penalty and insurance are eliminated, and 1
percent attorneys fees imposed upon the total unpaid balance of the principal and
interest as of the date of public auction. The P2 million deficiency claim therefore
vanishes, and a refund of P3,686,101.52 arises.

WHEREFORE, this Petition is hereby PARTLY GRANTED. The Decision of the Court
of Appeals is AFFIRMED, with the MODIFICATION that PNB is ORDERED to refund
the sum of P3,686,101.52 representing the overcollection computed above, plus
interest thereon at the legal rate of six percent (6%) per annum from the filing of
the Complaint until the finality of this Decision. After this Decision becomes final
and executory, the applicable rate shall be twelve percent (12%) per annum until
its satisfaction. No costs. SO ORDERED.

ARTICLE 1308
SAMPAGUITA BUILDERS v PNB
Mini digest: Sampaguita loaned money from PNB. PNB unilaterally increased rates of interest in
the loan w/o informing Sampaguita. PNB claimed they were authorized to do it as there was a
clause in the agreement that they may do so. Besides, Usury law was no longer in force = SC said
NO! PNB cannot do so; it will violate mutuality of contracts under 1308. Besides, SC may
intervene when amount of interest is unconscionable.
Facts:
Sampaguita secured a loan from PNB in an aggregate amount of 8M pesos, mortgaging the
properties of Sampaguita’s president and chairman of the board. Sampaguita also executed
several promissory notes due on different dates (payment dates). The first promissory note had
19.5% interest rate. The 2nd and 3rd had 21.5%. a uniform clause therein permitted PNB to
increase the rate “within the limits allowed by law at any time depending on whatever policy it
may adopt in the future x x x,” without even giving prior notice to petitioners. There was also a
clause in the promissory note that stated that if the same is not paid 2 years after release then it
shall be converted to a medium term loan – and the interest rate for such loan would apply.

Later on, Sampaguita defaulted on its payments and failed to comply with obligations on
promissory notes. Sampaguita thus requested for a 90 day extension to pay the loan. Again they
defaulted, so they asked for loan restructuring. It partly paid the loan and promised to pay the
balance later on. AGAIN they failed to pay so PNB extrajudicially foreclosed the mortgaged
properties. It was sold for 10M. PNB claimed that Sampaguita owed it 12M so they filed a case in
court asking sampaguita to pay for deficiency.

RTC found that Sampaguita was automatically entitled to the debt relief package of PNB and
ruled that the latter had no cause of action against the former. CA reversed, saying Sampaguita
was not entitled, thus ordered them to pay the deficiency – Appeal = Went to SC. Sampaguita
claims the loan was bloated so they don’t really owe PNB anymore, but it just overcharged them!

Issues/Ruling:
W/N the loan accounts are bloated: YES. There is no deficiency; there is actually an overpayment
of more than 3M based on the computation of the SC.
Whether PNB could unilaterally increase interest rates: NO

Ratio:
Sampaguita’s accessory duty to pay interest did not give PNB unrestrained freedom to charge
any rate other than that which was agreed upon. No interest shall be due, unless expressly
stipulated in writing. It would be the zenith of farcicality to specify and agree upon rates that
could be subsequently upgraded at whim by only one party to the agreement.

The “unilateral determination and imposition” of increased rates is “violative of the principle of
mutuality of contracts ordained in Article 1308 of the Civil Code.” One-sided impositions do not
have the force of law between the parties, because such impositions are not based on the parties’
essential equality.

Although escalation clauses are valid in maintaining fiscal stability and retaining the value of
money on long-term contracts, giving respondent an unbridled right to adjust the interest
independently and upwardly would completely take away from petitioners the “right to assent
to an important modification in their agreement” and would also negate the element of
mutuality in their contracts. The clause cited earlier made the fulfillment of the contracts
“dependent exclusively upon the uncontrolled will” of respondent and was therefore void.
Besides, the pro forma promissory notes have the character of a contract d’adhésion, “where the
parties do not bargain on equal footing, the weaker party’s [the debtor’s] participation being
reduced to the alternative ‘to take it or leave it.’”

Circular that lifted the ceiling of interest rates of usury law did not authorize either party to
unilaterally raise the interest rate without the other’s consent.

the interest ranging from 26 percent to 35 percent in the statements of account -- “must be
equitably reduced for being iniquitous, unconscionable and exorbitant.” Rates found to be
iniquitous or unconscionable are void, as if it there were no express contract thereon. Above all,
it is undoubtedly against public policy to charge excessively for the use of money.

It cannot be argued that assent to the increases can be implied either from the June 18, 1991
request of petitioners for loan restructuring or from their lack of response to the statements of
account sent by respondent. Such request does not indicate any agreement to an interest
increase; there can be no implied waiver of a right when there is no clear, unequivocal and
decisive act showing such purpose. Besides, the statements were not letters of information sent
to secure their conformity; and even if we were to presume these as an offer, there was no
acceptance. No one receiving a proposal to modify a loan contract, especially interest -- a vital
component -- is “obliged to answer the proposal.”

Besides, PNB did not comply with its own stipulation that should the loan not be paid 2 years
after release of money then it shall be converted to a medium term loan.

*Court applied 12% interest rate instead for being a forbearance of money

(there were some pieces of evidence presented by PNB in court that sampaguita objected to.
Lower courts overruled the objections but SC said the objections were correct and the evidence
should not have been admitted. i.e. contract wasn’t signed by the parties, a part of the contract
wasn’t properly annexed/no reference was made in the main contract.)

In addition to the preceding discussion, it is then useless to labor the point that the increase in
rates violates the impairment clause of the Constitution, because the sole purpose of this
provision is to safeguard the integrity of valid contractual agreements against unwarranted
interference by the State in the form of laws. Private individuals’ intrusions on interest rates is
governed by statutory enactments like the Civil Code
 13. Prudential Bank and Trust Company Abasolo GR No. 186738,
September 27, 2010

G.R. No. 186738 September 27, 2010

PRUDENTIAL BANK AND TRUST COMPANY (now BANK OF THE

PHILIPPINE ISLANDS,1) Petitioner,
vs.
LIWAYWAY ABASOLO, Respondent.

DECISION

CARPIO MORALES, J.:

Leonor Valenzuela-Rosales inherited two parcels of land situated in

Palanan, Sta. Cruz, Laguna (the properties), registered as Original
Certificates of Title Nos. RO-527 and RO-528. After she passed away, her
heirs executed on June 14, 1993 a Special Power of Attorney (SPA) in
favor of Liwayway Abasolo (respondent) empowering her to sell the
properties.2

Sometime in 1995, Corazon Marasigan (Corazon) wanted to buy the

properties which were being sold for ₱2,448,960, but as she had no
available cash, she broached the idea of first mortgaging the properties to
petitioner Prudential Bank and Trust Company (PBTC), the proceeds of
which would be paid directly to respondent. Respondent agreed to the
proposal.

On Corazon and respondent’s consultation with PBTC’s Head Office, its

employee, Norberto Mendiola (Mendiola), allegedly advised respondent to
issue an authorization for Corazon to mortgage the properties, and for her
(respondent) to act as one of the co-makers so that the proceeds could be
released to both of them.

To guarantee the payment of the property, Corazon executed on August

25, 1995 a Promissory Note for ₱2,448,960 in favor of respondent.

By respondent’s claim, in October 1995, Mendiola advised her to transfer

the properties first to Corazon for the immediate processing of Corazon’s
loan application with assurance that the proceeds thereof would be paid
directly to her (respondent), and the obligation would be reflected in a bank
guarantee.

Heeding Mendiola’s advice, respondent executed a Deed of Absolute Sale

over the properties in favor of Corazon following which or on December 4,
1995, Transfer Certificates of Title Nos. 164159 and 164160 were issued in
the name of Corazon.

Corazon’s application for a loan with PBTC’s Tondo Branch was approved
on December 1995. She thereupon executed a real estate mortgage
covering the properties to secure the payment of the loan. In the absence
of a written request for a bank guarantee, the PBTC released the proceeds
of the loan to Corazon.

Respondent later got wind of the approval of Corazon’s loan application

and the release of its proceeds to Corazon who, despite repeated
demands, failed to pay the purchase price of the properties.

Respondent eventually accepted from Corazon partial payment in kind

consisting of one owner type jeepney and four passenger jeepneys,3 plus
installment payments, which, by the trial court’s computation, totaled
₱665,000.

In view of Corazon’s failure to fully pay the purchase price, respondent filed
a complaint for collection of sum of money and annulment of sale and
mortgage with damages, against Corazon and PBTC (hereafter petitioner),
before the Regional Trial Court (RTC) of Sta. Cruz, Laguna.4

In her Answer,5 Corazon denied that there was an agreement that the
proceeds of the loan would be paid directly to respondent. And she claimed
that the vehicles represented full payment of the properties, and had in fact
overpaid ₱76,040.

Petitioner also denied that there was any arrangement between it and
respondent that the proceeds of the loan would be released to her.6 It
claimed that it "may process a loan application of the registered owner of
the real property who requests that proceeds of the loan or part thereof be
payable directly to a third party [but] the applicant must submit a letter
request to the Bank."7
On pre-trial, the parties stipulated that petitioner was not a party to the
contract of sale between respondent and Corazon; that there was no
written request that the proceeds of the loan should be paid to respondent;
and that respondent received five vehicles as partial payment of the
properties.8

Despite notice, Corazon failed to appear during the trial to substantiate her
claims.

By Decision of March 12, 2004,9 Branch 91 of the Sta. Cruz, Laguna RTC
rendered judgment in favor of respondent and against Corazon who was
made directly liable to respondent, and against petitioner who was made
subsidiarily liable in the event that Corazon fails to pay. Thus the trial court
disposed:

WHEREFORE, premises considered, finding the plaintiff has established

her claim against the defendants, Corazon Marasigan and Prudential Bank
and Trust Company, judgment is hereby rendered in favor of the plaintiff
ordering:

Defendant Corazon Marasigan to pay the plaintiff the amount of

P1,783,960.00 plus three percent (3%) monthly interest per month from
August 25, 1995 until fully paid. Further, to pay the plaintiff the sum
equivalent to twenty percent five [sic] (25%) of P1,783,960.00 as attorney’s
fees.

Defendant Prudential Bank and Trust Company to pay the plaintiff the
amount of P1,783,960.00 or a portion thereof plus the legal rate of interest
per annum until fully paid in the event that Defendant Corazon
Marasigan fails to pay the said amount or a portion thereof.

Other damages claimed not duly proved are hereby dismissed.

So Ordered.10 (emphasis in the original; underscoring partly in the original,

partly supplied)

In finding petitioner subsidiarily liable, the trial court held that petitioner
breached its understanding to release the proceeds of the loan to
respondent:
Liwayway claims that the bank should also be held responsible for breach
of its obligation to directly release to her the proceeds of the loan or part
thereof as payment for the subject lots. The evidence shows that her claim
is valid. The Bank had such an obligation as proven by evidence. It failed to
rebut the credible testimony of Liwayway which was given in a frank,
spontaneous, and straightforward manner and withstood the test of
rigorous cross-examination conducted by the counsel of the Bank. Her
credibility is further strengthened by the corroborative testimony of Miguela
delos Reyes who testified that she went with Liwayway to the bank for
several times. In her presence, Norberto Mendiola, the head of the loan
department, instructed Liwayway to transfer the title over the subject lots to
Corazon to facilitate the release of the loan with the guarantee that
Liwayway will be paid upon the release of the proceeds.

Further, Liwayway would not have executed the deed of sale in favor of
Corazon had Norberto Mendiola did not promise and guarantee that the
proceeds of the loan would be directly paid to her. Based on ordinary
human experience, she would not have readily transferred the title over the
subject lots had there been no strong and reliable guarantee. In this case,
what caused her to transfer title is the promise and guarantee made by
Norberto Mendiola that the proceeds of the loan would be directly paid to
her. 11 (emphasis underscoring supplied)

On appeal, the Court of Appeals¸ by Decision of January 14,

200812, affirmed the trial court’s decision with modification on the amount
of the balance of the purchase price which was reduced from ₱1,783,960
to ₱1,753,960. It disposed:

WHEREFORE, premises considered, the assailed Decision dated March

12, 2004 of the Regional Trial Court of Sta. Cruz, Laguna, Branch 91,
is AFFIRMED WITH MODIFICATION as to the amount to be paid which
is P1,753,960.00.

SO ORDERED.13 (emphasis in the original; underscoring supplied)

Petitioner’s motion for reconsideration having been denied by the appellate

court by Resolution of February 23, 2009, the present petition for review
was filed.

The only issue petitioner raises is whether it is subsidiarily liable.

The petition is meritorious.

In the absence of a lender-borrower relationship between petitioner and

Liwayway, there is no inherent obligation of petitioner to release the
proceeds of the loan to her.

To a banking institution, well-defined lending policies and sound lending

practices are essential to perform its lending function effectively and
minimize the risk inherent in any extension of credit.

Thus, Section X302 of the Manual of Regulations for Banks provides:

X-302. To ensure that timely and adequate management action is taken to

maintain the quality of the loan portfolio and other risk assets and that
adequate loss reserves are set up and maintained at a level sufficient to
absorb the loss inherent in the loan portfolio and other risk assets, each
bank shall establish a system of identifying and monitoring existing or
potential problem loans and other risk assets and of evaluating credit
policies vis-à-vis prevailing circumstances and emerging portfolio trends.
Management must also recognize that loss reserve is a stabilizing factor
and that failure to account appropriately for losses or make adequate
provisions for estimated future losses may result in misrepresentation of
the bank’s financial condition.

In order to identify and monitor loans that a bank has extended, a system of
documentation is necessary. Under this fold falls the issuance by a bank of
a guarantee which is essentially a promise to repay the liabilities of a
debtor, in this case Corazon. It would be contrary to established banking
practice if Mendiola issued a bank guarantee, even if no request to that
effect was made.

The principle of relativity of contracts in Article 1311 of the Civil Code

supports petitioner’s cause:

Art. 1311. Contracts take effect only between the parties, their assigns and
heirs, except in case where the rights and obligations arising from the
contract are not transmissible by their nature, or by stipulation or by
provision of law. The heir is not liable beyond the value of the property he
received from the decedent.
If a contract should contain some stipulation in favor of a third person, he
may demand its fulfillment provided he communicated his acceptance to
the obligor before its revocation. A mere incidental benefit or interest of a
person is not sufficient. The contracting parties must have clearly and
deliberately conferred a favor upon a third person. (underscoring supplied)

For Liwayway to prove her claim against petitioner, a clear and deliberate
act of conferring a favor upon her must be present. A written request would
have sufficed to prove this, given the nature of a banking business, not to
mention the amount involved.

Since it has not been established that petitioner had an obligation to

Liwayway, there is no breach to speak of. Liwayway’s claim should only be
directed against Corazon. Petitioner cannot thus be held subisidiarily liable.

To the Court, Liwayway did not rely on Mendiola’s representations, even if

he indeed made them. The contract for Liwayway to sell to Corazon was
perfected from the moment there was a meeting of minds upon the
properties-object of the contract and upon the price. Only the source of the
funds to pay the purchase price was yet to be resolved at the time the two
inquired from Mendiola. Consider Liwayway’s testimony:

Q: We are referring to the promissory note which you aforementioned a

while ago, why did this promissory note come about?

A: Because the negotiation was already completed, sir, and the deed of
sale will have to be executed, I asked the defendant (Corazon) to execute
the promissory note first before I could execute a deed of absolute sale, for
assurance that she really pay me, sir.14 (emphasis and underscoring
supplied)

That it was on Corazon’s execution of a promissory note that prompted

Liwayway to finally execute the Deed of Sale is thus clear.

The trial Court’s reliance on the doctrine of apparent authority – that the
principal, in this case petitioner, is liable for the obligations contracted by its
agent, in this case Mendiola, – does not lie. Prudential Bank v. Court of
Appeals15instructs:

[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 perpetuate
fraud upon his principal or some person, for his own ultimate
benefit.16 (underscoring supplied)

The onus probandi that attempt to commit fraud attended petitioner’s

employee Mendiola’s acts and that he abused his authority lies on
Liwayway. She, however, failed to discharge the onus. It bears noting that
Mendiola was not privy to the approval or disallowance of Corazon’s
application for a loan nor that he would benefit by the approval thereof.

Aside from Liwayway’s bare allegations, evidence is wanting to show that

there was collusion between Corazon and Mendiola to defraud her. Even in
Liwayway’s Complaint, the allegation of fraud is specifically directed
against Corazon.17

IN FINE, Liwayway’s cause of action lies against only Corazon.

WHEREFORE, the Decision of January 14, 2008 of the Court of Appeals,

in so far as it holds petitioner, Prudential Bank and Trust Company (now
Bank of the Philippine Islands), subsidiary liable in case its co-defendant
Corazon Marasigan, who did not appeal the trial court’s decision, fails to
pay the judgment debt, is REVERSED and SET ASIDE. The complaint
against petitioner is accordingly DISMISSED.

SO ORDERED.

14. Banco-De Oro – EPCI, inc vs JAPRL Development Corporation

GR No. 179901, April 14, 2008

G.R. No. 179901 April 14, 2008

BANCO DE ORO-EPCI, INC.,* petitioner,

vs.
JAPRL DEVELOPMENT CORPORATION, RAPID FORMING
CORPORATION and JOSE U. AROLLADO,respondents.
 DECISION

CORONA, J.:

This petition for review on certiorari1 seeks to set aside the decision2 of the
Court of Appeals (CA) in CA-G.R. SP No. 95659 and its resolution3 denying
reconsideration.

After evaluating the financial statements of respondent JAPRL

Development Corporation (JAPRL) for fiscal years 1998, 1999 and
2000,4 petitioner Banco de Oro-EPCI, Inc. extended credit facilities to it
amounting to P230,000,0005 on March 28, 2003. Respondents Rapid
Forming Corporation (RFC) and Jose U. Arollado acted as JAPRL's
sureties.

Despite its seemingly strong financial position, JAPRL defaulted in the

payment of four trust receipts soon after the approval of its loan.6 Petitioner
later learned from MRM Management, JAPRL's financial adviser, that
JAPRL had altered and falsified its financial statements. It allegedly bloated
its sales revenues to post a big income from operations for the concerned
fiscal years to project itself as a viable investment.7 The information
alarmed petitioner. Citing relevant provisions of the Trust Receipt
Agreement,8 it demanded immediate payment of JAPRL's outstanding
obligations amounting to P194,493,388.98.9

SP Proc. No. Q-03-064

On August 30, 2003, JAPRL (and its subsidiary, RFC) filed a petition for
rehabilitation in the Regional Trial Court (RTC) of Quezon City, Branch 90
(Quezon City RTC).10 It disclosed that it had been experiencing a decline in
sales for the three preceding years and a staggering loss in 2002.11

Because the petition was sufficient in form and substance, a stay

order12 was issued on September 28, 2003.13However, the proposed
rehabilitation plan for JAPRL and RFC was eventually rejected by the
Quezon City RTC in an order dated May 9, 2005.14

Civil Case No. 03-991

Because JAPRL ignored its demand for payment, petitioner filed a

complaint for sum of money with an application for the issuance of a writ of
preliminary attachment against respondents in the RTC of Makati City,
Branch 145 (Makati RTC) on August 21, 2003.15 Petitioner essentially
asserted that JAPRL was guilty of fraud because it (JAPRL) altered and
falsified its financial statements.16

The Makati RTC subsequently denied the application (for the issuance of a
writ of preliminary attachment) for lack of merit as petitioner was unable to
substantiate its allegations. Nevertheless, it ordered the service of
summons on respondents.17 Pursuant to the said order, summonses were
issued against respondents and were served upon them.

Respondents moved to dismiss the complaint due to an allegedly invalid

service of summons.18 Because the officer's return stated that an
"administrative assistant" had received the summons,19 JAPRL and RFC
argued that Section 11, Rule 14 of the Rules of Court20 contained an
exclusive list of persons on whom summons against a corporation must be
served.21 An "administrative assistant" was not one of them. Arollado, on
the other hand, cited Section 6, Rule 14 thereof22 which mandated personal
service of summons on an individual defendant.23

The Makati RTC, in its October 10, 2005 order,24 noted that because
corporate officers are often busy, summonses to corporations are usually
received only by administrative assistants or secretaries of corporate
officers in the regular course of business. Hence, it denied the motion for
lack of merit.

Respondents moved for reconsideration25 but withdrew it before the Makati

RTC could resolve the matter.26

RTC SEC Case No. 68-2008-C

On February 20, 2006, JAPRL (and its subsidiary, RFC) filed a petition for
rehabilitation in the RTC of Calamba, Laguna, Branch 34 (Calamba RTC).
Finding JAPRL's petition sufficient in form and in substance, the Calamba
RTC issued a stay order27 on March 13, 2006.

In view of the said order, respondents hastily moved to suspend the

proceedings in Civil Case No. 03-991 pending in the Makati RTC.28

On July 7, 2006, the Makati RTC granted the motion with regard to JAPRL
and RFC but ordered Arollado to file an answer. It ruled that, because he
was jointly and solidarily liable with JAPRL and RFC, the proceedings
against him should continue.29 Respondents moved for
reconsideration30 but it was denied.31

On August 11, 2006, respondents filed a petition for certiorari32 in the CA

alleging that the Makati RTC committed grave abuse of discretion in issuing
the October 10, 2005 and July 7, 2006 orders.33 They asserted that the
court did not acquire jurisdiction over their persons due to defective service
of summons. Thus, the Makati RTC could not hear the complaint for sum of
money.34

In its June 7, 2007 decision, the CA held that because the summonses
were served on a mere administrative assistant, the Makati RTC never
acquired jurisdiction over respondents. Thus, it granted the petition.35

Petitioner moved for reconsideration but it was denied.36 Hence, this

petition.

Petitioner asserts that respondents maliciously evaded the service of

summonses to prevent the Makati RTC from acquiring jurisdiction over their
persons. Furthermore, they employed bad faith to delay proceedings by
cunningly exploiting procedural technicalities to avoid the payment of their
obligations.37

We grant the petition.

Respondents, in their petition for certiorari in the CA, questioned the

jurisdiction of the Makati RTC over their persons (i.e., whether or not the
service of summons was validly made). Therefore, it was only the October
10, 2005 order of the said trial court which they in effect
assailed.38 However, because they withdrew their motion for
reconsideration of the said order, it became final. Moreover, the petition
was filed 10 months and 1 day after the assailed order was issued by the
Makati RTC,39 way past the 60 days allowed by the Rules of Court. For
these reasons, the said petition should have been dismissed outright by the
CA.

More importantly, when respondents moved for the suspension of

proceedings in Civil Case No. 03-991 before the Makati RTC (on the basis
of the March 13, 2006 order of the Calamba RTC), they waived whatever
defect there was in the service of summons and were deemed to have
submitted themselves voluntarily to the jurisdiction of the Makati RTC.40

We withhold judgment for the moment on the July 7, 2006 order of the
Makati RTC suspending the proceedings in Civil Case No. 03-991 insofar
as JAPRL and RFC are concerned. Under the Interim Rules of Procedure
on Corporate Rehabilitation, a stay order defers all actions or claims
against the corporation seeking rehabilitation41from the date of its issuance
until the dismissal of the petition or termination of the rehabilitation
proceedings.42

The Makati RTC may proceed to hear Civil Case No. 03-991 only against
Arollado if there is no ground to go after JAPRL and RFC (as will later be
discussed). A creditor can demand payment from the surety solidarily liable
with the corporation seeking rehabilitation.43

Respondents abused procedural technicalities (albeit unsuccessfully) for

the sole purpose of preventing, or at least delaying, the collection of their
legitimate obligations. Their reprehensible scheme impeded the speedy
dispensation of justice. More importantly, however, considering the amount
involved, respondents utterly disregarded the significance of a stable and
efficient banking system to the national economy.44

Banks are entities engaged in the lending of funds obtained through

deposits45 from the public.46 They borrow the public's excess money
(i.e., deposits) and lend out the same.47 Banks therefore redistribute wealth
in the economy by channeling idle savings to profitable investments.

Banks operate (and earn income) by extending credit facilities financed

primarily by deposits from the public.48 They plough back the bulk of said
deposits into the economy in the form of loans.49 Since banks deal with the
public's money, their viability depends largely on their ability to return those
deposits on demand. For this reason, banking is undeniably imbued with
public interest. Consequently, much importance is given to sound lending
practices and good corporate governance.50

Protecting the integrity of the banking system has become, by large, the
responsibility of banks. The role of the public, particularly individual
borrowers, has not been emphasized. Nevertheless, we are not unaware of
the rampant and unscrupulous practice of obtaining loans without intending
to pay the same.
In this case, petitioner alleged that JAPRL fraudulently altered and falsified
its financial statements in order to obtain its credit facilities. Considering the
amount of petitioner's exposure in JAPRL, justice and fairness dictate that
the Makati RTC hear whether or not respondents indeed committed fraud
in securing the credit accomodation.

A finding of fraud will change the whole picture. In this event, petitioner can
use the finding of fraud to move for the dismissal of the rehabilitation case
in the Calamba RTC.

The protective remedy of rehabilitation was never intended to be a refuge

of a debtor guilty of fraud.

Meanwhile, the Makati RTC should proceed to hear Civil Case No. 03-991
against the three respondents guided by Section 40 of the General Banking
Law which states:

Section 40. Requirement for Grant of Loans or Other Credit

Accommodations. Before granting a loan or other credit
accommodation, a bank must ascertain that the debtor is capable of
fulfilling his commitments to the bank.

Towards this end, a bank may demand from its credit applicants a
statement of their assets and liabilities and of their income and
expenditures and such information as may be prescribed by law or by
rules and regulations of the Monetary Board to enable the bank to
properly evaluate the credit application which includes the
corresponding financial statements submitted for taxation purposes to
the Bureau of Internal Revenue. Should such statements prove to
be false or incorrect in any material detail, the bank may
terminate any loan or credit accommodation granted on the
basis of said statements and shall have the right to demand
immediate repayment or liquidation of the obligation.

In formulating the rules and regulations under this Section, the

Monetary Board shall recognize the peculiar characteristics of
microfinancing, such as cash flow-based lending to the basic sectors
that are not covered by traditional collateral. (emphasis supplied)

Under this provision, banks have the right to annul any credit
accommodation or loan, and demand the immediate payment thereof, from
borrowers proven to be guilty of fraud. Petitioner would then be entitled to
the immediate payment of P194,493,388.98 and other appropriate
damages.51

Finally, considering that respondents failed to pay the four trust receipts,
the Makati City Prosecutor should investigate whether or not there is
probable cause to indict respondents for violation of Section 13 of the Trust
Receipts Law.52

ACCORDINGLY, the petition is hereby GRANTED. The June 7, 2007

decision and August 31, 2007 resolution of the Court of Appeals in CA-G.R.
SP No. 95659 are REVERSED and SET ASIDE.

The Regional Trial Court of Makati City, Branch 145 is ordered to proceed
expeditiously with the trial of Civil Case No. 03-991 with regard to
respondent Jose U. Arollado, and the other respondents if warranted.

SO ORDERED.

BANCO DE ORO-EPCI, INC., Petitioner vs. JAPRL DEVELOPMENT

CORPORATION, RAPID FORMING CORPORATION and JOSE U.
AROLLADO, Respondents. G.R. No. 179901, April 14, 2008, CORONA, J.
Key Doctrine: Banks have the right to annul any credit accommodation
or loan, and demand the immediate payment thereof, from borrowers
proven to be guilty of fraud. Facts: Petitioner Banco de Oro-EPCI, Inc.
extended credit facilities to JAPRL Development Corporation (JAPRL)
amounting to P230,000,000 after evaluating the latter’s financial
statements for fiscal years 1998, 1999 and 2000. Respondents Rapid
Forming Corporation (RFC) and Jose Arollado acted as JAPRLs sureties.
Despite its seemingly strong financial position, JAPRL defaulted in the
payment of four trust receipts soon after the approval of its loan. BDO-
EPCI later learned from MRM Management, JAPRLs financial adviser,
that JAPRL had altered and falsified its financial statements. It allegedly
bloated its sales revenues to post a big income from operations for the
concerned fiscal years to project itself as a viable investment. The
information alarmed petitioner. Citing relevant provisions of the Trust
Receipt Agreement, it demanded immediate payment of JAPRLs
outstanding obligations amounting to P194,493,388.98. JAPRL (and its
subsidiary, RFC) filed a petition for rehabilitation in the Regional Trial
Court (RTC) of Quezon City and disclosed that it had been experiencing
a decline in sales for the three preceding years and a staggering loss in
2002. As the petition was sufficient in form and substance, a stay order
was issued. However, the proposed rehabilitation plan for JAPRL and
RFC was eventually rejected by the Quezon City RTC. Petitioner BDO-
EPCI filed a complaint for sum of money with an application for the
issuance of a writ of preliminary attachment against respondents in
Makati RTC since JAPRL is ignoring its demand for payment. BDO-EPCI
asserted that JAPRL was guilty of fraud because it (JAPRL) altered and
falsified its financial statements. The Makati RTC subsequently denied
the application (for the issuance of a writ of preliminary attachment)
for lack of merit as petitioner was unable to substantiate its allegations.
Nevertheless, it ordered the service of summons on respondents.
Respondents moved to dismiss the complaint due to an allegedly
invalid service of summons. Because the officers return stated that an
administrative assistant had received the summons, JAPRL and RFC
argued that Section 11, Rule 14 of the Rules of Court contained an
exclusive list of persons on whom summons against a corporation must
be served. An administrative assistant was not one of them. Arollado,
on the other hand, cited Section 6, Rule 14 thereof which mandated
personal service of summons on an individual defendant. Makati RTC
noted that because corporate officers are often busy, summonses to
corporations are usually received only by administrative assistants or
secretaries of corporate officers in the regular course of business.
Hence, it denied the motion for lack of merit. JAPRL (and its subsidiary,
RFC) filed a petition for rehabilitation in the RTC of Calamba, Laguna,
Branch 34 (Calamba RTC). Finding JAPRLs petition sufficient in form and
in substance, the Calamba RTC issued a stay order. respondents hastily
moved to suspend the proceedings in Civil Case No. 03-991 pending in
the Makati RTC. Makati RTC granted the motion with regard to JAPRL
and RFC but ordered Arollado to file an answer. It ruled that, because
he was jointly and solidarily liable with JAPRL and RFC, the proceedings
against him should continue. Respondents moved for reconsideration
but it was denied. CA granted the petition and held that because the
summonses were served on a mere administrative assistant, the Makati
RTC never acquired jurisdiction over respondents. Respondents filed a
petition for certiorari in the CA and asserted that the Makati RTC
committed grave abuse of discretion as it did not acquire jurisdiction
over their persons due to defective service of summons. Thus, the
Makati RTC could not hear the complaint for sum of money. BDO-EPCI
asserts that respondents maliciously evaded the service of summonses
to prevent the -hmnMakati RTC from acquiring jurisdiction over their
persons. Furthermore, they employed bad faith to delay proceedings by
cunningly exploiting procedural technicalities to avoid the payment of
their obligations. Petitioner moved for reconsideration but it was
denied. Hence, this petition. Issue: Whether or not the bank (BPO-EPCI)
may demand the immediate payment of JAPRL’s outstanding
obligations. Ruling: YES. When respondents moved for the suspension
of proceedings in Civil Case No. 03-991 before the Makati RTC (on the
basis of the March 13, 2006 order of the Calamba RTC), they waived
whatever defect there was in the service of summons and were
deemed to have submitted themselves voluntarily to the jurisdiction of
the Makati RTC. Under the Interim Rules of Procedure on Corporate
Rehabilitation, a stay order defers all actions or claims against the
corporation seeking rehabilitation from the date of its issuance until the
dismissal of the petition or termination of the rehabilitation
proceedings. The Makati RTC may proceed to hear Civil Case No. 03-991
only against Arollado if there is no ground to go after JAPRL and RFC (as
will later be discussed). A creditor can demand payment from the
surety solidarily liable with the corporation seeking rehabilitation.
Respondents abused procedural technicalities (albeit unsuccessfully)
for the sole purpose of preventing, or at least delaying, the collection of
their legitimate obligations. Their reprehensible scheme impeded the
speedy dispensation of justice. More importantly, however, considering
the amount involved, respondents utterly disregarded the significance
of a stable and efficient banking system to the national economy. Banks
are entities engaged in the lending of funds obtained through deposits
from the public. They borrow the public’s excess money (i.e.,deposits)
and lend out the same. Banks therefore redistribute wealth in the
economy by channeling idle savings to profitable investments. Banks
operate (and earn income) by extending credit facilities financed
primarily by deposits from the public. They plough back the bulk of said
deposits into the economy in the form of loans. Since banks deal with
the public’s money, their viability depends largely on their ability to
return those deposits on demand. For this reason, banking is
undeniably imbued with public interest. Protecting the integrity of the
banking system has become, by large, the responsibility of banks. The
role of the public, particularly individual borrowers, has not been
emphasized. Nevertheless, we are not unaware of the rampant and
unscrupulous practice of obtaining loans without intending to pay the
same. In this case, petitioner BDO-EPCI alleged that JAPRL fraudulently
altered and falsified its financial statements in order to obtain its credit
facilities. Considering the amount of petitioner’s exposure in JAPRL,
justice and fairness dictate that the Makati RTC hear whether or not
respondents indeed committed fraud in securing the credit
accommodation. The protective remedy of rehabilitation was never
intended to be a refuge of a debtor guilty of fraud. Meanwhile, the
Makati RTC should proceed to hear Civil Case No. 03-991 against the
three -hmnrespondents guided by Section 40 of the General Banking
Law which states: Section 40. Requirement for Grant of Loans or Other
Credit Accommodations. Before granting a loan or other credit
accommodation, a bank must ascertain that the debtor is capable of
fulfilling his commitments to the bank. Towards this end, a bank may
demand from its credit applicants a statement of their assets and
liabilities and of their income and expenditures and such information as
may be prescribed by law or by rules and regulations of the Monetary
Board to enable the bank to properly evaluate the credit application
which includes the corresponding financial statements submitted for
taxation purposes to the Bureau of Internal Revenue. Should such
statements prove to be false or incorrect in any material detail, the
bank may terminate any loan or credit accommodation granted on the
basis of said statements and shall have the right to demand immediate
repayment or liquidation of the obligation. In formulating the rules and
regulations under this Section, the Monetary Board shall recognize the
peculiar characteristics of microfinancing, such as cash flow-based
lending to the basic sectors that are not covered by traditional
collateral. (emphasis supplied) Under this provision, banks have the
right to annul any credit accommodation or loan, and demand the
immediate payment thereof, from borrowers proven to be guilty of
fraud. Petitioner would then be entitled to the immediate payment of
P194,493,388.98 and other appropriate damages. Finally, considering
that respondents failed to pay the four trust receipts, the Makati City
Prosecutor should investigate whether or not there is probable cause to
indict respondents for violation of Section 13 of the Trust Receipts Law.
 15. Premier Development Bank vs Court of Appeals, et al GR No.
159352, April 14, 2004

[G.R. No. 159352. April 14, 2004]

PREMIERE DEVELOPMENT BANK, petitioner,

vs. COURT OF APPEALS, PANACOR
MARKETING CORPORATION and ARIZONA
TRANSPORT CORPORATION, respondents.
DECISION
YNARES-SANTIAGO, J.:

This is a petition for review under Rule 45 of the 1997

Rules on Civil Procedure seeking the annulment of the
Decision dated June 18, 2003 of the Court of
Appeals which affirmed the Decision of the Regional Trial
[1]

Court in Civil Case No. 65577.

[2]

The undisputed facts show that on or about October

1994, Panacor Marketing Corporation (Panacor for brevity),
a newly formed corporation, acquired an exclusive
distributorship of products manufactured by Colgate
Palmolive Philippines, Inc. (Colgate for short). To meet the
capital requirements of the exclusive distributorship, which
required an initial inventory level of P7.5 million, Panacor
applied for a loan of P4.1 million with Premiere
Development Bank. After an extensive study of Panacors
creditworthiness, Premiere Bank rejected the loan
application and suggested that its affiliate company,
Arizona Transport Corporation (Arizona for short), should
[3]

instead apply for the loan on condition that the proceeds

thereof shall be made available to Panacor. Eventually,
Panacor was granted a P4.1 million credit line as evidenced
by a Credit Line Agreement. As suggested, Arizona, which
[4]

was an existing loan client, applied for and was granted a

loan of P6.1 million, P3.4 million of which would be used to
pay-off its existing loan accounts and the remaining P2.7
million as credit line of Panacor. As security for the P6.1
million loan, Arizona, represented by its Chief Executive
Officer Pedro Panaligan and spouses Pedro and Marietta
Panaligan in their personal capacities, executed a Real
Estate Mortgage against a parcel of land covered by TCT
No. T-3475 as per Entry No. 49507 dated October 2, 1995. [5]

Since the P2.7 million released by Premiere Bank fell

short of the P4.1 million credit line which was previously
approved, Panacor negotiated for a take-out loan with Iba
Finance Corporation (hereinafter referred to as Iba-
Finance) in the sum of P10 million, P7.5 million of which will
be released outright in order to take-out the loan from
Premiere Bank and the balance of P2.5 million (to complete
the needed capital of P4.1 million with Colgate) to be
released after the cancellation by Premiere of the collateral
mortgage on the property covered by TCT No. T-
3475. Pursuant to the said take-out agreement, Iba-
Finance was authorized to pay Premiere Bank the prior
existing loan obligations of Arizona in an amount not to
exceed P6 million.
On October 5, 1995, Iba-Finance sent a letter to Ms.
Arlene R. Martillano, officer-in-charge of Premiere Banks
San Juan Branch, informing her of the approved loan in
favor of Panacor and Arizona, and requesting for the
release of TCT No. T-3475.Martillano, after reading the
letter, affixed her signature of conformity thereto and sent
the original copy to Premiere Banks legal office. The full text
of the letter reads:[6]

Please be informed that we have approved the loan application

of ARIZONA TRANSPORT CORP. and PANACOR
MARKETING CORPORATION. Both represented by MR.
PEDRO P. PANALIGAN (hereinafter the BORROWERS) in
the principal amount of PESOS: SEVEN MILLION FIVE
HUNDRED THOUSAND ONLY (P7,500,000.00) Philippine
Currency. The loan shall be secured by a Real Estate Mortgage
over a parcel of land located at #777 Nueve de Pebrero St. Bo.
Mauway, Mandaluyong City, Metro Manila covered by TCT
No. 3475 and registered under the name of Arizona Haulers, Inc.
which is presently mortgaged with your bank.
The borrowers have authorized IBA FINANCE CORP. to pay
Premiere Bank from the proceeds of their loan. The
disbursement of the loan, however is subject to the annotation of
our mortgage lien on the said property and final verification that
said title is free from any other lien or encumbrance other than
that of your company and IBA Finance Corporation.
In order to register the mortgage, please entrust to us the owners
duplicate copy of TCT No. 3475, current tax declaration, realty
tax receipts for the current year and other documents necessary
to affect annotation thereof.
Upon registration of our mortgage, we undertake to remit
directly to you or your authorized representative the amount
equivalent to the Borrowers outstanding indebtedness to
Premiere Bank as duly certified by your goodselves provided
such an amount shall not exceed PESOS: SIX MILLION ONLY
(P6,000,000.00) and any amount in excess of the aforestated
shall be for the account of the borrowers. It is understood that
upon receipt of payment, you will release to us the
corresponding cancellation of your mortgage within five (5)
banking days therefrom.
If the foregoing terms and conditions are acceptable to you,
please affix your signature provided below and furnish us a copy
of the Statement of Account of said borrowers.
On October 12, 1995, Premiere Bank sent a letter-
reply to Iba-Finance, informing the latter of its refusal to
[7]

turn over the requested documents on the ground

that Arizona had existing unpaid loan obligations and that it
was the banks policy to require full payment of all
outstanding loan obligations prior to the release of
mortgage documents. Thereafter, Premiere Bank issued to
Iba-Finance a Final Statement of
Account showing Arizonas total loan indebtedness.
[8]

On October 19, 1995, Panacor and Arizona executed in

favor of Iba-Finance a promissory note in the amount of 7.5
million. Thereafter, Iba-Finance paid to Premiere Bank the
amount of P6,235,754.79 representing the full outstanding
loan account of Arizona. Despite such payment, Premiere
Bank still refused to release the requested mortgage
documents specifically, the owners duplicate copy of TCT
No. T-3475. [9]

On November 2, 1995, Panacor requested Iba-Finance

for the immediate approval and release of the remaining
P2.5 million loan to meet the required monthly purchases
from Colgate. Iba-Finance explained however, that the
processing of the P2.5 million loan application was
conditioned, among others, on the submission of the
owners duplicate copy of TCT No. 3475 and the
cancellation by Premiere Bank of Arizonas
mortgage. Occasioned by Premiere Banks adamant refusal
to release the mortgage cancellation document, Panacor
failed to generate the required capital to meet its distribution
and sales targets. On December 7, 1995, Colgate informed
Panacor of its decision to terminate their distribution
agreement.
On March 13, 1996, Panacor and Arizona filed a
complaint for specific performance and damages against
Premiere Bank before
the Regional Trial Court of Pasig City, docketed as Civil
Case No. 65577.
On June 11, 1996, Iba-Finance filed a complaint-in-
intervention praying that judgment be rendered ordering
Premiere Bank to pay damages in its favor.
 On May 26, 1998, the trial court rendered a decision in
favor of Panacor and Iba-Finance, the decretal portion of
which reads:
WHEREFORE, judgment is hereby rendered in favor of the
plaintiff Panacor Marketing Corporation and against the
defendant Premiere Bank, ordering the latter to pay the former
the following sums, namely:
1) P4,520,000.00 in addition to legal interest from the
time of filing of the complaint until full payment;
2) P1,000,000.00 as and for exemplary damages;
3) P100,000.00 as and for reasonable attorneys fees; and
4) Costs of suit.
Similarly, judgment is hereby rendered in favor of plaintiff-in-
intervention IBA-Finance Corporation as against defendant
Premiere bank, as follows, namely:
1) Ordering defendant Premiere Bank to release to
plaintiff-intervenor IBA-Finance Corporation the
owners duplicate copy of Transfer Certificate of Title
No. 3475 registered in the name of Arizona Haulers,
Inc. including the deed of cancellation of the mortgage
constituted thereon;
2) Ordering the defendant Premiere Bank to pay to
Intervenor IBA-Finance, the following sums, to wit:
3) P1,000,000.00 as and by way of exemplary damages;
and
 4) P100,000.00 as and for reasonable attorneys fees; and
5) Costs of suit.
For lack of sufficient legal and factual basis, the counterclaim of
defendant Premiere Bank is DISMISSED.
SO ORDERED.
Premiere Bank appealed to the Court of Appeals
contending that the trial court erred in finding, inter alia, that
it had maliciously downgraded the credit-line of Panacor
from P4.1 million to P2.7 million.
In the meantime, a compromise agreement was entered
into between Iba-Finance and Premiere Bank whereby the
latter agreed to return without interest the amount of
P6,235,754.79 which Iba-Finance earlier remitted to
Premiere Bank to pay off the unpaid loans of Arizona.
On March 11, 1999, the compromise agreement was
approved.
On June 18, 2003, a decision was rendered by the Court
of Appeals which affirmed with modification the decision of
the trial court, the dispositive portion of which reads:
WHEREFORE, premises considered, the present appeal is
hereby DISMISSED, and the decision appealed from in Civil
Case No. 65577 is hereby AFFIRMED with MODIFICATION
in that the award of exemplary damages in favor of the appellees
is hereby reduced to P500,000.00. Needless to add, in view of
the Compromise Agreement plaintiff-intervenor IBA-Finance
and defendant-appellant PREMIERE between plaintiff-
intervenor IBA-Finance and defendant-appellant PREMIERE as
approved by this Court per Resolution dated March 11, 1999,
Our dispositive of the present appeal is only with respect to the
liability of appellant PREMIERE to the plaintiff-appellees.
With costs against the defendant-appellant.
SO ORDERED. [10]

Hence the present petition for review, which raises the

following issues: [11]

WHETHER OR NOT THE DECISION OF HONORABLE

COURT OF APPEALS EXCEEDED AND WENT BEYOND
THE FACTS, THE ISSUES AND EVIDENCE PRESENTED
IN THE APPEAL TAKING INTO CONSIDERATION THE
ARGUMENT OF PETITIONER BANK AND ADVENT OF
THE DULY APPROVED COMPROMISE AGREEMENT
BETWEEN THE PETITIONER BANK AND IBA FINANCE
CORPORATION.
II

WHETHER OR NOT THE ISSUES THAT SHOULD HAVE

BEEN RESOLVED BY THE HONORABLE COURT OF
APPEALS, BY REASON OF THE EXISTENCE OF THE
COMPROMISE AGREEMENT, IS LIMITED TO THE ISSUE
OF ALLEGED BAD FAITH OF PETITIONER BANK IN THE
DOWNGRADING OF THE LOAN AND SHOULD NOT
INCLUDE THE RENDITION OF AN ADVERSE
PRONOUNCEMENT TO AN ALREADY FAIT ACCOMPLI-
ISSUE ON THE REFUSAL OF THE BANK TO RECOGNIZE
THE TAKE-OUT OF THE LOAN AND THE RELEASE OF
TCT NO. 3475.
III

WHETHER OR NOT PETITIONER ACTED IN BAD FAITH

IN THE DOWNGRADING OF THE LOAN OF
RESPONDENTS TO SUPPORT AN AWARD OF ACTUAL
AND EXEMPLARY DAMAGES NOW REDUCED TO
P500,000.00.
IV

WHETHER OR NOT THERE IS BASIS OR COMPETENT

PIECE OF EVIDENCE PRESENTED DURING THE TRIAL
TO SUPPORT AN AWARD OF ACTUAL DAMAGES OF
P4,520,000.00.
Firstly, Premiere Bank argues that considering the
compromise agreement it entered with Iba-Finance, the
Court of Appeals should have ruled only on the issue of its
alleged bad faith in downgrading Panacors credit line. It
further contends that the Court of Appeals should have
refrained from making any adverse pronouncement on the
refusal of Premiere Bank to recognize the take-out and its
subsequent failure to release the cancellation of the
mortgage because they were rendered fait accompli by the
compromise agreement.
We are not persuaded.
In a letter-agreement dated October 5, 1995, Iba-
[12]

Finance informed Premiere Bank of its approval of

Panacors loan application in the amount of P10 million to
be secured by a real estate mortgage over a parcel of land
covered by TCT No. T-3475. It was agreed that Premiere
Bank shall entrust to Iba-Finance the owners duplicate copy
of TCT No. T-3475 in order to register its mortgage, after
which Iba-Finance shall pay off Arizonas outstanding
indebtedness. Accordingly, Iba-Finance remitted
P6,235,754.79 to Premiere Bank on the understanding that
said amount represented the full payment of Arizonas loan
obligations. Despite performance by Iba-Finance of its end
of the bargain, Premiere Bank refused to deliver the
mortgage document. As a consequence, Iba-Finance failed
to release the remaining P2.5 million loan it earlier pledged
to Panacor, which finally led to the revocation of its
distributorship agreement with Colgate.
Undeniably, the not-so-forthright conduct of Premiere
Bank in its dealings with respondent corporations caused
damage to Panacor and Iba-Finance. It is error for Premiere
Bank to assume that the compromise agreement it entered
with Iba-Finance extinguished all direct and collateral
incidents to the aborted take-out such that it also cancelled
its obligations to Panacor. The unjustified refusal by
Premiere Bank to release the mortgage document
prompted Iba-Finance to withhold the release of the P2.5
million earmarked for Panacor which eventually terminated
the distributorship agreement. Both Iba-Finance and
Panacor, which are two separate and distinct juridical
entities, suffered damages due to the fault of Premiere
Bank.Hence, it should be held liable to each of them.
While the compromise agreement may have resulted in
the satisfaction of Iba-Finances legal claims, Premiere
Banks liability to Panacor remains. We agree with the Court
of Appeals that the present appeal is only with respect to
the liability of appellant Premiere Bank to the plaintiffs-
appellees (Panacor and Arizona) taking into account the
[13]

compromise agreement.
For the foregoing reasons, we find that the Court of
Appeals did not err in discussing in the assailed decision
the abortive take-out and the refusal by Premiere Bank to
release the cancellation of the mortgage document.
Secondly, Premiere Bank asserts that it acted in good
faith when it downgraded the credit line of Panacor from
P4.1 million to P2.7 million. It cites the decision of the trial
court which, albeit inconsistent with its final disposition,
expressly recognized that the downgrading of the loan was
not the proximate cause of the damages suffered by
respondents.
Under the Credit Line Agreement dated September
[14]

1995, Premiere Bank agreed to extend a loan of P4.1

million to Arizona to be used by its affiliate, Panacor, in its
operations. Eventually, Premiere approved in favor
of Arizona a loan equivalent to P6.1 million, P3.4 million of
which was allotted for the payment of Arizonas existing loan
obligations and P2.7 million as credit line of Panacor. Since
only P2.7 million was made available to Panacor, instead of
P4.1 million as previously approved, Panacor applied for a
P2.5 loan from Iba-Finance, which, as earlier mentioned,
was not released because of Premiere Banks refusal to
issue the mortgage cancellation.
 It is clear that Premiere Bank deviated from the terms of
the credit line agreement when it unilaterally and arbitrarily
downgraded the credit line of Panacor from P4.1 million to
P2.7 million. Having entered into a well-defined contractual
relationship, it is imperative that the parties should honor
and adhere to their respective rights and obligations
thereunder. Law and jurisprudence dictate that obligations
arising from contracts have the force of law between the
contracting parties and should be complied with in good
faith. The appellate court correctly observed, and we
[15]

agree, that:
Appellants actuations, considering the actual knowledge of its
officers of the tight financial situation of appellee PANACOR
brought about primarily by the appellant banks considerable
reduction of the credit line portion of the loan, in relation to the
bail-out efforts of IBA Finance, whose payment of the
outstanding loan account of appellee ARIZONA with appellant
was readily accepted by the appellant, were truly marked by bad
faith and lack of due regard to the urgency of its compliance by
immediately releasing the mortgage cancellation document and
delivery of the title to IBA Finance. That time is of the essence
in the requested release of the mortgage cancellation and
delivery of the subject title was only too well-known to
appellant, having only belatedly invoked the cross-default
provision in the Real Estate Mortgage executed in its favor by
appellee ARIZONA to resist the plain valid and just demand of
IBA Finance for such compliance by appellant bank. [16]

Premiere Bank cannot justify its arbitrary act of

downgrading the credit line on the alleged finding by its
project analyst that the distributorship was not financially
feasible. Notwithstanding the alleged forewarning,
Premiere Bank still extended Arizonathe loan of P6.1
million, albeit in contravention of the credit line agreement.
This indubitably indicates that Premiere Bank had
deliberately and voluntarily granted the said loan despite its
claim that the distributorship contract was not viable.
Neither can Premiere Bank rely on the puerile excuse
that it was the banks policy not to release the mortgage
cancellation prior to the settlement of outstanding loan
obligations. Needless to say, the Final Statement of
Account dated October 17, 1995 showing in no uncertain
terms Arizonas outstanding indebtedness, which was
subsequently paid by Iba-Finance, was the full payment
of Arizonas loan obligations. Equity demands that a party
cannot disown it previous declaration to the prejudice of the
other party who relied reasonably and justifiably on such
declaration.
Thirdly, Premiere Bank avers that the appellate courts
reliance on the credit line agreement as the basis of bad
faith on its part was inadmissible or self-serving for not
being duly notarized, being unsigned in all of its left
margins, and undated. According to Premiere Bank, the
irregularities in the execution of the credit line agreement
bolsters the theory that the same was the product of
manipulation orchestrated by respondent corporations
through undue influence and pressure exerted by its
officers on Martillano.
Premiere Banks posture deserves scant consideration.
As found by the lower court, there are sufficient indicia that
demonstrate that the alleged unjust pressure exerted on
Martillano was more imagined than real. In her testimony,
Martillano claims that she was persuaded and coaxed by
Caday of Iba-Finance and Panaligan of Panacor to sign the
letter. It was she who provided Iba-Finance with the Final
Statement of Account and accepted its payment without
objection or qualification. These acts show that she was
vested by Premiere Bank with sufficient authority to enter
into the said transactions.
If a private corporation intentionally or negligently clothes
its officers or agents with apparent power to perform acts
for it, the corporation will be estopped to deny that the
apparent authority is real as to innocent third persons
dealing in good faith with such officers or agents. As [17]

testified to by Martillano, after she received a copy of the

credit line agreement and affixed her signature in
conformity thereto, she forwarded the same to the legal
department of the Bank at its Head Office. Despite its
knowledge, Premiere Bank failed to disaffirm the contract.
When the officers or agents of a corporation exceed their
powers in entering into contracts or doing other acts, the
corporation, when it has knowledge thereof, must promptly
disaffirm the contract or act and allow the other party or third
persons to act in the belief that it was authorized or has
been ratified. If it acquiesces, with knowledge of the facts,
or fails to disaffirm, ratification will be implied or else it will
be estopped to deny ratification. [18]

Finally, Premiere Bank argues that the finding by the

appellate court that it was liable for actual damages in the
amount of P4,520,000.00 is without basis. It contends that
the evidence presented by Panacor in support of its claim
for actual damages are not official receipts but self-serving
declarations.
To justify an award for actual damages, there must be
competent proof of the actual amount of loss. Credence can
be given only to claims, which are duly supported by
receipts. The burden of proof is on the party who will be
[19]

defeated if no evidence is presented on either side. He must

establish his case by a preponderance of evidence which
means that the evidence, as a whole, adduced by one side
is superior to that of the other. In other words, damages
cannot be presumed and courts, in making an award, must
point out specific facts that can afford a basis for measuring
whatever compensatory or actual damages are borne.
Under Article 2199 of the Civil Code, actual or
compensatory damages are those awarded in satisfaction
of, or in recompense for, loss or injury sustained. They
proceed from a sense of natural justice and are designed to
repair the wrong that has been done, to compensate for the
injury inflicted and not to impose a penalty.
In the instant case, the actual damages were proven
through the sole testimony of Themistocles Ruguero, the
vice president for administration of Panacor. In his
testimony, the witness affirmed that Panacor incurred
losses, specifically, in terms of training and seminars,
leasehold acquisition, procurement of vehicles and office
equipment without, however, adducing receipts to
substantiate the same. The documentary evidence marked
as exhibit W, which was an ordinary private writing allegedly
itemizing the capital expenditures and losses from the failed
operation of Panacor, was not testified to by any witness to
ascertain the veracity of its contents. Although the lower
court fixed the sum of P4,520,000.00 as the total
expenditures incurred by Panacor, it failed to show how and
in what manner the same were substantiated by the
claimant with reasonable certainty. Hence, the claim for
actual damages should be admitted with extreme caution
since it is only based on bare assertion without support from
independent evidence. Premieres failure to prove actual
expenditure consequently conduces to a failure of its claim.
In determining actual damages, the court cannot rely on
mere assertions, speculations, conjectures or guesswork
but must depend on competent proof and on the best
evidence obtainable regarding the actual amount of loss. [20]

Even if not recoverable as compensatory damages,

Panacor may still be awarded damages in the concept of
temperate or moderate damages. When the court finds that
some pecuniary loss has been suffered but the amount
cannot, from the nature of the case, be proved with
certainty, temperate damages may be recovered.
Temperate damages may be allowed in cases where from
the nature of the case, definite proof of pecuniary loss
cannot be adduced, although the court is convinced that the
aggrieved party suffered some pecuniary loss.
The Code Commission, in explaining the concept of
temperate damages under Article 2224, makes the
following comment: [21]

In some States of the American Union, temperate damages are

allowed. There are cases where from the nature of the case,
definite proof of pecuniary loss cannot be offered, although the
court is convinced that there has been such loss. For instance,
injury to ones commercial credit or to the goodwill of a business
firm is often hard to show with certainty in terms of money.
Should damages be denied for that reason? The judge should be
empowered to calculate moderate damages in such cases, rather
than that the plaintiff should suffer, without redress from the
defendant's wrongful act.
It is obvious that the wrongful acts of Premiere Bank
adversely affected, in one way or another, the commercial
credit of Panacor, greatly contributed to, if not, decisively
[22]

caused the premature stoppage of its business operations

and the consequent loss of business opportunity. Since
these losses are not susceptible to pecuniary estimation,
temperate damages may be awarded. Article 2216 of the
Civil Code:
No proof of pecuniary loss is necessary in order that moral,
nominal, temperate, liquidated or exemplary damages may be
adjudicated. The assessment of such damages, except liquidated
ones, is left to the discretion of the Court, according to the
circumstances of each case.
Under the circumstances, the sum of P200,000.00 as
temperate damages is reasonable.
WHEREFORE, the petition is DENIED. The Decision
dated June 18, 2003 of the Court of Appeals in CA-G.R. CV
No. 60750, ordering Premiere Bank to pay Panacor
Marketing Corporation P500,000.00 as exemplary
damages, P100,000.00 as attorneys fees, and costs, is
AFFIRMED, with the MODIFICATION that the award of
P4,520,000.00 as actual damages is DELETED for lack of
factual basis. In lieu thereof, Premiere Bank is ordered to
pay Panacor P200,000.00 as temperate damages.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Panganiban,
Carpio, and Azcuna, JJ., concur.

16. Restituta M. Imperial vs Alex A. Jaucion GR No. 149004, April

14, 2004

G.R. No. 149004 April 14, 2004

RESTITUTA M. IMPERIAL, petitioner,

vs.
ALEX A. JAUCIAN, respondent.

DECISION

PANGANIBAN, J.:

Iniquitous and unconscionable stipulations on interest rates, penalties and

attorney’s fees are contrary to morals. Consequently, courts are granted
authority to reduce them equitably. If reasonably exercised, such authority
shall not be disturbed by appellate courts.

The Case

Before us is a Petition for Review1 under Rule 45 of the Rules of Court,

assailing the July 19, 2000 Decision2 and the June 14, 2001 Resolution3 of
the Court of Appeals (CA) in CA-GR CV No. 43635. The decretal portion of
the Decision is as follows:

"WHEREFORE, premises considered, the appealed Decision of the

Regional Trial Court, 5th Judicial Region, Branch 21, Naga City,
 dated August 31, 1993, in Civil Case No. 89-1911 for Sum of Money,
is hereby AFFIRMED in toto."4

The assailed Resolution denied petitioner’s Motion for Reconsideration.

The dispositive portion of the August 31, 1993 Decision, promulgated by

the Regional Trial Court (RTC) of Naga City (Branch 21) and affirmed by
the CA, reads as follows:

"Wherefore, Judgment is hereby rendered declaring Section I,

Central Bank Circular No. 905, series of 1982 to be of no force and
legal effect, it having been promulgated by the Monetary Board of the
Central Bank of the Philippines with grave abuse of discretion
amounting to excess of jurisdiction; declaring that the rate of interest,
penalty, and charges for attorney’s fees agreed upon between the
parties are unconscionable, iniquitous, and in violation of Act No.
2655, otherwise known as the Usury Law, as amended; and ordering
Defendant to pay Plaintiff the amount of FOUR HUNDRED
SEVENTY-EIGHT THOUSAND, ONE HUNDRED NINETY-FOUR
and 54/100 (₱478,194.54) PESOS, Philippine currency, with regular
and compensatory interests thereon at the rate of twenty-eight (28%)
per centum per annum, computed from August 31, 1993 until full
payment of the said amount, and in addition, an amount equivalent to
ten (10%) per centum of the total amount due and payable, for
attorney’s fees, without pronouncement as to costs."5

The Facts

The CA summarized the facts of the case in this wise:

"The present controversy arose from a case for collection of money,

filed by Alex A. Jaucian against Restituta Imperial, on October 26,
1989. The complaint alleges, inter alia, that defendant obtained from
plaintiff six (6) separate loans for which the former executed in favor
of the latter six (6) separate promissory notes and issued several
checks as guarantee for payment. When the said loans became
overdue and unpaid, especially when the defendant’s checks were
dishonored, plaintiff made repeated oral and written demands for
payment.
"Specifically, the six (6) separate loans obtained by defendant from
plaintiff on various dates are as follows:

(a) November 13, 1987 ₱ 50,000.00

(b) December 28, 1987 40,000.00
(c) January 6, 1988 30,000.00
(d) January 11, 1988 50,000.00
(e) January 12, 1988 50,000.00
(f) January 13, 1988 100,000.00

Total ₱320,000.00

"The loans were covered by six (6) separate promissory notes

executed by defendant. The face value of each promissory notes is
bigger [than] the amount released to defendant because said face
value already include[d] the interest from date of note to date of
maturity. Said promissory notes, which indicate the interest of 16%
per month, date of issue, due date, the corresponding guarantee
checks issued by defendant, penalties and attorney’s fees, are the
following:

1. Exhibit ‘D’ – for loan of ₱40,000.00 on December 28, 1987,

with face value of ₱65,000.00;

2. Exhibit ‘E’ – for loan of ₱50,000.00 on January 11, 1988, with

face value of ₱82,000.00;

3. Exhibit ‘F’ – for loan of ₱50,000.00 on January 12, 1988, with

face value of ₱82,000.00;

4. Exhibit ‘G’ – for loan of ₱100,000.00 on January 13, 1988,

with face value of ₱164,000.00;

5. Exhibit ‘H’ – This particular promissory note covers the

second renewal of the original loan of ₱50,000.00 on November
13, 1987, which was renewed for the first time on March 16,
1988 after certain payments, and which was renewed finally for
 the second time on January 4, 1988 also after certain
payments, with a face value of ₱56,240.00;

6. Exhibit ‘I’ – This particular promissory note covers the

second renewal of the original loan of ₱30,000.00 on January
6, 1988, which was renewed for the first time on June 4, 1988
after certain payments, and which was finally renewed for the
second time on August 6, 1988, also after certain payments,
with [a] face value of ₱12,760.00;

"The particulars about the postdated checks, i.e., number, amount,

date, etc., are indicated in each of the promissory notes. Thus, for
Exhibit ‘D’, four (4) PB checks were issued; for Exhibit ‘E’ four (4)
checks; for Exhibit ‘F’ four (4) checks; for Exhibit ‘G’ four (4) checks;
for Exhibit ‘H’ one (1) check; for Exhibit ‘I’ one (1) check;

"The arrangement between plaintiff and defendant regarding these

guarantee checks was that each time a check matures the defendant
would exchange it with cash.

"Although, admittedly, defendant made several payments, the same

were not enough and she always defaulted whenever her loans
mature[d]. As of August 16, 1991, the total unpaid amount, including
accrued interest, penalties and attorney’s fees, [was] ₱2,807,784.20.

"On the other hand, defendant claims that she was extended loans by
the plaintiff on several occasions, i.e., from November 13, 1987 to
January 13, 1988, in the total sum of ₱320,000.00 at the rate of
sixteen percent (16%) per month. The notes mature[d] every four (4)
months with unearned interest compounding every four (4) months if
the loan [was] not fully paid. The loan releases [were] as follows:

(a) November 13, 1987 ₱ 50,000.00

(b) December 28, 1987 40,000.00
(c) January 6, 1988 30,000.00
(d) January 11, 1988 50,000.00
(e) January 12, 1988 50,000.00
 (f) January 13, 1988 100,000.00

Total ₱320,000.00

"The loan on November 13, 1987 and January 6, 1988 ha[d] been
fully paid including the usurious interests of 16% per month, this is
the reason why these were not included in the complaint.

"Defendant alleges that all the above amounts were released

respectively by checks drawn by the plaintiff, and the latter must
produce these checks as these were returned to him being the
drawer if only to serve the truth. The above amount are the real
amount released to the defendant but the plaintiff by masterful
machinations made it appear that the total amount released was
₱462,600.00. Because in his computation he made it appear that the
true amounts released was not the original amount, since it include[d]
the unconscionable interest for four months.

"Further, defendant claims that as of January 25, 1989, the total

payments made by defendants [were] as follows:

a. Paid releases on November

13, 1987 of ₱50,000.00 and
January 6, 1988 of ₱30,000.00
these two items were not
included in the complaint
affirming the fact that these
were paid ₱ 80,000.00
b. Exhibit ‘26’ Receipt 231,000.00
c. Exhibit ‘8-25’ Receipt 65,300.00
d. Exhibit ‘27’ Receipt 65,000.00

Total
₱441,780.00
Less: 320,000.00
Excess Payment
 ₱121,780.00

"Defendant contends that from all perspectives the above excess

payment of ₱121,780.00 is more than the interest that could be
legally charged, and in fact as of January 25, 1989, the total releases
have been fully paid.

"On 31 August 1993, the trial court rendered the assailed decision."6

Ruling of the Court of Appeals

On appeal, the CA held that without judicial inquiry, it was improper for the
RTC to rule on the constitutionality of Section 1, Central Bank Circular No.
905, Series of 1982. Nonetheless, the appellate court affirmed the
judgment of the trial court, holding that the latter’s clear and detailed
computation of petitioner’s outstanding obligation to respondent was
convincing and satisfactory.

Hence, this Petition.7

The Issues

Petitioner raises the following arguments for our consideration:

"1. That the petitioner has fully paid her obligations even before filing
of this case.

"2. That the charging of interest of twenty-eight (28%) per centum per
annum without any writing is illegal.

"3. That charging of excessive attorney’s fees is hemorrhagic.

"4. Charging of excessive penalties per month is in the guise of

hidden interest.

"5. The non-inclusion of the husband of the petitioner at the time the
case was filed should have dismissed this case."8

The Court’s Ruling

The Petition has no merit.

 First Issue:

Computation of Outstanding Obligation

Arguing that she had already fully paid the loan before the filing of the case,
petitioner alleges that the two lower courts misappreciated the facts when
they ruled that she still had an outstanding balance of ₱208,430.

This issue involves a question of fact. Such question exists when a doubt
or difference arises as to the truth or the falsehood of alleged facts; and
when there is need for a calibration of the evidence, considering mainly the
credibility of witnesses and the existence and the relevancy of specific
surrounding circumstances, their relation to each other and to the whole,
and the probabilities of the situation.9

It is a well-entrenched rule that pure questions of fact may not be the

subject of an appeal by certiorari under Rule 45 of the Rules of Court, as
this remedy is generally confined to questions of law.10 The jurisdiction of
this Court over cases brought to it is limited to the review and rectification
of errors of law allegedly committed by the lower court. As a rule, the
latter’s factual findings, when adopted and affirmed by the CA, are final and
conclusive and may not be reviewed on appeal.11

Generally, this Court is not required to analyze and weigh all over again the
evidence already considered in the proceedings below.12 In the present
case, we find no compelling reason to overturn the factual findings of the
RTC -- that the total amount of the loans extended to petitioner was
₱320,000, and that she paid a total of only ₱116,540 on twenty-nine dates.
These findings are supported by a preponderance of evidence. Moreover,
the amount of the outstanding obligation has been meticulously computed
by the trial court and affirmed by the CA. Petitioner has not given us
sufficient reason why her cause falls under any of the exceptions to this
rule on the finality of factual findings.

Second Issue:

Rate of Interest

The trial court, as affirmed by the CA, reduced the interest rate from 16
percent to 1.167 percent per month or 14 percent per annum; and the
stipulated penalty charge, from 5 percent to 1.167 percent per month or 14
percent per annum.

Petitioner alleges that absent any written stipulation between the parties,
the lower courts should have imposed the rate of 12 percent per annum
only.

The records show that there was a written agreement between the parties
for the payment of interest on the subject loans at the rate of 16 percent per
month. As decreed by the lower courts, this rate must be equitably reduced
for being iniquitous, unconscionable and exorbitant. "While the Usury Law
ceiling on interest rates was lifted by C.B. Circular No. 905, nothing in the
said 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."13

In Medel v. CA,14 the Court found the stipulated interest rate of 5.5 percent
per month, or 66 percent per annum, unconscionable. In the present case,
the rate is even more iniquitous and unconscionable, as it amounts to 192
percent per annum. When the agreed rate is iniquitous or unconscionable,
it is considered "contrary to morals, if not against the law. [Such] stipulation
is void."15

Since the stipulation on the interest rate is void, it is as if there were no

express contract thereon.16 Hence, courts may reduce the interest rate as
reason and equity demand. We find no justification to reverse or modify the
rate imposed by the two lower courts.

Third and Fourth Issue:

Penalties and Attorney’s Fees

Article 1229 of the Civil Code states thus:

"The judge shall equitably reduce the penalty when the principal
obligation has been partly or irregularly complied with by the debtor.
Even if there has been no performance, the penalty may also be
reduced by the courts if it is iniquitous or unconscionable."

In exercising this power to determine what is iniquitous and

unconscionable, courts must consider the circumstances of each
case.17 What may be iniquitous and unconscionable in one may be totally
just and equitable in another. In the present case, iniquitous and
unconscionable was the parties’ stipulated penalty charge of 5 percent per
month or 60 percent per annum, in addition to regular interests and
attorney’s fees. Also, there was partial performance by petitioner when she
remitted ₱116,540 as partial payment of her principal obligation of
₱320,000. Under the circumstances, the trial court was justified in reducing
the stipulated penalty charge to the more equitable rate of 14 percent per
annum.

The Promissory Note carried a stipulation for attorney’s fees of 25 percent

of the principal amount and accrued interests. Strictly speaking, this
covenant on attorney’s fees is different from that mentioned in and
regulated by the Rules of Court.18 "Rather, the attorney’s fees here are in
the nature of liquidated damages and the stipulation therefor is aptly called
a penal clause."19 So long as the stipulation does not contravene the law,
morals, public order or public policy, it is binding upon the obligor. It is the
litigant, not the counsel, who is the judgment creditor entitled to enforce the
judgment by execution.

Nevertheless, it appears that petitioner’s failure to comply fully with her

obligation was not motivated by ill will or malice. The twenty-nine partial
payments she made were a manifestation of her good faith. Again, Article
1229 of the Civil Code specifically empowers the judge to reduce the civil
penalty equitably, when the principal obligation has been partly or
irregularly complied with. Upon this premise, we hold that the RTC’s
reduction of attorney’s fees -- from 25 percent to 10 percent of the total
amount due and payable -- is reasonable.

Fifth Issue:

Non-Inclusion of Petitioner’s Husband

Petitioner contends that the case against her should have been dismissed,
because her husband was not included in the proceedings before the RTC.

We are not persuaded. The husband’s non-joinder does not warrant

dismissal, as it is merely a formal requirement that may be cured by
amendment.20 Since petitioner alleges that her husband has already
passed away, such an amendment has thus become moot.
WHEREFORE, the Petition is DENIED. Costs against petitioner.

SO ORDERED.

Davide, Jr., Ynares-Santiago, Carpio, and Azcuna, JJ., concur.

Restituta M. Imperial vs Alexa Jaucian

G.R. No. 149004

FACTS:

• Controversy Arose from a case of collection of money, filed by Alex A.

Jaucian (now respondent) against Restituta Imperial (now petitioner).
The complaint alleges that defendant now petitioner obtained from
plaintiff now respondent six separate loans for which the former
executed in favour of the latter 6 separate promissory notes and issued
several checks as guarantee for payment.

• When said loans became overdue and unpaid, defendant’s

(petitioner’s) checks were dishonoured, respondent made repeated
oral and written demands for payment.

•RTC and CA held that the respondents clear and detailed computation
of petitioner’s outstanding obligation was convincing and satisfactory.
ISSUES:

1) Whether or not the petitioner has fully paid her obligations

even before filing of the case.
2) Whether or not the charging of 28% interest per annum
without any writing is legal.
3) Whether or not charging of excessive penalties is a guise of hidden
interest.

HELD:

The court held that the petition has NO MERIT.

1) involves a question of fact. Such question exists when a doubt or

difference arises as to the truth or the falsehood of alleged facts; and
when there is need for a calibration of the evidence, considering mainly
the credibility of witnesses and the existence and the relevancy of
specific surrounding circumstances, their relation to each other and to
the whole, and the probabilities of the situation. It is a well-entrenched
rule that pure questions of fact may not be the subject of an appeal by
certiorari under Rule 45 of the Rules of Court, as this remedy is
generally confined to questions of law.

2) The records show that there was a written agreement between

the parties for the payment of interest on the subject loans at the rate
of 16 percent per month. As decreed by the lower courts, this rate
must be equitably reduced for being iniquitous, unconscionable and
exorbitant. “While the Usury Law ceiling on interest rates was lifted by
C.B. Circular No. 905, nothing in the said 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.”

3) Article 1229 of the Civil Code states thus: “The judge shall
equitably reduce the penalty when the principal obligation has been
partly or irregularly complied with by the debtor. Even if there has
been no performance, the penalty may also be reduced by the courts if
it is iniquitous or unconscionable.” Nevertheless, it appears that
petitioner’s failure to comply fully with her obligation was not
motivated by ill will or malice. The twenty-nine partial payments she
made were a manifestation of her good faith. Again, Article 1229 of the
Civil Code specifically empowers the judge to reduce the civil penalty
equitably, when the principal obligation has been partly or irregularly
complied with. Upon this premise, we hold that the RTC’s reduction of
attorney’s fees -- from 25 percent to 10 percent of the total amount
due and payable -- is reasonable.

17. Gloria Ocampo, et al vs. Land Ban of the Philippines, et al

GR No. 164968, July 3, 2009

G.R. No. 164968 July 3, 2009

GLORIA OCAMPO and TERESITA TAN, Petitioners,

vs.
LAND BANK OF THE PHILIPPINES, URDANETA, PANGASINAN
BRANCH and EX OFFICIO PROVINCIAL SHERIFF OF
PANGASINAN, Respondents.

DECISION

DEL CASTILLO, J.:

This Petition for Review on Certiorari assails the Court of Appeals

Decision1 dated July 21, 2004, in CA-G.R. CV No. 77683, which reversed
and set aside the March 18, 2002 Decision2 of the Regional Trial Court,
Branch 45, Urdaneta City, Pangasinan, in Civil Case No. U-7095.

The facts, as culled from the records, follow.

In 1991, Gloria Ocampo and her daughter, Teresita Tan, obtained from the
Land Bank of the Philippines a ₱10,000,000.003 loan (herein referred to as
quedan loan), which was released to them on the following dates:
₱3,996,000.00 on January 31, 1991, upon the issuance of promissory note
(PN) Nos. 91-038 and 98-039,4 to mature on July 30, 1991; ₱6,000,000.00,
on April 5, 1991, upon the issuance of PN Nos. 91-054, 91-055 and 91-
056,5 to mature on October 2, 1991.

Ocampo and Tan availed of the Quedan Financing Program for Grain
Stocks of the Quedan and Rural Credit Guarantee
Corporation6 (Quedancor), whereby the latter guaranteed to pay the Land
Bank their loan, upon maturity, in case of non-payment. Pursuant thereto,
they delivered to the Land Bank several grains warehouse receipts
(quedans), and executed a Deed of Assignment/Contract of Pledge
covering 41,690 cavans of palay.7

The liability of Quedancor, however, was limited to eighty percent (80%) of

the outstanding loan plus interests at the time of maturity.8 Corollarily, the
quedans delivered by Ocampo and Tan, as security, turned out to be
insufficient. To address the matter, the Land Bank wrote Ocampo a
letter9 dated August 15, 1991, requiring her and Tan to give an additional
security with respect to the (20%) percent unsecured portion of the quedan
loan.

Accordingly, Ocampo and Tan constituted a real estate mortgage10 over

two parcels of unregistered land owned by Ocampo, as evidenced by Tax
Declaration (TD) Nos. 6958 and 695911 (subsequently canceled and
replaced by TD No. 317-A).12 The mortgage was executed on September 6,
1991 and delivered by Ocampo and Tan to the Land Bank, together with
the TDs and survey plan of the properties. Land Bank, in turn, registered
the mortgage with the Register of Deeds of Lingayen, Pangasinan.

Meanwhile, Ocampo filed with the RTC, Branch 49, Urdaneta, Pangasinan,
a case for the registration of the subject properties, docketed as Land
Registration Case No. U-1116. Land Bank filed therein a Motion,13 praying
for the RTC to take into consideration the mortgage over the properties,
and to register the same in Ocampo's name bearing the said encumbrance.

On August 15, 1991, Ocampo signed debit advices amounting to

₱100,000.00 as partial payment of the quedan loan.14 After the maturity of
the remaining three (3) promissory notes on October 2, 1991, Ocampo
failed to pay the balance for her quedan loan. Thus, the Land Bank filed
with Quedancor a claim for guarantee payment. It also filed with the RTC,
Branch 46, Urdaneta, Pangasinan, a criminal case for estafa15 against
Ocampo for disposing the stocks of palay covered by the grains warehouse
receipts, docketed as Criminal Case No. U-7373.

As regards the 20% portion of the quedan loan, Land Bank filed on March
27, 2000 a petition16 for extrajudicial foreclosure of real estate mortgage
pursuant to Act No. 3135, as amended. On April 4, 2000, the Ex Officio
Provincial Sheriff of Pangasinan issued a Notice of Extrajudicial
Sale,17 setting the sale at public auction on May 30, 2000, a copy of which
was furnished to, and received by, Ocampo.

On May 25, 2000, Ocampo and Tan filed with the RTC a
Complaint18 for Declaration of Nullity and Damages with Application for a
Writ of Preliminary Injunction against the Land Bank of the Philippines and
the Ex Officio Provincial Sheriff of Pangasinan, praying19 that after due
notice and hearing on the merits, the RTC: (1) declare the deed of real
estate mortgage null and void; (2) declare the extrajudicial foreclosure
proceedings and notice of extrajudicial sale, null and void; (3) make the writ
of preliminary injunction permanent; and (4) order the defendants to pay,
jointly and severally, moral damages in an amount to be fixed by the RTC,
plus attorney's fees, expenses of litigation, among others.

In their Complaint, Ocampo and Tan claimed that the real estate mortgage
is a forgery, because Land Bank did not inform them that the properties
would be used to secure the payment of a ₱2,000,000.00 loan, which they
never applied for, much less received its proceeds. They also claimed that
Tan could not have mortgaged the properties since she does not own the
same.

During the trial,20 Ocampo narrated that, on August 29, 1991, she went to
the Land Bank to apply for another loan amounting to ₱5,000,000.00, but
only ₱1,000,000.00 was approved. Not amenable to the said amount, she
decided not to pursue her loan application. She further narrated that, in
order to facilitate her ₱5,000,000.00 loan application, she signed a
document denominated as Real Estate Mortgage. She insisted, however,
that when she affixed her signature thereon, some portions were still in
blank.21 As for the quedan loan, she contended that she had fully paid the
same when she executed a Deed of Absolute Assignment22 dated July 3,
1991 in favor of Quedancor.23 Such payment she made known to Land
Bank through a letter24 dated August 30, 1991.

In its Answer,25 Land Bank contended that Ocampo and Tan executed a
Deed of Real Estate Mortgage dated September 6, 1991, knowing fully well
that the same would secure the 20% portion of their quedan loan, which
was not guaranteed by Quedancor. They even submitted the TDs covering
the properties as well as the survey plan. Tan, on the other hand, signed,
not as a co-owner of the properties, but in her capacity as a co-borrower of
the quedan loan.

Land Bank presented as its witness, Zenaida Dasig, the assigned account
officer of Ocampo. Dasig testified26 that Ocampo and Tan obtained a
₱10,000,000.00 quedan loan from the Land Bank, 80% of which was
secured by quedan receipts. She stated that Ocampo was required to
submit an additional collateral for the 20% unsecured portion, which she
did through the mortgage contract. As for Ocampo's claim of full payment
of the quedan loan, Land Bank insisted otherwise. It argued that the
quedan loan was still not fully satisfied because it was not made a party to
the Deed of Absolute Assignment between Ocampo and Quedancor. Land
Bank relayed its position on the matter through a letter27 dated September
17, 1991 to Ocampo, wherein it acknowledged receipt of her August 30,
1991 letter and informed her of the subsisting balance in the quedan loan.

On May 29, 2000, the RTC issued a Writ of Temporary Restraining

Order,28 effective for seventy-two (72) hours, to enjoin the Ex Officio
Provincial Sheriff from proceeding with the scheduled May 30, 2000 sale at
public auction.

After the trial, the RTC rendered a Decision29 in favor of Ocampo and Tan,
to wit:

WHEREFORE, in view of the foregoing, the Court renders judgment

declaring the Real Estate Mortgage between the Plaintiffs and Defendant
[Land] Bank of the Philippines and signed by the Plaintiffs on September 6,
1991, null and void.30

Land Bank moved for reconsideration,31 but the RTC denied the same in its
Order32 dated July 12, 2002.

Land Bank filed an appeal with the CA, which granted the same.
Accordingly, it reversed the RTC and ordered the dismissal of the
complaint. The dispositive portion of the decision reads:

WHEREFORE, premises considered, the instant appeal is

hereby GRANTED and the Decision dated March 18, 2002 of the Regional
Trial Court, Branch 45 of Urdaneta City, Pangasinan, is
hereby REVERSED and SET ASIDE.The complaint is ordered
DISMISSED.

SO ORDERED.33

Ocampo and Tan did not file a motion for reconsideration of the CA
decision. Instead, they elevated the matter before the Court via the present
petition,34 which involves the following issues: (1) whether or not the deed
of real estate mortgage was void; and (2) assuming that it was valid,
whether or not the loan was already extinguished.

The resolution of the first issue is factual in nature and calls for a review of
the evidence already considered in the proceedings below. As a general
rule, the Court is not a trier of facts and does not normally undertake the re-
examination of the evidence presented by the contending parties during the
trial of the case.35 Only errors of law are reviewable by the Supreme Court
on petitions for review.36 However, this rule admits of several exceptions,
wherein We disregarded the aforesaid tenet and proceeded to review the
findings of facts of the lower courts.37 Two exceptions are present in this
case, namely: (1) when the findings of facts are conflicting; and (2) when
the findings of fact of the Court of Appeals are contrary to those of the trial
court.

Ocampo and Tan filed the complaint invoking the nullity of the real estate
mortgage on the ground of forgery. To bolster their claim, they averred that
a physical examination of Ocampo's signature showed that the typewritten
name "Gloria Ocampo" was superimposed, or it overlapped the signature
"Gloria Ocampo." They argued that this indicated that the signature "Gloria
Ocampo" was affixed to the printed form of the deed before the typewritten
"Gloria Ocampo" was typed thereon. Such also confirmed the testimony of
Ocampo that she was made to sign a blank form before the typewritten
parts thereof were typed.38 1avvphi1

Forgery is present when any writing is counterfeited by the signing of

another’s name with intent to defraud.39 Here, Ocampo admitted that she

had affixed her signature to a Deed of Real Estate Mortgage purportedly as

a prefatory act to a ₱5,000,000.00 loan application. In her direct
examination,40 she testified as follows:

ATTY. TANOPO: DIRECT EXAMINATION

Q. Mrs. Ocampo, I show you here a Deed of Real Estate Mortgage

purportedly executed by you and the Land Bank of the Philippines,
which has already been marked for purposes of identification as
Exhibit "6" for the defendants, and I point to you a signature which
overlapped (sic) the typewritten name Gloria Ocampo, will you inform
this Honorable Court, whose signature is that which overlaps the
typewritten name Gloria Ocampo?

A. That is my signature, sir.

ATTY. TANOPO:

Q. Now, in your complaint, you claim or alleged that this mortgage is

a forgery, notwithstanding the fact that you admitted that the
signature overlapped the typewritten Gloria Ocampo is your
signature. Kindly inform the court why is this a forgery?

A. Because they made me sign a blank form, sir.

 Q. Why were you made to sign a blank form by the bank?

A. Because that was the procedure of the bank, letting them sign
blank forms for the loan.

xxxx

COURT:

Q. Madam Witness, what do you mean by blank form? It would seem

that the exhibit is not blank?

A. They showed us blank instrument for us to sign before we can

obtain the loan, your Honor.

Q. You mean to say in blank form, the form is not filled up

although there are printed statements, is that correct?

A. Yes, sir.

Corollarily, Ocampo's signature in the Deed of Real Estate Mortgage was

not forged. We agree with the CA when it held that there is really no reason
to discuss forgery.41 Notably, Ocampo and Tan failed to present any
evidence to disprove the genuineness or authenticity of their signatures.42 A
perusal of the Deed of Real Estate Mortgage dated September 6, 1991
revealed the signatures of Gloria Ocampo and Teresita Tan as well as that
of Zenaida Dasig and Julita Orpiano. On the acknowledgment portion were
the names of Gloria Ocampo and Teresita Tan, alongside their respective
residence certificate numbers and the places and dates of issue, together
with the name of Atty. Elmer Veloria, the notary public.

It is well settled that a document acknowledged before a notary public is a

public document that enjoys the presumption of regularity. It is a prima
facie evidence of the truth of the facts stated therein and a conclusive
presumption of its existence and due execution. To overcome this
presumption, there must be presented evidence that is clear and
convincing. Absent such evidence, the presumption must be upheld. In
addition, one who denies the due execution of a deed where one’s
signature appears has the burden of proving that contrary to the recital in
the jurat, one never appeared before the notary public and acknowledged
the deed to be a voluntary act.43 We have also held that a notarized
instrument is admissible in evidence without further proof of its due
execution and is conclusive as to the truthfulness of its contents, and has in
its favor the presumption of regularity.44

Ocampo denied having appeared before the notary public.45 When asked
further by the RTC if she was certain, she replied that she cannot
remember if she had indeed appeared before the notary public.46 She also
denied knowing Zenaida Dasig but she knew Julita Orpiano, who,
according to her, was in-charge of the loan in Land Bank.47Contrary to
Ocampo's claims, Dasig narrated that Ocampo signed the real estate
mortgage in the presence of the notary public48 because she was also
present during that time.49 As Land Bank's account officer, Dasig was
tasked to evaluate loan applications and projects related thereto, for
proposal as to viability and profitability, including the renewal of credit lines
for management approval. As such, she was not only vested with
knowledge of banking procedures and practices, she was also acquainted
with the individuals who transact business with the Land Bank.

The real issue here is not so much on forgery, but on the fact that the Land
Bank allegedly used the genuine signature of Ocampo in order to make it
appear that she had executed a real estate mortgage to secure a
₱2,000,000.00 loan. Ocampo maintained that when she signed the blank
form, she was led to believe by the Land Bank that such would be used to
process her ₱5,000,000.00 loan application. She was, therefore, surprised
when she received a notice from the sheriff regarding the foreclosure of a
mortgage over her properties.

Article 1338 of the Civil Code provides:

ART. 1338. There is fraud when, through insidious words or machinations

of one of the contracting parties, the other is induced to enter into a
contract which, without them, he would not have agreed to.

Verily, fraud refers to all kinds of deception -- whether through insidious

machination, manipulation, concealment or misrepresentation -- that would
lead an ordinarily prudent person into error after taking the circumstances
into account.50 The deceit employed must be serious. It must be sufficient
to impress or lead an ordinarily prudent person into error, taking into
account the circumstances of each case.51
Unfortunately, Ocampo was unable to establish clearly and precisely how
the Land Bank committed the alleged fraud. She failed to convince Us that
she was deceived, through misrepresentations and/or insidious actions,
into signing a blank form for use as security to her previous loan. Quite the
contrary, circumstances indicate the weakness of her submissions. The
Court of Appeals aptly held that:

Granting, for the sake of argument, that appellant bank did not apprise the
appellees of the real nature of the real estate mortgage, such stratagem,
deceit or misrepresentations employed by defendant bank are facts
constitutive of fraud which is defined in Article 1338 of the Civil Code as
that insidious words or machinations of one of the contracting parties, by
which the other is induced to enter into a contract which without them, he
would not have agreed to. When fraud is employed to obtain the consent of
the other party to enter into a contract, the resulting contract is merely a
voidable contract, that is a valid and subsisting contract until annulled or set
aside by a competent court. It must be remembered that an action to
declare a contract null and void on the ground of fraud must be instituted
within four years from the date of discovery of fraud. In this case, it is
presumed that the appellees must have discovered the alleged fraud since
1991 at the time when the real estate mortgage was registered with the
Register of Deeds of Lingayen, Pangasinan. The appellees cannot now
feign ignorance about the execution of the real estate mortgage.52

In fine, We hold that the Deed of Real Estate Mortgage was valid.

Anent the second issue, We also resolve the same against Ocampo and
Tan and, consequently, hold that the loan obligation was not yet
extinguished.

Ocampo claimed that she had already paid the quedan loan when she
assigned parcels of land covered by three (3) transfer certificates of title in
favor of Quedancor, as evidenced by the Deed of Absolute
Assignment,53 to wit:

WHEREAS, the ASSIGNOR acknowledges to be justly indebted to the

ASSIGNEE in the total sum of NINE MILLION NINE HUNDRED NINETY-
SIX THOUSAND ₱9,996,000.00 exclusive of interest charges.
WHEREAS, the ASSIGNOR, in full settlement thereof has voluntarily
offered to assign and convey certain properties belonging to her and the
ASSIGNEE indicated his willingness to accept the same;

NOW, THEREFORE, for and in consideration of the sum of NINE MILLION

NINE HUNDRED NINETY-SIX THOUSAND representing the total
obligation owing to the ASSIGNEE by the ASSIGNOR does hereby sede
(sic), assign, transfer and convey in a manner absolute and irrevocable in
favor of the said ASSIGNEE the following property/ies free and clear of all
liens and encumbrances, x x x

The essence of a contract of mortgage indebtedness is that a property has

been identified or set apart from the mass of the property of the debtor-
mortgagor as security for the payment of money or the fulfillment of an
obligation to answer the amount of indebtedness, in case of default of
payment.54 In the case before Us, the loan amount was established. It was
also admitted that 80% was guaranteed by Quedancor, while the remaining
20%, by the Deed of Real Estate Mortgage. Finally, the records show that
Ocampo and Tan obtained the loan from the Land Bank and it was the
latter which released the loan proceeds.

We cannot countenance Ocampo's actions in order to justify her alleged full

payment of the quedan loan. The loan was between her and the Land
Bank; yet, she did not include the latter as party to the Deed of Absolute
Assignment, for the following reasons: that it was Quedancor which
collected from her and that, once, when she went to the Land Bank to pay
her loan, the person she approached merely smiled at her.55 Her
justifications were flimsy and incredulous. Moreover, there are other
evidence on record which she chose to ignore, showing her indebtedness
to the Land Bank, and not to Quedancor, to wit: (1) she delivered the TDs
on her properties as well as the survey plan to the Land Bank; (2) the
mortgage was annotated on TD Nos. 6958 and 6959, and subsequently, on
TD 317-A; (3) the Land Bank registered the mortgage with the Register of
Deeds of Lingayen, Pangasinan; (4) she used TD No. 317-A in her
application for the registration of her properties before the cadastral court;
(5) the Land Bank even filed a motion in the land registration case so that
the mortgage will be considered and noted as encumbrance on the
properties; and (6) she paid Land Bank, by way of debit advices, in the
amount of ₱100,000.00.
All the above circumstances, notwithstanding, Ocampo hastily executed the
Deed of Absolute Assignment and conveyed some of her properties to
Quedancor without prior notice to the Land Bank.

In the case of Vda. De Jayme v. Court of Appeals,56 We held that dacion en

pago is the delivery and transmission of ownership of a thing by the debtor
to the creditor as an accepted equivalent of the performance of the
obligation. Thus, it is a special mode of payment where the debtor offers
another thing to the creditor, who accepts it as equivalent of payment of an
outstanding debt, which undertaking, in one sense, amounts to a sale. As
such, the essential elements are consent, object certain, and cause or
consideration. In its modern concept, what actually takes place in dacion en
pago is an objective novation of the obligation where the thing offered as
an accepted equivalent of the performance of an obligation is considered
as the object of the contract of sale, while the debt is considered as the
purchase price. In any case, common consent is an essential prerequisite,
be it sale or novation, to have the effect of totally extinguishing the debt or
obligation.

The requisite consent is not present in this case, for as explained by the
Court of Appeals:

x x x True, the plaintiffs-appellees executed a Deed of Assignment. But

what does the said deed guarantee? The Deed of Assignment referred to
was entered into between Quedan [Guarantee] Fund Board and the
plaintiffs-appellees. The appellant creditor bank, however, had no
participation, or much less, consented to the execution of the said deed of
assignment. Hence, the deed of assignment cannot have the valid effect of
extinguishing the real estate mortgage or much less the quedan loan
insofar as the creditor bank is concerned. Basic is the rule that in order to
have a valid payment, the payment shall be made to the person in whose
favor the obligation is constituted, or his successor-in-interest, or any
person authorized to receive it. Why then did the plaintiff Gloria Ocampo
assigned (sic) her properties to a guarantor and not directly to the creditor
bank? The pre-trial order will readily disclose that the Quedan [Guarantee]
Fund Board is a mere guarantor or surety of 80% of the quedan loan. Thus,
even if the deed of assignment has the effect of a valid payment, we may
reasonably conclude that the extinguishment is only up to the extent of
80% of the quedan loan. Thus, it leaves the balance of 20% of the quedan
loan which can be fully satisfied by the foreclosure of the real estate
mortgage.57

In a civil case, the burden of proof is on the plaintiff to establish his case
through a preponderance of evidence. If he claims a right granted or
created by law, he must prove his claim by competent evidence.58 After
considering the evidence presented by the parties, as well as their
arguments in their respective pleadings, We hold that petitioners Ocampo
and Tan failed to sufficiently establish their cause of action. Consequently,
their complaint should have been dismissed by the RTC.

One more thing. Ocampo is a businesswoman and she had testified that
she had availed of loans from other banks. The amount involved was not a
measly amount. Verily, she is expected to be acquainted with the banking
procedures as regards to loan applications. With this premise, she ought to
have read the terms and conditions of the document that she was signing,
especially so when, as claimed by her, there were still blank spaces at that
time when she affixed her signature thereon. Finally, We believe that she
must also be familiar with the manner by which the loans should be paid
and settled; yet, that was not what happened here. The Court has always
maintained its impartiality as early as in the case of Vales v. Villa,59 and has
warned litigants that:

x x x The law furnishes no protection to the inferior simply because he is

inferior any more than it protects the strong because he is strong. The law
furnishes protection to both alike – to one no more or less than the other. It
makes no distinction between the wise and the foolish, the great and the
small, the strong and the weak. The foolish may lose all they have to the
wise; but that does not mean that the law will give it back to them again.
Courts cannot follow one every step of his life and extricate him from bad
bargains, protect him from unwise investments, relieve him from one-sided
contracts, or annul the effects of foolish acts. x x x60

WHEREFORE, the Petition is DENIED. The Court of Appeals Decision

dated July 21, 2004 in CA-G.R. CV No. 77683 is hereby AFFIRMED. Costs
against the petitioners.

SO ORDERED.

DIOSDADO M. PERALTA
Associate Justice
WE CONCUR:

GLORIA OCAMPO AND TERESITA TAN VS. LANDBANK OF THE

PHILIPPINES, URDANETA, PANGASINAN BRANCH AND EX-OFFICIO
PROVINCIAL SHERIFF OF PANGASINAN GR No. 164968, July 3, 2009
Facts: This is an instant petition for review on Certiorari assailing the
decision of CA (favoring Landbank). In 1991, Ocampo and her daughter,
Tan obtained from the Landbank a PhP10M quedan loan upon issuance
of promissory notes (PNs) which was released to them by: Amount
Release Date Maturity Date Remarks PhP3.996M 01/31/1991
07/30/1991 2 PNs PhP6M 04/05/1991 10/02/1991 3 PNs Quedan Rural
Credit Guarantee Corporation (Quedancor) guaranteed to pay
Landbank their loan but only up to 80% of the outstanding loan plus
interests at the time of maturity. Pursuant thereto, Ocampo and Tan
delivered to Landbank quedans and executed a Deed of Assignment
covering 41,690 cavans of palay (equivalent to PhP9.996M – 100% of
the loan) in favor of Quedancor. Ocampo and Tan constituted a Real
Estate Mortgage (REM) over 2 parcels of unregistered land owned by
Ocampo to secure the remaining 20%. Such encumbrance was
annotated in the land title when Ocampo filed for the lands’
registration. When Ocampo failed to pay the 3 remaining PNs on Oct. 2,
1991, Lanbank filed the following:  Claim for guarantee payment with
Quedancor;  Criminal case of estafa against Ocampo for disposing
stocks of palay covered by the quedans;  Extrajudicial foreclosure of
REM (re: 20% of loan) The Ex-Officio Provincial Sheriff issued a notice of
Extrajudicial Sale (Public Auction). RTC issued TRO on the public auction
and favored Ocampo and Tan when they filed a Complaint for
Declaration of Nullity and Damages with Application of a Writ of
Preliminary Injunction against Landbank and the Sheriff on the basis on
forgery regarding the REM on the 20% of the loan. Upon Landbank’s
appeal, the CA granted its petition and reversed the RTC’s decision.
Hence, this petition. Issues: 1. WON the Deed of Real Estate Mortgage
was void? 2. Assuming it was valid, WON the loan was already
extinguished? Held: 1. NO. The Deed of REM was valid. There is no
forgery. Ocampo and Tan failed to present any evidence to disprove the
genuineness or authenticity of their signatures. In fact, Ocampo
admitted in her direct examination that such signature was hers,
although she claimed that she was made to sign a blank form (printed
form with blanks yet to be filled up). Moreover, the bank personnel
who were also signatories to the deed confirmed their appearances
despite her testimony that she cannot say for certain if she appeared
before the notary public. It is well-settled that a document
acknowledged before a notary public is a public document that enjoys
the presumption of regularity. It is a prima facie evidence of the truth
of the facts stated therein and a conclusive presumption of its existence
and due execution. The real issue is fraud and not forgery. Ocampo
claimed that she was led to believe by Landbank that the form she
signed was to process her PhP5M loan application and not to secure
the subject 20% of the loan. However, Ocampo was unable to establish
clearly and precisely how Landbank committed the alleged fraud. She
failed to lay down the deception through insidious words or
machinations or misrepresentations made by Landbank so that she
signed the blank form. Granting for the sake of argument that there
was fraud, such contract was merely voidable where an action should
have been instituted within 4 yours from discovery, i.e. when the REM
was registered with the Register of Deeds. 2. NO. The loan was not yet
extinguished. Ocampo claimed that she already paid the quedan loan
when she executed the Deed of Assignment in favor of Quedancor. The
loan was between Ocampo and Landbank. Yet, she did not include
Landbank as party to the Deed of Assignment despite evidence on
record showing her indebtedness to Landbank (e.g.
registration/annotation of REM). Ocampo hastily executed the Deed of
Assignment and conveyed some of her properties to Quedancor
without prior notice to Landbank. Dacion en pago is the delivery and
transmission of ownership of a thing by the debtor to the creditor as an
accepted equivalent of the performance of an obligation. As properly
ruled by the CA, the required consent is absent in this case. Landbank
had no participation much less consented to the execution of the Deed
of Assignment. Hence, no extinguishment of loan can be had. Even if
the Deed of Assignment has the effect of valid payment, the
extinguishment is only up to the extent of 80% of the quedan loan.
Thus, it leaves a balance of 20% which can be fully satisfied by the
foreclosure of the REM. Petition denied.

18. Republic of the Philippines vs. Sandigan Bayan (1st

Division), et al GR. NO. 166859, April 12, 2011

G.R. No. 166859 April 12, 2011

REPUBLIC OF THE PHILIPPINES, Petitioner,

vs.
SANDIGANBAYAN (FIRST DIVISION), EDUARDO M. COJUANGCO,
JR., AGRICULTURAL CONSULTANCY SERVICES, INC.,
ARCHIPELAGO REALTY CORP., BALETE RANCH, INC., BLACK
STALLION RANCH, INC., CHRISTENSEN PLANTATION COMPANY,
DISCOVERY REALTY CORP., DREAM PASTURES, INC., ECHO
RANCH, INC., FAR EAST RANCH, INC., FILSOV SHIPPING COMPANY,
INC., FIRST UNITED TRANSPORT, INC., HABAGAT REALTY
DEVELOPMENT, INC., KALAWAKAN RESORTS, INC., KAUNLARAN
AGRICULTURAL CORP., LABAYUG AIR TERMINALS, INC., LANDAIR
INTERNATIONAL MARKETING CORP., LHL CATTLE CORP., LUCENA
OIL FACTORY, INC., MEADOW LARK PLANTATIONS, INC.,
METROPLEX COMMODITIES, INC., MISTY MOUNTAIN
AGRICULTURAL CORP., NORTHEAST CONTRACT TRADERS, INC.,
NORTHERN CARRIERS CORP., OCEANSIDE MARITIME
ENTERPRISES, INC., ORO VERDE SERVICES, INC., PASTORAL
FARMS, INC., PCY OIL MANUFACTURING CORP., PHILIPPINE
TECHNOLOGIES, INC., PRIMAVERA FARMS, INC., PUNONG-BAYAN
HOUSING DEVELOPMENT CORP., PURA ELECTRIC COMPANY, INC.,
RADIO AUDIENCE DEVELOPERS INTEGRATED ORGANIZATION,
INC., RADYO PILIPINO CORP., RANCHO GRANDE, INC., REDDEE
DEVELOPERS, INC., SAN ESTEBAN DEVELOPMENT CORP., SILVER
LEAF PLANTATIONS, INC., SOUTHERN SERVICE TRADERS, INC.,
SOUTHERN STAR CATTLE CORP., SPADE ONE RESORTS CORP.,
UNEXPLORED LAND DEVELOPERS, INC., VERDANT PLANTATIONS,
INC., VESTA AGRICULTURAL CORP. AND WINGS RESORTS
CORP., Respondents.

x - - - - - - - - - - - - - - - - - - - - - - -x

G.R. No. 169203

REPUBLIC OF THE PHILIPPINES, Petitioner,

vs.
SANDIGANBAYAN (FIRST DIVISION), EDUARDO M. COJUANGCO,
JR., MEADOW LARK PLANTATIONS, INC., SILVER LEAF
PLANTATIONS, INC., PRIMAVERA FARMS, INC., PASTORAL FARMS,
INC., BLACK STALLION RANCH, INC., MISTY MOUNTAINS
AGRICULTURAL CORP., ARCHIPELAGO REALTY CORP.,
AGRICULTURAL CONSULTANCY SERVICES, INC., SOUTHERN STAR
CATTLE CORP., LHL CATTLE CORP., RANCHO GRANDE, INC.,
DREAM PASTURES, INC., FAR EAST RANCH, INC., ECHO RANCH,
INC., LAND AIR INTERNATIONAL MARKETING CORP., REDDEE
DEVELOPERS, INC., PCY OIL MANUFACTURING CORP., LUCENA OIL
FACTORY, INC., METROPLEX COMMODITIES, INC., VESTA
AGRICULTURAL CORP., VERDANT PLANTATIONS, INC.,
KAUNLARAN AGRICULTURAL CORP., ECJ & SONS AGRICULTURAL
ENTERPRISES, INC., RADYO PILIPINO CORP., DISCOVERY REALTY
CORP., FIRST UNITED TRANSPORT, INC., RADIO AUDIENCE
DEVELOPERS INTEGRATED ORGANIZATION, INC., ARCHIPELAGO
FINANCE AND LEASING CORP., SAN ESTEBAN DEVELOPMENT
CORP., CHRISTENSEN PLANTATION COMPANY, NORTHERN
CARRIERS CORP., VENTURE SECURITIES, INC., BALETE RANCH,
INC., ORO VERDE SERVICES, INC., and KALAWAKAN RESORTS,
INC., Respondents.

x - - - - - - - - - - - - - - - - - - - - - - -x

G.R. No. 180702

REPUBLIC OF THE PHILIPPINES, Petitioner,

vs.
EDUARDO M. COJUANGCO, JR., FERDINAND E. MARCOS, IMELDA R.
MARCOS, EDGARDO J. ANGARA,* JOSE C. CONCEPCION, AVELINO
V. CRUZ, EDUARDO U. ESCUETA, PARAJA G. HAYUDINI, JUAN
PONCE ENRILE, TEODORO D. REGALA, DANILO URSUA, ROGELIO
A. VINLUAN, AGRICULTURAL CONSULTANCY SERVICES, INC.,
ANGLO VENTURES, INC., ARCHIPELAGO REALTY CORP., AP
HOLDINGS, INC., ARC INVESTMENT, INC., ASC INVESTMENT, INC.,
AUTONOMOUS DEVELOPMENT CORP., BALETE RANCH, INC.,
BLACK STALLION RANCH, INC., CAGAYAN DE ORO OIL COMPANY,
INC., CHRISTENSEN PLANTATION COMPANY, COCOA INVESTORS,
INC., DAVAO AGRICULTURAL AVIATION, INC., DISCOVERY REALTY
CORP., DREAM PASTURES, INC., ECHO RANCH, INC., ECJ & SONS
AGRI. ENT., INC., FAR EAST RANCH, INC., FILSOV SHIPPING
COMPANY, INC., FIRST MERIDIAN DEVELOPMENT, INC., FIRST
UNITED TRANSPORT, INC., GRANEXPORT MANUFACTURING CORP.,
HABAGAT REALTY DEVELOPMENT, INC., HYCO AGRICULTURAL,
INC., ILIGAN COCONUT INDUSTRIES, INC., KALAWAKAN RESORTS,
INC., KAUNLARAN AGRICULTURAL CORP., LABAYOG AIR
TERMINALS, INC., LANDAIR INTERNATIONAL MARKETING CORP.,
LEGASPI OIL COMPANY, LHL CATTLE CORP., LUCENA OIL
FACTORY, INC., MEADOW LARK PLANTATIONS, INC., METROPLEX
COMMODITIES, INC., MISTY MOUNTAIN AGRICULTURAL CORP.,
NORTHEAST CONTRACT TRADERS, INC., NORTHERN CARRIERS
CORP., OCEANSIDE MARITIME ENTERPRISES, INC., ORO VERDE
SERVICES, INC., PASTORAL FARMS, INC., PCY OIL
MANUFACTURING CORP., PHILIPPINE RADIO CORP., INC.,
PHILIPPINE TECHNOLOGIES, INC., PRIMAVERA FARMS, INC.,
PUNONG-BAYAN HOUSING DEVELOPMENT CORP., PURA ELECTRIC
COMPANY, INC., RADIO AUDIENCE DEVELOPERS INTEGRATED
ORGANIZATION, INC., RADYO PILIPINO CORP., RANCHO GRANDE,
INC., RANDY ALLIED VENTURES, INC., REDDEE DEVELOPERS, INC.,
ROCKSTEEL RESOURCES, INC., ROXAS SHARES, INC., SAN
ESTEBAN DEVELOPMENT CORP., SAN MIGUEL CORPORATION
OFFICERS, INC., SAN PABLO MANUFACTURING CORP., SOUTHERN
LUZON OIL MILLS, INC., SILVER LEAF PLANTATIONS, INC.,
SORIANO SHARES, INC., SOUTHERN SERVICE TRADERS, INC.,
SOUTHERN STAR CATTLE CORP., SPADE 1 RESORTS CORP.,
TAGUM AGRICULTURAL DEVELOPMENT CORP., TEDEUM
RESOURCES, INC., THILAGRO EDIBLE OIL MILLS, INC., TODA
HOLDINGS, INC., UNEXPLORED LAND DEVELOPERS, INC.,
VALHALLA PROPERTIES, INC., VENTURES SECURITIES, INC.,
VERDANT PLANTATIONS, INC., VESTA AGRICULTURAL CORP. and
WINGS RESORTS CORP., Respondents.
JOVITO R. SALONGA, WIGBERTO E. TAÑADA, OSCAR F. SANTOS,
VIRGILIO M. DAVID, ROMEO C. ROYANDAYAN for himself and for
SURIGAO DEL SUR FEDERATION OF AGRICULTURAL
COOPERATIVES (SUFAC), MORO FARMERS ASSOCIATION OF
ZAMBOANGA DEL SUR (MOFAZS) and COCONUT FARMERS OF
SOUTHERN LEYTE COOPERATIVE (COFA-SL); PHILIPPINE RURAL
RECONSTRUCTION MOVEMENT (PRRM), represented by CONRADO
S. NAVARRO; COCONUT INDUSTRY REFORM MOVEMENT, INC.
(COIR) represented by JOSE MARIE T. FAUSTINO; VICENTE FABE for
himself and for PAMBANSANG KILUSAN NG MGA SAMAHAN NG
MAGSASAKA (PAKISAMA); NONITO CLEMENTE for himself and for
the NAGKAKAISANG UGNAYAN NG MGA MALILIIT NA MAGSASAKA
AT MANGGAGAWA SA NIYUGAN (NIUGAN); DIONELO M. SUANTE,
SR. for himself and for KALIPUNAN NG MALILIIT NA MAGNINIYOG
NG PILIPINAS (KAMMPIL), INC., Petitioners-Intervenors.

DECISION

BERSAMIN, J.:

For over two decades, the issue of whether the sequestered sizable block
of shares representing 20% of the outstanding capital stock of San Miguel
Corporation (SMC) at the time of acquisition belonged to their registered
owners or to the coconut farmers has remained unresolved. Through this
decision, the Court aims to finally resolve the issue and terminate the
uncertainty that has plagued that sizable block of shares since then.

These consolidated cases were initiated on various dates by the Republic

of the Philippines (Republic) via petitions for certiorari in G.R. Nos.
1668591 and 169023,2 and via petition for review on certiorari in
180702,3 the first two petitions being brought to assail the following
resolutions issued in Civil Case No. 0033-F by the Sandiganbayan, and the
third being brought to appeal the adverse decision promulgated on
November 28, 2007 in Civil Case No. 0033-F by the Sandiganbayan.

Specifically, the petitions and their particular reliefs are as follows:

(a) G.R. No. 166859 (petition for certiorari), to assail the resolution
promulgated on December 10, 20044denying the Republic’s Motion
For Partial Summary Judgment;

(b) G.R. No. 169023 (petition for certiorari), to nullify and set aside,
firstly, the resolution promulgated on October 8, 2003,5 and,
secondly, the resolution promulgated on June 24, 20056 modifying
the resolution of October 8, 2003; and

(c) G.R. No. 180702 (petition for review on certiorari), to appeal the
decision promulgated on November 28, 2007.7

ANTECEDENTS

On July 31, 1987, the Republic commenced Civil Case No. 0033 in the
Sandiganbayan by complaint, impleading as defendants respondent
Eduardo M. Cojuangco, Jr. (Cojuangco) and 59 individual defendants. On
October 2, 1987, the Republic amended the complaint in Civil Case No.
0033 to include two additional individual defendants. On December 8,
1987, the Republic further amended the complaint through its Amended
Complaint [Expanded per Court-Approved Plaintiff’s ‘Manifestation/Motion
Dated Dec. 8, 1987] albeit dated October 2, 1987.

More than three years later, on August 23, 1991, the Republic once more
amended the complaint apparently to avert the nullification of the writs of
sequestration issued against properties of Cojuangco. The amended
complaint dated August 19, 1991, designated as Third Amended Complaint
[Expanded Per Court-Approved Plaintiff’s Manifestation/Motion Dated Dec.
8, 1987],8 impleaded in addition to Cojuangco, President Marcos, and First
Lady Imelda R. Marcos nine other individuals, namely: Edgardo J. Angara,
Jose C. Concepcion, Avelino V. Cruz, Eduardo U. Escueta, Paraja G.
Hayudini, Juan Ponce Enrile, Teodoro D. Regala, and Rogelio Vinluan,
collectively, the ACCRA lawyers, and Danilo Ursua, and 71 corporations.

On March 24, 1999, the Sandiganbayan allowed the subdivision of the

complaint in Civil Case No. 0033 into eight complaints, each pertaining to
distinct transactions and properties and impleading as defendants only the
parties alleged to have participated in the relevant transactions or to have
owned the specific properties involved. The subdivision resulted into the
following subdivided complaints, to wit:

Subdivided
Subject Matter
Complaint
1. Civil Case Anomalous Purchase and Use of First
No. 0033-A United Bank (now United Coconut Planters
Bank)
2. Civil Case Creation of Companies Out of Coco Levy
No. 0033-B Funds
3. Civil Case Creation and Operation of Bugsuk Project
No. 0033-C and Award of P998 Million Damages to
Agricultural Investors, Inc.
4. Civil Case Disadvantageous Purchases and
No. 0033-D Settlement of the Accounts of Oil Mills Out
of Coco Levy Funds
5. Civil Case Unlawful Disbursement and Dissipation of
No. 0033-E Coco Levy Funds
6. Civil Case Acquisition of SMC shares of stock
No. 0033-F
7. Civil Case Acquisition of Pepsi-Cola
No. 0033-G
8. Civil Case Behest Loans and Contracts
No. 0033-H
In Civil Case No. 0033-F, the individual defendants were Cojuangco,
President Marcos and First Lady Imelda R. Marcos, the ACCRA lawyers,
and Ursua. Impleaded as corporate defendants were Southern Luzon Oil
Mills, Cagayan de Oro Oil Company, Incorporated, Iligan Coconut
Industries, Incorporated, San Pablo Manufacturing Corporation, Granexport
Manufacturing Corporation, Legaspi Oil Company, Incorporated,
collectively referred to herein as the CIIF Oil Mills, and their 14 holding
companies, namely: Soriano Shares, Incorporated, Roxas Shares,
Incorporated, Arc Investments, Incorporated, Toda Holdings, Incorporated,
ASC Investments, Incorporated, Randy Allied Ventures, Incorporated, AP
Holdings, Incorporated, San Miguel Corporation Officers, Incorporated, Te
Deum Resources, Incorporated, Anglo Ventures, Incorporated, Rock Steel
Resources, Incorporated, Valhalla Properties, Incorporated, and First
Meridian Development, Incorporated.

Allegedly, Cojuangco purchased a block of 33,000,000 shares of SMC

stock through the 14 holding companies owned by the CIIF Oil Mills. For
this reason, the block of 33,133,266 shares of SMC stock shall be referred
to as the CIIF block of shares.

Also impleaded as defendants in Civil Case No. 0033-F were several

corporations9 alleged to have been under Cojuangco’s control and used by
him to acquire the block of shares of SMC stock totaling 16,276,879 at the
time of acquisition (representing approximately 20% percent of the capital
stock of SMC). These corporations are referred to as Cojuangco
corporations or companies, to distinguish them from the CIIF Oil Mills.
Reference hereafter to Cojuangco and the Cojuangco corporations or
companies shall be as Cojuangco, et al., unless the context requires
individualization.

The material averments of the Republic’s Third Amended Complaint

(Subdivided)10 in Civil Case No. 0033-F included the following:

12. Defendant Eduardo Cojuangco, Jr., served as a public officer

during the Marcos administration. During the period of his
incumbency as a public officer, he acquired assets, funds, and other
property grossly and manifestly disproportionate to his salaries, lawful
income and income from legitimately acquired property.
13. Having fully established himself as the undisputed "coconut king"
with unlimited powers to deal with the coconut levy funds, the stage
was now set for Defendant Eduardo M. Cojuangco, Jr. to launch his
predatory forays into almost all aspects of Philippine economic
activity namely: softdrinks, agribusiness, oil mills, shipping, cement
manufacturing, textile, as more fully described below.

14. Defendant Eduardo Cojuangco, Jr. taking undue advantage of his

association, influence and connection, acting in unlawful concert with
Defendants Ferdinand E. Marcos and Imelda R. Marcos, and the
individual defendants, embarked upon devices, schemes and
stratagems, including the use of defendant corporations as fronts, to
unjustly enrich themselves at the expense of Plaintiff and the Filipino
people, such as when he – misused coconut levy funds to buy out
majority of the outstanding shares of stock of San Miguel Corporation
in order to control the largest agri-business, foods and beverage
company in the Philippines, more particularly described as follows:

(b) He entered SMC in early 1983 when he bought most of the

20 million shares Enrique Zobel owned in the Company. The
shares, worth $49 million, represented 20% of SMC;

(c) Later that year, Cojuangco also acquired the Soriano stocks
through a series of complicated and secret agreements, a key
feature of which was a "voting trust agreement" that stipulated
that Andres, Jr. or his heir would proxy over the vote of the
shares owned by Soriano and Cojuangco. This agreement,
which accounted for 30% of the outstanding shares of SMC and
which lasted for five (5) years, enabled the Sorianos to retain
management control of SMC for the same period;

(d) Furthermore, in exchange for an SMC investment of $45

million in non-voting preferred shares in UCPB, Soriano served
as the vice-chairman of the supposed bank of the coconut
farmers, UCPB, and in return, Cojuangco, for investing funds
from the coconut levy, was named vice-chairman of SMC;

(e) Consequently, Cojuangco enjoyed the privilege of

appointing his nominees to the SMC Board, to which he
appointed key members of the ACCRA Law Firm (herein
Defendants) instead of coconut farmers whose money really
funded the sale;

(f) The scheme of Cojuangco to use the lawyers of the said

Firm was revealed in a document which he signed on 19
February 1983 entitled "Principles and Framework of Mutual
Cooperation and Assistance" which governed the rules for the
conduct of management of SMC and the disposition of the
shares which he bought.

(g) All together, Cojuangco purchased 33 million shares of the

SMC through the following 14 holding companies:

a) Soriano Shares, Inc. 1,249,163

b) ASC Investors, Inc. 1,562,449
c) Roxas Shares, Inc. 2,190,860
d) ARC Investors, Inc. 4,431,798
e) Toda Holdings, Inc. 3,424,618
f) AP Holdings, Inc. 1,580,997
g) Fernandez Holdings, Inc. 838,837
h) SMC Officers Corps., Inc. 2,385,987
i) Te Deum Resources, Inc. 2,674,899
j) Anglo Ventures Corp. 1,000.000
k) Randy Allied Ventures, Inc. 1,000,000
l) Rock Steel Resources, Inc. 2,432,625
m) Valhalla Properties Ltd., Inc. 1,361,033
n) First Meridian Development, Inc. 1,000,000

33,133,266

3.1. The same fourteen companies were in turn owned by the

following six (6) so-called CIIF Companies which were:
 a) San Pablo Manufacturing Corp. 19%
b) Southern Luzon Coconut Oil Mills, Inc. 11%
c) Granexport Manufacturing Corporation 19%
d) Legaspi Oil Company, Inc. 18%
e) Cagayan de Oro Oil Company, Inc. 18%
f) Iligan Coconut Industries, Inc. 15%

100%

(h) Defendant Corporations are but "shell" corporations owned

by interlocking shareholders who have previously admitted that
they are just "nominee stockholders" who do not have any
proprietary interest over the shares in their names. The
respective affidavits of the following, namely: Jose C.
Concepcion, Florentino M. Herrera III, Teresita J. Herbosa,
Teodoro D. Regala, Victoria C. de los Reyes, Manuel R. Roxas,
Rogelio A. Vinluan, Eduardo U. Escuete and Franklin M. Drilon,
who were all, at the time they became such stockholders,
lawyers of the Angara Abello Concepcion Regala & Cruz
(ACCRA) Law Offices, the previous counsel who incorporated
said corporations, prove that they were merely nominee
stockholders thereof.

(i) Mr. Eduardo M. Cojuangco, Jr., acquired a total of

16,276,879 shares of San Miguel Corporation from the Ayala
group: of said shares, a total of 8,138,440 (broken into
7,128,227 Class A and 1,010,213 Class B shares) were placed
in the names of Meadowlark Plantations, Inc. (2,034,610) and
Primavera Farms, Inc. (4,069,220). The Articles of
Incorporation of these three companies show that Atty. Jose C.
Concepcion of ACCRA owns 99.6% of the entire outstanding
stock. The same shareholder executed three (3) separate
"Declaration of Trust and Assignment of Subscription:" in favor
of a BLANK assignee pertaining to his shareholdings in
Primavera Farms, Inc., Silver Leaf Plantations, Inc. and
Meadowlark Plantations, Inc.
(k) The other respondent Corporations are owned by
interlocking shareholders who are likewise lawyers in the
ACCRA Law Offices and had admitted their status as "nominee
stockholders" only.

(k-1) The corporations: Agricultural Consultancy Services,

Inc., Archipelago Realty Corporation, Balete Ranch, Inc.,
Black Stallion Ranch, Inc., Discovery Realty Corporation,
First United Transport, Inc., Kaunlaran Agricultural
Corporation, LandAir International Marketing Corporation,
Misty Mountains Agricultural Corporation, Pastoral Farms,
Inc., Oro Verde Services, Inc. Radyo Filipino Corporation,
Reddee Developers, Inc., Verdant Plantations, Inc. and
Vesta Agricultural Corporation, were incorporated by
lawyers of ACCRA Law Offices.

(k-2) With respect to PCY Oil Manufacturing Corporation

and Metroplex Commodities, Inc., they are controlled
respectively by HYCO, Inc. and Ventures Securities, Inc.,
both of which were incorporated likewise by lawyers of
ACCRA Law Offices.

(k-3) The stockholders who appear as incorporators in

most of the other Respondents corporations are also
lawyers of the ACCRA Law Offices, who as early as 1987
had admitted under oath that they were acting only as
"nominee stockholders."

(l) These companies, which ACCRA Law Offices organized for

Defendant Cojuangco to be able to control more than 60% of
SMC shares, were funded by institutions which depended upon
the coconut levy such as the UCPB, UNICOM, United Coconut
Planters Assurance Corp. (COCOLIFE), among others.
Cojuangco and his ACCRA lawyers used the funds from 6 large
coconut oil mills and 10 copra trading companies to borrow
money from the UCPB and purchase these holding companies
and the SMC stocks. Cojuangco used $150 million from the
coconut levy, broken down as follows:
 Amount Source Purpose
(in million)
$22.26 Oil Mills equity in holding companies
$65.6 Oil Mills loan to holding companies
$61.2 UCPB loan to holding companies [164]

The entire amount, therefore, came from the coconut levy,

some passing through the Unicom Oil mills, others directly from
the UCPB.

(m) With his entry into the said Company, it began to get favors
from the Marcos government, significantly the lowering of the
excise taxes (sales and specific taxes) on beer, one of the main
products of SMC.

(n) Defendant Cojuangco controlled SMC from 1983 until his

co-defendant Marcos was deposed in 1986.

(o) Along with Cojuangco, Defendant Enrile and ACCRA also

had interests in SMC, broken down as follows:

% of SMC
Owner
Cojuangco
31.3% coconut levy money
18% companies linked to Cojuangco
5.2% government
5.2% SMC employee retirement fund
Enrile & ACCRA
1.8% Enrile
1.8% Jaka Investment Corporation
1.8% ACCRA Investment Corporation

15. Defendants Eduardo Cojuangco, Jr., Edgardo J. Angara, Jose C.

Concepcion, Teodoro Regala, Avelino Cruz, Rogelio Vinluan,
Eduardo U. Escueta and Paraja G. Hayudini of the Angara
Concepcion Cruz Regala and Abello law offices (ACCRA) plotted,
 devised, schemed, conspired and confederated with each other in
setting up, through the use of coconut levy funds, the financial and
corporate framework and structures that led to the establishment of
UCPB, UNICOM, COCOLIFE, COCOMARK. CIC, and more than
twenty other coconut levy-funded corporations, including the
acquisition of San Miguel Corporation shares and its
institutionalization through presidential directives of the coconut
monopoly. Through insidious means and machinations, ACCRA,
being the wholly-owned investment arm, ACCRA Investments
Corporation, became the holder of approximately fifteen million
shares representing roughly 3.3% of the total outstanding capital
stock of UCPB as of 31 March 1987. This ranks ACCRA Investments
Corporation number 44 among the top 100 biggest stockholders of
UCPB which has approximately 1,400,000 shareholders. On the
other hand, the corporate books show the name Edgardo J. Angara
as holding approximately 3,744 shares as of February, 1984.

16. The acts of Defendants, singly or collectively, and/or in unlawful

concert with one another, constitute gross abuse of official position
and authority, flagrant breach of public trust and fiduciary obligations,
brazen abuse of right and power, unjust enrichment, violation of the
constitution and laws of the Republic of the Philippines, to the grave
and irreparable damage of Plaintiff and the Filipino people.11

On June 17, 1999, Ursua and Enrile each filed his separate Answer with
Compulsory Counterclaims.

Before filing their answer, the ACCRA lawyers sought their exclusion as
defendants in Civil Case No. 0033, averring that even as they admitted
having assisted in the organization and acquisition of the companies
included in Civil Case No. 0033, they had acted as mere nominees-
stockholders of corporations involved in the sequestration proceedings
pursuant to office practice. After the Sandiganbayan denied their motion,
they elevated their cause to this Court, which ultimately ruled in their favor
in the related cases of Regala, et al. v. Sandiganbayan, et
al.12 and Hayudini v. Sandiganbayan, et al.,13 as follows:

WHEREFORE, IN VIEW OF THE FOREGOING, the Resolutions of

respondent Sandiganbayan (First Division) promulgated on March 18, 1992
and May 21, 1992 are hereby ANNULLED and SET ASIDE. Respondent
Sandiganbayan is further ordered to exclude petitioners Teodoro D.
Regala, Edgardo J. Angara, Avelino V. Cruz, Jose C. Concepcion, Victor P.
Lazatin, Eduardo U. Escueta and Paraja G. Hayudini as parties-defendants
in SB Civil Case No. 0033 entitled "Republic of the Philippines v. Eduardo
Cojuangco, Jr., et al."

SO ORDERED.

Conformably with the ruling, the Sandiganbayan excluded the ACCRA

lawyers from the case on May 24, 2000.14

On June 23, 1999, Cojuangco filed his Answer to the Third Amended
Complaint,15 averring the following affirmative defenses, to wit:

7.00. The Presidential Commission on Good Government (PCGG) is

without authority to act in the name and in behalf of the "Republic of
the Philippines".

7.01. As constituted in E.O. No. 1, the PCGG was composed of

"Minister Jovito R. Salonga, as Chairman, Mr. Ramon Diaz, Mr.
Pedro L. Yap, Mr. Raul Daza and Ms. Mary Concepcion Bautista, as
Commissioners". When the complaint in the instant case was filed,
Minister Salonga, Mr. Pedro L. Yap and Mr. Raul Daza had already
left the PCGG. By then the PCGG had become functus officio.

7.02. The Sandiganbayan has no jurisdiction over the complaint or

over the transaction alleged in the complaint.

7.03. The complaint does not allege any cause of action.

7.04. The complaint is not brought in the name of the real parties in
interest, assuming any cause of action exists.

7.05. Indispensable and necessary parties have not been impleaded.

7.06. There is improper joinder of causes of action (Sec. 6, Rule 2,

Rules of Civil Procedure). The causes of action alleged, if any, do not
arise out of the same contract, transaction or relation between the
parties, nor are they simply for money, or are of the same nature and
character.
 7.07. There is improper joinder of parties defendants (Sec. 11, Rule
3, Rules of Civil Procedure).The causes of action alleged as to
defendants, if any, do not involve a single transaction or a related
series of transactions. Defendant is thus compelled to litigate in a suit
regarding matters as to which he has no involvement. The questions
of fact and law involved are not common to all defendants.

7.08. In so far as the complaint seeks the forfeiture of assets

allegedly acquired by defendant "manifestly out of proportion to their
salaries, to their other lawful income and income from legitimately
acquired property," under R.A. 1379, the "previous inquiry similar to
preliminary investigation in criminal cases" required to be conducted
under Sec. 2 of that law before any suit for forfeiture may be
instituted, was not conducted; as a consequence, the Court may not
acquire and exercise jurisdiction over such a suit.

7.09. The complaint in the instant suit was filed July 31, 1987, or
within one year before the local election held on January 18, 1988. If
this suit involves an action under R.A. 1379, its institution was also in
direct violation of Sec. 2, R.A. No. 1379.

7.10. E.O. No. 1, E.O. No. 2, E.O. No. 14 and 14-A, are
unconstitutional. They violate due process, equal protection, ex post
facto and bill of attainder provisions of the Constitution.

7.11. Acts imputed to defendant which he had committed were done

pursuant to law and in good faith.

The Cojuangco corporations’ Answer16 had the same tenor as the Answer
of Cojuangco.

In his own Answer with Compulsory Counterclaims,17 Ursua averred

affirmative and special defenses.

In his own Answer with Compulsory Counterclaims,18 Enrile specifically

denied the material averments of the Third Amended Complaint and
asserted affirmative defenses.

The CIIF Oil Mills’ Answer19 also contained affirmative defenses.

On December 20, 1999, the Sandiganbayan scheduled the pre-trial in Civil
Case No. 0033-F on March 8, 2000, giving the parties sufficient time to file
their Pre-Trial Briefs prior to that date. Subsequently, the parties filed their
respective Pre-Trial Briefs, as follows: Cojuangco and the Cojuangco
corporations, jointly on February 14, 2000; Enrile, on March 1, 2000; the
CIIF Oil Mills, on March 3, 2000; and Ursua, on March 6, 2000. However,
the Republic sought several extensions to file its own Pre-Trial Brief, and
eventually did so on May 9, 2000.

In the meanwhile, some non-parties sought to intervene. On November 22,

1999, GABAY Foundation, Inc. (GABAY) filed its complaint-in-intervention.
On February 24, 2000, the Philippine Coconut Producers Federation, Inc.,
Maria Clara L. Lobregat, Jose R. Eleazar, Jr., Domingo Espina, Jose
Gomez, Celestino Sabate, Manuel del Rosario, Jose Martinez, Jr., and
Eladio Chato (collectively referred to as COCOFED, considering that the
co-intervenors were its officers) also sought to intervene, citing the October
2, 1989 ruling in G.R. No. 75713 entitled COCOFED v. PCGG whereby the
Court recognized COCOFED as the "private national association of
coconut producers certified in 1971 by the PHILCOA as having the largest
membership among such producers" and as such "entrusted it with the task
of maintaining continuing liaison with the different sectors of the industry,
the government and its mass base." Pending resolution of its motion for
intervention, COCOFED filed a Pre-Trial Brief on March 2, 2000.

On May 24, 2000, the Sandiganbayan denied GABAY’s intervention

without prejudice because it found "that the allowance of GABAY to enter
under the special character in which it presents itself would be to open the
doors to other groups of coconut farmers whether of the same kind or of
any other kind which could be considered a sub-class or a sub-
classification of the coconut planters or the coconut industry of this
country."20

COCOFED’s intervention as defendant was allowed on May 24, 2000,

however, because "the position taken by the COCOFED is relevant to the
proceedings herein, if only to state that there is a special function which the
COCOFED and the coconut planters have in the matter of the coconut levy
funds and the utilization of those funds, part of which is in dispute in the
instant matter."21
The pre-trial was actually held on May 24, 2000,22 during which the
Sandiganbayan sought clarification from the parties, particularly the
Republic, on their respective positions, but at the end it found the
clarifications "inadequately" enlightening. Nonetheless, the Sandiganbayan,
not disposed to reset, terminated the pre-trial:

xxx primarily because the Court is given a very clear impression that the
plaintiff does not know what documents will be or whether they are even
available to prove the causes of action in the complaint. The Court has
pursued and has exerted every form of inquiry to see if there is a way by
which the plaintiff could explain in any significant particularity the acts and
the evidence which will support its claim of wrong-doing by the defendants.
The plaintiff has failed to do so.23

The following material portions of the pre-trial order24 are quoted to provide
a proper perspective of what transpired during the pre-trial, to wit:

Upon oral inquiry from the Court, the issues which were being raised by
plaintiff appear to have been made on a very generic character.
Considering that any claim for violation or breach of trust or deception
cannot be made on generic statements but rather by specific acts which
would demonstrate fraud or breach of trust or deception, together with the
evidence in support thereof, the same was not acceptable to the Court.

The plaintiff through its designated counsel for this morning, Atty. Dennis
Taningco, has represented to this Court that the annexes to its pre-trial
brief, more particularly the findings of the COA in its various examinations,
copies of which COA reports are attached to the pre-trial brief, would
demonstrate the wrong, the act or omission attributed to the defendants or
to several of them and the basis, therefore, for the relief that plaintiff seeks
in its complaint. It would appear, however, that the plaintiff through its
counsel at this time is not prepared to go into the specifics of the
identification of these wrongs or omissions attributed to plaintiff.

The Court has reminded the plaintiff that a COA report proves itself only in
proceedings where the issue arises from a review of the accountability of
particular officers and, therefore, to show the existence of shortages or
deficiencies in an examination conducted for that purpose, provided that
such a report is accompanied by its own working papers and other
supporting documents.
In civil cases such as this, a COA report would not have the same
independent probative value since it is not a review of the accountability of
public officers for public property in their custody as accountable officers. It
has been the stated view of this Court that a COA report, to be of
significant evidence, may itself stand only on the basis of the supporting
documents that upon which it is based and upon an analysis made by
those who are competent to do so. The Court, therefore, sought a more
specific statement from plaintiff as to what these documents were and
which of them would prove a particular act or omission or a series of acts or
omissions purportedly committed by any, by several or by all of the
defendants in any particular stage of the chain of alleged wrong-doing in
this case.

The plaintiff was not in a position to do so.

The Court has remonstrated with the plaintiff, insofar as its inadequacy is
concerned, primarily because this case was set for pre-trial as far back as
December and has been reset from its original setting, with the undertaking
by the plaintiff to prepare itself for these proceedings. It appears to this
Court at this time that the failure of the plaintiff to have available responses
and specific data and documents at this stage is not because the matter
has been the product of oversight or notes and papers left elsewhere;
rather, the agitation of this Court arises from the fact that at this very stage,
the plaintiff through its counsel does not know what these documents are,
where these documents will be and is still anticipating a submission or a
delivery thereof by COA at an undetermined time. The justification made by
counsel for this stance is that this is only pre-trial and this information and
the documents are not needed yet.

The Court is not prepared to postpone the pre-trial anew primarily because
the Court is given a very clear impression that the plaintiff does not know
what documents will be or whether they are even available to prove the
causes of action in the complaint. The Court has pursued and has exerted
every form of inquiry to see if there is a way by which the plaintiff could
explain in any significant particularity the acts and the evidence which will
support its claim of wrong-doing by the defendants. The plaintiff has failed
to do so.

Defendants Cojuangco have come back and reiterated their previous

inquiry as to the statement of the cause of action and the description
thereof. While the Court acknowledges that logically, that statement along
that line would be primary, the Court also recognizes that sometimes the
phrasing of the issue may be determined or may arise after a statement of
the evidence is determined by this Court because the Court can put itself in
a position of more clearly and perhaps more accurately stating what the
issues are. The Pre-Trial Order, after all, is not so much a reflection of
merely separate submissions by all of the parties involved, witnesses by
the Court, as to what the subject matter of litigation will be, including the
determination of what matters of fact remain unresolved. At this time, the
plaintiff has not taken the position on any factual statement or any piece of
evidence which can be subject of admission or denial, nor any specifics of
any act which could be disputed by the defendants; what plaintiff through
counsel has stated are general conclusions, general statements of abuse
and misuse and opportunism.

After an extended break requested by some of the parties, the sessions

were resumed and nothing anew arose from the plaintiff. The plaintiff
sought fifteen (15) days to file a reply to the comments and observations
made by defendant Cojuangco to the pre-trial brief of the plaintiff. This
Court denied this Request since the submissions in preparation for pre-trial
are not litigious or contentious matters. They are mere assertions or
positions which may or may not be meritorious depending upon the view of
the Court of the entire case and if useful at the pre-trial. At this stage, the
plaintiff then reiterated its earlier request to consider the pre-trial
terminated. The Court sought the positions of the other parties, whether or
not they too were prepared to submit their respective positions on the basis
of what was before the Court at pre-trial. All of the parties, in the end, have
come to an agreement that they were submitting their own respective
positions for purpose of pre-trial on the basis of the submissions made of
record.

With all of the above, the pre-trial is now deemed terminated.

This Order has been overly extended simply because there has been a
need to put on record all of the events that have taken place leading to the
conclusions which were drawn herein.

The parties have indicated a desire to make their submissions outside of

trial as a consequence of this terminated pre-trial, with the plea that the
transcript of the proceedings this morning be made available to them, so
that they may have the basis for whatever assertions they will have to
make either before this Court or elsewhere. The Court deems the same
reasonable and the Court now gives the parties fifteen (15) days after
notice to them that the transcript of stenographic notes of the proceedings
herein are complete and ready for them to be retrieved. Settings for trial or
for any other proceeding hereafter will be fixed by this Court either upon
request of the parties or when the Court itself shall have determined that
nothing else has to be done.

The Court has sought confirmation from the parties present as to the
accuracy of the recapitulation herein of the proceedings this morning and
the Court has gotten assent from all of the parties.

xxx

SO ORDERED.25

In the meanwhile, the Sandiganbayan, in order to conform with the ruling in

Presidential Commission on Good Government v. Cojuangco, et
al.,26 resolved COCOFED’s Omnibus Motion (with prayer for preliminary
injunction) relative to who should vote the UCPB shares under
sequestration, holding as follows: 27

In the light of all of the above, the Court submits itself to jurisprudence and
with the statements of the Supreme Court in G.R. No. 115352
entitled Enrique Cojuangco, Jr., et al. vs. Jaime Calpo, et al. dated January
27, 1997, as well as the resolution of the Supreme Court promulgated on
January 27, 1999 in the case of PCGG vs. Eduardo Cojuangco, Jr., et
al., G.R. No. 13319 which included the Sandiganbayan as one of the
respondents. In these two cases, the Supreme Court ruled that the voting
of sequestered shares of stock is governed by two considerations, namely:

1. whether there is prima facie evidence showing that the said shares
are ill-gotten and thus belong to the State; and

2. whether there is an imminent danger of dissipation thus

necessitating their continued sequestration and voting by the PCGG
while the main issue pends with the Sandiganbayan.

xxx xxx xxx

In view hereof, the movants COCOFED, et al and Ballares, et al. as well as
Eduardo Cojuangco, et al. who were acknowledged to be registered
stockholders of the UCPB are authorized, as are all other registered
stockholders of the United Coconut Planters Bank, until further orders from
this Court, to exercise their rights to vote their shares of stock and
themselves to be voted upon in the United Coconut Planters Bank (UCPB)
at the scheduled Stockholders’ Meeting on March 6, 2001 or on any
subsequent continuation or resetting thereof, and to perform such acts as
will normally follow in the exercise of these rights as registered
stockholders.

xxx xxx xxx

Consequently, on March 1, 2001, the Sandiganbayan issued a writ of

preliminary injunction to enjoin the PCGG from voting the sequestered
shares of stock of the UCPB.

On July 25, 2002, before Civil Case No. 0033-F could be set for trial, the
Republic filed a Motion for Judgment on the Pleadings and/or for Partial
Summary Judgment (Re: Defendants CIIF Companies, 14 Holding
Companies and COCOFED, et al.).28

Cojuangco, Enrile, and COCOFED separately opposed the motion. Ursua

adopted COCOFED’s opposition.

Thereafter, the Republic likewise filed a Motion for Partial Summary

Judgment [Re: Shares in San Miguel Corporation Registered in the
Respective Names of Defendant Eduardo M. Cojuangco, Jr. and the
Defendant Cojuangco Companies].29

Cojuangco, et al. opposed the motion,30 after which the Republic submitted
its reply.31

On February 23, 2004, the Sandiganbayan issued an order,32 in which it

enumerated the admitted facts or facts that appeared to be without
substantial controversy in relation to the Republic’s Motion for Judgment on
the Pleadings and/or for Partial Summary Judgment [Re: Defendants CIIF
Companies, 14 Holding Companies and COCOFED, et al.].

Commenting on the order of February 23, 2004, Cojuangco, et al. specified

the items they considered as inaccurate, but particularly interposed no
objection to item no. 17 (to the extent that item no. 17 stated that
Cojuangco had disclaimed any interest in the CIIF block SMC shares of
stock registered in the names of the 14 corporations listed in item no. 1 of
the order).33

The Republic also filed its Comment,34 but COCOFED denied the admitted
facts summarized in the order of February 23, 2004.35

Earlier, on October 8, 2003,36 the Sandiganbayan resolved the various

pending motions and pleadings relative to the writs of sequestration issued
against the defendants, disposing:

IN VIEW OF THE FOREGOING, the Writs of Sequestration Nos. (a) 86-

0042 issued on April 8, 1986, (b) 86-0062 issued on April 21, 1986, (c) 86-
0069 issued on April 22, 1986, (d) 86-0085 issued on May 9, 1986, (e) 86-
0095 issued on May 16, 1986, (f) 86-0096 dated May 16, 1986, (g) 86-0097
issued on May 16, 1986, (h) 86-0098 issued on May 16, 1986 and (i) 87-
0218 issued on May 27, 1987 are hereby declared automatically lifted for
being null and void.

Despite the lifting of the writs of sequestration, since the Republic

continues to hold a claim on the shares which is yet to be resolved, it is
hereby ordered that the following shall be annotated in the relevant
corporate books of San Miguel Corporation:

(1) any sale, pledge, mortgage or other disposition of any of the

shares of the Defendants Eduardo Cojuangco, et al. shall be subject
to the outcome of this case;

(2) the Republic through the PCGG shall be given twenty (20) days
written notice by Defendants Eduardo Cojuangco, et al. prior to any
sale, pledge, mortgage or other disposition of the shares;

(3) in the event of sale, mortgage or other disposition of the shares,

by the Defendants Cojuangco, et al., the consideration therefore,
whether in cash or in kind, shall be placed in escrow with Land Bank
of the Philippines, subject to disposition only upon further orders of
this Court; and

(4) any cash dividends that are declared on the shares shall be
placed in escrow with the Land Bank of the Philippines, subject to
 disposition only upon further orders of this Court. If in case stock
dividends are declared, the conditions on the sale, pledge, mortgage
and other disposition of any of the shares as above-mentioned in
conditions 1, 2 and 3, shall likewise apply.

In so far as the matters raised by Defendants Eduardo Cojuangco, et al. in

their "Omnibus Motion" dated September 23, 1996 and "Reply to PCGG’s
Comment/Opposition with Motion to Order PCGG to Complete Inventory, to
Nullify Writs of Sequestration and to Enjoin PCGG from Voting
Sequestered Shares of Stock" dated January 3, 1997, considering the
above conclusion, this Court rules that it is no longer necessary to delve
into the matters raised in the said Motions.

SO ORDERED.37

Cojuangco, et al. moved for the modification of the resolution,38 praying for
the deletion of the conditions for allegedly restricting their rights. The
Republic also sought reconsideration of the resolution.39

Eventually, on June 24, 2005, the Sandiganbayan denied both motions, but
reduced the restrictions thuswise:

WHEREFORE, the "Motion for Reconsideration (Re: Resolution dated

September 17, 2003 Promulgated on October 8, 2003)" dated October 24,
2003 of Plaintiff Republic is hereby DENIED for lack of merit. As to the
"Motion for Modification (Re: Resolution Promulgated on October 8, 2003)"
dated October 22, 2003, the same is hereby DENIED for lack of merit.
However, the restrictions imposed by this Court in its Resolution dated
September 17, 2003 and promulgated on October 8, 2003 shall now read
as follows:

"Despite the lifting of the writs of sequestration, since the Republic

continues to hold a claim on the shares which is yet to be resolved, it is
hereby ordered that the following shall be annotated in the relevant
corporate books of San Miguel Corporation:

"a) any sale, pledge, mortgage or other disposition of any of the shares of
the Defendants Eduardo Cojuangco, et al. shall be subject to the outcome
of this case.
"b) the Republic through the PCGG shall be given twenty (20) days written
notice by Defendants Eduardo Cojuangco, et al. prior to any sale, pledge,
mortgage or other disposition of the shares.

"SO ORDERED."40

Pending resolution of the motions relative to the lifting of the writs of

sequestration, SMC filed a Motion for Intervention with attached Complaint-
in-Intervention,41 alleging, among other things, that it had an interest in the
matter in dispute between the Republic and defendants CIIF Companies for
being the owner by purchase of a portion (i.e., 25,450,000 SMC shares
covered by Stock Certificate Nos. A0004129 and B0015556 of the so-
called "CIIF block of SMC shares of stock" sought to be recovered as
alleged ill-gotten wealth).

Although Cojuangco, et al. interposed no objection to SMC’s intervention,

the Republic opposed,42 averring that the intervention would be improper
and was a mere attempt to litigate anew issues already raised and passed
upon by the Supreme Court. COCOFED similarly opposed SMC’s
intervention,43 and Ursua adopted its opposition.

On May 6, 2004, the Sandiganbayan denied SMC’s motion to

intervene.44 SMC sought reconsideration,45 and its motion to that effect was
opposed by COCOFED and the Republic.

On May 7, 2004, the Sandiganbyan granted the Republic’s Motion for

Judgment on the Pleadings and/or Partial Summary Judgment (Re:
Defendants CIIF Companies, 14 Holding Companies and COCOFED, et
al.) and rendered a Partial Summary Judgment,46 the dispositive portion of
which reads as follows:

WHEREFORE, in view of the foregoing, we hold that:

The Motion for Partial Summary Judgment (Re: Defendants CIIF

Companies, 14 Holding Companies and Cocofed, et al.) filed by Plaintiff is
hereby GRANTED. ACCORDINGLY, THE CIIF COMPANIES, NAMELY:

1. Southern Luzon Coconut Oil Mills (SOLCOM);

2. Cagayan de Oro Oil Co., Inc. (CAGOIL);

 3. Iligan Coconut Industries, Inc. (ILICOCO);

4. San Pablo Manufacturing Corp. (SPMC);

5. Granexport Manufacturing Corp. (GRANEX); and

6. Legaspi Oil Co., Inc. (LEGOIL),

AS WELL AS THE 14 HOLDING COMPANIES, NAMELY:

1. Soriano Shares, Inc.;

2. ACS Investors, Inc.;

3. Roxas Shares, Inc.;

4. Arc Investors, Inc.;

5. Toda Holdings, Inc.;

6. AP. Holdings, Inc.;

7. Fernandez Holdings, Inc.;

8. SMC Officers Corps. Inc.;

9. Te Deum Resources, Inc.;

10. Anglo Ventures, Inc.;

11. Randy Allied Ventures, Inc.;

12. Rock Steel Resources, Inc.;

13. Valhalla Properties Ltd., Inc.; and

14. First Meridian Development, Inc.

AND THE CIIF BLOCK OF SAN MIGUEL CORPORATION (SMC)

SHARES OF STOCK TOTALING 33,133,266 SHARES AS OF 1983
TOGETHER WITH ALL DIVIDENDS DECLARED, PAID AND ISSUED
THEREON AS WELL AS ANY INCREMENTS THERETO ARISING FROM,
BUT NOT LIMITED TO, EXERCISE OF PRE-EMPTIVE RIGHTS ARE
DECLARED OWNED BY THE GOVERNMENT IN-TRUST FOR ALL THE
COCONUT FARMERS AND ORDERED RECONVEYED TO THE
GOVERNMENT.

Let the trial of this Civil Case proceed with respect to the issues which have
not been disposed of in this partial Summary Judgment, including the
determination of whether the CIIF Block of SMC Shares adjudged to be
owned by the Government represents 27% of the issued and outstanding
capital stock of SMC according to plaintiff or 31.3% of said capital stock
according to COCOFED, et al. and Ballares, et al.

SO ORDERED.47

In the same resolution of May 7, 2004, the Sandiganbayan considered the

Motions to Dismiss filed by Cojuangco, et al. on August 2, 2000 and by
Enrile on September 4, 2000 as overtaken by the Republic’s Motion for
Judgment on the Pleadings and/or Partial Summary Judgment.48

On May 25, 2004, Cojuangco, et al. filed their Motion for Reconsideration.49

COCOFED filed its so-called Class Action Omnibus Motion: (a) Motion to
Dismiss for Lack of Subject Matter Jurisdiction and Alternatively, (b) Motion
for Reconsideration dated May 26, 2004.50

The Republic submitted its Consolidated Comment.51

Relative to the resolution of May 7, 2004, the Sandiganbayan issued its

resolution of December 10, 2004,52 denying the Republic’s Motion for
Partial Summary Judgment (Re: Shares in San Miguel Corporation
Registered in the Respective Names of Defendants Eduardo M.
Cojuangco, Jr. and the defendant Cojuangco Companies) upon the
following reasons:

In the instant case, a circumspect review of the records show that while
there are facts which appear to be undisputed, there are also genuine
factual issues raised by the defendants which need to be threshed out in a
full-blown trial. Foremost among these issues are the following:
 1) What are the "various sources" of funds, which the defendant
Cojuangco and his companies claim they utilized to acquire the
disputed SMC shares?

2) Whether or not such funds acquired from alleged "various sources"

can be considered coconut levy funds;

3) Whether or not defendant Cojuangco had indeed served in the

governing bodies of PC, UCPB and/or CIIF Oil Mills at the time the
funds used to purchase the SMC shares were obtained such that he
owed a fiduciary duty to render an account to these entities as well as
to the coconut farmers;

4) Whether or not defendant Cojuangco took advantage of his

position and/or close ties with then President Marcos to obtain
favorable concessions or exemptions from the usual financial
requirements from the lending banks and/or coco-levy funded
companies, in order to raise the funds to acquire the disputed SMC
shares; and if so, what are these favorable concessions or
exemptions?

Answers to these issues are not evident from the submissions of the
plaintiff and must therefore be proven through the presentation of relevant
and competent evidence during trial. A perusal of the subject Motion shows
that the plaintiff hastily derived conclusions from the defendants’
statements in their previous pleadings although such conclusions were not
supported by categorical facts but only mere inferences. In the Reply dated
October 2, 2003, the plaintiff construed the supposed meaning of the
phrase "various sources" (referring to the source of defendant Cojuangco’s
funds which were used to acquire the subject SMC shares), which plaintiff
said was quite obvious from the defendants’ admission in his Pre-Trial
Brief, which we quote:

"According to Cojuangco’s own Pre-Trial Brief, these so-called ‘various

sources’, i.e., the sources from which he obtained the funds he claimed to
have used in buying the 20% SMC shares are not in fact ‘various’ as he
claims them to be. He says he obtained ‘loans’ from UCPB and ‘advances’
from the CIIF Oil Mills. He even goes as far as to admit that his only
evidence in this case would have been ‘records of UCPB’ and a
‘representative of the CIIF Oil Mills’ obviously the ‘records of UCPB’ relate
to the ‘loans’ that Cojuangco claims to have obtained from UCPB – of
which he was President and CEO – while the ‘representative of the CIIF Oil
Mills’ will obviously testify on the ‘advances’ Cojuangco obtained from CIIF
Oil Mills – of which he was also the President and CEO."

From the foregoing premises, plaintiff went on to conclude that:

"These admissions of defendant Cojuangco are outright admissions that he

(1) took money from the bank entrusted by law with the administration of
coconut levy funds and (2) took more money from the very corporations/oil
mills in which part of those coconut levy funds (the CIIF) was placed –
treating the funds of UCPB and the CIIF as his own personal capital to buy
‘his’ SMC shares."

We cannot agree with the plaintiff’s contention that the defendant’s

statements in his Pre-Trial Brief regarding the presentation of a possible
CIIF witness as well as UCPB records, can already be considered as
admissions of the defendant’s exclusive use and misuse of coconut levy
funds to acquire the subject SMC shares and defendant Cojuangco’s
alleged taking advantage of his positions to acquire the subject SMC
shares. Moreover, in ruling on a motion for summary judgment, the court
"should take that view of the evidence most favorable to the party against
whom it is directed, giving such party the benefit of all inferences."
Inasmuch as this issue cannot be resolved merely from an interpretation of
the defendant’s statements in his brief, the UCPB records must be
produced and the CIIF witness must be heard to ensure that the
conclusions that will be derived have factual basis and are thus, valid.

WHEREFORE, in view of the forgoing, the Motion for Partial Summary

Judgment dated July 11, 2003 is hereby DENIED for lack of merit.

SO ORDERED.

Thereafter, on December 28, 2004, the Sandiganbayan resolved the other

pending motions,53 viz:

WHEREFORE, in view of the foregoing, the Motion for Reconsideration

dated May 25, 2004 filed by defendant Eduardo M. Cojuangco, Jr., et al.
and the Class Action Omnibus Motion: (a) Motion to Dismiss for Lack of
Subject Matter Jurisdiction and Alternatively, (b) Motion for Reconsideration
dated May 26, 2004 filed by COCOFED, et al. and Ballares, et al. are
hereby DENIED for lack of merit.

SO ORDERED.54

COCOFED moved to set the case for trial,55 but the Republic opposed the
motion.56 On their part, Cojuangco, et al. also moved to set the trial,57 with
the Republic similarly opposing the motion.58

On March 23, 2006, the Sandiganbayan granted the motions to set for trial
and set the trial on August 8, 10, and 11, 2006.59

In the meanwhile, on August 9, 2005, the Republic filed a Motion for

Execution of Partial Summary Judgment (re: CIIF block of SMC Shares of
Stock),60 contending that an execution pending appeal was justified
because any appeal by the defendants of the Partial Summary Judgment
would be merely dilatory.

Cojuangco, et al. opposed the motion.61

The Sandiganbayan denied the Republic’s Motion for Execution of Partial

Summary Judgment (re: CIIF block of SMC Shares of Stock),62 to wit:

WHEREFORE, the MOTION FOR EXECUTION OF PARTIAL SUMMARY

JUDGMENT (RE: CIIF BLOCK OF SMC SHARES OF STOCK) dated
August 8, 2005 of the plaintiff is hereby denied for lack of merit. However,
this Court orders the severance of this particular claim of Plaintiff. The
Partial Summary Judgment dated May 7, 2004 is now considered a
separate final and appealable judgment with respect to the said CIIF Block
of SMC shares of stock.

The Partial Summary Judgment rendered on May 7, 2004 is modified by

deleting the last paragraph of the dispositive portion which will now read, as
follows:

WHEREFORE, in view of the foregoing, we hold that:

The Motion for Partial Summary Judgment (Re: Defendants CIIF

Companies, 14 Holding Companies and Cocofed, et al.) filed by Plaintiff is
hereby GRANTED. ACCORDINGLY, THE CIIF COMPANIES, NAMELY:
 1. Southern Coconut Oil Mills (SOLCOM);

2. Cagayan de Oro Oil Co., Inc. (CAGOIL);

3. Iligan Coconut Industries, Inc. (ILICOCO);

4. San Pablo Manufacturing Corp. (SPMC);

5. Granexport Manufacturing Corp.

(GRANEX); and

6. Legaspi Oil Co., Inc. (LEGOIL),

AS WELL AS THE 14 HOLDING COMPANIES, NAMELY:

1. Soriano Shares, Inc.;

2. ACS Investors, Inc.;

3. Roxas Shares, Inc.;

4. Arc Investors, Inc.;

5. Toda Holdings, Inc.;

6. AP Holdings, Inc.;

7. Fernandez Holdings, Inc.;

8. SMC Officers Corps, Inc.;

9. Te Deum Resources, Inc.;

10. Anglo Ventures, Inc.;

11. Randy Allied Ventures, Inc.;

12. Rock Steel Resources, Inc.;

13. Valhalla Properties Ltd., Inc.; and

 14. First Meridian Development, Inc.

AND THE CIIF BLOCK OF SAN MIGUEL CORPORATION (SMC)

SHARES OF STOCK TOTALING 33,133,266 SHARES AS OF 1983
TOGETHER WITH ALL DIVIDENDS DECLARED, PAID AND ISSUED
THEREON AS WELL AS ANY INCREMENTS THERETO ARISING FROM,
BUT NOT LIMITED TO, EXERCISE OF PRE-EMPTIVE RIGHTS ARE
DECLARED OWNED BY THE GOVERNMENT IN TRUST FOR ALL THE
COCONUT FARMERS AND ORDERED RECONVEYED TO THE
GOVERNMENT.

The aforementioned Partial Summary Judgment is now deemed a separate

appealable judgment which finally disposes of the ownership of the CIIF
Block of SMC Shares, without prejudice to the continuation of proceedings
with respect to the remaining claims particularly those pertaining to the
Cojuangco, et al. block of SMC shares.

SO ORDERED.63

During the pendency of the Republic’s motion for execution, Cojuangco, et

al. filed a Motion for Authority to Sell San Miguel Corporation (SMC)
shares, praying for leave to allow the sale of SMC shares to proceed,
exempted from the conditions set forth in the resolutions promulgated on
October 3, 2003 and June 24, 2005.64 The Republic opposed, contending
that the requested leave to sell would be tantamount to removing
jurisdiction over the res or the subject of litigation.65

However, the Sandiganbayan eventually granted the Motion for Authority to

Sell San Miguel Corporation (SMC) shares.66

Thereafter, Cojuangco, et al. manifested to the Sandiganbayan that the

shares would be sold to the San Miguel Corporation Retirement
Plan.67 Ruling on the manifestations of Cojuangco, et al., the
Sandiganbayan issued its resolution of July 30, 2007 allowing the sale of
the shares, to wit:

This notwithstanding however, while the Court exempts the sale from the
express condition that it shall be subject to the outcome of the case,
defendants Cojuangco, et al. may well be reminded that despite the
deletion of the said condition, they cannot transfer to any buyer any interest
higher than what they have. No one can transfer a right to another greater
than what he himself has. Hence, in the event that the Republic prevails in
the instant case, defendants Cojuangco, et al. hold themselves liable to
their transferees-buyers, especially if they are buyers in good faith and for
value. In such eventuality, defendants Cojuangco, et al. cannot be shielded
by the cloak of principle of caveat emptor because case law has it that this
rule only requires the purchaser to exercise such care and attention as is
usually exercised by ordinarily prudent men in like business affairs, and
only applies to defects which are open and patent to the service of one
exercising such care.

Moreover, said defendants Eduardo M. Cojuangco, et al. are hereby

ordered to render their report on the sale within ten (10) days from
completion of the payment by the San Miguel Corporation Retirement Plan.

SO ORDERED.68

Cojuangco, et al. later rendered a complete accounting of the proceeds

from the sale of the Cojuangco block of shares of SMC stock, informing
that a total amount of ₱ 4,786,107,428.34 had been paid to the UCPB as
loan repayment.69

It appears that the trial concerning the disputed block of shares was not
scheduled because the consideration and resolution of the aforecited
motions for summary judgment occupied much of the ensuing proceedings.

At the hearing of August 8, 2006, the Republic manifested70 that it did not
intend to present any testimonial evidence and asked for the marking of
certain exhibits that it would have the Sandiganbayan take judicial notice
of. The Republic was then allowed to mark certain documents as its
Exhibits A to I, inclusive, following which it sought and was granted time
within which to formally offer the exhibits.

On August 31, 2006, the Republic filed its Manifestation of Purposes (Re:
Matters Requested or Judicial Notice on the 20% Shares in San Miguel
Corporation Registered in the Respective Names of defendant Eduardo M.
Cojuangco, Jr. and the defendant Cojuangco Companies).71

On September 18, 2006, the Sandiganbayan issued the following

resolution,72 to wit:
Acting on the Manifestation of Purposes (Re: Matters Requested or Judicial
Notice on the 20% Shares in San Miguel Corporation Registered in the
Respective names of Defendant Eduardo M. Cojuangco, Jr. and the
Defendant Cojuangco Companies) dated 28 August 2006 filed by the
plaintiff, which has been considered its formal offer of evidence, and the
Comment of Defendants Eduardo M. Cojuangco, Jr., et al. on Plaintiff’s
"Manifestation of Purposes …" Dated August 30, 2006 dated September
15, 2006, the court resolves to ADMIT all the exhibits offered, i.e.:

• Exhibit "A" – the Answer of defendant Eduardo M. Cojuangco, Jr. to

the Third Amended Complaint (Subdivided) dated June 23, 1999, as
well as the sub-markings (Exhibit "A-1" to "A-4";

• Exhibit "B" – the "Pre-Trial Brief dated January 11, 2000 of

defendant CIIF Oil Mills and fourteen (14) CIIF Holding Companies,
as well as the sub-markings Exhibits "B-1" and "B-2"

• Exhibit "C" – the Pre-Trial Brief dated January 11, 2000 of

defendant Eduardo M. Cojuangco, Jr. as well as the sub-markings
Exhibits "C-1", "C-1-a" and "C-1-b";

• Exhibit "D" – the Plaintiff’s Motion for Summary Judgment [Re:

Shares in San Miguel Corporation Registered in the Respective
Names of Defendant Eduardo M. Cojuangco, Jr. and the Defendant
Cojuangco Companies] dated July 11, 2003, as well as the sub-
markings Exhibits "D-1" to "D-4"

the said exhibits being part of the record of the case, as well as

• Exhibit "E" – Presidential Decree No. 961 dated July 11, 1976;

• Exhibit "F" – Presidential Decree No. 755 dated July 29, 1975;

• Exhibit "G" – Presidential Decree No. 1468 dated June 11, 1978;

• Exhibit "H" – Decision of the Supreme Court in Republic vs.

COCOFED, et al., G.R. Nos. 147062-64, December 14, 2001, 372
SCRA 462

the aforementioned exhibits being matters of public record.

The admission of these exhibits is being made over the objection of the
defendants Cojuangco, et al. as to the relevance thereof and as to the
purposes for which they were offered in evidence, which matters shall be
taken into consideration by the Court in deciding the case on the merits.

The trial hereon shall proceed on November 21, 2006, at 8:30 in the
morning as previously scheduled.73

During the hearing on November 24, 2006, Cojuangco, et al. filed their
Submission and Offer of Evidence of Defendants,74 formally offering in
evidence certain documents to substantiate their counterclaims, and
informing that they found no need to present countervailing evidence
because the Republic’s evidence did not prove the allegations of the
Complaint. On December 5, 2006, after the Republic submitted its
Comment,75 the Sandiganbayan admitted the exhibits offered by
Cojuangco, et al., and granted the parties a non-extendible period within
which to file their respective memoranda and reply-memoranda.

Thereafter, on February 23, 2007, the Sandiganbayan considered the case

submitted for decision.76

ISSUES

The various issues submitted for consideration by the Court are

summarized hereunder.

G.R. No. 166859

The Republic came to the Court via petition for certiorari77 to assail the
denial of its Motion for Partial Summary Judgment through the resolution
promulgated on December 10, 2004, insisting that the Sandiganbayan
thereby committed grave abuse of discretion: (a) in holding that the various
sources of funds used in acquiring the SMC shares of stock remained
disputed; (b) in holding that it was disputed whether or not Cojuangco had
served in the governing bodies of PCA, UCPB, and/or the CIIF Oil Mills;
and (c) in not finding that Cojuangco had taken advantage of his position
and had violated his fiduciary obligations in acquiring the SMC shares of
stock in issue.

The Court will consider and resolve the issues thereby raised alongside the
issues presented in G.R. No. 180702.
 G.R. No. 169203

In the resolution promulgated on October 8, 2003, the Sandiganbayan

declared as "automatically lifted for being null and void" nine writs of
sequestration (WOS) issued against properties of Cojuangco and
Cojuangco companies, considering that: (a) eight of them (i.e., WOS No.
86-0062 dated April 21, 1986; WOS No. 86-0069 dated April 22, 1986;
WOS No. 86-0085 dated May 9, 1986; WOS No. 86-0095 dated May 16,
1986; WOS No. 86-0096 dated May 16, 1986; WOS No. 86-0097 dated
May 16, 1986; WOS No. 86-0098 dated May 16, 1986; and WOS No. 87-
0218 dated May 27, 1987) had been issued by only one PCGG
Commissioner, contrary to the requirement of Section 3 of the Rules of the
PCGG for at least two Commissioners to issue the WOS; and (b) the ninth
(i.e., WOS No. 86-0042 dated April 8, 1986), although issued prior to the
promulgation of the Rules of the PCGG requiring at least two
Commissioners to issue the WOS, was void for being issued without prior
determination by the PCGG of a prima facie basis for sequestration. 1avvphi1

Nonetheless, despite its lifting of the nine WOS, the Sandiganbayan

prescribed four conditions to be still "annotated in the relevant corporate
books of San Miguel Corporation" considering that the Republic "continues
to hold a claim on the shares which is yet to be resolved."78

In its resolution promulgated on June 24, 2005, the Sandiganbayan denied

the Republic’s Motion for Reconsideration filed vis-a-vis the resolution
promulgated on October 8, 2003, but reduced the conditions earlier
imposed to only two.79

On September 1, 2005, the Republic filed a petition for certiorari80 to annul

the resolutions promulgated on October 8, 2003 and on June 24, 2005 on
the ground that the Sandiganbayan had thereby committed grave abuse of
discretion:

I.

XXX IN LIFTING WRIT OF SEQUESTRATION NOS. 86-0042 AND 87-

0218 DESPITE EXISTENCE OF THE BASIC REQUISITES FOR THE
VALIDITY OF SEQUESTRATION.

II.
XXX WHEN IT DENIED PETITIONER’S ALTERNATIVE PRAYER IN ITS
MOTION FOR RECONSIDERATION FOR THE ISSUANCE OF AN
ORDER OF SEQUESTRATION AGAINST ALL THE SUBJECT SHARES
OF STOCK IN ACCORDNCE WITH THE RULING IN REPUBLIC VS.
SANDIGANBAYAN, 258 SCRA 685 (1996).

III.

XXX IN SUBSEQUENTLY DELETING THE LAST TWO (2) CONDITIONS

WHICH IT EARLIER IMPOSED ON THE SUBJECT SHARES OF
STOCK.81

G.R. No. 180702

On November 28, 2007, the Sandiganbayan promulgated its

decision,82 decreeing as follows:

WHEREFORE, in view of all the foregoing, the Court is constrained to

DISMISS, as it hereby DISMISSES, the Third Amended Complaint in
subdivided Civil Case No. 0033-F for failure of plaintiff to prove by
preponderance of evidence its causes of action against defendants with
respect to the twenty percent (20%) outstanding shares of stock of San
Miguel Corporation registered in defendants’ names, denominated herein
as the "Cojuangco, et al. block" of SMC shares. For lack of satisfactory
warrant, the counterclaims in defendants’ Answers are likewise ordered
dismissed.

SO ORDERED.

Hence, the Republic appeals, positing:

I.

COCONUT LEVY FUNDS ARE PUBLIC FUNDS. THE SMC

SHARES, WHICH WERE ACQUIRED BY RESPONDENTS
COJUANGCO, JR. AND THE COJUANGCO COMPANIES WITH
THE USE OF COCONUT LEVY FUNDS – IN VIOLATION OF
RESPONDENT COJUANGCO, JR.’S FIDUCIARY OBLIGATION –
ARE, NECESSARILY, PUBLIC IN CHARACTER AND SHOULD BE
RECONVEYED TO THE GOVERNMENT.
 II.

PETITIONER HAS CLEARLY DEMONSTRATED ITS

ENTITLEMENT, AS A MATTER OF LAW, TO THE RELIEFS
PRAYED FOR.83

and urging the following issues to be resolved, to wit:

I.

WHETHER THE HONORABLE SANDIGANBAYAN COMMITTED A

REVERSIBLE ERROR WHEN IT DISMISSED CIVIL CASE NO.
0033-F; AND

II.

WHETHER OR NOT THE SUBJECT SHARES IN SMC, WHICH

WERE ACQUIRED BY, AND ARE IN THE RESPECTIVE NAMES OF
RESPONDENTS COJUANGCO, JR. AND THE COJUANGCO
COMPANIES, SHOULD BE RECONVEYED TO THE REPUBLIC OF
THE PHILIPPINES FOR HAVING BEEN ACQUIRED USING
COCONUT LEVY FUNDS.84

On their part, the petitioners-in-intervention85 submit the following issues, to

wit:

WHETHER OR NOT THE COURT A QUO GRAVELY ERRED AND

DECIDED THE CASE A QUO IN VIOLATION OF LAW AND
APPLICABLE RULINGS OF THE HONORABLE COURT IN RULING
THAT, WHILE ADMITTEDLY THE SUBJECT SMC SHARES WERE
PURCHASED FROM LOAN PROCEEDS FROM UCPB AND
ADVANCES FROM THE CIIF OIL MILLS, SAID SUBJECT SMC
SHARES ARE NOT PUBLIC PROPERTY

II

WHETHER OR NOT THE COURT A QUO GRAVELY ERRED AND

DECIDED THE CASE A QUO IN VIOLATION OF LAW AND
APPLICABLE RULINGS OF THE HONORABLE COURT IN FAILING
 TO RULE THAT, EVEN ASSUMING FOR THE SAKE OF
ARGUMENT THAT LOAN PROCEEDS FROM UCPB ARE NOT
PUBLIC FINDS, STILL, SINCE RESPONDENT COJUANGCO, IN
THE PURCHASE OF THE SUBJECT SMC SHARES FROM SUCH
LOAN PROCEEDS, VIOLATED HIS FIDUCIARY DUTIES AND
TOOK A COMMERCIAL OPPORTUNITY THAT RIGHTFULLY
BELONGED TO UCPB (A PUBLIC CORPORATION), THE
SUBJECT SMC SHARES SHOULD REVERT BACK TO THE
GOVERNMENT.

RULING

We deny all the petitions of the Republic.

Lifting of nine WOS for violation of PCGG Rules

did not constitute grave abuse of discretion

Through its resolution promulgated on June 24, 2005, assailed on certiorari

in G.R. No. 169203, the Sandiganbayan lifted the nine WOS for the
following reasons, to wit:

Having studied the antecedent facts, this Court shall now resolve the
pending incidents especially defendants’ "Motion to Affirm that the Writs or
Orders of Sequestration Issued on Defendants’ Properties Were
Unauthorized, Invalid and Never Became Effective" dated March 5, 1999.

Section 3 of the PCGG Rules and Regulations promulgated on April 11,

1986, provides:

"Sec. 3. Who may issue. – A writ of sequestration or a freeze or hold order

may be issued by the Commission upon the authority of at least two
Commissioners, based on the affirmation or complaint of an interested
party or motu propio (sic) the issuance thereof is warranted."

In this present case, of all the questioned writs of sequestration issued after
the effectivity of the PCGG Rules and Regulations or after April 11, 1986,
only writ no. 87-0218 issued on May 27, 1987 complied with the
requirement that it be issued by at least two Commissioners, the same
having been issued by Commissioners Ramon E. Rodrigo and Quintin S.
Doromal. However, even if Writ of Sequestration No. 87-0218 complied
with the requirement that the same be issued by at least two
Commissioners, the records fail to show that it was issued with factual
basis or with factual foundation as can be seen from the Certification of the
Commission Secretary of the PCGG of the excerpt of the minutes of the
meeting of the PCGG held on May 26, 1987, stating therein that:

"The Commission approved the recommendation of Dir. Cruz to sequester

all the shares of stock, assets, records, and documents of Balete Ranch,
Inc. and the appointment of the Fiscal Committee with ECI Challenge,
Inc./Pepsi-Cola for Balete Ranch, Inc. and the Aquacor Marketing Corp.
vice Atty. S. Occena. The objective is to consolidate the Fiscal Committee
activities covering three associated entities of Mr. Eduardo
Cojuangco.Upon recommendation of Comm. Rodrigo, the reconstitution of
the Board of Directors of the three companies was deferred for further
study."

Nothing in the above-quoted certificate shows that there was a prior

determination of a factual basis or factual foundation. It is the absence of
a prima facie basis for the issuance of a writ of sequestration and not the
lack of authority of two (2) Commissioners which renders the said writ
void ab initio. Thus, being the case, Writ of Sequestration No. 87-0218
must be automatically lifted.

As declared by the Honorable Supreme Court in two cases it has decided,

"The absence of a prior determination by the PCGG of a prima facie basis

for the sequestration order is, unavoidably, a fatal defect which rendered
the sequestration of respondent corporation and its properties void ab
initio." And

"The corporation or entity against which such writ is directed will not be
able to visually determine its validity, unless the required signatures of at
least two commissioners authorizing its issuance appear on the very
document itself. The issuance of sequestration orders requires the
existence of a prima facie case. The two –commissioner rule is obviously
intended to assure a collegial determination of such fact. In this light, a writ
bearing only one signature is an obvious transgression of the PCGG
Rules."
Consequently, the writs of sequestration nos. 86-0062, 86-0069, 86-0085,
86-0095, 86-0096, 86-0097 and 86-0098 must be lifted for not having
complied with the pertinent provisions of the PCGG Rules and Regulations,
all of which were issued by only one Commissioner and after April 11, 1986
when the PCGG Rules and Regulations took effect, an utter disregard of
the PCGG’s Rules and Regulations. The Honorable Supreme Court has
stated that:

"Obviously, Section 3 of the PCGG Rules was intended to protect the

public from improvident, reckless and needless sequestrations of private
property. And since these Rules were issued by Respondent Commission,
it should be the first entity to observe them."

Anent the writ of sequestration no. 86-0042 which was issued on April 8,
1986 or prior to the promulgation of the PCGG Rules and Regulations on
April 11, 1986, the same cannot be declared void on the ground that it was
signed by only one Commissioner because at the time it was issued, the
Rules and Regulations of the PCGG were not yet in effect. However, it
again appears that there was no prior determination of the existence of
a prima facie basis or factual foundation for the issuance of the said writ.
The PCGG, despite sufficient time afforded by this Court to show that a
prima facie basis existed prior to the issuance of Writ No. 86-0042, failed to
do so. Nothing in the records submitted by the PCGG in compliance of the
Resolutions and Order of this Court would reveal that a meeting was held
by the Commission for the purpose of determining the existence of a prima
facie evidence prior to its issuance. In a case decided by the Honorable
Supreme Court, wherein it involved a writ of sequestration issued by the
PCGG on March 19, 1986 against all assets, movable and immovable, of
Provident International Resources Corporation and Philippine Casino
Operators Corporation, the Honorable Supreme Court enunciated:

"The questioned sequestration order was, however issued on March 19,

1986, prior to the promulgation of the PCGG Rules and Regulations. As a
consequence, we cannot reasonably expect the commission to abide by
said rules, which were nonexistent at the time the subject writ was issued
by then Commissioner Mary Concepcion Bautista. Basic is the rule that no
statute, decree, ordinance, rule or regulation (and even policies) shall be
given retrospective effect unless explicitly stated so. We find no provision in
said Rules which expressly gives them retroactive effect, or implies the
abrogation of previous writs issued not in accordance with the same Rules.
Rather, what said Rules provide is that they "shall be effective
immediately," which in legal parlance, is understood as "upon
promulgation". Only penal laws are given retroactive effect insofar as they
favor the accused.

We distinguish this case from Republic vs. Sandiganbayan, Romualdez

and Dio Island Resort, G.R. No. 88126, July 12, 1996 where the
sequestration order against Dio Island Resort, dated April 14, 1986, was
prepared, issued and signed not by two commissioners of the PCGG, but
by the head of its task force in Region VIII. In holding that said order was
not valid since it was not issued in accordance with PCGG Rules and
Regulations, we explained:

"(Sec. 3 of the PCGG Rules and Regulations), couched in clear and simple
language, leaves no room for interpretation. On the basis thereof, it is
indubitable that under no circumstances can a sequestration or freeze
order be validly issued by one not a commissioner of the PCGG.

xxx xxx xxx

Even assuming arguendo that Atty. Ramirez had been given prior authority
by the PCGG to place Dio Island Resort under sequestration, nevertheless,
the sequestration order he issued is still void since PCGG may not
delegate its authority to sequester to its representatives and subordinates,
and any such delegation is valid and ineffective."

We further said:

"In the instant case, there was clearly no prior determination made by the
PCGG of a prima facie basis for the sequestration of Dio Island Resort, Inc.
xxx

xxx xxx xxx

The absence of a prior determination by the PCGG of a prima facie basis

for the sequestration order is, unavoidably, a fatal defect which rendered
the sequestration of respondent corporation and its properties void ab initio.
Being void ab initio, it is deemed nonexistent, as though it had never been
issued, and therefore is not subject to ratification by the PCGG.
What were obviously lacking in the above case were the basic requisites
for the validity of a sequestration order which we laid down in BASECO vs.
PCGG, 150 SCRA 181, 216, May 27, 1987, thus:

"Section (3) of the Commission’s Rules and regulations provides that

sequestration or freeze (and takeover) orders issue upon the authority of at
least two commissioners, based on the affirmation or complaint of an
interested party, or motu propio (sic) when the Commission has reasonable
grounds to believe that the issuance thereof is warranted."

In the case at bar, there is no question as to the presence of prima

facie evidence justifying the issuance of the sequestration order against
respondent corporations. But the said order cannot be nullified for lack of
the other requisite (authority of at least two commissioners) since, as
explained earlier, such requisite was nonexistent at the time the order was
issued."

As to the argument of the Plaintiff Republic that Defendants Cojuangco, et

al. have not shown any contrary prima facie proof that the properties
subject matter of the writs of sequestration were legitimate acquisitions, the
same is misplaced. It is a basic legal doctrine, as well as many times
enunciated by the Honorable Supreme Court that when a prima facie proof
is required in the issuance of a writ, the party seeking such extraordinary
writ must establish that it is entitled to it by complying strictly with the
requirements for its issuance and not the party against whom the writ is
being sought for to establish that the writ should not be issued against it.

According to the Republic, the Sandiganbayan thereby gravely abused its

discretion in: (a) in lifting WOS No. 86-0042 and No. 87-0218 despite the
basic requisites for the validity of sequestration being existent; (b) in
denying the Republic’s alternative prayer for the issuance of an order of
sequestration against all the subject shares of stock in accordance with the
ruling in Republic v. Sandiganbayan, 258 SCRA 685, as stated in its Motion
For Reconsideration; and (c) in deleting the last two conditions the
Sandiganbayan had earlier imposed on the subject shares of stock.

We sustain the lifting of the nine WOS for the reasons made extant in the
assailed resolution of October 8, 2003, supra.

Section 3 of the Rules of the PCGG, promulgated on April 11, 1986,

provides:
Section 3. Who may issue. – A writ of sequestration or a freeze or hold
order may be issued by the Commission upon the authority of at least two
Commissioners, based on the affirmation or complaint of an interested
party or motu proprio when the Commission has reasonable grounds to
believe that the issuance thereof is warranted.

Conformably with Section 3, supra, WOS No. 86-0062 dated April 21,
1986; WOS No. 86-0069 dated April 22, 1986; WOS No. 86-0085 dated
May 9, 1986; WOS No. 86-0095 dated May 16, 1986; WOS No. 86-0096
dated May 16, 1986; WOS No. 86-0097 dated May 16, 1986; and WOS No.
86-0098 dated May 16, 1986 were lawfully and correctly nullified
considering that only one PCGG Commissioner had issued them.

Similarly, WOS No. 86-0042 dated April 8, 1986 and WOS No. 87-0218
dated May 27, 1987 were lawfully and correctly nullified ̶ notwithstanding
that WOS No. 86-0042, albeit signed by only one Commissioner (i.e.,
Commissioner Mary Concepcion Bautista), was not at the time of its
issuance subject to the two-Commissioners rule, and WOS No. 87-0218,
albeit already issued under the signatures of two Commissioners ̶
considering that both had been issued without a prior determination by the
PCGG of a prima facie basis for the sequestration.

Plainly enough, the irregularities infirming the issuance of the several WOS
could not be ignored in favor of the Republic and resolved against the
persons whose properties were subject of the WOS. Where the Rules of
the PCGG instituted safeguards under Section 3, supra, by requiring the
concurrent signatures of two Commissioners to every WOS issued and the
existence of a prima facie case of ill gotten wealth to support the issuance,
the non-compliance with either of the safeguards nullified the WOS thus
issued. It is already settled that sequestration, due to its tendency to
impede or limit the exercise of proprietary rights by private citizens, is
construed strictly against the State, conformably with the legal maxim that
statutes in derogation of common rights are generally strictly construed and
rigidly confined to the cases clearly within their scope and purpose.86

Consequently, the nullification of the nine WOS, being in implementation of

the safeguards the PCGG itself had instituted, did not constitute any abuse
of its discretion, least of all grave, on the part of the Sandiganbayan.
Nor did the Sandiganbayan gravely abuse its discretion in reducing from
four to only two the conditions imposed for the lifting of the WOS. The
Sandiganbayan thereby acted with the best of intentions, being all too
aware that the claim of the Republic to the sequestered assets and
properties might be prejudiced or harmed pendente lite unless the
protective conditions were annotated in the corporate books of SMC.
Moreover, the issue became academic following the Sandiganbayan’s
promulgation of its decision dismissing the Republic’s Amended Complaint,
which thereby removed the stated reason – "the Republic continues to hold
a claim on the shares which is yet to be resolved" – underlying the need for
the annotation of the conditions (whether four or two).

II

The Concept and Genesis of

Ill-Gotten Wealth in the Philippine Setting

A brief review of the Philippine law and jurisprudence pertinent to ill-gotten

wealth should furnish an illuminating backdrop for further discussion.

In the immediate aftermath of the peaceful 1986 EDSA Revolution, the

administration of President Corazon C. Aquino saw to it, among others, that
rules defining the authority of the government and its instrumentalities were
promptly put in place. It is significant to point out, however, that the
administration likewise defined the limitations of the authority.

The first official issuance of President Aquino, which was made on

February 28, 1986, or just two days after the EDSA Revolution, was
Executive Order (E.O.) No. 1, which created the Presidential Commission
on Good Government (PCGG). Ostensibly, E.O. No. 1 was the first
issuance in light of the EDSA Revolution having come about mainly to
address the pillage of the nation’s wealth by President Marcos, his family,
and cronies.

E.O. No. 1 contained only two WHEREAS Clauses, to wit:

WHEREAS, vast resources of the government have been amassed by

former President Ferdinand E. Marcos, his immediate family, relatives, and
close associates both here and abroad;

WHEREAS, there is an urgent need to recover all ill-gotten wealth;87

Paragraph (4) of E.O. No. 288 further required that the wealth, to be ill-
gotten, must be "acquired by them through or as a result of improper or
illegal use of or the conversion of funds belonging to the Government of the
Philippines or any of its branches, instrumentalities, enterprises, banks or
financial institutions, or by taking undue advantage of their official position,
authority, relationship, connection or influence to unjustly enrich
themselves at the expense and to the grave damage and prejudice of the
Filipino people and the Republic of the Philippines."

Although E.O. No. 1 and the other issuances dealing with ill-gotten wealth
(i.e., E.O. No. 2, E.O. No. 14, and E.O. No. 14-A) only identified the subject
matter of ill-gotten wealth and the persons who could amass ill-gotten
wealth and did not include an explicit definition of ill-gotten wealth, we can
still discern the meaning and concept of ill-gotten wealth from the
WHEREAS Clauses themselves of E.O. No. 1, in that ill-gotten wealth
consisted of the "vast resources of the government" amassed by "former
President Ferdinand E. Marcos, his immediate family, relatives and close
associates both here and abroad." It is clear, therefore, that ill-gotten
wealth would not include all the properties of President Marcos, his
immediate family, relatives, and close associates but only the part that
originated from the "vast resources of the government."

In time and unavoidably, the Supreme Court elaborated on the meaning

and concept of ill-gotten wealth. In Bataan Shipyard & Engineering Co., Inc.
v. Presidential Commission on Good Government,89 or BASECO, for the
sake of brevity, the Court held that:

xxx until it can be determined, through appropriate judicial proceedings,

whether the property was in truth "ill-gotten," i.e., acquired through or as a
result of improper or illegal use of or the conversion of funds belonging to
the Government or any of its branches, instrumentalities, enterprises,
banks or financial institutions, or by taking undue advantage of official
position, authority, relationship, connection or influence, resulting in unjust
enrichment of the ostensible owner and grave damage and prejudice to the
State. And this, too, is the sense in which the term is commonly understood
in other jurisdictions.90

The BASECO definition of ill-gotten wealth was reiterated in Presidential

Commission on Good Government v. Lucio C. Tan,91 where the Court said:
On this point, we find it relevant to define "ill-gotten wealth." In Bataan
Shipyard and Engineering Co., Inc., this Court described "ill-gotten wealth"
as follows:

"Ill-gotten wealth is that acquired through or as a result of improper or

illegal use of or the conversion of funds belonging to the Government or
any of its branches, instrumentalities, enterprises, banks or financial
institutions, or by taking undue advantage of official position, authority,
relationship, connection or influence, resulting in unjust enrichment of the
ostensible owner and grave damage and prejudice to the State. And this,
too, is the sense in which the term is commonly understood in other
jurisdiction."

Concerning respondents’ shares of stock here, there is no evidence

presented by petitioner that they belong to the Government of the
Philippines or any of its branches, instrumentalities, enterprises, banks or
financial institutions. Nor is there evidence that respondents, taking undue
advantage of their connections or relationship with former President
Marcos or his family, relatives and close associates, were able to acquire
those shares of stock.

Incidentally, in its 1998 ruling in Chavez v. Presidential Commission on

Good Government,92 the Court rendered an identical definition of ill-gotten
wealth, viz:

xxx. We may also add that ‘ill-gotten wealth’, by its very nature, assumes a
public character. Based on the aforementioned Executive Orders, ‘ill-gotten
wealth’ refers to assets and properties purportedly acquired, directly or
indirectly, by former President Marcos, his immediate family, relatives and
close associates through or as a result of their improper or illegal use of
government funds or properties; or their having taken undue
advantage of their public office; or their use of powers, influence or
relationships, "resulting in their unjust enrichment and causing grave
damage and prejudice to the Filipino people and the Republic of the
Philippines." Clearly, the assets and properties referred to supposedly
originated from the government itself. To all intents and purposes,
therefore, they belong to the people. As such, upon reconveyance
they will be returned to the public treasury, subject only to the
satisfaction of positive claims of certain persons as may be adjudged by
competent courts. Another declared overriding consideration for the
expeditious recovery of ill-gotten wealth is that it may be used for national
economic recovery.

All these judicial pronouncements demand two concurring elements to be

present before assets or properties were considered as ill-gotten wealth,
namely: (a) they must have "originated from the government itself," and (b)
they must have been taken by former President Marcos, his immediate
family, relatives, and close associates by illegal means.

But settling the sources and the kinds of assets and property covered by
E.O. No. 1 and related issuances did not complete the definition of ill-gotten
wealth. The further requirement was that the assets and property should
have been amassed by former President Marcos, his immediate family,
relatives, and close associates both here and abroad. In this regard,
identifying former President Marcos, his immediate family, and relatives
was not difficult, but identifying other persons who might be the close
associates of former President Marcos presented an inherent difficulty,
because it was not fair and just to include within the term close associates
everyone who had had any association with President Marcos, his
immediate family, and relatives.

Again, through several rulings, the Court became the arbiter to determine
who were the close associates within the coverage of E.O. No. 1.

In Republic v. Migriño,93 the Court held that respondents Migriño, et al.

were not necessarily among the persons covered by the term close
subordinate or close associate of former President Marcos by reason alone
of their having served as government officials or employees during the
Marcos administration, viz:

It does not suffice, as in this case, that the respondent is or was a

government official or employee during the administration of former
Pres. Marcos. There must be a prima facie showing that the
respondent unlawfully accumulated wealth by virtue of his close
association or relation with former Pres. Marcos and/or his wife. This
is so because otherwise the respondent’s case will fall under existing
general laws and procedures on the matter. xxx

In Cruz, Jr. v. Sandiganbayan,94 the Court declared that the petitioner was
not a close associate as the term was used in E.O. No. 1 just because he
had served as the President and General Manager of the GSIS during the
Marcos administration.

In Republic v. Sandiganbayan,95 the Court stated that respondent Maj.

Gen. Josephus Q. Ramas’ having been a Commanding General of the
Philippine Army during the Marcos administration "d[id] not automatically
make him a subordinate of former President Ferdinand Marcos as this term
is used in Executive Order Nos. 1, 2, 14 and 14-A absent a showing that he
enjoyed close association with former President Marcos."

It is well to point out, consequently, that the distinction laid down by E.O.
No. 1 and its related issuances, and expounded by relevant judicial
pronouncements unavoidably required competent evidentiary
substantiation made in appropriate judicial proceedings to determine: (a)
whether the assets or properties involved had come from the vast
resources of government, and (b) whether the individuals owning or holding
such assets or properties were close associates of President Marcos. The
requirement of competent evidentiary substantiation made in appropriate
judicial proceedings was imposed because the factual premises for the
reconveyance of the assets or properties in favor of the government due to
their being ill-gotten wealth could not be simply assumed. Indeed, in
BASECO,96 the Court made this clear enough by emphatically observing:

6. Government’s Right and Duty to Recover All Ill-gotten Wealth

There can be no debate about the validity and eminent propriety of the
Government’s plan "to recover all ill-gotten wealth."

Neither can there be any debate about the proposition that assuming the
above described factual premises of the Executive Orders and
Proclamation No. 3 to be true, to be demonstrable by competent evidence,
the recovery from Marcos, his family and his minions of the assets and
properties involved, is not only a right but a duty on the part of Government.

But however plain and valid that right and duty may be, still a balance must
be sought with the equally compelling necessity that a proper respect be
accorded and adequate protection assured, the fundamental rights of
private property and free enterprise which are deemed pillars of a free
society such as ours, and to which all members of that society may without
exception lay claim.
xxx Democracy, as a way of life enshrined in the Constitution, embraces as
its necessary components freedom of conscience, freedom of expression,
and freedom in the pursuit of happiness. Along with these freedoms are
included economic freedom and freedom of enterprise within reasonable
bounds and under proper control. xxx Evincing much concern for the
protection of property, the Constitution distinctly recognizes the preferred
position which real estate has occupied in law for ages. Property is bound
up with every aspect of social life in a democracy as democracy is
conceived in the Constitution. The Constitution realizes the indispensable
role which property, owned in reasonable quantities and used legitimately,
plays in the stimulation to economic effort and the formation and growth of
a solid social middle class that is said to be the bulwark of democracy and
the backbone of every progressive and happy country.

a. Need of Evidentiary Substantiation in Proper Suit

Consequently, the factual premises of the Executive Orders cannot simply

be assumed. They will have to be duly established by adequate proof in
each case, in a proper judicial proceeding, so that the recovery of the ill-
gotten wealth may be validly and properly adjudged and consummated;
although there are some who maintain that the fact — that an immense
fortune, and "vast resources of the government have been amassed by
former President Ferdinand E. Marcos, his immediate family, relatives, and
close associates both here and abroad," and they have resorted to all sorts
of clever schemes and manipulations to disguise and hide their illicit
acquisitions — is within the realm of judicial notice, being of so extensive
notoriety as to dispense with proof thereof. Be this as it may, the
requirement of evidentiary substantiation has been expressly
acknowledged, and the procedure to be followed explicitly laid down, in
Executive Order No. 14. 97

Accordingly, the Republic should furnish to the Sandiganbayan in proper

judicial proceedings the competent evidence proving who were the close
associates of President Marcos who had amassed assets and properties
that would be rightly considered as ill-gotten wealth.

III.

Summary Judgment was not warranted;

 The Republic should have adduced evidence
to substantiate its allegations against the Respondents

We affirm the decision of November 28, 2007, because the Republic did
not discharge its burden as the plaintiff to establish by preponderance of
evidence that the respondents’ SMC shares were illegally acquired with
coconut-levy funds.

The decision of November 28, 2007 fully explained why the Sandiganbayan
dismissed the Republic’s case against Cojuangco, et al., viz:

Going over the evidence, especially the laws, i.e., P.D. No. 961, P.D. No.
755, and P.D. No. 1468, over which plaintiff prayed that Court to take
judicial notice of, it is worth noting that these same laws were cited by
plaintiff when it filed its motion for judgment on the pleadings and/or
summary judgment regarding the CIIF block of SMC shares of stock. Thus,
the Court has already passed upon the same laws when it arrived at
judgment determining ownership of the CIIF block of SMC shares of stock.
Pertinently, in the Partial Summary Judgment promulgated on May 7, 2004,
the Court gave the following rulings finding certain provisions of the above-
cited laws to be constitutionally infirmed, thus:

In this case, Section 2(d) and Section 9 and 10, Article III, of P.D. Nos. 961
and 1468 mandated the UCPB to utilize the CIIF, an accumulation of a
portion of the CCSF and the CIDF, for investment in the form of shares of
stock in corporations organized for the purpose of engaging in the
establishment and the operation of industries and commercial activities and
other allied business undertakings relating to coconut and other palm oils
industry in all aspects. The investments made by UCPB in CIIF companies
are required by the said Decrees to be equitably distributed for free by the
said bank to the coconut farmers (Sec. 10, P.D. No. 961 and Sec. 10, P.D.
No. 1468). The public purpose sought to be served by the free distribution
of the shares of stock acquired with the use of public funds is not evident in
the laws mentioned. More specifically, it is not clear how private ownership
of the shares of stock acquired with public funds can serve a public
purpose. The mode of distribution of the shares of stock also left much
room for the diversion of assets acquired through public funds into private
uses or to serve directly private interests, contrary to the Constitution. In
the said distribution, defendants COCOFED, et al. and Ballares, et al.
admitted that UCPB followed the administrative issuances of PCA which
we found to be constitutionally objectionable in our Partial Summary
Judgment in Civil Case No. 0033-A, the pertinent portions of which are
quoted hereunder:

xxx xxx xxx

The distribution for free of the shares of stock of the CIIF Companies is
tainted with the above-mentioned constitutional infirmities of the PCA
administrative issuances. In view of the foregoing, we cannot consider the
provision of P.D. No. 961 and P.D. No. 1468 and the implementing
regulations issued by the PCA as valid legal basis to hold that assets
acquired with public funds have legitimately become private properties.

The CIIF Companies having been acquired with public funds, the 14 CIIF-
owned Holding Companies and all their assets, including the CIIF Block of
SMC Shares, being public in character, belong to the government. Even
granting that the 14 Holding Companies acquired the SMC Shares through
CIIF advances and UCPB loans, said advances and loans are still the
obligations of the said companies. The incorporating equity or capital of the
14 Holding Companies, which were allegedly used also for the acquisition
of the subject SMC shares, being wholly owned by the CIIF Companies,
likewise form part of the coconut levy funds, and thus belong to the
government in trust for the ultimate beneficiaries thereof, which are all the
coconut farmers.

xxx xxx xxx

And, with the above-findings of the Court, the CIIF block of SMC shares
were subsequently declared to be of public character and should be
reconveyed to the government in trust for coconut farmers. The foregoing
findings notwithstanding, a question now arises on whether the same laws
can likewise serve as ultimate basis for a finding that the Cojuangco, et al.
block of SMC shares are also imbued with public character and should
rightfully be reconveyed to the government.

On this point, the Court disagrees with plaintiff that reliance on said laws
would suffice to prove that defendants Cojuangco, et al.’s acquisition of
SMC shares of stock was illegal as public funds were used. For one,
plaintiff’s reliance thereon has always had reference only to the CIIF block
of shares, and the Court has already settled the same by going over the
laws and quoting related findings in the Partial Summary judgment
rendered in Civil Case No. 0033-A. For another, the allegations of plaintiff
pertaining to the Cojuangco block representing twenty percent (20%) of the
outstanding capital stock of SMC stress defendant Cojuangco’s acquisition
by virtue of his positions as Chief Executive Officer of UCPB, a member-
director of the Philippine Coconut Authority (PCA) Governing Board, and a
director of the CIIF Oil Mills. Thus, reference to the said laws would not
settle whether there was abuse on the part of defendants Cojuangco, et al.
of their positions to acquire the SMC shares. 98

Besides, in the Resolution of the Court on plaintiff’s Motion for Parial

Summary Judgment (Re: Shares in San Miguel Corporation Registered in
the Respective Names of Defendants Eduardo M. Cojuangco, Jr. and the
defendant Cojuangco Companies), the Court already rejected plaintiff’s
reference to said laws. In fact, the Court declined to grant plaintiff’s motion
for partial summary judgment because it simply contended that defendant
Cojuangco’s statements in his pleadings, which plaintiff again offered in
evidence herein, regarding the presentation of a possible CIIF witness as
well as UCPB records can already be considered admissions of
defendants’ exclusive use and misuse of coconut levy funds. In the said
resolution, the Court already reminded plaintiff that the issues cannot be
resolved by plaintiff’s interpretation of defendant Cojuangco’s statements in
his brief. Thus, the substantial portion of the Resolution of the Court
denying plaintiff’s motion for partial summary judgment is again quoted for
emphasis: 99

We cannot agree with the plaintiff’s contention that the defendant’s

statements in his Pre-Trial Brief regarding the presentation of a possible
CIIF witness as well as UCPB records, can already be considered as
admissions of the defendant’s exclusive use and misuse of coconut levy
funds to acquire the subject SMC shares and defendant Cojuangco’s
alleged taking advantage of his positions to acquire the subject SMC
shares. Moreover, in ruling on a motion for summary judgment, the court
"should take that view of the evidence most favorable to the party against
whom it is directed, giving such party the benefit of all favorable
inferences." Inasmuch as this issue cannot be resolved merely from an
interpretation of the defendant’s statements in his brief, the UCPB records
must be produced and the CIIF witness must be heard to ensure that the
conclusions that will be derived have factual basis and are thus, valid. 100
WHEREFORE, in view of the foregoing, the Motion for Partial Summary
Judgment dated July 11, 2003 is hereby DENIED for lack of merit.

SO ORDERED.

(Emphasis supplied)

Even assuming that, as plaintiff prayed for, the Court takes judicial notice of
the evidence it offered with respect to the Cojuangco block of SMC shares
of stock, as contained in plaintiff’s manifestation of purposes, still its
evidence do not suffice to prove the material allegations in the complaint
that Cojuangco took advantage of his positions in UCPB and PCA in order
to acquire the said shares. As above-quoted, the Court, itself, has already
ruled, and hereby stress that "UCPB records must be produced and the
CIIF witness must be heard to ensure that the conclusions that will be
derived have factual basis and are thus, valid." Besides, the Court found
that there are genuine factual issues raised by defendants that need to be
threshed out in a full-blown trial, and which plaintiff had the burden to
substantially prove. Thus, the Court outlined these genuine factual issues
as follows:

1) What are the "various sources" of funds, which defendant

Cojuangco and his companies claim they utilized to acquire the
disputed SMC shares?

2) Whether or not such funds acquired from alleged "various sources"

can be considered coconut levy funds;

3) Whether or not defendant Cojuangco had indeed served in the

governing bodies of PCA, UCPB and/or CIIF Oil Mills at the time the
funds used to purchase the SMC shares were obtained such that he
owed a fiduciary duty to render an account to these entities as well as
to the coconut farmers;

4) Whether or not defendant Cojuangco took advantage of his

position and/or close ties with then President Marcos to obtain
favorable concessions or exemptions from the usual financial
requirements from the lending banks and/or coco-levy funded
companies, in order to raise the funds to acquire the disputed SMC
shares; and if so, what are these favorable concessions or
exemptions?101
Answers to these issues are not evident from the submissions of plaintiff
and must therefore be proven through the presentation of relevant and
competent evidence during trial. A perusal of the subject Motion shows that
the plaintiff hastily derived conclusions from the defendants’ statements in
their previous pleadings although such conclusions were not supported by
categorical facts but only mere inferences. xxx xxx xxx." (Emphasis
supplied) 102

Despite the foregoing pronouncement of the Court, plaintiff did not present
any other evidence during the trial of this case but instead made its
manifestation of purposes, that later served as its offer of evidence in the
instant case, that merely used the same evidence it had already relied
upon when it moved for partial summary judgment over the Cojuangco
block of SMC shares. Altogether, the Court finds the same insufficient to
prove plaintiff’s allegations in the complaint because more than judicial
notices, the factual issues require the presentation of admissible,
competent and relevant evidence in accordance with Sections 3 and 4,
Rule 128 of the Rules on Evidence.

Moreover, the propriety of taking judicial notice of plaintiff’s exhibits is aptly

questioned by defendants Cojuangco, et al. Certainly, the Court can take
judicial notice of laws pertaining to the coconut levy funds as well as
decisions of the Supreme Court relative thereto, but taking judicial notice
does not mean that the Court would accord full probative value to these
exhibits. Judicial notice is based upon convenience and expediency for it
would certainly be superfluous, inconvenient, and expensive both to parties
and the court to require proof, in the ordinary way, of facts which are
already known to courts. However, a court cannot take judicial notice of a
factual matter in controversy. Certainly, there are genuine factual matters in
the instant case, as above-cited, which plaintiff ought to have proven with
relevant and competent evidence other than the exhibits it offered.

Referring to plaintiff’s causes of action against defendants Cojuangco, et

al., the Court finds its evidence insufficient to prove that the source of funds
used to purchase SMC shares indeed came from coconut levy funds. In
fact, there is no direct link that the loans obtained by defendant Cojuangco,
Jr. were the same money used to pay for the SMC shares. The scheme
alleged to have been taken by defendant Cojuangco, Jr. was not even
established by any paper trail or testimonial evidence that would have
identified the same. On account of his positions in the UCPB, PCA and the
CIIF Oil Mills, the Court cannot conclude that he violated the fiduciary
obligations of the positions he held in the absence of proof that he was so
actuated and that he abused his positions.103

It was plain, indeed, that Cojuangco, et al. had tendered genuine issues
through their responsive pleadings and did not admit that the acquisition of
the Cojuangco block of SMC shares had been illegal, or had been made
with public funds. As a result, the Republic needed to establish its
allegations with preponderant competent evidence, because, as earlier
stated, the fact that property was ill gotten could not be presumed but must
be substantiated with competent proof adduced in proper judicial
proceedings. That the Republic opted not to adduce competent evidence
thereon despite stern reminders and warnings from the Sandiganbayan to
do so revealed that the Republic did not have the competent evidence to
prove its allegations against Cojuangco, et al.

Still, the Republic, relying on the 2001 holding in Republic v.

COCOFED,104 pleads in its petition for review (G.R. No. 180702) that:

With all due respect, the Honorable Sandiganbayan failed to consider legal
precepts and procedural principles vis-à-vis the records of the case
showing that the funds or "various loans" or "advances" used in the
acquisition of the disputed SMC Shares ultimately came from the coconut
levy funds.

As discussed hereunder, respondents’ own admissions in their Answers

and Pre-Trial Briefs confirm that the "various sources" of funds utilized in
the acquisition of the disputed SMC shares came from "borrowings" and
"advances" from the UCPB and the CIIF Oil Mills.105

Thereby, the Republic would have the Sandiganbayan pronounce the block
of SMC shares of stock acquired by Cojuangco, et al. as ill-gotten wealth
even without the Republic first presenting preponderant evidence
establishing that such block had been acquired illegally and with the use of
coconut levy funds.

The Court cannot heed the Republic’s pleas for the following reasons:

To begin with, it is notable that the decision of November 28, 2007 did not
rule on whether coconut levy funds were public funds or not. The silence of
the Sandiganbayan on the matter was probably due to its not seeing the
need for such ruling following its conclusion that the Republic had not
preponderantly established the source of the funds used to pay the
purchase price of the concerned SMC shares, and whether the shares had
been acquired with the use of coconut levy funds.

Secondly, the ruling in Republic v. COCOFED106 determined only whether

certain stockholders of the UCPB could vote in the stockholders’ meeting
that had been called. The issue now before the Court could not be
controlled by the ruling in Republic v. COCOFED, however, for even as that
ruling determined the issue of voting, the Court was forthright enough about
not thereby preempting the Sandiganbayan’s decisions on the merits on ill-
gotten wealth in the several cases then pending, including this one, viz:

In making this ruling, we are in no way preempting the proceedings the

Sandiganbayan may conduct or the final judgment it may promulgate in
Civil Case No. 0033-A, 0033-B and 0033-F. Our determination here is
merely prima facie, and should not bar the anti-graft court from making a
final ruling, after proper trial and hearing, on the issues and prayers in the
said civil cases, particularly in reference to the ownership of the subject
shares.

We also lay down the caveat that, in declaring the coco levy funds to be
prima facie public in character, we are not ruling in any final manner on
their classification — whether they are general or trust or special funds —
since such classification is not at issue here. Suffice it to say that the public
nature of the coco levy funds is decreed by the Court only for the purpose
of determining the right to vote the shares, pending the final outcome of the
said civil cases.

Neither are we resolving in the present case the question of whether the
shares held by Respondent Cojuangco are, as he claims, the result of
private enterprise. This factual matter should also be taken up in the final
decision in the cited cases that are pending in the court a quo. Again,
suffice it to say that the only issue settled here is the right of PCGG to vote
the sequestered shares, pending the final outcome of said cases.

Thirdly, the Republic’s assertion that coconut levy funds had been used to
source the payment for the Cojuangco block of SMC shares was premised
on its allegation that the UCPB and the CIIF Oil Mills were public
corporations. But the premise was grossly erroneous and overly
presumptuous, because:

(a) The fact of the UCPB and the CIIF Oil Mills being public
corporations or government-owned or government-controlled
corporations precisely remained controverted by Cojuangco, et al. in
light of the lack of any competent to that effect being in the records;

(b) Cojuangco explicitly averred in paragraph 2.01.(b) of his Answer

that the UCPB was a "private corporation;" and

(c) The Republic did not competently identify or establish which ones
of the Cojuangco corporations had supposedly received advances
from the CIIF Oil Mills.

Fourthly, the Republic asserts that the contested block of shares had been
paid for with "borrowings" from the UCPB and "advances" from the CIIF Oil
Mills, and that such borrowings and advances had been illegal because the
shares had not been purchased for the "benefit of the Coconut Farmers."
To buttress its assertion, the Republic relied on the admissions supposedly
made in paragraph 2.01 of Cojuangco’s Answer in relation to paragraph 4
of the Republic’s Amended Complaint.

The best way to know what paragraph 2.01 of Cojuangco’s Answer

admitted is to refer to both paragraph 4 of the Amended Complaint and
paragraph 2.01 of his Answer, which are hereunder quoted:

Paragraph 4 of the Amended Complaint

4. Defendant EDUARDO M. COJUANGCO, JR., was Governor of Tarlac,

Congressman of then First District of Tarlac and Ambassador-at-Large in
the Marcos Administration. He was commissioned Lieutenant Colonel in
the Philippine Air Force, Reserve. Defendant Eduardo M. Cojuangco, Jr.,
otherwise known as the "Coconut King" was head of the coconut monopoly
which was instituted by Defendant Ferdinand E. Marcos, by virtue of the
Presidential Decrees. Defendant Eduardo E. Cojuangco, Jr., who was also
one of the closest associates of the Defendant Ferdinand E. Marcos, held
the positions of Director of the Philippine Coconut Authority, the United
Coconut Mills, Inc., President and Board Director of the United Coconut
Planters Bank, United Coconut Planters Life Assurance Corporation, and
United Coconut Chemicals, Inc. He was also the Chairman of the Board
and Chief Executive Officer and the controlling stockholder of the San
Miguel Corporation. He may be served summons at 45 Balete Drive,
Quezon City or at 136 East 9th Street, Quezon City.

Paragraph 2.01 of Respondent Cojuangco’s Answer

2.01. Herein defendant admits paragraph 4 only insofar as it alleges the

following:

(a) That herein defendant has held the following positions in

government: Governor of Tarlac, Congressman of the then First
District of Tarlac, Ambassador-at-Large, Lieutenant Colonel in the
Philippine Air Force and Director of the Philippines Coconut Authority;

(b) That he held the following positions in private corporations:

Member of the Board of Directors of the United Coconut Oil Mills,
Inc.; President and member of the Board of Directors of the United
Coconut Planters Bank, United Coconut Planters Life Assurance
Corporation, and United Coconut Chemicals, Inc.; Chairman of the
Board and Chief Executive of San Miguel Corporation; and

(c) That he may be served with summons at 136 East 9th Street,
Quezon City.

Herein defendant specifically denies the rest of the allegations of paragraph

4, including any insinuation that whatever association he may have had
with the late Ferdinand Marcos or Imelda Marcos has been in connection
with any of the acts or transactions alleged in the complaint or for any
unlawful purpose.

It is basic in remedial law that a defendant in a civil case must apprise the
trial court and the adverse party of the facts alleged by the complaint that
he admits and of the facts alleged by the complaint that he wishes to place
into contention. The defendant does the former either by stating in his
answer that they are true or by failing to properly deny them. There are two
ways of denying alleged facts: one is by general denial, and the other, by
specific denial.107

In this jurisdiction, only a specific denial shall be sufficient to place into

contention an alleged fact.108 Under Section 10,109 Rule 8 of the Rules of
Court, a specific denial of an allegation of the complaint may be made in
any of three ways, namely: (a) a defendant specifies each material
allegation of fact the truth of which he does not admit and, whenever
practicable, sets forth the substance of the matters upon which he relies to
support his denial; (b) a defendant who desires to deny only a part of an
averment specifies so much of it as is true and material and denies only the
remainder; and (c) a defendant who is without knowledge or information
sufficient to form a belief as to the truth of a material averment made in the
complaint states so, which has the effect of a denial.

The express qualifications contained in paragraph 2.01 of Cojuangco’s

Answer constituted efficient specific denials of the averments of paragraph
2 of the Republic’s Amended Complaint under the first method mentioned
in Section 10 of Rule 8, supra. Indeed, the aforequoted paragraphs of the
Amended Complaint and of Cojuangco’s Answer indicate that Cojuangco
thereby expressly qualified his admission of having been the President and
a Director of the UCPB with the averment that the UCPB was a "private
corporation;" that his Answer’s allegation of his being a member of the
Board of Directors of the United Coconut Oil Mills, Inc. did not admit that he
was a member of the Board of Directors of the CIIF Oil Mills, because the
United Coconut Oil Mills, Inc. was not one of the CIIF Oil Mills; and that his
Answer nowhere contained any admission or statement that he had held
the various positions in the government or in the private corporations at the
same time and in 1983, the time when the contested acquisition of the
SMC shares of stock took place.

What the Court stated in Bitong v. Court of Appeals (Fifth Division)110 as to

admissions is illuminating:

When taken in its totality, the Amended Answer to the Amended Petition, or
even the Answer to the Amended Petition alone, clearly raises an issue as
to the legal personality of petitioner to file the complaint. Every alleged
admission is taken as an entirety of the fact which makes for the one side
with the qualifications which limit, modify or destroy its effect on the other
side. The reason for this is, where part of a statement of a party is used
against him as an admission, the court should weigh any other portion
connected with the statement, which tends to neutralize or explain the
portion which is against interest.

In other words, while the admission is admissible in evidence, its probative

value is to be determined from the whole statement and others intimately
related or connected therewith as an integrated unit. Although acts or facts
admitted do not require proof and cannot be contradicted, however,
evidence aliunde can be presented to show that the admission was made
through palpable mistake. The rule is always in favor of liberality in
construction of pleadings so that the real matter in dispute may be
submitted to the judgment of the court.

And, lastly, the Republic cites the following portions of the joint Pre-Trial
Brief of Cojuangco, et al.,111 to wit:

IV.

PROPOSED EVIDENCE

xxx

4.01. xxx Assuming, however, that plaintiff presents evidence to support its
principal contentions, defendant’s evidence in rebuttal would include
testimonial and documentary evidence showing: a) the ownership of the
shares of stock prior to their acquisition by respondents (listed in Annexes
‘A" and ‘B"); b) the consideration for the acquisition of the shares of stock
by the persons or companies in whose names the shares of stock are now
registered; and c) the source of the funds used to pay the purchase price.

4.02. Herein respondents intend to present the following evidence:

xxx

b. Proposed Exhibits ____, ____, ____

Records of the United Coconut Planters Bank which would show

borrowings of the companies listed in Annexes "A" and "B", or companies
affiliated or associated with them, which were used to source payment of
the shares of stock of the San Miguel Corporation subject of this case.

4.03. Witnesses.

xxx
 (b) A representative of the United Coconut Planters Bank who will
testify in regard the loans which were used to source the payment of
the price of SMC shares of stock.

(c) A representative from the CIIF Oil Mills who will testify in regard
the loans or credit advances which were used to source the payment
of the purchase price of the SMC shares of stock.

The Republic insists that the aforequoted portions of the joint Pre-Trial Brief
were Cojuangco, et al.’s admission that:

(a) Cojuangco had received money from the UCPB, a bank entrusted
by law with the administration of the coconut levy funds; and

(b) Cojuangco had received more money from the CIIF Oil Mills in
which part of the CIIF funds had been placed, and thereby used the
funds of the UCPB and the CIIF as capital to buy his SMC shares.112

We disagree with the Republic’s posture.

The statements found in the joint Pre-Trial Brief of Cojuangco, et al. were
noticeably written beneath the heading of Proposed Evidence. Such
location indicated that the statements were only being proposed, that is,
they were not yet intended or offered as admission of any fact stated
therein. In other words, the matters stated or set forth therein might or
might not be presented at all. Also, the text and tenor of the statements
expressly conditioned the proposal on the Republic ultimately presenting its
evidence in the action. After the Republic opted not to present its evidence,
the condition did not transpire; hence, the proposed admissions, assuming
that they were that, did not materialize.

Obviously, too, the statements found under the heading of Proposed

Evidence in the joint Pre-Trial Brief were incomplete and inadequate on the
important details of the supposed transactions (i.e., alleged borrowings and
advances). As such, they could not constitute admissions that the funds
had come from borrowings by Cojuangco, et al. from the UCPB or had
been credit advances from the CIIF Oil Companies. Moreover, the purpose
for presenting the records of the UCPB and the representatives of the
UCPB and of the still unidentified or unnamed CIIF Oil Mills as declared in
the joint Pre-Trial Brief did not at all show whether the UCPB and/or the
unidentified or unnamed CIIF Oil Mills were the only sources of funding, or
that such institutions, assuming them to be the sources of the funding, had
been the only sources of funding. Such ambiguousness disqualified the
statements from being relied upon as admissions. It is fundamental that
any statement, to be considered as an admission for purposes of judicial
proceedings, should be definite, certain and unequivocal;113 otherwise, the
disputed fact will not get settled.

Another reason for rejecting the Republic’s posture is that the

Sandiganbayan, as the trial court, was in no position to second-guess what
the non-presented records of the UCPB would show as the borrowings
made by the corporations listed in Annexes A and B, or by the companies
affiliated or associated with them, that "were used to source payment of the
shares of stock of the San Miguel Corporation subject of this case," or what
the representative of the UCPB or the representative of the CIIF Oil Mills
would testify about loans or credit advances used to source the payment of
the price of SMC shares of stock.

Lastly, the Rules of Court has no rule that treats the statements found
under the heading Proposed Evidence as admissions binding Cojuangco,
et al. On the contrary, the Rules of Court has even distinguished between
admitted facts and facts proposed to be admitted during the stage of pre-
trial. Section 6 (b),114 Rule 18 of the Rules of Court, requires a Pre-Trial
Brief to include a summary of admitted facts and a proposed stipulation of
facts. Complying with the requirement, the joint Pre-Trial Brief of
Cojuangco, et al. included the summary of admitted facts in its paragraph
3.00 of its Item III, separately and distinctly from the Proposed Evidence, to
wit:

III.

SUMMARY OF UNDISPUTED FACTS

3.00. Based on the complaint and the answer, the acquisition of the San
Miguel shares by, and their registration in the names of, the companies
listed in Annexes "A" and "B" may be deemed undisputed.

3.01. All other allegations in the complaint are disputed.115

The burden of proof, according to Section 1, Rule 131 of the Rules of

Court, is "the duty of a party to present evidence on the facts in issue
necessary to establish his claim or defense by the amount of evidence
required by law." Here, the Republic, being the plaintiff, was the party that
carried the burden of proof. That burden required it to demonstrate through
competent evidence that the respondents, as defendants, had purchased
the SMC shares of stock with the use of public funds; and that the affected
shares of stock constituted ill-gotten wealth. The Republic was well
apprised of its burden of proof, first through the joinder of issues made by
the responsive pleadings of the defendants, including Cojuangco, et al. The
Republic was further reminded through the pre-trial order and the
Resolution denying its Motion for Summary Judgment, supra, of the duty to
prove the factual allegations on ill-gotten wealth against Cojuangco, et al.,
specifically the following disputed matters:

(a) When the loans or advances were incurred;

(b) The amount of the loans from the UCPB and of the credit
advances from the CIIF Oil Mills, including the specific CIIF Oil Mills
involved;

(c) The identities of the borrowers, that is, all of the respondent
corporations together, or separately; and the amounts of the
borrowings;

(d) The conditions attendant to the loans or advances, if any;

(e) The manner, form, and time of the payments made to Zobel or to
the Ayala Group, whether by check, letter of credit, or some other
form; and

(f) Whether the loans were paid, and whether the advances were
liquidated.

With the Republic nonetheless choosing not to adduce evidence proving

the factual allegations, particularly the aforementioned matters, and instead
opting to pursue its claims by Motion for Summary Judgment, the
Sandiganbayan became completely deprived of the means to know the
necessary but crucial details of the transactions on the acquisition of the
contested block of shares. The Republic’s failure to adduce evidence
shifted no burden to the respondents to establish anything, for it was basic
that the party who asserts, not the party who denies, must prove.116 Indeed,
in a civil action, the plaintiff has the burden of pleading every essential fact
and element of the cause of action and proving them by preponderance of
evidence. This means that if the defendant merely denies each of the
plaintiff’s allegations and neither side produces evidence on any such
element, the plaintiff must necessarily fail in the action.117 Thus, the
Sandiganbayan correctly dismissed Civil Case No. 0033-F for failure of the
Republic to prove its case by preponderant evidence.

A summary judgment under Rule 35 of the Rules of Court is a procedural

technique that is proper only when there is no genuine issue as to the
existence of a material fact and the moving party is entitled to a judgment
as a matter of law.118 It is a method intended to expedite or promptly
dispose of cases where the facts appear undisputed and certain from the
pleadings, depositions, admissions, and affidavits on record.119 Upon a
motion for summary judgment the court’s sole function is to determine
whether there is an issue of fact to be tried, and all doubts as to the
existence of an issue of fact must be resolved against the moving party. In
other words, a party who moves for summary judgment has the burden of
demonstrating clearly the absence of any genuine issue of fact, and any
doubt as to the existence of such an issue is resolved against the movant.
Thus, in ruling on a motion for summary judgment, the court should take
that view of the evidence most favorable to the party against whom it is
directed, giving that party the benefit of all favorable inferences.120

The term genuine issue has been defined as an issue of fact that calls for
the presentation of evidence as distinguished from an issue that is sham,
fictitious, contrived, set up in bad faith, and patently unsubstantial so as not
to constitute a genuine issue for trial. The court can determine this on the
basis of the pleadings, admissions, documents, affidavits, and counter-
affidavits submitted by the parties to the court. Where the facts pleaded by
the parties are disputed or contested, proceedings for a summary judgment
cannot take the place of a trial.121 Well-settled is the rule that a party who
moves for summary judgment has the burden of demonstrating clearly the
absence of any genuine issue of fact.122 Upon that party’s shoulders rests
the burden to prove the cause of action, and to show that the defense is
interposed solely for the purpose of delay. After the burden has been
discharged, the defendant has the burden to show facts sufficient to entitle
him to defend.123 Any doubt as to the propriety of a summary judgment shall
be resolved against the moving party.

We need not stress that the trial courts have limited authority to render
summary judgments and may do so only in cases where no genuine issue
as to any material fact clearly exists between the parties. The rule on
summary judgment does not invest the trial courts with jurisdiction to try
summarily the factual issues upon affidavits, but authorizes summary
judgment only when it appears clear that there is no genuine issue as to
any material fact.124

IV.

Republic’s burden to establish by preponderance of evidence that

respondents’ SMC shares had been illegally acquired with coconut-levy
funds was not discharged

Madame Justice Carpio Morales argues in her dissent that although the
contested SMC shares could be inescapably treated as fruits of funds that
are prima facie public in character, Cojuangco, et al. abstained from
presenting countervailing evidence; and that with the Republic having
shown that the SMC shares came into fruition from coco levy funds that are
prima facie public funds, Cojuangco, et al. had to go forward with
contradicting evidence, but did not.

The Court disagrees. We cannot reverse the decision of November 28,

2007 on the basis alone of judicial pronouncements to the effect that the
coconut levy funds were prima facie public funds,125 but without any
competent evidence linking the acquisition of the block of SMC shares by
Cojuangco, et al. to the coconut levy funds.

V.

No violation of the DOSRI and

Single Borrower’s Limit restrictions

The Republic’s lack of proof on the source of the funds by which

Cojuangco, et al. had acquired their block of SMC shares has made it shift
its position, that it now suggests that Cojuangco had been enabled to
obtain the loans by the issuance of LOI 926 exempting the UCPB from the
DOSRI and the Single Borrower’s Limit restrictions.

We reject the Republic’s suggestion.

Firstly, as earlier pointed out, the Republic adduced no evidence on the

significant particulars of the supposed loan, like the amount, the actual
borrower, the approving official, etc. It did not also establish whether or not
the loans were DOSRI126 or issued in violation of the Single Borrower’s
Limit. Secondly, the Republic could not outrightly assume that President
Marcos had issued LOI 926 for the purpose of allowing the loans by the
UCPB in favor of Cojuangco. There must be competent evidence to that
effect. And, finally, the loans, assuming that they were of a DOSRI nature
or without the benefit of the required approvals or in excess of the Single
Borrower’s Limit, would not be void for that reason. Instead, the bank or the
officers responsible for the approval and grant of the DOSRI loan would be
subject only to sanctions under the law.127

VI.

Cojuangco violated no fiduciary duties

The Republic invokes the following pertinent statutory provisions of the Civil
Code, to wit:

Article 1455. When any trustee, guardian or other person holding a

fiduciary relationship uses trust funds for the purchase of property and
causes the conveyance to be made to him or to a third person, a trust is
established by operation of law in favor of the person to whom the funds
belong.

Article 1456. If property is acquired through mistake or fraud, the person

obtaining it s by force of law, considered a trustee of an implied trust for the
benefit of the person from whom the property comes.

and the Corporation Code, as follows:

Section 31. Liability of directors, trustees or officers.—Directors or trustees

who willfully 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.

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.

Did Cojuangco breach his "fiduciary duties" as an officer and member of

the Board of Directors of the UCPB? Did his acquisition and holding of the
contested SMC shares come under a constructive trust in favor of the
Republic?

The answers to these queries are in the negative.

The conditions for the application of Articles 1455 and 1456 of the Civil
Code (like the trustee using trust funds to purchase, or a person acquiring
property through mistake or fraud), and Section 31 of the Corporation Code
(like a director or trustee willfully and knowingly voting for or assenting to
patently unlawful acts of the corporation, among others) require factual
foundations to be first laid out in appropriate judicial proceedings. Hence,
concluding that Cojuangco breached fiduciary duties as an officer and
member of the Board of Directors of the UCPB without competent evidence
thereon would be unwarranted and unreasonable.

Thus, the Sandiganbayan could not fairly find that Cojuangco had
committed breach of any fiduciary duties as an officer and member of the
Board of Directors of the UCPB. For one, the Amended Complaint
contained no clear factual allegation on which to predicate the application
of Articles 1455 and 1456 of the Civil Code, and Section 31 of the
Corporation Code. Although the trust relationship supposedly arose from
Cojuangco’s being an officer and member of the Board of Directors of the
UCPB, the link between this alleged fact and the borrowings or advances
was not established. Nor was there evidence on the loans or borrowings,
their amounts, the approving authority, etc. As trial court, the
Sandiganbayan could not presume his breach of fiduciary duties without
evidence showing so, for fraud or breach of trust is never presumed, but
must be alleged and proved.128

The thrust of the Republic that the funds were borrowed or lent might even
preclude any consequent trust implication. In a contract of loan, one of the
parties (creditor) delivers money or other consumable thing to another
(debtor) on the condition that the same amount of the same kind and
quality shall be paid.129 Owing to the consumable nature of the thing
loaned, the resulting duty of the borrower in a contract of loan is to pay, not
to return, to the creditor or lender the very thing loaned. This explains why
the ownership of the thing loaned is transferred to the debtor upon
perfection of the contract.130 Ownership of the thing loaned having
transferred, the debtor enjoys all the rights conferred to an owner of
property, including the right to use and enjoy (jus utendi), to consume the
thing by its use (jus abutendi), and to dispose (jus disponendi), subject to
such limitations as may be provided by law.131Evidently, the resulting
relationship between a creditor and debtor in a contract of loan cannot be
characterized as fiduciary.132

To say that a relationship is fiduciary when existing laws do not provide for
such requires evidence that confidence is reposed by one party in another
who exercises dominion and influence. Absent any special facts and
circumstances proving a higher degree of responsibility, any dealings
between a lender and borrower are not fiduciary in nature.133This explains
why, for example, a trust receipt transaction is not classified as a simple
loan and is characterized as fiduciary, because the Trust Receipts Law
(P.D. No. 115) punishes the dishonesty and abuse of confidence in the
handling of money or goods to the prejudice of another regardless of
whether the latter is the owner.134

Based on the foregoing, a debtor can appropriate the thing loaned without
any responsibility or duty to his creditor to return the very thing that was
loaned or to report how the proceeds were used. Nor can he be compelled
to return the proceeds and fruits of the loan, for there is nothing under our
laws that compel a debtor in a contract of loan to do so. As owner, the
debtor can dispose of the thing borrowed and his act will not be considered
misappropriation of the thing.135 The only liability on his part is to pay the
loan together with the interest that is either stipulated or provided under
existing laws.

WHEREFORE, the Court dismisses the petitions for certiorari in G.R. Nos.
166859 and 169023; denies the petition for review on certiorari in G.R. No.
180702; and, accordingly, affirms the decision promulgated by the
Sandiganbayan on November 28, 2007 in Civil Case No. 0033-F.

The Court declares that the block of shares in San Miguel Corporation in
the names of respondents Cojuangco, et al. subject of Civil Case No. 0033-
F is the exclusive property of Cojuangco, et al. as registered owners.
Accordingly, the lifting and setting aside of the Writs of Sequestration
affecting said block of shares (namely: Writ of Sequestration No. 86-0062
dated April 21, 1986; Writ of Sequestration No. 86-0069 dated April 22,
1986; Writ of Sequestration No. 86-0085 dated May 9, 1986; Writ of
Sequestration No. 86-0095 dated May 16, 1986; Writ of Sequestration No.
86-0096 dated May 16, 1986; Writ of Sequestration No. 86-0097 dated May
16, 1986; Writ of Sequestration No. 86-0098 dated May 16, 1986; Writ of
Sequestration No. 86-0042 dated April 8, 1986; and Writ of Sequestration
No. 87-0218 dated May 27, 1987) are affirmed; and the annotation of the
conditions prescribed in the Resolutions promulgated on October 8, 2003
and June 24, 2005 is cancelled.

SO ORDERED.

Giovanni Christian D. Ladines

October 2, 2013

Republic v. Sandiganbayan
G.R. No. 166859, G.R. No. 169203, G.R. No. 180702, April
12, 2011

FACTS:
 The Republic commenced Civil Case No. 0033 in the Sandiganbayan
by complaint, impleading as defendants respondent Eduardo M.
Cojuangco, Jr. (Cojuangco) and 59 individual defendants.
 Cojuangco allegedly purchased a block of 33,000,000 shares of SMC
stock through the 14 holding companies owned by the CIIF Oil Mills.
For this reason, the block of 33,133,266 shares of SMC stock shall be
referred to as the CIIF block of shares.

 Contention of the Republic of the Philippines:

  That Cojuangco is the undisputed "coconut king" with unlimited
powers to deal with the coconut levy funds, who took undue
advantage of his association, influence and connection, acting in
unlawful concert with Defendants Ferdinand E. Marcos, misused
coconut levy funds to buy out majority of the outstanding shares of
stock of San Miguel Corporation.

 Defendants Eduardo Cojuangco, Jr., and ACCRA law offices

plotted, devised, schemed, conspired and confederated with each
other in setting up, through the use of coconut levy funds, the
financial and corporate framework and structures that led to the
establishment of UCPB, UNICOM, COCOLIFE, COCOMARK.
CIC, and more than twenty other coconut levy-funded
corporations, including the acquisition of San Miguel Corporation
shares and its institutionalization through presidential directives of
the coconut monopoly.

 Ruling of the Sandiganbayan:

 Amended Complaint in Civil Case No. 0033-F was dismissed for

failure of plaintiff to prove by preponderance of evidence its
causes of action against defendants with respect to the twenty
percent (20%) outstanding shares of stock of San Miguel
Corporation registered in defendants’ names

 Republic of the Philippines appealed the case to the Supreme Court

invoking that coconut levy funds are public funds. The SMC shares,
which were acquired by respondents Cojuangco, Jr. and the
Cojuangco companies with the use of coconut levy funds – in
violation of respondent Cojuangco, Jr.’s fiduciary obligation – are,
necessarily, public in character and should be reconveyed to the
government.

ISSUE:

 Whether Respondent Cojuangco Jr. used the coconut levy funds to

acquire SMC shares in violation of the his fiduciary obligation as a
public officer.
Ruling of the Supreme Court:

 Cojuangco violated no fiduciary duties

It does not suffice, as in this case, that the respondent is or was a

government official or employee during the administration of former Pres.
Marcos. There must be a prima facie showing that the respondent
unlawfully accumulated wealth by virtue of his close association or relation
with former Pres. Marcos and/or his wife.

Republic’s burden to establish by preponderance of evidence that

respondents’ SMC shares had been illegally acquired with coconut-levy
funds was not discharged.

The conditions for the application of Articles 1455 and 1456 of the
Civil Code (like the trustee using trust funds to purchase, or a person
acquiring property through mistake or fraud), and Section 31 of the
Corporation Code (like a director or trustee willfully and knowingly voting for
or assenting to patently unlawful acts of the corporation, among others)
require factual foundations to be first laid out in appropriate judicial
proceedings. Hence, concluding that Cojuangco breached fiduciary duties
as an officer and member of the Board of Directors of the UCPB without
competent evidence thereon would be unwarranted and unreasonable.

Thus, the Sandiganbayan could not fairly find that Cojuangco had
committed breach of any fiduciary duties as an officer and member of the
Board of Directors of the UCPB. For one, the Amended Complaint
contained no clear factual allegation on which to predicate the application
of Articles 1455 and 1456 of the Civil Code, and Section 31 of the
Corporation Code. Although the trust relationship supposedly arose from
Cojuangco’s being an officer and member of the Board of Directors of the
UCPB, the link between this alleged fact and the borrowings or advances
was not established. Nor was there evidence on the loans or borrowings,
their amounts, the approving authority, etc. As trial court, the
Sandiganbayan could not presume his breach of fiduciary duties without
evidence showing so, for fraud or breach of trust is never presumed, but
must be alleged and proved.
 The thrust of the Republic that the funds were borrowed or lent might
even preclude any consequent trust implication but is more inclined to be a
contract of loan. To say that a relationship is fiduciary when existing laws
do not provide for such requires evidence that confidence is reposed by
one party in another who exercises dominion and influence. Absent any
special facts and circumstances proving a higher degree of responsibility,
any dealings between a lender and borrower are not fiduciary in nature.

DISPOSITION:

The Court DISMISSES the petitions for certiorari and, AFFIRMS the
decision promulgated by the Sandiganbayan on November 28, 2007 in Civil
Case No. 0033-F.

The Court declares that the block of shares in San Miguel

Corporation in the names of respondents Cojuangco, et al. subject of Civil
Case No. 0033-F is the exclusive property of Cojuangco, et al. as
registered owners.

19. Jose C. Go vs. Bangko Sentral ng Pilipinas GR. No. 178429,

October 23, 2009

G.R. No. 178429 October 23, 2009

JOSE C. GO, Petitioner,

vs.
BANGKO SENTRAL NG PILIPINAS, Respondent.

DECISION

BRION, J.:

Through the present petition for review on certiorari,1 petitioner Jose C. Go

(Go) assails the October 26, 2006 decision2 of the Court of Appeals (CA) in
CA-G.R. SP No. 79149, as well as its June 4, 2007 resolution.3 The CA
decision and resolution annulled and set aside the May 20, 20034 and June
30, 20035 orders of the Regional Trial Court (RTC), Branch 26, Manila
which granted Go’s motion to quash the Information filed against him.

THE FACTS

On August 20, 1999, an Information6 for violation of Section 83 of Republic

Act No. 337 (RA 337) or the General Banking Act, as amended by
Presidential Decree No. 1795, was filed against Go before the RTC. The
charge reads:

That on or about and during the period comprised between June 27, 1996
and September 15, 1997, inclusive, in the City of Manila, Philippines, the
said accused, being then the Director and the President and Chief
Executive Officer of the Orient Commercial Banking Corporation (Orient
Bank), a commercial banking institution created, organized and existing
under Philippines laws, with its main branch located at C.M. Recto Avenue,
this City, and taking advantage of his position as such officer/director of the
said bank, did then and there wilfully, unlawfully and knowingly borrow,
either directly or indirectly, for himself or as the representative of his other
related companies, the deposits or funds of the said banking
institution and/or become a guarantor, indorser or obligor for loans from the
said bank to others, by then and there using said borrowed deposits/funds
of the said bank in facilitating and granting and/or caused the facilitating
and granting of credit lines/loans and, among others, to the New Zealand
Accounts loans in the total amount of TWO BILLION AND SEVEN
HUNDRED FIFTY-FOUR MILLION NINE HUNDRED FIVE THOUSAND
AND EIGHT HUNDRED FIFTY-SEVEN AND 0/100 PESOS, Philippine
Currency, said accused knowing fully well that the same has been done by
him without the written approval of the majority of the Board of Directors of
said Orient Bank and which approval the said accused deliberately failed to
obtain and enter the same upon the records of said banking institution and
to transmit a copy of which to the supervising department of the said bank,
as required by the General Banking Act.

CONTRARY TO LAW. [Emphasis supplied.]

On May 28, 2001, Go pleaded not guilty to the offense charged.

After the arraignment, both the prosecution and accused Go took part in
the pre-trial conference where the marking of the voluminous evidence for
the parties was accomplished. After the completion of the marking, the trial
court ordered the parties to proceed to trial on the merits.

Before the trial could commence, however, Go filed on February 26,

20037 a motion to quash the Information, which motion Go amended on
March 1, 2003.8 Go claimed that the Information was defective, as the facts
charged therein do not constitute an offense under Section 83 of RA
337 which states:

No director or officer of any banking institution shall either directly or

indirectly, for himself or as the representative or agent of
another, borrow any of the deposits of funds of such banks, nor shall
he become a guarantor, indorser, or surety for loans from such bank, to
others, or in any manner be an obligor for money borrowed from the bank
or loaned by it, except with the written approval of the majority of the
directors of the bank, excluding the director concerned. Any such approval
shall be entered upon the records of the corporation and a copy of such
entry shall be transmitted forthwith to the appropriate supervising
department. The office of any director or officer of a bank who violates the
provisions of this section shall immediately become vacant and the director
or officer shall be punished by imprisonment of not less than one year nor
more than ten years and by a fine of not less than one thousand nor more
than ten thousand pesos.

The Monetary Board may regulate the amount of credit accommodations

that may be extended, directly or indirectly, by banking institutions to their
directors, officers, or stockholders. However, the outstanding credit
accommodations which a bank may extend to each of its stockholders
owning two percent (2%) or more of the subscribed capital stock, its
directors, or its officers, shall be limited to an amount equivalent to the
respective outstanding deposits and book value of the paid-in capital
contribution in the bank. Provided, however, that loans and advances to
officers in the form of fringe benefits granted in accordance with rules and
regulations as may be prescribed by Monetary Board shall not be subject to
the preceding limitation. (As amended by PD 1795)

In addition to the conditions established in the preceding paragraph, no

director or a building and loan association shall engage in any of the
operations mentioned in said paragraphs, except upon the pledge of
shares of the association having a total withdrawal value greater than the
amount borrowed. (As amended by PD 1795)

In support of his motion to quash, Go averred that based on the facts

alleged in the Information, he was being prosecuted for borrowing the
deposits or funds of the Orient Bank and/or acting as a guarantor, indorser
or obligor for the bank’s loans to other persons. The use of the word
"and/or" meant that he was charged for being either a borrower or a
guarantor, or for being both a borrower and guarantor. Go claimed that the
charge was not only vague, but also did not constitute an offense. He
posited that Section 83 of RA 337 penalized only directors and officers of
banking institutions who acted either as borrower or as guarantor, but not
as both.

Go further pointed out that the Information failed to state that his alleged
act of borrowing and/or guarantying was not among the exceptions
provided for in the law. According to Go, the second paragraph of Section
83 allowed banks to extend credit accommodations to their directors,
officers, and stockholders, provided it is "limited to an amount equivalent to
the respective outstanding deposits and book value of the paid-in capital
contribution in the bank." Extending credit accommodations to bank
directors, officers, and stockholders is not per se prohibited, unless the
amount exceeds the legal limit. Since the Information failed to state that the
amount he purportedly borrowed and/or guarantied was beyond the limit
set by law, Go insisted that the acts so charged did not constitute an
offense.

Finding Go’s contentions persuasive, the RTC granted Go’s motion to

quash the Information on May 20, 2003. It denied on June 30, 2003 the
motion for reconsideration filed by the prosecution.

The prosecution did not accept the RTC ruling and filed a petition for
certiorari to question it before the CA. The Information, the prosecution
claimed, was sufficient. The word "and/or" did not materially affect the
validity of the Information, as it merely stated a mode of committing the
crime penalized under Section 83 of RA 337. Moreover, the prosecution
asserted that the second paragraph of Section 83 (referring to the credit
accommodation limit) cannot be interpreted as an exception to what the
first paragraph provided. The second paragraph only sets borrowing limits
that, if violated, render the bank, not the director-borrower, liable. A
violation of the second paragraph of Section 83 – under which Go is being
prosecuted – is therefore separate and distinct from a violation of the first
paragraph. Thus, the prosecution prayed that the orders of the RTC
quashing the Information be set aside and the criminal case against Go be
reinstated.

On October 26, 2006, the CA rendered the assailed decision granting the
prosecution’s petition for certiorari.9 The CA declared that the RTC misread
the law when it decided to quash the Information against Go. It explained
that the allegation that Go acted either as a borrower or a guarantor or as
both borrower and guarantor merely set forth the different modes by which
the offense was committed. It did not necessarily mean that Go acted both
as borrower and guarantor for the same loan at the same time. It agreed
with the prosecution’s stand that the second paragraph of Section 83 of RA
337 is not an exception to the first paragraph. Thus, the failure of the
Information to state that the amount of the loan Go borrowed or guaranteed
exceeded the legal limits was, to the CA, an irrelevant issue. For these
reasons, the CA annulled and set aside the RTC’s orders and ordered the
reinstatement of the criminal charge against Go. After the CA’s denial of his
motion for reconsideration,10 Go filed the present appeal by certiorari.

THE PETITION

In his petition, Go alleges that the appellate court legally erred in

overturning the trial court’s orders. He insists that the Information failed to
allege the acts or omissions complained of with sufficient particularity to
enable him to know the offense being charged; to allow him to properly
prepare his defense; and likewise to allow the court to render proper
judgment.

Repeating his arguments in his motion to quash, Go reads Section 83 of

RA 337 as penalizing a director or officer of a banking institution for either
borrowing the deposits or funds of the bank, or guaranteeing or indorsing
loans to others, but not for assuming both capacities. He claimed that the
prosecution’s shotgun approach in alleging that he acted as borrower
and/or guarantor rendered the Information highly defective for failure to
specify with certainty the specific act or omission complained of. To
petitioner Go, the prosecution’s approach was a clear violation of his
constitutional right to be informed of the nature and cause of the accusation
against him.
Additionally, Go reiterates his claim that credit accommodations by banks
to their directors and officers are legal and valid, provided that these are
limited to their outstanding deposits and book value of the paid-in capital
contribution in the bank. The failure to state that he borrowed deposits
and/or guaranteed loans beyond this limit rendered the Information
defective. He thus asks the Court to reverse the CA decision to reinstate
the criminal charge.

In its Comment,11 the prosecution raises the same defenses against Go’s
contentions. It insists on the sufficiency of the allegations in the Information
and prays for the denial of Go’s petition.

THE COURT’S RULING

The Court does not find the petition meritorious and accordingly denies it.

The Accused’s Right to be Informed

Under the Constitution, a person who stands charged of a criminal offense

has the right to be informed of the nature and cause of the accusation
against him.12 The Rules of Court, in implementing the right, specifically
require that the acts or omissions complained of as constituting the offense,
including the qualifying and aggravating circumstances, must be stated in
ordinary and concise language, not necessarily in the language used in the
statute, but in terms sufficient to enable a person of common understanding
to know what offense is being charged and the attendant qualifying and
aggravating circumstances present, so that the accused can properly
defend himself and the court can pronounce judgment.13 To broaden the
scope of the right, the Rules authorize the quashal, upon motion of the
accused, of an Information that fails to allege the acts constituting the
offense.14Jurisprudence has laid down the fundamental test in appreciating
a motion to quash an Information grounded on the insufficiency of the facts
alleged therein. We stated in People v. Romualdez15 that:

The determinative test in appreciating a motion to quash xxx is the

sufficiency of the averments in the information, that is, whether the facts
alleged, if hypothetically admitted, would establish the essential elements
of the offense as defined by law without considering matters aliunde. As
Section 6, Rule 110 of the Rules of Criminal Procedure requires, the
information only needs to state the ultimate facts; the evidentiary and other
details can be provided during the trial.
To restate the rule, an Information only needs to state the ultimate facts
constituting the offense, not the finer details of why and how the illegal acts
alleged amounted to undue injury or damage – matters that are appropriate
for the trial. [Emphasis supplied]

The facts and circumstances necessary to be included in the Information

are determined by reference to the definition and elements of the specific
crimes. The Information must allege clearly and accurately the elements of
the crime charged.16

Elements of Violation of

Section 83 of RA 337

Under Section 83, RA 337, the following elements must be present to

constitute a violation of its first paragraph:

1. the offender is a director or officer of any banking institution;

2. the offender, either directly or indirectly, for himself or as

representative or agent of another, performs any of the following acts:

a. he borrows any of the deposits or funds of such bank; or

b. he becomes a guarantor, indorser, or surety for loans from

such bank to others, or

c. he becomes in any manner an obligor for money borrowed

from bank or loaned by it;

3. the offender has performed any of such acts without the written
approval of the majority of the directors of the bank, excluding the
offender, as the director concerned.

A simple reading of the above elements easily rejects Go’s contention that
the law penalizes a bank director or officer only either for borrowing the
bank’s deposits or funds or for guarantying loans by the bank, but not for
acting in both capacities. The essence of the crime is becoming an obligor
of the bank without securing the necessary written approval of the majority
of the bank’s directors.
The second element merely lists down the various modes of committing the
offense. The third mode, by declaring that "[no director or officer of any
banking institution shall xxx] in any manner be an obligor for money
borrowed from the bank or loaned by it," in fact serves a catch-all phrase
that covers any situation when a director or officer of the bank becomes its
obligor. The prohibition is directed against a bank director or officer who
becomes in any manner an obligor for money borrowed from or loaned by
the bank without the written approval of the majority of the bank’s board of
directors. To make a distinction between the act of borrowing and
guarantying is therefore unnecessary because in either situation, the
director or officer concerned becomes an obligor of the bank against whom
the obligation is juridically demandable.

The language of the law is broad enough to encompass either act of

borrowing or guaranteeing, or both. While the first paragraph of Section 83
is penal in nature, and by principle should be strictly construed in favor of
the accused, the Court is unwilling to adopt a liberal construction that would
defeat the legislature’s intent in enacting the statute. The objective of the
law should allow for a reasonable flexibility in its construction. Section 83 of
RA 337, as well as other banking laws adopting the same prohibition,17 was
enacted to ensure that loans by banks and similar financial institutions to
their own directors, officers, and stockholders are above board.18 Banks
were not created for the benefit of their directors and officers; they cannot
use the assets of the bank for their own benefit, except as may be
permitted by law. Congress has thus deemed it essential to impose
restrictions on borrowings by bank directors and officers in order to protect
the public, especially the depositors.19 Hence, when the law prohibits
directors and officers of banking institutions from becoming in any manner
an obligor of the bank (unless with the approval of the board), the terms of
the prohibition shall be the standards to be applied to directors’
transactions such as those involved in the present case.

Credit accommodation limit is not an exception nor is it an element of the

offense

Contrary to Go’s claims, the second paragraph of Section 83, RA 337 does
not provide for an exception to a violation of the first paragraph thereof, nor
does it constitute as an element of the offense charged. Section 83 of RA
337 actually imposes three restrictions: approval, reportorial, and ceiling
requirements.
The approval requirement (found in the first sentence of the first
paragraph of the law) refers to the written approval of the majority of the
bank’s board of directors required before bank directors and officers can in
any manner be an obligor for money borrowed from or loaned by the bank.
Failure to secure the approval renders the bank director or officer
concerned liable for prosecution and, upon conviction, subjects him to the
penalty provided in the third sentence of first paragraph of Section 83.

The reportorial requirement, on the other hand, mandates that any such
approval should be entered upon the records of the corporation, and a copy
of the entry be transmitted to the appropriate supervising department. The
reportorial requirement is addressed to the bank itself, which, upon its
failure to do so, subjects it to quo warranto proceedings under Section 87
of RA 337.20

The ceiling requirement under the second paragraph of Section 83

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

Evidently, the failure to observe the three requirements under Section 83

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

Rules of Court allow amendment of insufficient Information

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

offense, we find it erroneous for the RTC to immediately order the dismissal
of the Information, without giving the prosecution a chance to amend it.
Section 4 of Rule 117 states:
SEC. 4. Amendment of complaint or information.—If the motion to quash is
based on an alleged defect of the complaint or information which can be
cured by amendment, the court shall order that an amendment be made.

If it is based on the ground that the facts charged do not constitute an

offense, the prosecution shall be given by the court an opportunity to
correct the defect by amendment. The motion shall be granted if the
prosecution fails to make the amendment, or the complaint or information
still suffers from the same defect despite the amendment. [Emphasis
supplied]

Although an Information may be defective because the facts charged do

not constitute an offense, the dismissal of the case will not necessarily
follow. The Rules specifically require that the prosecution should be given a
chance to correct the defect; the court can order the dismissal only upon
the prosecution’s failure to do so. The RTC’s failure to provide the
prosecution this opportunity twice21 constitutes an arbitrary exercise of
power that was correctly addressed by the CA through the certiorari
petition. This defect in the RTC’s action on the case, while not central to the
issue before us, strengthens our conclusion that this criminal case should
be resolved through full-blown trial on the merits.

WHEREFORE, we DENY the petitioner’s petition for review on certiorari

and AFFIRM the decision of the Court of Appeals in CA-G.R. SP No.
79149, promulgated on October 26, 2006, as well as its resolution of June
4, 2007. The Regional Trial Court, Branch 26, Manila is directed to
PROCEED with the hearing of Criminal Case No. 99-178551. Costs
against the petitioner.

SO ORDERED.

ARTURO D. BRION
Associate Justice

WE CONCUR:
JOSE C. GO, Petitioner, vs.BANGKO SENTRAL
NG PILIPINAS, Respondent.

G.R. No. 178429

October 23, 2009

Facts: Jose Go, the Director and the President and Chief Executive Officer
of the Orient Commercial Banking Corporation (Orient Bank) was charged
before the RTC for violation of Section 83 of RA 337 or the General Banking
Act. Go allegedly borrowed the deposits/funds of the Orient Bank and/or
acting as guarantor, indorser of obligor for loans to other persons. He then
used the borrowed deposits/funds in facilitating and granting and/or of credit
lines/loans to the New Zealand Accounts loans in the total amount of PHP
2,754,905,857. He completed the alleged transaction without the written
approval of the majority of the Board of Directors of said Orient Bank. Go
then filed a motion to quash the Information. He averred that the use of the
word "and/or" meant that he was charged for being either a borrower or a
guarantor, or for being both. Thus the charge do not constitute an offense.
That the Section 83 of RA 337 penalized only directors and officers xxx who
acted either as borrower or as guarantor, but not as both. Also that the
Information did not constitute an offense since the information failed to state
the amount he purportedly borrowed. According to Go, the second
paragraph of Section 83, serves as an exception to the first paragraph which
allows the banks to extend credit accommodations to their directors, officers,
and stockholders, provided it is "limited to an amount equivalent to the
respective outstanding deposits and book value of the paid-in capital
contribution in the bank." The RTC granted Go’s motion to quash the
Information.

The prosecution filed a petition for certiorari before the CA. The CA granted
the petition. It explained that the allegation that Go acted either as a borrower
or a guarantor or both did not necessarily mean that Go acted both as
borrower and guarantor for the same loan at the same time. It agreed with
the prosecution’s stand that the second paragraph of Section 83 of RA 337
is not an exception to the first paragraph. Hence, this petition.

Issue: whether or not the allegation that Go acted as borrower or gurantor

rendered the information defective?
Whether or not the failure to state that Go borrowed beyond the limit
of his outstanding deposits and book value of the paid-in capital contribution
in the bank rendered the Information defective?

Ruling: No, the information was not defective. The following elements of
violation of Section 83 of RA 337 which must be present to constitute a
violation of its first paragraph: 1. the offender is a director or officer of any
banking institution; 2. the offender, either directly or indirectly, for himself or
as representative or agent of another, performs any of the following acts: a.
he borrows any of the deposits or funds of such bank; or b. he becomes a
guarantor, indorser, or surety for loans from such bank to others, or c. he
becomes in any manner an obligor for money borrowed from bank or loaned
by it; 3. the offender has performed any of such acts without the written
approval of the majority of the directors of the bank, excluding the offender,
as the director concerned.

The language of the law is broad enough to encompass either act of

borrowing or guaranteeing, or both. Banks were not created for the benefit
of their directors and officers; they cannot use the assets of the bank for their
own benefit, except as may be permitted by law. Congress has thus deemed
it essential to impose restrictions on borrowings by bank directors and
officers in order to protect the public, especially the depositors. Hence, when
the law prohibits directors and officers of banking institutions from becoming
in any manner an obligor of the bank (unless with the approval of the board),
the terms of the prohibition shall be the standards to be applied to directors’
transactions such as those involved in the present case.

Credit accommodation limit is not an exception nor is it an element of the

offense as contrary to Go’s claims.

Section 83 of RA 337 actually imposes three restrictions: approval,

reportorial, and ceiling requirements.

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

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

The ceiling requirement under the second paragraph of Section 83

regulates the amount of credit accommodations that banks may extend to
their directors or officers by limiting these to an amount equivalent to the
respective outstanding deposits and book value of the paid-in capital
contribution in the bank. Again, this is a requirement directed at the bank. In
this light, a prosecution for violation of the first paragraph of Section 83, such
as the one involved here, does not require an allegation that the loan
exceeded the legal limit. Even if the loan involved is below the legal limit, a
written approval by the majority of the bank’s directors is still required;
otherwise, the bank director or officer who becomes an obligor of the bank
is liable. Compliance with the ceiling requirement does not dispense with the
approval requirement.
Evidently, the failure to observe the three requirements under Section 83
paves the way for the prosecution of three different offenses, each with its
own set of elements. A successful indictment for failing to comply with the
approval requirement will not necessitate proof that the other two were
likewise not observed.

20. Zulueta vs. Asia Brewery, Inc. GR No. 138137, March 8,

2001

G.R. No. 138137 March 8, 2001

PERLA S. ZULUETA, petitioner,

vs.
ASIA BREWERY, INC., respondent.

PANGANIBAN, J.:

When two or more cases involve the same parties and affect closely
related subject matters, they must be consolidated and jointly tried, in order
to serve the best interests of the parties and to settle expeditiously the
issues involved. Consolidation, when appropriate, also contributes to the
declogging of court dockets.

The Case

Before us is a Petition for Review on Certiorari under Rule 45 of the Rules

of Court, questioning the August 4, 1998 Decision1 of the Court of Appeals
(CA) in CA-GR SP No. 45020; as well as the February 23, 1999
Resolution2denying petitioner's Motion for Reconsideration. The decretal
portion of the CA Decision reads as follows:
 "WHEREFORE, the instant petition is given due course. The assailed
orders of the Regional Trial Court, Makati City, Branch 142 dated 13
February 1997 and 19 May 1997 are hereby ANNULED and SET
ASIDE.

SO ORDERED."

The Facts

Respondent Asia Brewery, Inc., is engaged in the manufacture, the

distribution and sale of beer; while Petitioner Perla Zulueta is a dealer and
an operator of an outlet selling the former's beer products. A Dealership
Agreement governed their contractual relations.

On March 30, 1992, petitioner filed before the Regional Trial Court (RTC) of
Iloilo, Branch 22, a Complaint against respondent for Breach of Contract,
Specific Performance and Damages. The Complaint, docketed as Civil
Case No. 20341 (hereafter referred to as the "Iloilo case"), was grounded
on the alleged violation of the Dealership Agreement.

On July 7, 1994, during the pendency of the Iloilo case, respondent filed
with the Makati Regional Trial Court, Branch 66, a Complaint docketed as
Civil Case No. 94-2110 (hereafter referred to as the "Makati case"). The
Complaint was for the collection of a sum of money in the amount of
P463,107.75 representing the value of beer products, which respondent
had delivered to petitioner.

In view of the pendency of the Iloilo case, petitioner moved to dismiss the
Makati case on the ground that it had split the cause of action and violated
the rule against the multiplicity of suits. The Motion was denied by the
Makati RTC through Judge Eriberto U. Rosario.

Upon petitioner's Motion, however, Judge Rosario inhibited himself. The

case was raffled again and thereafter assigned to Branch 142 of the Makati
RTC, presided by Judge Jose Parentala Jr.

On January 3, 1997, petitioner moved for the consolidation of the Makati

case with the Iloilo case. Granting the Motion, Judge Parentala ordered on
February 13, 1997, the consolidation of the two cases. Respondent filed a
Motion for Reconsideration, which was denied in an Order dated May 19,
1997.
On August 18, 1997, respondent filed before the Court of Appeals a
Petition for Certiorari assailing Judge Parentala's February 13, 1997 and
May 19, 1997 Orders.

Ruling of the Court of Appeals

Setting aside the trial court's assailed Orders which consolidated the Iloilo
and the Makati cases, the CA ruled in this wise:

"There is no common issue of law or fact between the two cases. The
issue in Civil Case No. 94-2110 is private respondent's indebtedness
for unpaid beer products; while in Civil Case No. 20341, it is whether
or not petitioner (therein defendant) breached its dealership contract
with private respondent.

"Private respondent in her complaint aforequoted attempts to project

a commonality between the two civil cases, but it cannot be denied
that her obligation to pay for the beer deliveries can exist regardless
of any "stop payment" order she made with regard to the checks.
Thus, the rationale for consolidation, which is to avoid the possibility
of conflicting decisions being rendered, (Active Wood products, Co.
vs. Court of Appeals, 181 SCRA 774, Benguet Corporation, Inc. vs.
Court of Appeals, 165 SCRA 27; Vallacar Transit, Inc. vs. Yap, 126
SCRA 503) does not exist."3

Hence, this Petition.4

The Issues

In her Memorandum,5 petitioner interposes the following issues for the

consideration of this Court:

"a. Were the Orders of February 13, 1997 and May 19, 1997 of the
Regional Trial Court, Branch 142 in Makati City (ordering
consolidation of Makati Civil Case No. 94-2110 with the Iloilo Civil
Case No. 20341) already final and executory when respondent filed
its petition for certiorari with the Hon. Court of Appeals such that said
Court could no longer acquire jurisdiction over the case and should
have dismissed it outright (as it originally did) x x x, instead of due
giving course to the petition?; and
 "b. Independent of the first issue, did the Makati RTC, Branch 142,
correctly order the consolidation of the Makati case (which was filed
later) with the Iloilo Case (which was filed earlier) for the reason that
the obligation sought to be collected in the Makati case is the same
obligation that is also one of the subject matters of the Iloilo case, x x
x?"6

The Court's Ruling

The Petition is meritorious.

First Issue:
Propriety of Petition with the CA

Petitioner avers that the Makati RTC's February 13, 1997 and May 19,
1997 Orders consolidating the two cases could no longer be assailed.
Allegedly, respondent's Petition for Certiorari was filed with the CA beyond
the reglementary sixty-day period prescribed in the 1997 Revised Rules of
Civil Procedure, which took effect on July 1, 1997. Hence, the CA should
have dismissed it outright.

The records show that respondent received on May 23, 1997, the Order
denying its Motion for Reconsideration. It had, according to petitioner, only
sixty days or until July 22, 1997, within which to file the Petition for
Certiorari. It did so, however, only on August 21, 1997.

On the other hand, respondent insists that its Petition was filed on time,
because the reglementary period before the effectivity of the 1997 Rules
was ninety days. It theorizes that the sixty-day period under the 1997 Rules
does not apply.

As a general rule, laws have no retroactive effect. But there are certain
recognized exceptions, such as when they are remedial or procedural in
nature. This Court explained this exception in the following language:

"It is true that under the Civil Code of the Philippines, "(l)aws shall
have no retroactive effect, unless the contrary is provided. But there
are settled exceptions to this general rule, such as when the statute is
CURATIVE or REMEDIAL in nature or when it CREATES NEW
RIGHTS.
 xxx xxx xxx

"On the other hand, remedial or procedural laws, i.e., those statutes
relating to remedies or modes of procedure, which do not create new
or take away vested rights, but only operate in furtherance of the
remedy or confirmation of such rights, ordinarily do not come within
the legal meaning of a retrospective law, nor within the general rule
against the retrospective operation of statutes."7 (emphasis supplied)

Thus, procedural laws may operate retroactively as to pending proceedings

even without express provision to that effect.8 Accordingly, rules of
procedure can apply to cases pending at the time of their enactment.9 In
fact, statutes regulating the procedure of the courts will be applied on
actions undetermined at the time of their effectivity. Procedural laws are
retrospective in that sense and to that extent.10

Clearly, the designation of a specific period of sixty days for the filing of an
original action for certiorari under Rule 65 is purely remedial or procedural
in nature. It does not alter or modify any substantive right of respondent,
particularly with respect to the filing of petitions for certiorari. Although the
period for filing the same may have been effectively shortened, respondent
had not been unduly prejudiced thereby considering that he was not at all
deprived of that right.

It is a well-established doctrine that rules of procedure may be modified at

any time to become effective at once, so long as the change does not
affect vested rights.11 Moreover, it is equally axiomatic that there are no
vested rights to rules of procedure.12

It also bears noting that the ninety-day limit established by jurisprudence

cannot be deemed a vested right. It is merely a discretionary prerogative of
the courts that may be exercised depending on the peculiar circumstances
of each case. Hence, respondent was not entitled, as a matter of right, to
the 90-day period for filing a petition for certiorari; neither can it imperiously
demand that the same period be extended to it.

Upon the effectivity of the 1997 Revised Rules of Civil Procedure on July 1,
1997, respondent's lawyers still had 21 days or until July 22, 1997 to file a
petition for certiorari and to comply with the sixty-day reglementary period.
Had they been more prudent and circumspect in regard to the implications
of these procedural changes, respondent's right of action would not have
been foreclosed. After all, the 1997 amendments to the Rules of Court
were well-publicized prior to their date of effectivity. At the very least
counsel should have asked for as extension of time to file the petition.

Certification of Non-forum
Shopping Defective

Petitioner likewise assails the validity of the sworn certification against

forum-shopping, arguing that the same was signed by counsel and not by
petitioner as required by Supreme Court Circular No. 28-91. For his part,
respondent claims that even if it was its counsel who signed the
certification, there was still substantial compliance with Circular No. 28-91
because, a corporation acts through its authorized officers or agents, and
its counsel is an agent having personal knowledge of other pending cases.

The requirement that the petitioner should sign the certificate of non-forum
shopping applies even to corporations, considering that the mandatory
directives of the Circular and the Rules of Court make no distinction
between natural and juridical persons. In this case, the Certification should
have been signed "by a duly authorized director or officer of the
corporation,"13 who has knowledge of the matter being certified.14 In Robern
Development Corporation v. Quitain,15 in which the Certification was signed
by Atty. Nemesio S. Cañete who was the acting regional legal counsel of
the National Power Corporation in Mindanao, the Court held that "he was
not merely a retained lawyer, but an NPC in-house counsel and officer,
whose basic function was to prepare legal pleadings and to represent NPC-
Mindanao in legal cases. As regional legal counsel for the Mindanao area,
he was the officer who was in the best position to verify the truthfulness
and the correctness of the allegations in the Complaint for expropriation in
Davao City. As internal legal counsel, he was also in the best position to
know and to certify if an action for expropriation had already been filed and
pending with the courts."

Verily, the signatory in the Certification of the Petition before the CA should
not have been respondent's retained counsel, who would not know whether
there were other similar cases of the corporation.16 Otherwise, this
requirement would easily be circumvented by the signature of every
counsel representing corporate parties.
No Explanation for
Non-Filing by Personal Service

Citing Section 11 of Rule 13 of the 1997 Rules, petitioner also faults

respondent for the absence of a written explanation why the Petition with
the Court of Appeals was served on her counsel by registered mail. In
reply, respondent points out that such explanation was not necessary,
because its counsel held office in Makati City while petitioner and her
counsel were in Iloilo City.

We agree with petitioner. Under Section 11, Rule 13 of the 1997 Rules,
personal service of petitions and other pleadings is the general rule, while a
resort to other modes of service and filing is the exception. Where recourse
is made to the exception, a written explanation why the service and the
filing were not done personally is indispensable, even when such
explanation by its nature is acceptable and manifest. Where no explanation
is offered to justify the resort to other modes, the discretionary power of the
court to expunge the pleading becomes mandatory.17 Thus, the CA should
have considered the Petition as not having been filed, in view of the failure
of respondent to present a written explanation of its failure to effect
personal service.

In sum, the Petition for Certiorari filed with the CA by herein respondent,
questioning the orders of consolidation by the Makati RTC, should not have
been given due course. Not only was the Petition filed beyond the sixty-day
reglementary period; it likewise failed to observe the requirements of non-
forum shopping and personal service or filing. All or any of these acts ought
to have been sufficient cause for its outright denial.

Second Issue:
Propriety of Consolidation

Apart from procedural problems, respondent's cause is also afflicted with

substantial defects. The CA ruled that there was no common issue in law or
in fact between the Makati case and the Iloilo case. The former involved
petitioner's indebtedness to respondent for unpaid beer products, while the
latter pertained to an alleged breach of the Dealership Agreement between
the parties. We disagree.

True, petitioner's obligation to pay for the beer products delivered by

respondent can exist regardless of an alleged breach in the Dealership
Agreement. Undeniably, however, this obligation and the relationship
between respondent and petitioner, as supplier and distributor respectively,
arose from the Dealership Agreement which is now the subject of inquiry in
the Iloilo case. In fact, petitioner herself claims that her obligation to pay
was negated by respondent's contractual breach. In other words, the non-
payment -- the res of the Makati case -- is an incident of the Iloilo case.

Inasmuch as the binding force of the Dealership Agreement was put in

question, it would be more practical and convenient to submit to the Iloilo
court all the incidents and their consequences. The issues in both civil
cases pertain to the respective obligations of the same parties under the
Dealership Agreement. Thus, every transaction as well as liability arising
from it must be resolved in the judicial forum where it is put in issue. The
consolidation of the two cases then becomes imperative to a complete,
comprehensive and consistent determination of all these related issues.

Two cases involving the same parties and affecting closely related subject
matters must be ordered consolidated and jointly tried in court, where the
earlier case was filed.18 The consolidation of cases is proper when they
involve the resolution of common questions of law or facts.19

Indeed, upon the consolidation of the cases, the interests of both parties in
the two civil cases will best be served and the issues involved therein
expeditiously settled. After all, there is no question on the propriety of the
venue in the Iloilo case.

WHEREFORE, the Petition is hereby GRANTED and the assailed Decision

REVERSED and SET ASIDE. The Orders of the Makati RTC (Br. 142)
dated February 13, 1997 and May 19, 1997 are hereby REINSTATED. No
costs.

SO ORDERED.

Melo, Vitug, Gonzaga-Reyes, and Sandoval-Gutierrez, JJ., concur.

PERLA S. ZULUETA, petitioner, vs. ASIA BREWERY, Inc., respondent

G.R. No. 138137
 March 8, 2001

Doctrine: As a general rule, laws have no retroactive effect. But there are certain
recognized exceptions, such as when they are remedial or procedural in nature.

Nature of the Case: Petition for Review on Certiorari under Rule 45 of the Rules of Court,
questioning the August 4, 1998 Decision of the Court of Appeals (CA) in CA-GR SP No.
45020; as well as the February 23, 1999 Resolution denying petitioner’s Motion for
Reconsideration.

The Parties:
Asia Brewery, Inc. (ABI) - engaged in the manufacture, the distribution and sale of beer
Perla Zulueta - dealer and an operator of an outlet selling the former’s beer products

FACTS:
 March 30, 1992 – Petitioner Zulueta filed a complaint against ABI for Breach of Contract,
Specific Performance and Damages with RTC of Iloilo. The complaint was grounded on
the alleged violation of the Dealership Agreement executed between the paties.
 July 7, 1992 – ABI filed with the Makati RTC a Complaint against Zulueta, for the collection
of a sum of money in the amount of P463,107.75 representing the value of beer products
which ABI had delivered to petitioner.
 Zulueta moved to dismiss the Makati case in view of the pending Iloilo case
o Ground: that Makati case split the cause of action and violated the rule against
the multiplicity of suits
o Motion was denied by the Makati RTC
o (Makati Judge then inhibited himself upon the motion of Zulueta, so the case was
reraffled and assigned to another branch)
 January 3, 1997 - petitioner moved for the consolidation of the Makati case with the
Iloilo case.
o February 13, 1997 – judge granted the motion and ordered the consolidation of
the two cases
o ABI filed a Motion for Reconsideration – denied
 August 18, 1997 - ABI filed before the CA a Petition for Certiorari assailing Judge
Parentala’s February 13, 1997 and May 19, 1997 Orders
o CA granted the petition and set aside the RTC orders which consolidated the Iloilo
and Makati cases
o Ground of CA decision: no common issue of law or fact between the two cases;
the issue in the Makati case is the indebtedness of Zulueta for unpaid beer
products while the issue in the Iloilo case is the breach by ABI in its dealership
contract with Zulueta; CA also held that Zulueta’s obligation to pay for the beer
 deliveries can exist regardless of any “stop payment” order she made with regard
to the checks, hence, the rationale for consolidation, which is to avoid the
possibility of conflicting decisions does not exist
 Hence, this petition.
ADJUDICATION: The petition is granted.

ZULUETA’s ABI’s ISSUES SC RULING

Contentions CONTENTIONS

1.The Makati 1. Its Petition was 1. Whether the 1. YES. As a general rule,
RTC’s February filed on time, orders of the laws have no retroactive
13, 1997 and because the Makati RTC effect. But there are certain
May 19, 1997 reglementary ordering the recognized exceptions, such
Orders period before the consolidation of as when they are remedial or
consolidating the effectivity of the the Makati case procedural in nature.
two cases could 1997 Rules was with the Iloilo case
Remedial or procedural laws,
no longer be ninety days. It were already final
i.e., those statutes relating to
assailed as ABI’s theorizes that the and executory
remedies or modes of
Petition for sixty-day period when ABI filed its
procedure, which do not
Certiorari was under the 1997 petition for
create new or take away
filed with the CA Rules does not certiorari with the
vested rights, but only operate
beyond the apply. CA; hence, CA did
in furtherance of the remedy
reglementary not acquire
2. Even if it or confirmation of such rights,
sixty-day period jurisdiction and
was its counsel ordinarily do not come within
prescribed in the should have
who signed the the legal meaning of a
1997 Revised dismissed the
certification, there retrospective law, nor within
Rules of Civil case
was still the general rule against the
Procedure,
substantial 2. Whether the retrospective operation of
which took effect
compliance with sworn certification statutesThus, procedural laws
on July 1, 1997.
Circular No. 28-91 against forum may operate retroactively as
2. The sworn because, a shopping was to pending proceedings even
certification corporation acts valid. without express provision to
against forum- through its that effect.
3. Whether a
shopping was authorized
written a. The records show that
invalid, as the officers or agents,
explanation by respondent received on May
same was and its counsel is
ABI is necessary 23, 1997, the Order denying
signed by an agent having
when a copy of the its Motion for
counsel and not personal
Petition with the Reconsideration. It filed its
by petitioner as knowledge of
Court of Appeals Petition for Certiorari,
required by other pending was served on however, only on August 21,
Supreme Court cases. Zulueta’s counsel 1997.
Circular No. 28- by registered mail,
3. Such b. Upon the effectivity of
91. and not in
explanation was the 1997 Revised Rules of
person.
3. Citing Section not necessary, Civil Procedure on July 1,
11 of Rule 13 of because its 4. Whether the 1997, respondent’s lawyers
the 1997 Rules, counsel held Makati RTC still had 21 days or until July
petitioner also office in Makati correctly order the 22, 1997 to file a petition for
faults City while consolidation of certiorari and to comply with
respondent for petitioner and her the Makati and the sixty-day reglementary
the absence of a counsel were in Iloilo cases, for the period.
written Iloilo City. reason that the
The designation of a specific
explanation why obligation sought
period of sixty days for the
the Petition with to be collected in
filing of an original action for
the Court of the Makati case is
certiorari under Rule 65 is
Appeals was the same
purely remedial or procedural
served on her obligation that is
in nature. It does not alter or
counsel by also one of the
modify any substantive right of
registered mail. subject matters of
respondent. Although the
the Iloilo case.
period for filing the same may
have been effectively
shortened, respondent had
not been unduly prejudiced
thereby considering that he
was not at all deprived of that
right.
It bears noting that the ninety-
day limit established by
jurisprudence cannot be
deemed a vested right. It is
merely a discretionary
prerogative of the courts that
may be exercised depending
on the peculiar circumstances
of each case. Hence,
respondent was not entitled,
as a matter of right, to the 90-
day period for filing a petition
for certiorari; neither can it
imperiously demand that the
same period be extended to it.
2. NO. The Certification
should have been signed “by
a duly authorized director or
officer of the corporation”, who
has knowledge of the matter
being certified. Verily, the
signatory in the Certification of
the Petition before the CA
should not have been
respondent’s retained
counsel, who would not know
whether there were other
similar cases of the
corporation. Otherwise, this
requirement would easily be
circumvented by the signature
of every counsel representing
corporate parties.
3. YES. Under Section 11,
Rule 13 of the 1997 Rules,
personal service of petitions
and other pleadings is the
general rule, while a resort to
other modes of service and
filing is the
exception. . Where recourse
is made to the exception,
a written explanation why the
service and the filing were not
done personally is
indispensable, even when
such explanation by its nature
is acceptable and
manifest. Where no
explanation is offered to justify
the resort to other modes, the
discretionary power of the
court to expunge the pleading
becomes mandatory. Thus,
the CA should have
considered the Petition as not
having been filed, in view of
the failure of respondent to
present a written explanation
of its failure to effect personal
service. the Petition for
Certiorari filed with the CA by
herein respondent,
questioning the orders of
consolidation by the Makati
RTC, should not have been
given due course.
4. YES. Two cases
involving the same parties and
affecting closely related
subject matters must be
ordered consolidated and
jointly tried in court, where the
earlier case was filed. The
consolidation of cases is
proper when they involve the
resolution of common
questions of law or facts.
Here, the issues in both civil
cases pertain to the
respective obligations of the
same parties under the
Dealership Agreement. The
non-payment -- the res of the
Makati case -- is an incident of
the Iloilo case.
Thus, every transaction as
well as liability arising from it
must be resolved in the
 judicial forum where it is put in
issue. The consolidation of the
two cases then becomes
imperative to a complete,
comprehensive and
consistent determination of all
these related issues.

Zulueta vs. Asia Brewery, Inc.

G.R. No. 138137; March 8, 2001
Nature: PETITION for review on certiorari of a decision of the Court of
Appeals
Ponente: Panganiban

Facts:
Respondent Asia Brewery, Inc, is engaged in the manufacture,
distribution and sale of beer; while Petitioner Perla Zulueta is a dealer
and an operator of an outlet selling the former’s beer products. A
Dealership Agreement governed their contractual relations.
On March 30, 1992, petitioner filed a complaint before the
Regional Trial Court (RTC) of Iloilo [Iloilo case], against respondent for
Breach of Contract, Specific Performance and Damages.
On July 7, 1994, during the pendency of the Iloilo case, respondent
filed a complaint with the Makati RTC [Makati case] against the
petitioner for the failure of the latter to pay the value of beer products
that was delivered to her.
On January 3, 1997, petitioner moved for the consolidation of the
Makati case with the Iloilo case which the Makati RTC granted on
February 13, 1997. Respondent filed for a Motion of Reconsideration
but was denied on May 19, 1997.
On August 18, 1997, respondent filed before the Court of Appeals
a Petition for Certiorari assailing the consolidation of the two cases
decided by the Makati RTC. The CA granted respondent’s petition and
has set aside the decision of the RTC (re: consolidation). The CA ruled
that there is no common issue of law or fact between the two cases so
they cannot be consolidated. The issue in the Makati case is private
respondent’s complaint for the unpaid beer products by the petitioner;
while in the Iloilo case is whether or notrespondent breached its
dealership contract with petitioner. According to the CA, the petitioner’s
obligation to pay for the beer deliveries can exist regardless of any
breach in the contract.
The petitioner then filed a Petition for Certiorari assailing the
decision of the CA.

Issues:
1. Whether the decision of the RTC in granting the consolidation of
the two case was already final and executory when respondent
filed its petition at the CA such that the CA could have no longer
acquire jurisdiction over the case and should have dismissed it
outright. (Procedural)

2. Did the CA correctly ruled that the two cases cannot be

consolidated since there was no common issue in law or in fact
between the two. (Substantive)
Held/Ruling:

1.Yes, it was final and executory.

Respondent’s Petition for Certiorari was filed with the CA beyond the
reglementary 60-day period prescribed in the 1997 Revised Rules of
Civil Procedure, which took effect on July 1, 1997. The records show
that the respondent received on May 23, 1997 the Order denying its
Motion for Reconsideration. According to the petitioner, the respondent
has only 60 days or until July 22, 1997, within which to file the Petition
for Certiorari. However, the respondent filed the petition on August 18,
1997. On the other hand, respondent contended that they filed on time
because the reglementary period was 90 days under the 1997 Rules of
Civil Procedure. Hence, the last day must be still on August 21, 1997.
Respondent said that the Revised Rules cannot apply since laws have no
retroactive effect.

Under the Civil Code, laws shall have no retroactive effect, unless the
contrary is provided. There are exceptions to the general rule, such as
when the statute is Remedial or Procedural in nature. Thus, procedural
laws may operate retroactively as to pending proceedings even without
provision to that effect. Accordingly, rules of procedure can apply to
cases pending at the time of their enactment. Statute regulating the
procedure of the courts will be applied on actions undetermined at the
time of their effectivity.

Thus, the CA should have dismissed the respondent’s petition

outright.

Note: Remedial or Procedural laws are those statutes relating to

remedies or modes of procedure which do not create new or take away
vested rights, but only operate in furtherance of the remedy or
confirmation of such rights.

2. The CA erred in its decision that the two cases cannot be

consolidated.

It is true that the petitioner’s obligation to pay for the beer products
delivered can exist regardless of an alleged breach in the Dealership
Agreement which is the subject of the inquiry in the Iloilo case.
However, this obligation and the relationship between respondent and
petitioner, as supplier and distributor respectively, arose from the
Agreement. In fact, petitioner herself claims that her obligation to pay
was negated by respondent’s contractual breach. In other words, the
nonpayment— the res of the Makati case—is an incident of the Iloilo
case. Hence, the issues in both civil cases pertain to the respective
obligation of the parties under the Dealership Agreement.
Two cases involving the same parties and affecting closely related
subject matters must be ordered consolidated and jointly tried in court,
where the earlier
case was filed. The consolidation of cases is proper when they involve
the resolution of common questions of law or facts.

21. Metro Concast Street Corp, et al vs. Allied Bank

Corporation GR No. 177921, December 2013

G.R. No. 177921 December 4, 2013

METRO CONCAST STEEL CORPORATION, SPOUSES JOSE S.

DYCHIAO AND TIUOH YAN, SPOUSES GUILLERMO AND MERCEDES
DYCHIAO, AND SPOUSES VICENTE AND FILOMENA
DYCHIAO, Petitioners,
vs.
ALLIED BANK CORPORATION, Respondent.

RESOLUTION

PERLAS-BERNABE, J.:

Assailed in this petition for review on certiorari1 are the Decision2 dated
February 12, 2007 and the Resolution3dated May 10, 2007 of the Court of
Appeals (CA) in CA-G.R. CV No. 86896 which reversed and set aside the
Decision4 dated January 17, 2006 of the Regional Trial Court of Makati,
Branch 57 (RTC) in Civil Case No. 00-1563, thereby ordering petitioners
Metro Concast Steel Corporation (Metro Concast), Spouses Jose S.
Dychiao and Tiu Oh Yan, Spouses Guillermo and Mercedes Dychiao, and
Spouses Vicente and Filomena Duchiao (individual petitioners) to solidarily
pay respondent Allied Bank Corporation (Allied Bank) the aggregate
amount of ₱51,064,094.28, with applicable interests and penalty charges.

The Facts

On various dates and for different amounts, Metro Concast, a corporation

duly organized and existing under and by virtue of Philippine laws and
engaged in the business of manufacturing steel,5 through its officers, herein
individual petitioners, obtained several loans from Allied Bank. These loan
transactions were covered by a promissory note and separate letters of
credit/trust receipts, the details of which are as follows:

Date Document Amount

December 13, 1996 Promissory Note No. 96-213016 ₱2,000,000.00
November 7, 1995 Trust Receipt No. 96-2023657 ₱608,603.04
May 13, 1996 Trust Receipt No. 96-9605228 ₱3,753,777.40
May 24, 1996 Trust Receipt No. 96-9605249 ₱4,602,648.08
March 21, 1997 Trust Receipt No. 97-20472410 ₱7,289,757.79
June 7, 1996 Trust Receipt No. 96-20328011 ₱17,340,360.73
July 26, 1995 Trust Receipt No. 95-20194312 ₱670,709.24
August 31, 1995 Trust Receipt No. 95-20205313 ₱313,797.41
November 16, 1995 Trust Receipt No. 96-20243914 ₱13,015,109.87
July 3, 1996 Trust Receipt No. 96-20355215 ₱401,608.89
June 20, 1995 Trust Receipt No. 95-20171016 ₱750,089.25
December 13, 1995 Trust Receipt No. 96-37908917 ₱92,919.00
December 13, 1995 Trust Receipt No. 96/20258118 ₱224,713.58

The interest rate under Promissory Note No. 96-21301 was pegged at
15.25% per annum (p.a.), with penalty charge of 3% per month in case of
default; while the twelve (12) trust receipts uniformly provided for an
interest rate of 14% p.a. and 1% penalty charge. By way of security, the
individual petitioners executed several Continuing
Guaranty/Comprehensive Surety Agreements19 in favor of Allied Bank.
Petitioners failed to settle their obligations under the aforementioned
promissory note and trust receipts, hence, Allied Bank, through counsel,
sent them demand letters,20 all dated December 10, 1998, seeking payment
of the total amount of ₱51,064,093.62, but to no avail. Thus, Allied Bank
was prompted to file a complaint for collection of sum of money21 (subject
complaint) against petitioners before the RTC, docketed as Civil Case No.
00-1563. In their second22 Amended Answer,23petitioners admitted their
indebtedness to Allied Bank but denied liability for the interests and
penalties charged, claiming to have paid the total sum of ₱65,073,055.73
by way of interest charges for the period covering 1992 to 1997.24

They also alleged that the economic reverses suffered by the Philippine
economy in 1998 as well as the devaluation of the peso against the US
dollar contributed greatly to the downfall of the steel industry, directly
affecting the business of Metro Concast and eventually leading to its
cessation. Hence, in order to settle their debts with Allied Bank, petitioners
offered the sale of Metro Concast’s remaining assets, consisting of
machineries and equipment, to Allied Bank, which the latter, however,
refused. Instead, Allied Bank advised them to sell the equipment and apply
the proceeds of the sale to their outstanding obligations. Accordingly,
petitioners offered the equipment for sale, but since there were no takers,
the equipment was reduced into ferro scrap or scrap metal over the years.
In 2002, Peakstar Oil Corporation (Peakstar), represented by one Crisanta
Camiling (Camiling), expressed interest in buying the scrap metal. During
the negotiations with Peakstar, petitioners claimed that Atty. Peter Saw
(Atty. Saw), a member of Allied Bank’s legal department, acted as the
latter’s agent. Eventually, with the alleged conformity of Allied Bank,
through Atty. Saw, a Memorandum of Agreement25 dated November 8,
2002 (MoA) was drawn between Metro Concast, represented by petitioner
Jose Dychiao, and Peakstar, through Camiling, under which Peakstar
obligated itself to purchase the scrap metal for a total consideration of
₱34,000,000.00, payable as follows:

(a) ₱4,000,000.00 by way of earnest money – ₱2,000,000.00 to be

paid in cash and the other ₱2,000,000.00 to be paid in two (2) post-
dated checks of ₱1,000,000.00 each;26 and

(b) the balance of ₱30,000,000.00 to be paid in ten (10) monthly

installments of ₱3,000,000.00, secured by bank guarantees from
Bankwise, Inc. (Bankwise) in the form of separate post-dated
checks.27

Unfortunately, Peakstar reneged on all its obligations under the MoA. 1âwphi1 In
this regard, petitioners asseverated that:

(a) their failure to pay their outstanding loan obligations to Allied Bank
must be considered as force majeure ; and
 (b) since Allied Bank was the party that accepted the terms and
conditions of payment proposed by Peakstar, petitioners must
therefore be deemed to have settled their obligations to Allied Bank.
To bolster their defense, petitioner Jose Dychiao (Jose Dychiao)
testified28 during trial that it was Atty. Saw himself who drafted the
MoA and subsequently received29 the ₱2,000,000.00 cash and the
two (2) Bankwise post-dated checks worth ₱1,000,000.00 each from
Camiling. However, Atty. Saw turned over only the two (2) checks
and ₱1,500,000.00 in cash to the wife of Jose Dychiao.30

Claiming that the subject complaint was falsely and maliciously filed,
petitioners prayed for the award of moral damages in the amount of
₱20,000,000.00 in favor of Metro Concast and at least ₱25,000,000.00 for
each individual petitioner, ₱25,000,000.00 as exemplary damages,
₱1,000,000.00 as attorney’s fees, ₱500,000.00 for other litigation
expenses, including costs of suit.

The RTC Ruling

After trial on the merits, the RTC, in a Decision31 dated January 17, 2006,
dismissed the subject complaint, holding that the "causes of action sued
upon had been paid or otherwise extinguished." It ruled that since Allied
Bank was duly represented by its agent, Atty. Saw, in all the negotiations
and transactions with Peakstar – considering that Atty. Saw

(a) drafted the MoA,

(b) accepted the bank guarantee issued by Bankwise, and

(c) was apprised of developments regarding the sale and disposition

of the scrap metal – then it stands to reason that the MoA between
Metro Concast and Peakstar was binding upon said bank.

The CA Ruling

Allied Bank appealed to the CA which, in a Decision32 dated February 12,

2007, reversed and set aside the ruling of the RTC, ratiocinating that there
was "no legal basis in fact and in law to declare that when Bankwise
reneged its guarantee under the [MoA], herein [petitioners] should be
deemed to be discharged from their obligations lawfully incurred in favor of
[Allied Bank]."33
The CA examined the MoA executed between Metro Concast, as seller of
the ferro scrap, and Peakstar, as the buyer thereof, and found that the
same did not indicate that Allied Bank intervened or was a party thereto. It
also pointed out the fact that the post-dated checks pursuant to the MoA
were issued in favor of Jose Dychiao. Likewise, the CA found no sufficient
evidence on record showing that Atty. Saw was duly and legally authorized
to act for and on behalf of Allied Bank, opining that the RTC was "indulging
in hypothesis and speculation"34 when it made a contrary pronouncement.
While Atty. Saw received the earnest money from Peakstar, the receipt was
signed by him on behalf of Jose Dychiao.35

It also added that "[i]n the final analysis, the aforesaid checks and receipts
were signed by [Atty.] Saw either as representative of [petitioners] or as
partner of the latter’s legal counsel, and not in anyway as representative of
[Allied Bank]."36

Consequently, the CA granted the appeal and directed petitioners to

solidarily pay Allied Bank their corresponding obligations under the
aforementioned promissory note and trust receipts, plus interests, penalty
charges and attorney’s fees. Petitioners sought reconsideration37 which
was, however, denied in a Resolution38 dated May 10, 2007. Hence, this
petition.

The Issue Before the Court

At the core of the present controversy is the sole issue of whether or not
the loan obligations incurred by the petitioners under the subject
promissory note and various trust receipts have already been extinguished.

The Court’s Ruling

Article 1231 of the Civil Code states that obligations are extinguished either
by payment or performance, the loss of the thing due, the condonation or
remission of the debt, the confusion or merger of the rights of creditor and
debtor, compensation or novation.

In the present case, petitioners essentially argue that their loan obligations
to Allied Bank had already been extinguished due to Peakstar’s failure to
perform its own obligations to Metro Concast pursuant to the MoA.
Petitioners classify Peakstar’s default as a form of force majeure in the
sense that they have, beyond their control, lost the funds they expected to
have received from the Peakstar (due to the MoA) which they would, in
turn, use to pay their own loan obligations to Allied Bank. They further state
that Allied Bank was equally bound by Metro Concast’s MoA with Peakstar
since its agent, Atty. Saw, actively represented it during the negotiations
and execution of the said agreement. Petitioners’ arguments are untenable.
At the outset, the Court must dispel the notion that the MoA would have
any relevance to the performance of petitioners’ obligations to Allied Bank.
The MoA is a sale of assets contract, while petitioners’ obligations to Allied
Bank arose from various loan transactions. Absent any showing that the
terms and conditions of the latter transactions have been, in any way,
modified or novated by the terms and conditions in the MoA, said contracts
should be treated separately and distinctly from each other, such that the
existence, performance or breach of one would not depend on the
existence, performance or breach of the other. In the foregoing respect, the
issue on whether or not Allied Bank expressed its conformity to the assets
sale transaction between Metro Concast and Peakstar (as evidenced by
the MoA) is actually irrelevant to the issues related to petitioners’ loan
obligations to the bank. Besides, as the CA pointed out, the fact of Allied
Bank’s representation has not been proven in this case and hence, cannot
be deemed as a sustainable defense to exculpate petitioners from their
loan obligations to Allied Bank. Now, anent petitioners’ reliance on force
majeure, suffice it to state that Peakstar’s breach of its obligations to Metro
Concast arising from the MoA cannot be classified as a fortuitous event
under jurisprudential formulation. As discussed in Sicam v. Jorge:39

Fortuitous events by definition are extraordinary events not foreseeable or

avoidable. It is therefore, not enough that the event should not have
1âwphi1

been foreseen or anticipated, as is commonly believed but it must be one

impossible to foresee or to avoid. The mere difficulty to foresee the
happening is not impossibility to foresee the same. To constitute a
fortuitous event, the following elements must concur: (a) the cause of the
unforeseen and unexpected occurrence or of the failure of the debtor to
comply with obligations must be independent of human will; (b) it must
be impossible to foresee the event that constitutes the caso fortuito or, if it
can be foreseen, it must be impossible to avoid; (c) the occurrence must
be such as to render it impossible for the debtor to fulfill obligations
in a normal manner; and (d) the obligor must be free from any
participation in the aggravation of the injury or loss.40(Emphases supplied)
While it may be argued that Peakstar’s breach of the MoA was unforseen
by petitioners, the same us clearly not "impossible"to foresee or even an
event which is independent of human will." Neither has it been shown that
said occurrence rendered it impossible for petitioners to pay their loan
obligations to Allied Bank and thus, negates the former’s force
majeure theory altogether. In any case, as earlier stated, the performance
or breach of the MoA bears no relation to the performance or breach of the
subject loan transactions, they being separate and distinct sources of
obligations. The fact of the matter is that petitioners’ loan obligations to
Allied Bank remain subsisting for the basic reason that the former has not
been able to prove that the same had already been paid41 or, in any way,
extinguished. In this regard, petitioners’ liability, as adjudged by the CA,
must perforce stand. Considering, however, that Allied Bank’s extra-judicial
demand on petitioners appears to have been made only on December 10,
1998, the computation of the applicable interests and penalty charges
should be reckoned only from such date.

WHEREFORE, the petition is DENIED. The Decision dated February 12,

2007 and Resolution dated May 10, 2007 of the Court of Appeals in CA-
G.R. CV No. 86896 are hereby AFFIRMED with MODIFICATION reckoning
the applicable interests and penalty charges from the date of the
extrajudicial demand or on December 10, 1998. The rest of the appellate
court’s dispositions stand.

SO ORDERED.

ESTELA M. PERLAS-BERNABE
Associate Justice

WE CONCUR:

22. Golden Merchandising Corporation vs. Equitable PCI Bank

GR No. 195540, March 13, 2013
G.R. No. 195540 March 13, 2013

GOLDENWAY MERCHANDISING CORPORATION, Petitioner,

vs.
EQUITABLE PCI BANK, Respondent.

DECISION

VILLARAMA, JR., J.:

Before the Court is a petition for review on certiorari which seeks to reverse
and set aside the Decision1 dated November 19, 2010 and
Resolution2 dated January 31, 2011 of the Court of Appeals (CA) in CA-
G.R. CV No. 91120. The CA affirmed the Decision3 dated January 8, 2007
of the Regional Trial Court (RTC) of- Valenzuela City, Branch 171
dismissing the complaint in Civil Case No. 295-V -01.

The facts are undisputed.

On November 29, 1985, Goldenway Merchandising Corporation (petitioner)

executed a Real Estate Mortgage in favor of Equitable PCI Bank
(respondent) over its real properties situated in Valenzuela, Bulacan (now
Valenzuela City) and covered by Transfer Certificate of Title (TCT) Nos. T-
152630, T-151655 and T-214528 of the Registry of Deeds for the Province
of Bulacan. The mortgage secured the Two Million Pesos (₱2,000,000.00)
loan granted by respondent to petitioner and was duly registered.4

As petitioner failed to settle its loan obligation, respondent extrajudicially

foreclosed the mortgage on December 13, 2000. During the public auction,
the mortgaged properties were sold for ₱3,500,000.00 to respondent.
Accordingly, a Certificate of Sale was issued to respondent on January 26,
2001. On February 16, 2001, the Certificate of Sale was registered and
inscribed on TCT Nos. T-152630, T-151655 and T-214528.5

In a letter dated March 8, 2001, petitioner’s counsel offered to redeem the

foreclosed properties by tendering a check in the amount of ₱3,500,000.00.
On March 12, 2001, petitioner’s counsel met with respondent’s counsel
reiterating petitioner’s intention to exercise the right of
redemption.6 However, petitioner was told that such redemption is no
longer possible because the certificate of sale had already been registered.
Petitioner also verified with the Registry of Deeds that title to the foreclosed
properties had already been consolidated in favor of respondent and that
new certificates of title were issued in the name of respondent on March 9,
2001.

On December 7, 2001, petitioner filed a complaint7 for specific performance

and damages against the respondent, asserting that it is the one-year
period of redemption under Act No. 3135 which should apply and not the
shorter redemption period provided in Republic Act (R.A.) No. 8791.
Petitioner argued that applying Section 47 of R.A. 8791 to the real estate
mortgage executed in 1985 would result in the impairment of obligation of
contracts and violation of the equal protection clause under the
Constitution. Additionally, petitioner faulted the respondent for allegedly
failing to furnish it and the Office of the Clerk of Court, RTC of Valenzuela
City with a Statement of Account as directed in the Certificate of Sale, due
to which petitioner was not apprised of the assessment and fees incurred
by respondent, thus depriving petitioner of the opportunity to exercise its
right of redemption prior to the registration of the certificate of sale.

In its Answer with Counterclaim,8 respondent pointed out that petitioner

cannot claim that it was unaware of the redemption price which is clearly
provided in Section 47 of R.A. No. 8791, and that petitioner had all the
opportune time to redeem the foreclosed properties from the time it
received the letter of demand and the notice of sale before the registration
of the certificate of sale. As to the check payment tendered by petitioner,
respondent said that even assuming arguendo such redemption was timely
made, it was not for the amount as required by law.

On January 8, 2007, the trial court rendered its decision dismissing the
complaint as well as the counterclaim. It noted that the issue of
constitutionality of Sec. 47 of R.A. No. 8791 was never raised by the
petitioner during the pre-trial and the trial. Aside from the fact that
petitioner’s attempt to redeem was already late, there was no valid
redemption made because Atty. Judy Ann Abat-Vera who talked to Atty.
Joseph E. Mabilog of the Legal Division of respondent bank, was not
properly authorized by petitioner’s Board of Directors to transact for and in
its behalf; it was only a certain Chan Guan Pue, the alleged President of
petitioner corporation, who gave instruction to Atty. Abat-Vera to redeem
the foreclosed properties.9
Aggrieved, petitioner appealed to the CA which affirmed the trial court’s
decision. According to the CA, petitioner failed to justify why Section 47 of
R.A. No. 8791 should be declared unconstitutional. Furthermore, the
appellate court concluded that a reading of Section 47 plainly reveals the
intention to shorten the period of redemption for juridical persons and that
the foreclosure of the mortgaged properties in this case when R.A. No.
8791 was already in effect clearly falls within the purview of the said
provision.10

Petitioner’s motion for reconsideration was likewise denied by the CA.

In the present petition, it is contended that Section 47 of R.A. No. 8791 is

inapplicable considering that the contracting parties expressly and
categorically agreed that the foreclosure of the real estate mortgage shall
be in accordance with Act No. 3135. Citing Co v. Philippine National
Bank11 petitioner contended that the right of redemption is part and parcel
of the Deed of Real Estate Mortgage itself and attaches thereto upon its
execution, a vested right flowing out of and made dependent upon the law
governing the contract of mortgage and not on the mortgagee’s act of
extrajudicially foreclosing the mortgaged properties. This Court thus held in
said case that "Under the terms of the mortgage contract, the terms and
conditions under which redemption may be exercised are deemed part and
parcel thereof whether the same be merely conventional or imposed by
law."

Petitioner then argues that applying Section 47 of R.A. No. 8791 to the
present case would be a substantial impairment of its vested right of
redemption under the real estate mortgage contract. Such impairment
would be violative of the constitutional proscription against impairment of
obligations of contract, a patent derogation of petitioner’s vested right and
clearly changes the intention of the contracting parties. Moreover, citing this
Court’s ruling in Rural Bank of Davao City, Inc. v. Court of Appeals 12 where
it was held that "Section 119 prevails over statutes which provide for a
shorter period of redemption in extrajudicial foreclosure sales", and in Sulit

v. Court of Appeals,13 petitioner stresses that it has always been the policy
of this Court to aid rather than defeat the mortgagor’s right to redeem his
property.
Petitioner further argues that since R.A. No. 8791 does not provide for its
retroactive application, courts therefore cannot retroactively apply its
provisions to contracts executed and consummated before its effectivity.
Also, since R.A. 8791 is a general law pertaining to the banking industry
while Act No. 3135 is a special law specifically governing real estate
mortgage and foreclosure, under the rules of statutory construction that in
case of conflict a special law prevails over a general law regardless of the
dates of enactment of both laws, Act No. 3135 clearly should prevail on the
redemption period to be applied in this case.

The constitutional issue having been squarely raised in the pleadings filed
in the trial and appellate courts, we shall proceed to resolve the same.

The law governing cases of extrajudicial foreclosure of mortgage is Act No.

3135,14 as amended by Act No. 4118. Section 6 thereof provides:

SEC. 6. In all cases in which an extrajudicial sale is made under the special
power hereinbefore referred to, the debtor, his successors-in-interest or
any judicial creditor or judgment creditor of said debtor, or any person
having a lien on the property subsequent to the mortgage or deed of

trust under which the property is sold, may redeem the same at any time
within the term of one year from and after the date of the sale; and such
redemption shall be governed by the provisions of sections four hundred
and sixty-four to four hundred and sixty-six, inclusive, of the Code of

Civil Procedure,15 in so far as these are not inconsistent with the provisions
of this Act.

The one-year period of redemption is counted from the date of the

registration of the certificate of sale. In this case, the parties provided in
their real estate mortgage contract that upon petitioner’s default and the
latter’s entire loan obligation becoming due, respondent may immediately
foreclose the mortgage judicially in accordance with the Rules of Court, or
extrajudicially in accordance with Act No. 3135, as amended.

However, Section 47 of R.A. No. 8791 otherwise known as "The General

Banking Law of 2000" which took effect on June 13, 2000, amended Act
No. 3135. Said provision reads:
SECTION 47. Foreclosure of Real Estate Mortgage. — In the event of
foreclosure, whether judicially or extrajudicially, of any mortgage on real
estate which is security for any loan or other credit accommodation
granted, the mortgagor or debtor whose real property has been sold for the
full or partial payment of his obligation shall have the right within one year
after the sale of the real estate, to redeem the property by paying the
amount due under the mortgage deed, with interest thereon at the rate
specified in the mortgage, and all the costs and expenses incurred by the
bank or institution from the sale and custody of said property less the
income derived therefrom. However, the purchaser at the auction sale
concerned whether in a judicial or extrajudicial foreclosure shall have the
right to enter upon and take possession of such property immediately after
the date of the confirmation of the auction sale and administer the same in
accordance with law. Any petition in court to enjoin or restrain the conduct
of foreclosure proceedings instituted pursuant to this provision shall be
given due course only upon the filing by the petitioner of a bond in an
amount fixed by the court conditioned that he will pay all the damages
which the bank may suffer by the enjoining or the restraint of the
foreclosure proceeding.

Notwithstanding Act 3135, juridical persons whose property is being sold

pursuant to an extrajudicial foreclosure, shall have the right to redeem the
property in accordance with this provision until, but not after, the
registration of the certificate of foreclosure sale with the applicable Register
of Deeds which in no case shall be more than three (3) months after
foreclosure, whichever is earlier. Owners of property that has been sold in
a foreclosure sale prior to the effectivity of this Act shall retain their
redemption rights until their expiration. (Emphasis supplied.)

Under the new law, an exception is thus made in the case of juridical
persons which are allowed to exercise the right of redemption only "until,
but not after, the registration of the certificate of foreclosure sale" and in no
case more than three (3) months after foreclosure, whichever comes first.16

May the foregoing amendment be validly applied in this case when the real
estate mortgage contract was executed in 1985 and the mortgage
foreclosed when R.A. No. 8791 was already in effect?

We answer in the affirmative.

When confronted with a constitutional question, it is elementary that every
court must approach it with grave care and considerable caution bearing in
mind that every statute is presumed valid and every reasonable doubt
should be resolved in favor of its constitutionality.17 For a law to be nullified,
it must be shown that there is a clear and unequivocal breach of the
Constitution. The ground for nullity must be clear and beyond reasonable
doubt.18Indeed, those who petition this Court to declare a law, or parts
thereof, unconstitutional must clearly establish the basis therefor.
Otherwise, the petition must fail.19

Petitioner’s contention that Section 47 of R.A. 8791 violates the

constitutional proscription against impairment of the obligation of contract
has no basis.

The purpose of the non-impairment clause of the Constitution20 is to

safeguard the integrity of contracts against unwarranted interference by the
State. As a rule, contracts should not be tampered with by subsequent laws
that would change or modify the rights and obligations of the
parties.21 Impairment is anything that diminishes the efficacy of the
contract. There is an impairment if a subsequent law changes the terms of
a contract between the parties, imposes new conditions, dispenses with
those agreed upon or withdraws remedies for the enforcement of the rights
of the parties.22

Section 47 did not divest juridical persons of the right to redeem their
foreclosed properties but only modified the time for the exercise of such
right by reducing the one-year period originally provided in Act No. 3135.
The new redemption period commences from the date of foreclosure sale,
and expires upon registration of the certificate of sale or three months after
foreclosure, whichever is earlier. There is likewise no retroactive application
of the new redemption period because Section 47 exempts from its
operation those properties foreclosed prior to its effectivity and whose
owners shall retain their redemption rights under Act No. 3135.

Petitioner’s claim that Section 47 infringes the equal protection clause as it

discriminates mortgagors/property owners who are juridical persons is
equally bereft of merit.

The equal protection clause is directed principally against undue favor and
individual or class privilege. It is not intended to prohibit legislation which
1âwphi1
is limited to the object to which it is directed or by the territory in which it is
to operate. It does not require absolute equality, but merely that all persons
be treated alike under like conditions both as to privileges conferred and
liabilities imposed.23 Equal protection permits of reasonable
classification.24 We have ruled that one class may be treated differently
from another where the groupings are based on reasonable and real
distinctions.25 If classification is germane to the purpose of the law,
concerns all members of the class, and applies equally to present and
future conditions, the classification does not violate the equal protection
guarantee.26

We agree with the CA that the legislature clearly intended to shorten the
period of redemption for juridical persons whose properties were foreclosed
and sold in accordance with the provisions of Act No. 3135.27

The difference in the treatment of juridical persons and natural persons was
based on the nature of the properties foreclosed – whether these are used
as residence, for which the more liberal one-year redemption period is
retained, or used for industrial or commercial purposes, in which case a
shorter term is deemed necessary to reduce the period of uncertainty in the
ownership of property and enable mortgagee-banks to dispose sooner of
these acquired assets. It must be underscored that the General Banking
Law of 2000, crafted in the aftermath of the 1997 Southeast Asian financial
crisis, sought to reform the General Banking Act of 1949 by fashioning a
legal framework for maintaining a safe and sound banking system.28 In this
context, the amendment introduced by Section 47 embodied one of such
safe and sound practices aimed at ensuring the solvency and liquidity of
our banks. It cannot therefore be disputed that the said provision
1âwphi1

amending the redemption period in Act 3135 was based on a reasonable

classification and germane to the purpose of the law.

This legitimate public interest pursued by the legislature further enfeebles

petitioner’s impairment of contract theory.

The right of redemption being statutory, it must be exercised in the manner

prescribed by the statute,29 and within the prescribed time limit, to make it
effective. Furthermore, as with other individual rights to contract and to
property, it has to give way to police power exercised for public
welfare.30 The concept of police power is well-established in this
jurisdiction. It has been defined as the "state authority to enact legislation
that may interfere with personal liberty or property in order to promote the
general welfare." Its scope, ever-expanding to meet the exigencies of the
times, even to anticipate the future where it could be done, provides
enough room for an efficient and flexible response to conditions and
circumstances thus assuming the greatest benefits.31

The freedom to contract is not absolute; all contracts and all rights are
subject to the police power of the State and not only may regulations which
affect them be established by the State, but all such regulations must be
subject to change from time to time, as the general well-being of the
community may require, or as the circumstances may change, or as
experience may demonstrate the necessity.32 Settled is the rule that the
non-impairment clause of the Constitution must yield to the loftier purposes
targeted by the Government. The right granted by this provision must
submit to the demands and necessities of the State’s power of
regulation.33 Such authority to regulate businesses extends to the banking
industry which, as this Court has time and again emphasized, is undeniably
imbued with public interest.34

Having ruled that the assailed Section 47 of R.A. No. 8791 is constitutional,
we find no reversible error committed by the CA in holding that petitioner
can no longer exercise the right of redemption over its foreclosed
properties after the certificate of sale in favor of respondent had been
registered.

WHEREFORE, the petition for review on certiorari is DENIED for lack of

merit. The Decision dated November 19, 2010 and Resolution dated
January 31, 2011 of the Court of Appeals in CA-G.R. CV No. 91120 are
hereby AFFIRMED.

With costs against the petitioner.

SO ORDERED.

GOLDENWAY MERCHANDISING CORPORATION v. EQUITABLE PCI

BANK, GR No. 195540, 2013-03-13
Facts:
On November 29, 1985, Goldenway Merchandising Corporation
(petitioner) executed a Real Estate Mortgage in favor of Equitable PCI
Bank (respondent) over its real properties... covered by Transfer
Certificate of Title (TCT)
Nos. T-152630, T-151655 and T-214528
The mortgage secured the Two Million Pesos (P2,000,000.00) loan
granted by respondent to petitioner and was duly registered.[4]
As petitioner failed to settle its loan obligation, respondent extrajudicially
foreclosed the mortgage on December 13, 2000. During the public
auction, the mortgaged properties were sold for P3,500,000.00 to
respondent. Accordingly, a Certificate of Sale was issued to
respondent... on January 26, 2001. On February 16, 2001, the
Certificate of Sale was registered and inscribed on TCT Nos. T-152630,
T-151655 and T-214528.[5]
In a letter dated March 8, 2001, petitioner's counsel offered to redeem
the foreclosed properties by tendering a check in the amount of
P3,500,000.00.
However, petitioner was told that such redemption is no longer possible
because the certificate of sale had already been registered. Petitioner
also verified with the Registry of Deeds that title to the foreclosed
properties had already... been consolidated in favor of respondent and
that new certificates of title were issued in the name of respondent on
March 9, 2001.
On December 7, 2001, petitioner filed a complaint[7] for specific
performance and damages against the respondent, asserting that it is
the one- year period of redemption under Act No. 3135 which should
apply and not the shorter redemption period provided in
Republic Act (R.A.) No. 8791. Petitioner argued that applying Section 47
of R.A. 8791 to the real estate mortgage executed in 1985 would result
in the impairment of obligation of contracts and violation of the equal
protection clause under the Constitution. Additionally,... petitioner faulted
the respondent for allegedly failing to furnish it and the Office of the
Clerk of Court, RTC of Valenzuela City with a Statement of Account as
directed in the Certificate of Sale, due to which petitioner was not
apprised of the assessment and fees incurred by... respondent, thus
depriving petitioner of the opportunity to exercise its right of redemption
prior to the registration of the certificate of sale.
respondent pointed out that petitioner cannot claim that it was unaware
of the redemption price which is clearly provided in Section 47 of R.A.
No. 8791, and that petitioner had all the opportune time to redeem the...
foreclosed properties from the time it received the letter of demand and
the notice of sale before the registration of the certificate of sale. As to
the check payment tendered by petitioner, respondent said that even
assuming arguendo such redemption was timely made, it... was not for
the amount as required by law.
On January 8, 2007, the trial court rendered its decision dismissing the
complaint as well as the counterclaim. It noted that the issue of
constitutionality of Sec. 47 of R.A. No. 8791 was never raised by the
petitioner during the pre-trial and the trial. Aside from the fact... that
petitioner's attempt to redeem was already late, there was no valid
redemption made because Atty. Judy Ann Abat-Vera who talked to Atty.
Joseph E. Mabilog of the Legal Division of respondent bank, was not
properly authorized by petitioner's Board of Directors to transact... for
and in its behalf; it was only a certain Chan Guan Pue, the alleged
President of petitioner corporation, who gave instruction to Atty. Abat-
Vera to redeem the foreclosed properties.[9]... petitioner appealed to the
CA which affirmed the trial court's decision. According to the CA,
petitioner failed to justify why Section 47 of R.A. No. 8791 should be
declared unconstitutional. Furthermore, the appellate court concluded
that a reading of Section 47... plainly reveals the intention to shorten the
period of redemption for juridical persons and that the foreclosure of the
mortgaged properties in this case when R.A. No. 8791 was already in
effect clearly falls within the purview of the said provision.[10]
Issues:
it is contended that Section 47 of R.A. No. 8791 is inapplicable
considering that the contracting parties expressly and categorically
agreed that the foreclosure of the real estate mortgage shall be in
accordance with Act No. 3135.
Petitioner then argues that applying Section 47 of R.A. No. 8791 to the
present case would be a substantial impairment of its vested right of
redemption under the real estate mortgage contract. Such impairment
would be violative of the constitutional proscription against... impairment
of obligations of contract
Petitioner further argues that since R.A. No. 8791 does not provide for its
retroactive application, courts therefore cannot retroactively apply its
provisions to contracts executed and consummated before its effectivity.
May the... amendment be validly applied in this case when the real
estate mortgage contract was executed in 1985 and the mortgage
foreclosed when R.A. No. 8791 was already in effect?
Ruling:
The law governing cases of extrajudicial foreclosure of mortgage is Act
No. 3135,[14] as amended by Act No. 4118.
The one-year period of redemption is counted from the date of the
registration of the certificate of sale. In this case, the parties provided in
their real estate mortgage contract that upon petitioner's default and the
latter's entire loan obligation becoming due, respondent... may
immediately foreclose the mortgage judicially in accordance with the
Rules of Court, or extrajudicially in accordance with Act No. 3135, as
amended.
However, Section 47 of R.A. No. 8791 otherwise known as "The General
Banking Law of 2000" which took effect on June 13, 2000, amended Act
No. 3135.
Under the new law, an exception is thus made in the case of juridical
persons which are allowed to exercise the right of redemption only "until,
but not after, the registration of the certificate of foreclosure sale" and in
no case more than three (3) months after foreclosure,... whichever
comes first.[16]
Petitioner's contention that Section 47 of R.A. 8791 violates the
constitutional proscription against impairment of the obligation of
contract has no basis.
The purpose of the non-impairment clause of the Constitution[20] is to
safeguard the integrity of contracts against unwarranted interference by
the State. As a rule, contracts should not be tampered with by
subsequent laws that would change or modify the... rights and
obligations of the parties.[21]
Impairment is anything that diminishes the efficacy of the contract. There
is an impairment if a subsequent law changes the terms of a contract
between the parties, imposes new conditions, dispenses with those
agreed upon or withdraws remedies for the enforcement of the rights...
of the parties.[22]
Section 47 did not divest juridical persons of the right to redeem their
foreclosed properties but only modified the time for the exercise of such
right by reducing the one-year period originally provided in Act No. 3135.
The new redemption period commences from the date of... foreclosure
sale, and expires upon registration of the certificate of sale or three
months after foreclosure, whichever is earlier. There is likewise no
retroactive application of the new redemption period because Section 47
exempts from its operation those properties foreclosed... prior to its
effectivity and whose owners shall retain their redemption rights under
Act No. 3135.
Petitioner's claim that Section 47 infringes the equal protection clause as
it discriminates mortgagors/property owners who are juridical persons is
equally bereft of merit.
The equal protection clause is directed principally against undue favor
and individual or class privilege. It is not intended to prohibit legislation
which is limited to the object to which it is directed or by the territory in
which it is to operate. It does not require... absolute equality, but merely
that all persons be treated alike under like conditions both as to
privileges conferred and liabilities imposed.[23]
We agree with the CA that the legislature clearly intended to shorten the
period of redemption for juridical persons whose properties were
foreclosed and sold in accordance with the provisions of Act No.
3135.[27]
The difference in the treatment of juridical persons and natural persons
was based on the nature of the properties foreclosed whether these are
used as residence, for which the more liberal one-year redemption
period is retained, or used for industrial or commercial purposes, in...
which case a shorter term is deemed necessary to reduce the period of
uncertainty in the ownership of property and enable mortgagee-banks to
dispose sooner of these acquired assets. It must be underscored that
the General Banking Law of 2000, crafted in the aftermath of the 1997
Southeast Asian financial crisis, sought to reform the General Banking
Act of 1949 by fashioning a legal framework for maintaining a safe and
sound banking system.[28] In this context, the amendment introduced by
Section 47 embodied one of such safe and... sound practices aimed at
ensuring the solvency and liquidity of our banks. It cannot therefore be
disputed that the said provision amending the redemption period in Act
3135 was based on a reasonable classification and germane to the
purpose of the law.
This legitimate public interest pursued by the legislature further
enfeebles petitioner's impairment of contract theory.
The right of redemption being statutory, it must be exercised in the
manner prescribed by the statute,[29] and within the prescribed time
limit, to make it effective. Furthermore, as with other individual rights to
contract and to property, it has to give... way to police power exercised
for public welfare.
Principles:

23. Gateway Electronics Corporation vs. Land Bank of the

Philippines GR. NO. 155217 and 156393, July 30, 2003

G.R. Nos. 155217 & 156393 July 30, 2003

GATEWAY ELECTRONICS CORPORATION, petitioner,

vs.
LAND BANK OF THE PHILIPPINES, respondent.

YNARES-SANTIAGO, J.:

Before the Court are consolidated petitions (1) for review of the decision of
the Court of Appeals in CA-G.R. SP No. 62658,1 which set aside the Order
dated October 18, 2000 of the Regional Trial Court of Makati City, Branch
133, in Civil Case No. 98-782;2 and (2) to cite Landbank President
Margarito Teves, and Landbank's counsel, in contempt of Court.

The undisputed facts are as follows: In 1995, petitioner Gateway

Electronics Corporation applied for a loan in the amount of one billion
pesos with respondent Landbank to finance the construction and
acquisition of machineries and equipment for a semi-conductor plant at
Gateway Business Park in Javalera, General Trias, Cavite. However,
Landbank was only able to extend petitioner a loan in the amount of six
hundred million pesos (P600,000,000.00). Hence, it offered to assist
petitioner in securing additional funding through its investment banking
services, which offer petitioner accepted. Thereafter, Landbank released to
petitioner the initial amount of P250,000,000.00, with the balance of
P350,000,000.00 to be released in June 1996. As security for the said
loans, petitioner mortgaged in favor of Landbank two parcels of
land3 located in Barangay Jalavera, General Trias, Cavite, the movable
properties as well as the machineries to be installed therein.4

After petitioner's acceptance of Landbank's financial banking services, the

latter prepared an Information Memorandum which it disseminated to
various banks to attract them into providing additional funding for petitioner.
The Information Memorandum stated that the security for the proposed
loan syndication will be the "Mortgage Trust Indenture (MTI) on the project
assets including land, building and equipment."5 In a letter dated July 30,
1996, Landbank informed petitioner of its willingness to share the loan
collateral which the latter constituted in its favor as part of the collateral for
the syndicated loan from the other banks.6 On August 20, 1996, Landbank
confirmed its undertaking to share the said collateral with the other creditor
banks, to wit:

In case of failure of syndication of the loan, allow the banks that have
granted loans to GEC [Gateway Electronics Corporation] in
anticipation of the loan syndication to have a registered pari passu
mortgage with you over the property, the intention being that all
banks, including Landbank, shall be on equal footing where the
aforesaid collateral is concerned.7

Consequently, Philippine Commercial International Bank (PCIB), Union

Bank of the Philippines, (UBP), Rizal Commercial Banking Corporation-
Trust Investment Division (RCBC), and Asia Trust Bank (Asia Trust) joined
the loan syndication and released various loans to petitioner. On October
10, 1996, a Memorandum of Understanding (MOU)8 was executed by
Landbank, PCIB, UBP, RCBC, Asiatrust and the petitioner, with RCBC as
the trustee of the loan syndication. Under the Memorandum of
Understanding, the said signatories agreed to –

enter into a Mortgage Trust Indenture (herein, the "MTI"), under

which GEC will constitute a mortgage over the land, building, other
land improvements, machinery and equipment of GEC located within
Gateway Business Park, Crisanto de Los Reyes Avenue, Javalera,
General Trias, Cavite as well as the assets to be acquired by GEC
under the Project (as hereinafter defined) in favor of RCBC-TID as
trustee, for the benefit of the Creditors (as defined in the MTI), to
secure the payment by GEC of its loan obligations.9

Meanwhile, the negotiations for the execution of an MTI failed because

Landbank and the petitioner were unable to agree on the valuation of the
equipment and machineries to be acquired by the latter. The petitioner
insisted on a 70% valuation, while the former wanted a 50% valuation. To
break the impasse, PCIB, RCBC, UBP, and Asiatrust proposed, subject to
the approval of their respective Executive Committees or Board of
Directors, to execute a Joint Real Estate Mortgage (JREM)10 as the "new
mode to secure [their] respective loan vis-à-vis [petitioner's]
collaterals."11 Under the proposed JREM, the six hundred million peso-loan
granted by Land Bank shall be secured up to 94.42%, while the loans
granted by PCIB, RCBC, and UBP would be similarly secured up to
75.22%.12 Land Bank, however, refused to agree to the said proposal
unless 100% of its loan exposure is secured, pursuant to the Loan
Agreement it executed with petitioner.13

On February 27, 1998, Land Bank informed petitioner of its intention not to
share collaterals with the other banks. In the meantime, petitioner's loan
with PCIB became due because of its failure to comply with the collateral
requirement under the MTI or JREM, or to provide acceptable substitute
collaterals. Hence, petitioner filed with the Regional Trial Court of Makati
City, Branch 133, a complaint against Land Bank for specific performance
and damages with prayer for the issuance of preliminary mandatory
injunction.
After hearing, the trial court issued an order on October 18, 2000 granting
petitioner's prayer for the issuance of a writ of preliminary mandatory
injunction, the dispositive portion of which reads:

Wherefore, in view of the foregoing, the application for a writ of

preliminary mandatory injunction is granted, conditioned upon the
filing of a bond in the amount of three hundred thousand pesos
(P300,000.00).

Defendant is hereby directed to accede to the terms of the draft MTI

and/or to agree to share collaterals under a joint real estate mortgage
[JREM] with long-term creditors of plaintiff (including PCIB) as joint
mortgagees and with defendant as custodian of the titles.

SO ORDERED.14

With the denial of its motion for reconsideration, respondent filed a petition
for certiorari with the Court of Appeals, on the ground that the trial court
gravely abused its discretion in issuing the assailed writ of preliminary
mandatory injunction. On March 23, 2001, the Court of Appeals, on motion
of Landbank, issued a temporary restraining order enjoining the trial court
from enforcing the October 18, 2000 Order.15

In a decision rendered on April 12, 2002, the Court of Appeals annulled the
assailed order of the trial court.16 It ruled that petitioner failed to prove the
requisite clear and legal right that would justify the issuance of the writ of
preliminary mandatory injunction; and that respondent cannot be compelled
to accede to the terms of the MTI and/or JREM which was supposed to
cover the syndicated loan of petitioner inasmuch as the said schemes were
never executed nor approved by the petitioner and the participating banks.

Hence, the instant petition for review filed by petitioner which was docketed
as G.R. No. 155217. On December 10, 2002, petitioner filed an omnibus
motion seeking, inter alia, the issuance of a temporary restraining order
enjoining Landbank from proceeding and completing the foreclosure
proceedings over its mortgaged properties.17 On January 22, 2003, the
Court denied said motion for lack of merit.18 Petitioner's motion for
reconsideration was likewise denied on March 26, 2003.19

Meanwhile, on January 10, 2003, petitioner filed a petition to cite Landbank

President Margarito Teves and Landbank's lawyer in contempt of Court for
proceeding and concluding the foreclosure proceedings and public auction
sale.20 Petitioner contended that Landbank's acts constitute improper
conduct which directly or indirectly impede, obstruct, or degrade the
administration of justice. The petition was docketed as G.R. No. 156393.

On March 12, 2003, the consolidation of G.R. No. 156393 and G.R. No.
155217 was ordered.21

The issues to be resolved in this petition are as follows: (1) Is Landbank

bound to share the properties mortgaged to it by respondent with the other
creditor banks in the loan syndication? (2) If the answer is in the affirmative,
can Landbank be compelled at this point to agree with the terms of the MTI
or JREM?

Anent the first issue, the Court finds that Landbank is bound by a perfected
contract to share petitioner's collateral with the participating banks in the
loan syndication. Article 1305 of the Civil Code defines a contract as a
meeting of minds between two persons whereby one binds himself, with
respect to the other, to give something or to render some service. A
contract undergoes three distinct stages — (1) preparation or negotiation;
(2) perfection; and (3) consummation. Negotiation begins from the time the
prospective contracting parties manifest their interest in the contract and
ends at the moment of agreement of the parties. The perfection or birth of
the contract takes place when the parties agree upon the essential
elements of the contract. The last stage is the consummation of the
contract wherein the parties fulfill or perform the terms agreed upon in the
contract, culminating in the extinguishment thereof. Article 1315 of the Civil
Code, on the other hand, provides that a contract is perfected by mere
consent, which is manifested by the meeting of the offer and the
acceptance upon the thing and the cause which are to constitute the
contract.22

In the case at bar, a perfected contract for the sharing of collaterals is

evident from the exchange of communications between Landbank and
petitioner and the participating banks, as well as in the Memorandum of
Understanding executed by petitioner and the participating banks, including
Landbank. In its July 31, 1996 letter to petitioner, Landbank stated that it is
"willing to submit the properties covered by the real estate mortgage (REM)
in its favor as part of [petitioner's] assets that will be covered by a Mortgage
Trust Indenture (MTI)." Thus, the Information Memorandum distributed by
Landbank to entice other banks to participate in the loan syndication,
expressly stated that the security for the syndicated loan will be the "MTI on
project assets including land, building and equipment."23Finally, on October
10, 1996, petitioner, Landbank, PCIB, RCBC, UBP, and Asiatrust executed
a Memorandum of Understanding confirming the said collateral sharing
agreement. To effect said sharing, they decided to enter into a Mortgage
Trust Indenture (MTI) which will be secured by the same properties
previously mortgaged by petitioner to Landbank, or more specifically, to –

enter into a Mortgage Trust Indenture (herein, the "MTI"), under

which GEC will constitute a mortgage over the land, building, other
land improvements, machinery and equipment of GEC located within
Gateway Business Park, Crisanto de Los Reyes Avenue, Javalera,
General Trias, Cavite as well as the assets to be acquired by GEC
under the Project (as hereinafter defined) in favor of RCBC-TID as
trustee, for the benefit of the Creditors (as defined in the MTI), to
secure the payment by GEC of its loan obligations.24

Clearly, there was an acceptance by petitioner and by PCIB, RCBC, UBP,

and Asiatrust of Lanbank's offer to share collaterals, culminating in the
execution of the Memorandum of Understanding. We agree with petitioner
that the MTI and/or the JREM belong to the realm of consummation of said
Memorandum of Understanding, being the proposed vehicles or modes to
effect the sharing agreement. Thus, in the JREM which was approved by
Landbank, except for its loan security coverage, the participating banks
expressly acknowledged that "[t]he Joint Real Estate Mortgage [is] pursued
by [them] as a new mode to secure [their] respective loans vis-à-vis GEC's
collateral."25Verily, the perfection of the collateral sharing agreement is not
dependent upon the execution of the MTI or the JREM. The failure to
execute said schemes did not affect the perfected and binding collateral
sharing contract.

With respect, however, to the second issue, we find that the issuance by
the trial court of the writ of preliminary mandatory injunction directing
Landbank to agree with the terms of the MTI or JREM was premature. This
is so because the MTI and/or JREM that were supposed to consummate
the perfected collateral sharing agreement have not yet come into
existence. As correctly held by the Court of Appeals, Landbank cannot be
compelled to agree with the terms of the MTI considering that no such
terms were finalized and approved by the petitioner and the participating
banks. Simply stated, Landbank cannot be forced to give its conformity to
an inexistent contract. So, also, the proposed JREM was never approved
by the petitioner and the participating banks. Notably, the JREM expressly
stated that "we hereby appeal to the GEC's senior management to decide
swiftly and to favorably approve our humble requests so that, in turn, we
can seek respective approvals from our senior management to culminate
this long term project financing deal of ours."26 No such approval, however,
appears in the records.

As to the questioned security coverage under the JREM, Landbank cannot

be compelled to agree to the proposed 94.42% loan security coverage over
its six hundred million peso-loan to petitioner. The security coverage of the
participating banks on the collaterals of petitioner was not agreed upon in
the Memorandum of Understanding. While it is true that Landbank informed
petitioner in its letter dated July 30, 1996 that "the participating banks in the
loan syndication will have equal security position",27 and that on August 20,
1996, Landbank confirmed to PCIB that the participating banks, "shall be
on equal footing where the aforesaid collateral is concerned,"28 no such
stipulation was embodied in the Memorandum of Understanding executed
by petitioner, Landbank, PCIB, RCBC, UBP, and Asiatrust on October 10,
1996. As the repository of the terms and conditions agreed upon by the
parties, the Memorandum of Understanding is considered as containing all
their stipulations and there can be no evidence of such terms other than the
contents thereof.29 Inasmuch as the parties to the Memorandum of
Understanding did not agree on the terms of the security coverage of the
participating banks in the MTI or JREM, we can neither add such a
stipulation nor direct Landbank to agree to the security coverage stated in
the JREM. Furthermore, the reasonableness of the terms of the MTI and
JREM, as well as the good faith or bad faith of the parties in negotiating the
terms of the said schemes, are matters that should be determined at the
trial, and cannot at this point be passed upon by this Court.

Furthermore, the other participating banks, namely PCIB, RCBC, UBP, and
Asiatrust, are not parties to the instant case and cannot, therefore, be
bound by an order directing Landbank to accede to the terms of the MTI or
the JREM. We are not even aware if said banks are amenable to the said
schemes or pursuing other modes to effect the sharing agreement. Indeed,
the scheme or mode and the terms that would consummate the collateral
sharing agreement are matters that the signatories of the Memorandum of
Understanding have yet to come up with. The rule in this jurisdiction is that
the contracting parties may establish any agreement, term, and condition
they may deem advisable, provided they are not contrary to law, morals or
public policy. The right to enter into lawful contracts constitutes one of the
liberties guaranteed by the Constitution. It cannot be struck down or
arbitrarily interfered with without violating the freedom to enter into lawful
contracts.30

A writ of mandatory injunction requires the performance of a particular act

and is granted only upon a showing of the following requisites – (1) the
invasion of the right is material and substantial; (2) the right of a
complainant is clear and unmistakable; and (3) there is an urgent and
permanent necessity for the writ to prevent serious damage. Since it
commands the performance of an act, a mandatory injunction does not
preserve the status quo and is thus more cautiously regarded than a mere
prohibitive injunction. Accordingly, the issuance of the former is justified
only in a clear case, free from doubt and dispute.31

While it is true that petitioner has a right to compel Landbank to comply

with the collateral sharing agreement, its right to enforce the same by way
of an inexistent MTI or JREM is certainly not clear and unmistakable. At
this stage, Landbank cannot be compelled to agree to the terms of the MTI
and/or JREM. At the most, Landbank can be compelled to comply with its
obligation to share with the other participating banks of the loan syndication
the properties mortgaged to it by petitioner and to execute the necessary
contract that would implement said collateral sharing agreement.

Coming now to the petition for contempt, we find that Landbank's acts of
foreclosing and selling at public auction the lots mortgaged by petitioner
were not contumacious. Landbank instituted the foreclosure proceedings
upon an honest belief that petitioner had defaulted in the payment of its
obligation. Having acted in good faith, the officers of the bank cannot be
held in contempt of court. However, in order not to render this decision
moot and ineffectual, the sale at public auction should be annulled.

WHEREFORE, in view of all the foregoing, the petition in G.R. No. 155217
is GRANTED. The decision of the Court of Appeals dated April 12, 2002 in
CA-G.R. SP. No. 62658 is SET ASIDE. The assailed Order dated October
18, 2000 of the Regional Trial Court of Makati City, Branch 133, in Civil
Case No. 98-782 is MODIFIED as follows: respondent Landbank is
directed to implement its agreement under the Memorandum of
Understanding dated October 10, 1996 to share with Philippine
Commercial International Bank (PCIB), Union Bank of the Philippines,
(UBP), Rizal Commercial Banking Corporation-Trust Investment Division
(RCBC), and Asia Trust Bank (Asia Trust) the properties mortgaged to it by
petitioner Gateway Electronics Corporation, as collaterals for the
syndicated loan.

In G.R. No. 156393, the petition to cite Landbank President Margarito

Teves and Landbank's lawyer in contempt of Court is DENIED for lack of
merit.

SO ORDERED.

GEC v. LANDBANK

Topic: Perfection: In General

Petitioner: Gateway Electronics Corporation

Respondent: Land Bank of the Philippines

QUICK ANSWERS

Who’s chasing whom: GEC is chasing after Landbank

When did the problem start: When Landbank and petitioner were unable
to agree on the valuation of the equipment and machineries to be acquired
by the latter
What documents/provisions were used:
1. Memorandum of Understanding
2. Mortgage Trust Indenture (MTI)
3. Joint Real Estate Mortgage (JREM)

FACTS:
 In 1995, petitioner Gateway Electronics Corporation applied for a loan in
the amount of one billion pesos with respondent Landbank to finance the
construction and acquisition of machineries and equipment for a semi-
conductor plant at Gateway Business Park in Javalera, General Trias,
Cavite.
 However, Landbank was only able to extend petitioner a loan in the
amount of six hundred million pesos (P600,000,000.00). Hence, it offered
to assist petitioner in securing additional funding through its investment
banking services, which offer petitioner accepted.
 Thereafter, Landbank released to petitioner the initial amount of
P250,000,000.00, with the balance of P350,000,000.00 to be released in
June 1996. As security for the said loans, petitioner mortgaged in favor of
Landbank two parcels of land, the movable properties as well as the
machineries to be installed therein.
 In case of failure of syndication of the loan, allow the banks that have
granted loans to GEC [Gateway Electronics Corporation], the intention
being that all banks, including Landbank, shall be on equal footing where
the aforesaid collateral is concerned.
 Consequently, PCIB, UBP, RCBC, and Asia Trust joined the loan
syndication and released various loans to petitioner.
 On October 10, 1996, a Memorandum of Understanding (MOU) was
executed by Landbank, PCIB, UBP, RCBC, Asiatrust and the petitioner,
with RCBC as the trustee of the loan syndication.
 Meanwhile, the negotiations for the execution of an MTI failed because
Landbank and the petitioner were unable to agree on the valuation of the
equipment and machineries to be acquired by the latter.
 To break the impasse, PCIB, RCBC, UBP, and Asiatrust proposed,
subject to the approval of their respective Executive Committees or Board
of Directors, to execute a Joint Real Estate Mortgage (JREM) as the new
mode to secure [their] respective loan vis--vis [petitioners] collaterals.
 On February 27, 1998, Land Bank informed petitioner of its intention not
to share collaterals with the other banks. In the meantime, petitioners loan
with PCIB became due because of its failure to comply with the collateral
requirement under the MTI or JREM, or to provide acceptable substitute
collaterals. Hence, petitioner filed with the Regional Trial Court of Makati
City, Branch 133, a complaint against Land Bank for specific performance
and damages with prayer for the issuance of preliminary mandatory
injunction.
 RTC: Defendant is hereby directed to accede to the terms of the draft MTI
and/or to agree to share collaterals under a joint real estate mortgage
[JREM] with long-term creditors of plaintiff (including PCIB) as joint
mortgagees and with defendant as custodian of the titles.
 CA: Respondent cannot be compelled to accede to the terms of the MTI
and/or JREM which was supposed to cover the syndicated loan of
 petitioner inasmuch as the said schemes were never executed nor
approved by the petitioner and the participating banks.

ISSUE:
1. Is Landbank bound to share the properties mortgaged to it by respondent
with the other creditor banks in the loan syndication?
2. If the answer is in the affirmative, can Landbank be compelled at this point
to agree with the terms of the MTI or JREM?

HELD:

1st ISSUE
 The Court finds that Landbank is bound by a perfected contract to share
petitioners collateral with the participating banks in the loan syndication
 Article 1315 of the Civil Code, provides that a contract is perfected by
mere consent, which is manifested by the meeting of the offer and the
acceptance upon the thing and the cause which are to constitute the
contract.
 In the case at bar, a perfected contract for the sharing of collaterals is
evident from the exchange of communications between Landbank and
petitioner and the participating banks, as well as in the Memorandum of
Understanding executed by petitioner and the participating banks,
including Landbank.
 there was an acceptance by petitioner and by PCIB, RCBC, UBP, and
Asiatrust of Lanbanks offer to share collaterals, culminating in the
execution of the Memorandum of Understanding.
 the MTI and/or the JREM belong to the realm of consummation of said
Memorandum of Understanding, being the proposed vehicles or modes
to effect the sharing agreement. Thus, in the JREM which was approved
by Landbank, except for its loan security coverage, the participating banks
expressly acknowledged that [t]he Joint Real Estate Mortgage [is]
pursued by [them] as a new mode to secure [their] respective loans vis--
vis GECs collateral.

2nd ISSUE
 Writ of preliminary mandatory injunction directing Landbank to agree with
the terms of the MTI or JREM by trial court was premature.
 This is so because the MTI and/or JREM that were supposed to
consummate the perfected collateral sharing agreement have not yet
come into existence.
 As correctly held by the Court of Appeals, Landbank cannot be compelled
to agree with the terms of the MTI considering that no such terms were
finalized and approved by the petitioner and the participating banks
 Notably, the JREM expressly stated that we hereby appeal to the GECs
senior management to decide swiftly and to favorably approve our humble
requests so that, in turn, we can seek respective approvals from our
senior management to culminate this long term project financing deal of
ours. No such approval, however, appears in the records.
 While it is true that Landbank informed petitioner in its letter dated July
30, 1996 that the participating banks in the loan syndication will have
equal security position, and that on August 20, 1996, Landbank confirmed
to PCIB that the participating banks, shall be on equal footing where the
aforesaid collateral is concerned, no such stipulation was embodied in the
Memorandum of Understanding executed by petitioner, Landbank, PCIB,
RCBC, UBP, and Asiatrust on October 10, 1996.
 Petition GRANTED. CA decision SET ASIDE. RTC decision MODIFIED:
respondent Landbank is directed to implement its agreement under the
Memorandum of Understanding dated October 10, 1996 to share with
Philippine Commercial International Bank (PCIB), Union Bank of the
Philippines, (UBP), Rizal Commercial Banking Corporation-Trust
Investment Division (RCBC), and Asia Trust Bank (Asia Trust) the
properties mortgaged to it by petitioner Gateway Electronics Corporation,
as collaterals for the syndicated loan.

24. UCPB vs Sps Beluso GR No. 159912, August 17, 2007

G.R. No. 159912 August 17, 2007

UNITED COCONUT PLANTERS BANK, Petitioner,

vs.
SPOUSES SAMUEL and ODETTE BELUSO, Respondents.
 DECISION

CHICO-NAZARIO, J.:

This is a Petition for Review on Certiorari under Rule 45 of the Rules of

Court, which seeks to annul the Court of Appeals Decision1 dated 21
January 2003 and its Resolution2 dated 9 September 2003 in CA-G.R. CV
No. 67318. The assailed Court of Appeals Decision and Resolution
affirmed in turn the Decision3 dated 23 March 2000 and Order4 dated 8 May
2000 of the Regional Trial Court (RTC), Branch 65 of Makati City, in Civil
Case No. 99-314, declaring void the interest rate provided in the
promissory notes executed by the respondents Spouses Samuel and
Odette Beluso (spouses Beluso) in favor of petitioner United Coconut
Planters Bank (UCPB).

The procedural and factual antecedents of this case are as follows:

On 16 April 1996, UCPB granted the spouses Beluso a Promissory Notes

Line under a Credit Agreement whereby the latter could avail from the
former credit of up to a maximum amount of ₱1.2 Million pesos for a term
ending on 30 April 1997. The spouses Beluso constituted, other than their
promissory notes, a real estate mortgage over parcels of land in Roxas
City, covered by Transfer Certificates of Title No. T-31539 and T-27828, as
additional security for the obligation. The Credit Agreement was
subsequently amended to increase the amount of the Promissory Notes
Line to a maximum of ₱2.35 Million pesos and to extend the term thereof to
28 February 1998.

The spouses Beluso availed themselves of the credit line under the
following Promissory Notes:

PN # Date of PN Maturity Date Amount Secured

8314-96-00083-
29 April 1996 27 August 1996 ₱ 700,000
3
8314-96-00085-
2 May 1996 30 August 1996 ₱ 500,000
0
8314-96- 20 November
20 March 1997 ₱ 800,000
000292-2 1996
The three promissory notes were renewed several times. On 30 April 1997,
the payment of the principal and interest of the latter two promissory notes
were debited from the spouses Beluso’s account with UCPB; yet, a
consolidated loan for ₱1.3 Million was again released to the spouses
Beluso under one promissory note with a due date of 28 February 1998.

To completely avail themselves of the ₱2.35 Million credit line extended to

them by UCPB, the spouses Beluso executed two more promissory notes
for a total of ₱350,000.00:

PN # Date of PN Maturity Date Amount Secured

11 December 28 February
97-00363-1 ₱ 200,000
1997 1998
28 February
98-00002-4 2 January 1998 ₱ 150,000
1998

However, the spouses Beluso alleged that the amounts covered by these
last two promissory notes were never released or credited to their account
and, thus, claimed that the principal indebtedness was only ₱2 Million.

In any case, UCPB applied interest rates on the different promissory notes
ranging from 18% to 34%. From 1996 to February 1998 the spouses
Beluso were able to pay the total sum of ₱763,692.03.

From 28 February 1998 to 10 June 1998, UCPB continued to charge

interest and penalty on the obligations of the spouses Beluso, as follows:

PN # Amount Secured Interest Penalty Total

97-00363-1 ₱ 200,000 31% 36% ₱ 225,313.24
97-00366-6 ₱ 700,000 30.17% 32.786% ₱ 795,294.72
(7 days) (102 days)
97-00368-2 ₱ 1,300,000 28% 30.41% ₱ 1,462,124.54
(2 days) (102 days)
98-00002-4 ₱ 150,000 33% 36% ₱ 170,034.71
(102 days)
The spouses Beluso, however, failed to make any payment of the foregoing
amounts.

On 2 September 1998, UCPB demanded that the spouses Beluso pay their
total obligation of ₱2,932,543.00 plus 25% attorney’s fees, but the spouses
Beluso failed to comply therewith. On 28 December 1998, UCPB
foreclosed the properties mortgaged by the spouses Beluso to secure their
credit line, which, by that time, already ballooned to ₱3,784,603.00.

On 9 February 1999, the spouses Beluso filed a Petition for Annulment,

Accounting and Damages against UCPB with the RTC of Makati City.

On 23 March 2000, the RTC ruled in favor of the spouses Beluso,

disposing of the case as follows:

PREMISES CONSIDERED, judgment is hereby rendered declaring the

interest rate used by [UCPB] void and the foreclosure and Sheriff’s
Certificate of Sale void. [UCPB] is hereby ordered to return to [the spouses
Beluso] the properties subject of the foreclosure; to pay [the spouses
Beluso] the amount of ₱50,000.00 by way of attorney’s fees; and to pay the
costs of suit. [The spouses Beluso] are hereby ordered to pay [UCPB] the
sum of ₱1,560,308.00.5

On 8 May 2000, the RTC denied UCPB’s Motion for

Reconsideration,6 prompting UCPB to appeal the RTC Decision with the
Court of Appeals. The Court of Appeals affirmed the RTC Decision, to wit:

WHEREFORE, premises considered, the decision dated March 23, 2000 of

the Regional Trial Court, Branch 65, Makati City in Civil Case No. 99-314 is
hereby AFFIRMED subject to the modification that defendant-appellant
UCPB is not liable for attorney’s fees or the costs of suit.7

On 9 September 2003, the Court of Appeals denied UCPB’s Motion for

Reconsideration for lack of merit. UCPB thus filed the present petition,
submitting the following issues for our resolution:

WHETHER OR NOT THE HONORABLE COURT OF APPEALS

COMMITTED SERIOUS AND REVERSIBLE ERROR WHEN IT
AFFIRMED THE DECISION OF THE TRIAL COURT WHICH DECLARED
VOID THE PROVISION ON INTEREST RATE AGREED UPON BETWEEN
PETITIONER AND RESPONDENTS

II

WHETHER OR NOT THE HONORABLE COURT OF APPEALS

COMMITTED SERIOUS AND REVERSIBLE ERROR WHEN IT
AFFIRMED THE COMPUTATION BY THE TRIAL COURT OF
RESPONDENTS’ INDEBTEDNESS AND ORDERED RESPONDENTS TO
PAY PETITIONER THE AMOUNT OF ONLY ONE MILLION FIVE
HUNDRED SIXTY THOUSAND THREE HUNDRED EIGHT PESOS
(₱1,560,308.00)

III

WHETHER OR NOT THE HONORABLE COURT OF APPEALS

COMMITTED SERIOUS AND REVERSIBLE ERROR WHEN IT
AFFIRMED THE DECISION OF THE TRIAL COURT WHICH ANNULLED
THE FORECLOSURE BY PETITIONER OF THE SUBJECT PROPERTIES
DUE TO AN ALLEGED "INCORRECT COMPUTATION" OF
RESPONDENTS’ INDEBTEDNESS

IV

WHETHER OR NOT THE HONORABLE COURT OF APPEALS

COMMITTED SERIOUS AND REVERSIBLE ERROR WHEN IT
AFFIRMED THE DECISION OF THE TRIAL COURT WHICH FOUND
PETITIONER LIABLE FOR VIOLATION OF THE TRUTH IN LENDING
ACT

WHETHER OR NOT THE HONORABLE COURT OF APPEALS

COMMITTED SERIOUS AND REVERSIBLE ERROR WHEN IT FAILED
TO ORDER THE DISMISSAL OF THE CASE BECAUSE THE
RESPONDENTS ARE GUILTY OF FORUM SHOPPING8

Validity of the Interest Rates

The Court of Appeals held that the imposition of interest in the following
provision found in the promissory notes of the spouses Beluso is void, as
the interest rates and the bases therefor were determined solely by
petitioner UCPB:

FOR VALUE RECEIVED, I, and/or We, on or before due date, SPS.

SAMUEL AND ODETTE BELUSO (BORROWER), jointly and severally
promise to pay to UNITED COCONUT PLANTERS BANK (LENDER) or
order at UCPB Bldg., Makati Avenue, Makati City, Philippines, the sum of
______________ PESOS, (P_____), Philippine Currency, with interest
thereon at the rate indicative of DBD retail rate or as determined by the
Branch Head.9

UCPB asserts that this is a reversible error, and claims that while the
interest rate was not numerically quantified in the face of the promissory
notes, it was nonetheless categorically fixed, at the time of execution
thereof, at the "rate indicative of the DBD retail rate." UCPB contends that
said provision must be read with another stipulation in the promissory notes
subjecting to review the interest rate as fixed:

The interest rate shall be subject to review and may be increased or

decreased by the LENDER considering among others the prevailing
financial and monetary conditions; or the rate of interest and charges which
other banks or financial institutions charge or offer to charge for similar
accommodations; and/or the resulting profitability to the LENDER after due
consideration of all dealings with the BORROWER.10

In this regard, UCPB avers that these are valid reference rates akin to a
"prevailing rate" or "prime rate" allowed by this Court in Polotan v. Court of
Appeals.11 Furthermore, UCPB argues that even if the proviso "as
determined by the branch head" is considered void, such a declaration
would not ipso facto render the connecting clause "indicative of DBD retail
rate" void in view of the separability clause of the Credit Agreement, which
reads:

Section 9.08 Separability Clause. If any one or more of the provisions

contained in this AGREEMENT, or documents executed in connection
herewith shall be declared invalid, illegal or unenforceable in any respect,
the validity, legality and enforceability of the remaining provisions hereof
shall not in any way be affected or impaired.12

According to UCPB, the imposition of the questioned interest rates did not
infringe on the principle of mutuality of contracts, because the spouses
Beluso had the liberty to choose whether or not to renew their credit line at
the new interest rates pegged by petitioner.13 UCPB also claims that
assuming there was any defect in the mutuality of the contract at the time
of its inception, such defect was cured by the subsequent conduct of the
spouses Beluso in availing themselves of the credit line from April 1996 to
February 1998 without airing any protest with respect to the interest rates
imposed by UCPB. According to UCPB, therefore, the spouses Beluso are
in estoppel.14

We agree with the Court of Appeals, and find no merit in the contentions of
UCPB.

Article 1308 of the Civil Code provides:

Art. 1308. The contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them.

We applied this provision in Philippine National Bank v. Court of

Appeals,15 where we held:

In order that obligations arising from contracts may have the force of law
between the parties, there must be mutuality between the parties based on
their essential equality. A contract containing a condition which makes its
fulfillment dependent exclusively upon the uncontrolled will of one of the
contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555).
Hence, even assuming that the P1.8 million loan agreement between the
PNB and the private respondent gave the PNB a license (although in fact
there was none) to increase the interest rate at will during the term of the
loan, that license would have been null and void for being violative of the
principle of mutuality essential in contracts. It would have invested the loan
agreement with the character of a contract of adhesion, where the parties
do not bargain on equal footing, the weaker party's (the debtor)
participation being reduced to the alternative "to take it or leave it" (Qua vs.
Law Union & Rock Insurance Co., 95 Phil. 85). Such a contract is a
veritable trap for the weaker party whom the courts of justice must protect
against abuse and imposition.

The provision stating that the interest shall be at the "rate indicative of DBD
retail rate or as determined by the Branch Head" is indeed dependent
solely on the will of petitioner UCPB. Under such provision, petitioner
UCPB has two choices on what the interest rate shall be: (1) a rate
indicative of the DBD retail rate; or (2) a rate as determined by the Branch
Head. As UCPB is given this choice, the rate should be categorically
determinable in both choices. If either of these two choices presents an
opportunity for UCPB to fix the rate at will, the bank can easily choose such
an option, thus making the entire interest rate provision violative of the
principle of mutuality of contracts.

Not just one, but rather both, of these choices are dependent solely on the
will of UCPB. Clearly, a rate "as determined by the Branch Head" gives the
latter unfettered discretion on what the rate may be. The Branch Head may
choose any rate he or she desires. As regards the rate "indicative of the
DBD retail rate," the same cannot be considered as valid for being akin to a
"prevailing rate" or "prime rate" allowed by this Court in Polotan. The
interest rate in Polotan reads:

The Cardholder agrees to pay interest per annum at 3% plus the prime rate
of Security Bank and Trust Company. x x x.16

In this provision in Polotan, there is a fixed margin over the reference rate:
3%. Thus, the parties can easily determine the interest rate by applying
simple arithmetic. On the other hand, the provision in the case at bar does
not specify any margin above or below the DBD retail rate. UCPB can peg
the interest at any percentage above or below the DBD retail rate, again
giving it unfettered discretion in determining the interest rate.

The stipulation in the promissory notes subjecting the interest rate to review
does not render the imposition by UCPB of interest rates on the obligations
of the spouses Beluso valid. According to said stipulation:

The interest rate shall be subject to review and may be increased or

decreased by the LENDER considering among others the prevailing
financial and monetary conditions; or the rate of interest and charges which
other banks or financial institutions charge or offer to charge for similar
accommodations; and/or the resulting profitability to the LENDER after due
consideration of all dealings with the BORROWER.17

It should be pointed out that the authority to review the interest rate was
given UCPB alone as the lender. Moreover, UCPB may apply the
considerations enumerated in this provision as it wishes. As worded in the
above provision, UCPB may give as much weight as it desires to each of
the following considerations: (1) the prevailing financial and monetary
condition; (2) the rate of interest and charges which other banks or financial
institutions charge or offer to charge for similar accommodations; and/or (3)
the resulting profitability to the LENDER (UCPB) after due consideration of
all dealings with the BORROWER (the spouses Beluso). Again, as in the
case of the interest rate provision, there is no fixed margin above or below
these considerations.

In view of the foregoing, the Separability Clause cannot save either of the
two options of UCPB as to the interest to be imposed, as both options
violate the principle of mutuality of contracts.

UCPB likewise failed to convince us that the spouses Beluso were in

estoppel.

Estoppel cannot be predicated on an illegal act. As between the parties to a

contract, validity cannot be given to it by estoppel if it is prohibited by law or
is against public policy.18

The interest rate provisions in the case at bar are illegal not only because
of the provisions of the Civil Code on mutuality of contracts, but also, as
shall be discussed later, because they violate the Truth in Lending Act. Not
disclosing the true finance charges in connection with the extensions of
credit is, furthermore, a form of deception which we cannot countenance. It
is against the policy of the State as stated in the Truth in Lending Act:

Sec. 2. Declaration of Policy. – It is hereby declared to be the policy of the

State to protect its citizens from a lack of awareness of the true cost of
credit to the user by assuring a full disclosure of such cost with a view of
preventing the uninformed use of credit to the detriment of the national
economy.19

Moreover, while the spouses Beluso indeed agreed to renew the credit line,
the offending provisions are found in the promissory notes themselves, not
in the credit line. In fixing the interest rates in the promissory notes to cover
the renewed credit line, UCPB still reserved to itself the same two options –
(1) a rate indicative of the DBD retail rate; or (2) a rate as determined by
the Branch Head.

Error in Computation
UCPB asserts that while both the RTC and the Court of Appeals voided the
interest rates imposed by UCPB, both failed to include in their computation
of the outstanding obligation of the spouses Beluso the legal rate of interest
of 12% per annum. Furthermore, the penalty charges were also deleted in
the decisions of the RTC and the Court of Appeals. Section 2.04, Article II
on "Interest and other Bank Charges" of the subject Credit Agreement,
provides:

Section 2.04 Penalty Charges. In addition to the interest provided for in

Section 2.01 of this ARTICLE, any principal obligation of the CLIENT
hereunder which is not paid when due shall be subject to a penalty charge
of one percent (1%) of the amount of such obligation per month computed
from due date until the obligation is paid in full. If the bank accelerates teh
(sic) payment of availments hereunder pursuant to ARTICLE VIII hereof,
the penalty charge shall be used on the total principal amount outstanding
and unpaid computed from the date of acceleration until the obligation is
paid in full.20

Paragraph 4 of the promissory notes also states:

In case of non-payment of this Promissory Note (Note) at maturity, I/We,

jointly and severally, agree to pay an additional sum equivalent to twenty-
five percent (25%) of the total due on the Note as attorney’s fee, aside from
the expenses and costs of collection whether actually incurred or not, and a
penalty charge of one percent (1%) per month on the total amount due and
unpaid from date of default until fully paid.21

Petitioner further claims that it is likewise entitled to attorney’s fees,

pursuant to Section 9.06 of the Credit Agreement, thus:

If the BANK shall require the services of counsel for the enforcement of its
rights under this AGREEMENT, the Note(s), the collaterals and other
related documents, the BANK shall be entitled to recover attorney’s fees
equivalent to not less than twenty-five percent (25%) of the total amounts
due and outstanding exclusive of costs and other expenses.22

Another alleged computational error pointed out by UCPB is the negation of

the Compounding Interest agreed upon by the parties under Section 2.02
of the Credit Agreement:
Section 2.02 Compounding Interest. Interest not paid when due shall form
part of the principal and shall be subject to the same interest rate as herein
stipulated.23 and paragraph 3 of the subject promissory notes:

Interest not paid when due shall be added to, and become part of the
principal and shall likewise bear interest at the same rate.24

UCPB lastly avers that the application of the spouses Beluso’s payments in
the disputed computation does not reflect the parties’ agreement. The
1avvphi1

RTC deducted the payment made by the spouses Beluso amounting to

₱763,693.00 from the principal of ₱2,350,000.00. This was allegedly
inconsistent with the Credit Agreement, as well as with the agreement of
the parties as to the facts of the case. In paragraph 7 of the spouses
Beluso’s Manifestation and Motion on Proposed Stipulation of Facts and
Issues vis-à-vis UCPB’s Manifestation, the parties agreed that the amount
of ₱763,693.00 was applied to the interest and not to the principal, in
accord with Section 3.03, Article II of the Credit Agreement on "Order of the
Application of Payments," which provides:

Section 3.03 Application of Payment. Payments made by the CLIENT shall

be applied in accordance with the following order of preference:

1. Accounts receivable and other out-of-pocket expenses

2. Front-end Fee, Origination Fee, Attorney’s Fee and other

expenses of collection;

3. Penalty charges;

4. Past due interest;

5. Principal amortization/Payment in arrears;

6. Advance interest;

7. Outstanding balance; and

8. All other obligations of CLIENT to the BANK, if any.25

Thus, according to UCPB, the interest charges, penalty charges, and

attorney’s fees had been erroneously excluded by the RTC and the Court
of Appeals from the computation of the total amount due and demandable
from spouses Beluso.

The spouses Beluso’s defense as to all these issues is that the demand
made by UCPB is for a considerably bigger amount and, therefore, the
demand should be considered void. There being no valid demand,
according to the spouses Beluso, there would be no default, and therefore
the interests and penalties would not commence to run. As it was likewise
improper to foreclose the mortgaged properties or file a case against the
spouses Beluso, attorney’s fees were not warranted.

We agree with UCPB on this score. Default commences upon judicial or

extrajudicial demand.26 The excess amount in such a demand does not
nullify the demand itself, which is valid with respect to the proper amount. A
contrary ruling would put commercial transactions in disarray, as validity of
demands would be dependent on the exactness of the computations
thereof, which are too often contested.

There being a valid demand on the part of UCPB, albeit excessive, the
spouses Beluso are considered in default with respect to the proper
amount and, therefore, the interests and the penalties began to run at that
point.

As regards the award of 12% legal interest in favor of petitioner, the RTC
actually recognized that said legal interest should be imposed, thus: "There
being no valid stipulation as to interest, the legal rate of interest shall be
charged."27 It seems that the RTC inadvertently overlooked its non-
inclusion in its computation.

The spouses Beluso had even originally asked for the RTC to impose this
legal rate of interest in both the body and the prayer of its petition with the
RTC:

12. Since the provision on the fixing of the rate of interest by the sole will of
the respondent Bank is null and void, only the legal rate of interest which is
12% per annum can be legally charged and imposed by the bank, which
would amount to only about P599,000.00 since 1996 up to August 31,
1998.

xxxx
WHEREFORE, in view of the foregoing, petiitoners pray for judgment or
order:

xxxx

2. By way of example for the public good against the Bank’s taking unfair
advantage of the weaker party to their contract, declaring the legal rate of
12% per annum, as the imposable rate of interest up to February 28, 1999
on the loan of 2.350 million.28

All these show that the spouses Beluso had acknowledged before the RTC
their obligation to pay a 12% legal interest on their loans. When the RTC
failed to include the 12% legal interest in its computation, however, the
spouses Beluso merely defended in the appellate courts this non-inclusion,
as the same was beneficial to them. We see, however, sufficient basis to
impose a 12% legal interest in favor of petitioner in the case at bar, as what
we have voided is merely the stipulated rate of interest and not the
stipulation that the loan shall earn interest.

We must likewise uphold the contract stipulation providing the

compounding of interest. The provisions in the Credit Agreement and in the
promissory notes providing for the compounding of interest were neither
nullified by the RTC or the Court of Appeals, nor assailed by the spouses
Beluso in their petition with the RTC. The compounding of interests has
furthermore been declared by this Court to be legal. We have held in Tan v.
Court of Appeals,29 that:

Without prejudice to the provisions of Article 2212, interest due and unpaid
shall not earn interest. However, the contracting parties may by stipulation
capitalize the interest due and unpaid, which as added principal, shall earn
new interest.

As regards the imposition of penalties, however, although we are likewise

upholding the imposition thereof in the contract, we find the rate iniquitous.
Like in the case of grossly excessive interests, the penalty stipulated in the
contract may also be reduced by the courts if it is iniquitous or
unconscionable.30

We find the penalty imposed by UCPB, ranging from 30.41% to 36%, to be

iniquitous considering the fact that this penalty is already over and above
the compounded interest likewise imposed in the contract. If a 36% interest
in itself has been declared unconscionable by this Court,31 what more a
30.41% to 36% penalty, over and above the payment of compounded
interest? UCPB itself must have realized this, as it gave us a sample
computation of the spouses Beluso’s obligation if both the interest and the
penalty charge are reduced to 12%.

As regards the attorney’s fees, the spouses Beluso can actually be liable
therefor even if there had been no demand. Filing a case in court is the
judicial demand referred to in Article 116932 of the Civil Code, which would
put the obligor in delay.

The RTC, however, also held UCPB liable for attorney’s fees in this case,
as the spouses Beluso were forced to litigate the issue on the illegality of
the interest rate provision of the promissory notes. The award of attorney’s
fees, it must be recalled, falls under the sound discretion of the
court.33 Since both parties were forced to litigate to protect their respective
rights, and both are entitled to the award of attorney’s fees from the other,
practical reasons dictate that we set off or compensate both parties’
liabilities for attorney’s fees. Therefore, instead of awarding attorney’s fees
in favor of petitioner, we shall merely affirm the deletion of the award of
attorney’s fees to the spouses Beluso.

In sum, we hold that spouses Beluso should still be held liable for a
compounded legal interest of 12% per annum and a penalty charge of 12%
per annum. We also hold that, instead of awarding attorney’s fees in favor
of petitioner, we shall merely affirm the deletion of the award of attorney’s
fees to the spouses Beluso.

Annulment of the Foreclosure Sale

Properties of spouses Beluso had been foreclosed, titles to which had

already been consolidated on 19 February 2001 and 20 March 2001 in the
name of UCPB, as the spouses Beluso failed to exercise their right of
redemption which expired on 25 March 2000. The RTC, however, annulled
the foreclosure of mortgage based on an alleged incorrect computation of
the spouses Beluso’s indebtedness.

UCPB alleges that none of the grounds for the annulment of a foreclosure
sale are present in the case at bar. Furthermore, the annulment of the
foreclosure proceedings and the certificates of sale were mooted by the
subsequent issuance of new certificates of title in the name of said bank.
UCPB claims that the spouses Beluso’s action for annulment of foreclosure
constitutes a collateral attack on its certificates of title, an act proscribed by
Section 48 of Presidential Decree No. 1529, otherwise known as the
Property Registration Decree, which provides:

Section 48. Certificate not subject to collateral attack. – A certificate of title

shall not be subject to collateral attack. It cannot be altered, modified or
cancelled except in a direct proceeding in accordance with law.

The spouses Beluso retort that since they had the right to refuse payment
of an excessive demand on their account, they cannot be said to be in
default for refusing to pay the same. Consequently, according to the
spouses Beluso, the "enforcement of such illegal and overcharged demand
through foreclosure of mortgage" should be voided.

We agree with UCPB and affirm the validity of the foreclosure proceedings.
Since we already found that a valid demand was made by UCPB upon the
spouses Beluso, despite being excessive, the spouses Beluso are
considered in default with respect to the proper amount of their obligation to
UCPB and, thus, the property they mortgaged to secure such amounts may
be foreclosed. Consequently, proceeds of the foreclosure sale should be
applied to the extent of the amounts to which UCPB is rightfully entitled.

As argued by UCPB, none of the grounds for the annulment of a

foreclosure sale are present in this case. The grounds for the proper
annulment of the foreclosure sale are the following: (1) that there was
fraud, collusion, accident, mutual mistake, breach of trust or misconduct by
the purchaser; (2) that the sale had not been fairly and regularly conducted;
or (3) that the price was inadequate and the inadequacy was so great as to
shock the conscience of the court.34

Liability for Violation of Truth in Lending Act

The RTC, affirmed by the Court of Appeals, imposed a fine of ₱26,000.00

for UCPB’s alleged violation of Republic Act No. 3765, otherwise known as
the Truth in Lending Act.

UCPB challenges this imposition, on the argument that Section 6(a) of the
Truth in Lending Act which mandates the filing of an action to recover such
penalty must be made under the following circumstances:
Section 6. (a) Any creditor who in connection with any credit transaction
fails to disclose to any person any information in violation of this Act or any
regulation issued thereunder shall be liable to such person in the amount of
₱100 or in an amount equal to twice the finance charge required by such
creditor in connection with such transaction, whichever is greater, except
that such liability shall not exceed ₱2,000 on any credit transaction. Action
to recover such penalty may be brought by such person within one year
from the date of the occurrence of the violation, in any court of competent
jurisdiction. x x x (Emphasis ours.)

According to UCPB, the Court of Appeals even stated that "[a]dmittedly the
original complaint did not explicitly allege a violation of the ‘Truth in Lending
Act’ and no action to formally admit the amended petition [which expressly
alleges violation of the Truth in Lending Act] was made either by
[respondents] spouses Beluso and the lower court. x x x."35

UCPB further claims that the action to recover the penalty for the violation
of the Truth in Lending Act had been barred by the one-year prescriptive
period provided for in the Act. UCPB asserts that per the records of the
case, the latest of the subject promissory notes had been executed on 2
January 1998, but the original petition of the spouses Beluso was filed
before the RTC on 9 February 1999, which was after the expiration of the
period to file the same on 2 January 1999.

On the matter of allegation of the violation of the Truth in Lending Act, the
Court of Appeals ruled:

Admittedly the original complaint did not explicitly allege a violation of the
‘Truth in Lending Act’ and no action to formally admit the amended petition
was made either by [respondents] spouses Beluso and the lower court. In
such transactions, the debtor and the lending institutions do not deal on an
equal footing and this law was intended to protect the public from hidden or
undisclosed charges on their loan obligations, requiring a full disclosure
thereof by the lender. We find that its infringement may be inferred or
implied from allegations that when [respondents] spouses Beluso executed
the promissory notes, the interest rate chargeable thereon were left blank.
Thus, [petitioner] UCPB failed to discharge its duty to disclose in full to
[respondents] Spouses Beluso the charges applicable on their loans.36
We agree with the Court of Appeals. The allegations in the complaint, much
more than the title thereof, are controlling. Other than that stated by the
Court of Appeals, we find that the allegation of violation of the Truth in
Lending Act can also be inferred from the same allegation in the complaint
we discussed earlier:

b.) In unilaterally imposing an increased interest rates (sic) respondent

bank has relied on the provision of their promissory note granting
respondent bank the power to unilaterally fix the interest rates, which rate
was not determined in the promissory note but was left solely to the will of
the Branch Head of the respondent Bank, x x x.37

The allegation that the promissory notes grant UCPB the power to
unilaterally fix the interest rates certainly also means that the promissory
notes do not contain a "clear statement in writing" of "(6) the finance charge
expressed in terms of pesos and centavos; and (7) the percentage that the
finance charge bears to the amount to be financed expressed as a simple
annual rate on the outstanding unpaid balance of the
obligation."38 Furthermore, the spouses Beluso’s prayer "for such other
reliefs just and equitable in the premises" should be deemed to include the
civil penalty provided for in Section 6(a) of the Truth in Lending Act.

UCPB’s contention that this action to recover the penalty for the violation of
the Truth in Lending Act has already prescribed is likewise without merit.
The penalty for the violation of the act is ₱100 or an amount equal to twice
the finance charge required by such creditor in connection with such
transaction, whichever is greater, except that such liability shall not exceed
₱2,000.00 on any credit transaction.39 As this penalty depends on the
finance charge required of the borrower, the borrower’s cause of action
would only accrue when such finance charge is required. In the case at bar,
the date of the demand for payment of the finance charge is 2 September
1998, while the foreclosure was made on 28 December 1998. The filing of
the case on 9 February 1999 is therefore within the one-year prescriptive
period.

UCPB argues that a violation of the Truth in Lending Act, being a criminal
offense, cannot be inferred nor implied from the allegations made in the
complaint.40 Pertinent provisions of the Act read:
Sec. 6. (a) Any creditor who in connection with any credit transaction fails
to disclose to any person any information in violation of this Act or any
regulation issued thereunder shall be liable to such person in the amount of
₱100 or in an amount equal to twice the finance charge required by such
creditor in connection with such transaction, whichever is the greater,
except that such liability shall not exceed ₱2,000 on any credit transaction.
Action to recover such penalty may be brought by such person within one
year from the date of the occurrence of the violation, in any court of
competent jurisdiction. In any action under this subsection in which any
person is entitled to a recovery, the creditor shall be liable for reasonable
attorney’s fees and court costs as determined by the court.

xxxx

(c) Any person who willfully violates any provision of this Act or any
regulation issued thereunder shall be fined by not less than ₱1,000 or more
than ₱5,000 or imprisonment for not less than 6 months, nor more than one
year or both.

As can be gleaned from Section 6(a) and (c) of the Truth in Lending Act,
the violation of the said Act gives rise to both criminal and civil liabilities.
Section 6(c) considers a criminal offense the willful violation of the Act,
imposing the penalty therefor of fine, imprisonment or both. Section 6(a),
on the other hand, clearly provides for a civil cause of action for failure to
disclose any information of the required information to any person in
violation of the Act. The penalty therefor is an amount of ₱100 or in an
amount equal to twice the finance charge required by the creditor in
connection with such transaction, whichever is greater, except that the
liability shall not exceed ₱2,000.00 on any credit transaction. The action to
recover such penalty may be instituted by the aggrieved private person
separately and independently from the criminal case for the same offense.

In the case at bar, therefore, the civil action to recover the penalty under
Section 6(a) of the Truth in Lending Act had been jointly instituted with (1)
the action to declare the interests in the promissory notes void, and (2) the
action to declare the foreclosure void. This joinder is allowed under Rule 2,
Section 5 of the Rules of Court, which provides:
SEC. 5. Joinder of causes of action.—A party may in one pleading assert,
in the alternative or otherwise, as many causes of action as he may have
against an opposing party, subject to the following conditions:

(a) The party joining the causes of action shall comply with the rules
on joinder of parties;

(b) The joinder shall not include special civil actions or actions
governed by special rules;

(c) Where the causes of action are between the same parties but
pertain to different venues or jurisdictions, the joinder may be allowed
in the Regional Trial Court provided one of the causes of action falls
within the jurisdiction of said court and the venue lies therein; and

(d) Where the claims in all the causes of action are principally for
recovery of money, the aggregate amount claimed shall be the test of
jurisdiction.

In attacking the RTC’s disposition on the violation of the Truth in Lending

Act since the same was not alleged in the complaint, UCPB is actually
asserting a violation of due process. Indeed, due process mandates that a
defendant should be sufficiently apprised of the matters he or she would be
defending himself or herself against. However, in the 1 July 1999 pre-trial
brief filed by the spouses Beluso before the RTC, the claim for civil
sanctions for violation of the Truth in Lending Act was expressly alleged,
thus:

Moreover, since from the start, respondent bank violated the Truth in
Lending Act in not informing the borrower in writing before the execution of
the Promissory Notes of the interest rate expressed as a percentage of the
total loan, the respondent bank instead is liable to pay petitioners double
the amount the bank is charging petitioners by way of sanction for its
violation.41

In the same pre-trial brief, the spouses Beluso also expressly raised the
following issue:

b.) Does the expression indicative rate of DBD retail (sic) comply with the
Truth in Lending Act provision to express the interest rate as a simple
annual percentage of the loan?42
These assertions are so clear and unequivocal that any attempt of UCPB to
feign ignorance of the assertion of this issue in this case as to prevent it
from putting up a defense thereto is plainly hogwash.

Petitioner further posits that it is the Metropolitan Trial Court which has
jurisdiction to try and adjudicate the alleged violation of the Truth in Lending
Act, considering that the present action allegedly involved a single credit
transaction as there was only one Promissory Note Line.

We disagree. We have already ruled that the action to recover the penalty
under Section 6(a) of the Truth in Lending Act had been jointly instituted
with (1) the action to declare the interests in the promissory notes void, and
(2) the action to declare the foreclosure void. There had been no question
that the above actions belong to the jurisdiction of the RTC. Subsection (c)
of the above-quoted Section 5 of the Rules of Court on Joinder of Causes
of Action provides:

(c) Where the causes of action are between the same parties but pertain to
different venues or jurisdictions, the joinder may be allowed in the Regional
Trial Court provided one of the causes of action falls within the jurisdiction
of said court and the venue lies therein.

Furthermore, opening a credit line does not create a credit transaction of

loan or mutuum, since the former is merely a preparatory contract to the
contract of loan or mutuum. Under such credit line, the bank is merely
obliged, for the considerations specified therefor, to lend to the other party
amounts not exceeding the limit provided. The credit transaction thus
occurred not when the credit line was opened, but rather when the credit
line was availed of. In the case at bar, the violation of the Truth in Lending
Act allegedly occurred not when the parties executed the Credit
Agreement, where no interest rate was mentioned, but when the parties
executed the promissory notes, where the allegedly offending interest rate
was stipulated.

UCPB further argues that since the spouses Beluso were duly given copies
of the subject promissory notes after their execution, then they were duly
notified of the terms thereof, in substantial compliance with the Truth in
Lending Act.
Once more, we disagree. Section 4 of the Truth in Lending Act clearly
provides that the disclosure statement must be furnished prior to the
consummation of the transaction:

SEC. 4. Any creditor shall furnish to each person to whom credit is

extended, prior to the consummation of the transaction, a clear statement
in writing setting forth, to the extent applicable and in accordance with rules
and regulations prescribed by the Board, the following information:

(1) the cash price or delivered price of the property or service to be

acquired;

(2) the amounts, if any, to be credited as down payment and/or trade-

in;

(3) the difference between the amounts set forth under clauses (1)
and (2)

(4) the charges, individually itemized, which are paid or to be paid by

such person in connection with the transaction but which are not
incident to the extension of credit;

(5) the total amount to be financed;

(6) the finance charge expressed in terms of pesos and centavos;

and

(7) the percentage that the finance bears to the total amount to be
financed expressed as a simple annual rate on the outstanding
unpaid balance of the obligation.

The rationale of this provision is to protect users of credit from a lack of

awareness of the true cost thereof, proceeding from the experience that
banks are able to conceal such true cost by hidden charges, uncertainty of
interest rates, deduction of interests from the loaned amount, and the like.
The law thereby seeks to protect debtors by permitting them to fully
appreciate the true cost of their loan, to enable them to give full consent to
the contract, and to properly evaluate their options in arriving at business
decisions. Upholding UCPB’s claim of substantial compliance would defeat
these purposes of the Truth in Lending Act. The belated discovery of the
true cost of credit will too often not be able to reverse the ill effects of an
already consummated business decision.

In addition, the promissory notes, the copies of which were presented to

the spouses Beluso after execution, are not sufficient notification from
UCPB. As earlier discussed, the interest rate provision therein does not
sufficiently indicate with particularity the interest rate to be applied to the
loan covered by said promissory notes.

Forum Shopping

UCPB had earlier moved to dismiss the petition (originally Case No. 99-314
in RTC, Makati City) on the ground that the spouses Beluso instituted
another case (Civil Case No. V-7227) before the RTC of Roxas City,
involving the same parties and issues. UCPB claims that while Civil Case
No. V-7227 initially appears to be a different action, as it prayed for the
issuance of a temporary restraining order and/or injunction to stop
foreclosure of spouses Beluso’s properties, it poses issues which are
similar to those of the present case.43 To prove its point, UCPB cited the
spouses Beluso’s Amended Petition in Civil Case No. V-7227, which
contains similar allegations as those in the present case. The RTC of
Makati denied UCPB’s Motion to Dismiss Case No. 99-314 for lack of merit.
Petitioner UCPB raised the same issue with the Court of Appeals, and is
raising the same issue with us now.

The spouses Beluso claim that the issue in Civil Case No. V-7227 before
the RTC of Roxas City, a Petition for Injunction Against Foreclosure, is the
propriety of the foreclosure before the true account of spouses Beluso is
determined. On the other hand, the issue in Case No. 99-314 before the
RTC of Makati City is the validity of the interest rate provision. The spouses
Beluso claim that Civil Case No. V-7227 has become moot because, before
the RTC of Roxas City could act on the restraining order, UCPB proceeded
with the foreclosure and auction sale. As the act sought to be restrained by
Civil Case No. V-7227 has already been accomplished, the spouses
Beluso had to file a different action, that of Annulment of the Foreclosure
Sale, Case No. 99-314 with the RTC, Makati City.

Even if we assume for the sake of argument, however, that only one cause
of action is involved in the two civil actions, namely, the violation of the right
of the spouses Beluso not to have their property foreclosed for an amount
they do not owe, the Rules of Court nevertheless allows the filing of the
second action. Civil Case No. V-7227 was dismissed by the RTC of Roxas
City before the filing of Case No. 99-314 with the RTC of Makati City, since
the venue of litigation as provided for in the Credit Agreement is in Makati
City.

Rule 16, Section 5 bars the refiling of an action previously dismissed only in
the following instances:

SEC. 5. Effect of dismissal.—Subject to the right of appeal, an order

granting a motion to dismiss based on paragraphs (f), (h) and (i) of section
1 hereof shall bar the refiling of the same action or claim. (n)

Improper venue as a ground for the dismissal of an action is found in

paragraph (c) of Section 1, not in paragraphs (f), (h) and (i):

SECTION 1. Grounds.—Within the time for but before filing the answer to
the complaint or pleading asserting a claim, a motion to dismiss may be
made on any of the following grounds:

(a) That the court has no jurisdiction over the person of the defending
party;

(b) That the court has no jurisdiction over the subject matter of the
claim;

(c) That venue is improperly laid;

(d) That the plaintiff has no legal capacity to sue;

(e) That there is another action pending between the same parties for
the same cause;

(f) That the cause of action is barred by a prior judgment or by the

statute of limitations;

(g) That the pleading asserting the claim states no cause of action;

(h) That the claim or demand set forth in the plaintiff’s pleading has
been paid, waived, abandoned, or otherwise extinguished;
 (i) That the claim on which the action is founded is unenforceable
under the provisions of the statute of frauds; and

(j) That a condition precedent for filing the claim has not been
complied with.44 (Emphases supplied.)

When an action is dismissed on the motion of the other party, it is only

when the ground for the dismissal of an action is found in paragraphs (f),
(h) and (i) that the action cannot be refiled. As regards all the other
grounds, the complainant is allowed to file same action, but should take
care that, this time, it is filed with the proper court or after the
accomplishment of the erstwhile absent condition precedent, as the case
may be.

UCPB, however, brings to the attention of this Court a Motion for

Reconsideration filed by the spouses Beluso on 15 January 1999 with the
RTC of Roxas City, which Motion had not yet been ruled upon when the
spouses Beluso filed Civil Case No. 99-314 with the RTC of Makati. Hence,
there were allegedly two pending actions between the same parties on the
same issue at the time of the filing of Civil Case No. 99-314 on 9 February
1999 with the RTC of Makati. This will still not change our findings. It is
indeed the general rule that in cases where there are two pending actions
between the same parties on the same issue, it should be the later case
that should be dismissed. However, this rule is not absolute. According to
this Court in Allied Banking Corporation v. Court of Appeals45 :

In these cases, it is evident that the first action was filed in anticipation of
the filing of the later action and the purpose is to preempt the later suit or
provide a basis for seeking the dismissal of the second action.

Even if this is not the purpose for the filing of the first action, it may
nevertheless be dismissed if the later action is the more appropriate vehicle
for the ventilation of the issues between the parties. Thus, in Ramos v.
Peralta, it was held:

[T]he rule on litis pendentia does not require that the later case should yield
to the earlier case. What is required merely is that there be another
pending action, not a prior pending action. Considering the broader scope
of inquiry involved in Civil Case No. 4102 and the location of the property
involved, no error was committed by the lower court in deferring to the
Bataan court's jurisdiction.
Given, therefore, the pendency of two actions, the following are the
relevant considerations in determining which action should be dismissed:
(1) the date of filing, with preference generally given to the first action filed
to be retained; (2) whether the action sought to be dismissed was filed
merely to preempt the later action or to anticipate its filing and lay the basis
for its dismissal; and (3) whether the action is the appropriate vehicle for
litigating the issues between the parties.

In the case at bar, Civil Case No. V-7227 before the RTC of Roxas City
was an action for injunction against a foreclosure sale that has already
been held, while Civil Case No. 99-314 before the RTC of Makati City
includes an action for the annulment of said foreclosure, an action certainly
more proper in view of the execution of the foreclosure sale. The former
case was improperly filed in Roxas City, while the latter was filed in Makati
City, the proper venue of the action as mandated by the Credit Agreement.
It is evident, therefore, that Civil Case No. 99-314 is the more appropriate
vehicle for litigating the issues between the parties, as compared to Civil
Case No. V-7227. Thus, we rule that the RTC of Makati City was not in
error in not dismissing Civil Case No. 99-314.

WHEREFORE, the Decision of the Court of Appeals is hereby AFFIRMED

with the following MODIFICATIONS:

1. In addition to the sum of ₱2,350,000.00 as determined by the

courts a quo, respondent spouses Samuel and Odette Beluso are
also liable for the following amounts:

a. Penalty of 12% per annum on the amount due46 from the

date of demand; and

b. Compounded legal interest of 12% per annum on the amount

due47 from date of demand;

2. The following amounts shall be deducted from the liability of the

spouses Samuel and Odette Beluso:

a. Payments made by the spouses in the amount of

₱763,692.00. These payments shall be applied to the date of
actual payment of the following in the order that they are listed,
to wit:
 i. penalty charges due and demandable as of the time of
payment;

ii. interest due and demandable as of the time of

payment;

iii. principal amortization/payment in arrears as of the time

of payment;

iv. outstanding balance.

b. Penalty under Republic Act No. 3765 in the amount of

₱26,000.00. This amount shall be deducted from the liability of
the spouses Samuel and Odette Beluso on 9 February 1999 to
the following in the order that they are listed, to wit:

i. penalty charges due and demandable as of time of

payment;

ii. interest due and demandable as of the time of

payment;

iii. principal amortization/payment in arrears as of the time

of payment;

iv. outstanding balance.

3. The foreclosure of mortgage is hereby declared VALID.

Consequently, the amounts which the Regional Trial Court and the
Court of Appeals ordered respondents to pay, as modified in this
Decision, shall be deducted from the proceeds of the foreclosure
sale.

SO ORDERED.

MINITA V. CHICO-NAZARIO
Associate Justice

WE CONCUR:
UCPB vs Spouses Beluso
GR No. 159912, August 17, 2007
Ponente: Chico-Nazario, J.
Facts:
1. Petition for Review on Certiorari declaring void the interest rate
provided in the promissory notes executed by the respondents
Spouses Samuel and Odette Beluso (spouses Beluso) in favor of
petitioner United Coconut Planters Bank (UCPB)
2. UCPB granted the spouses Beluso a Promissory Notes Line under a
Credit Agreement whereby the latter could avail from the former
credit of up to a maximum amount of P1.2 Million pesos for a term
ending on 30 April 1997. The spouses Beluso constituted, other than
their promissory notes, a real estate mortgage over parcels of land
in Roxas City, covered by Transfer Certificates of Title No. T-31539 and
T-27828, as additional security for the obligation. The Credit
Agreement was subsequently amended to increase the amount of the
Promissory Notes Line to a maximum of P2.35 Million pesos and to
extend the term thereof to 28 February 1998.
3. On 30 April 1997, the payment of the principal and interest of the
latter two promissory notes were debited from the spouses Beluso’s
account with UCPB; yet, a consolidated loan for P1.3 Million was again
released to the spouses Beluso under one promissory note with a due
date of 28 February 1998. To completely avail themselves of the P2.35
Million credit line extended to them by UCPB, the spouses Beluso
executed two more promissory notes for a total of P350,000.00.
However, the spouses Beluso alleged that the amounts covered by
these last two promissory notes were never released or credited to
their account and, thus, claimed that the principal indebtedness was
only P2 Million.
4. The spouses Beluso, however, failed to make any payment of the
foregoing amounts.
5. On 2 September 1998, UCPB demanded that the spouses Beluso pay
their total obligation of P2,932,543.00 plus 25% attorney’s fees, but
the spouses Beluso failed to comply therewith. On 28 December
1998, UCPB foreclosed the properties mortgaged by the spouses
 Beluso to secure their credit line, which, by that time, already
ballooned to P3,784,603.00.
6. On 9 February 1999, the spouses Beluso filed a Petition for Annulment,
Accounting and Damages against UCPB with the RTC of Makati City.
7. Trial court declared in its judgment that:
a. the interest rate used by [UCPB] void
b. the foreclosure and Sheriff’s Certificate of Sale void
c. UCPB is ordered to return to [the spouses Beluso] the properties
subject of the foreclosure
d. UCPB to pay [the spouses Beluso] the amount of P50,000.00 by way
of attorney’s fees
e. UCPB to pay the costs of suit.
f. Spouses Beluso] are hereby ordered to pay [UCPB] the sum
of P1,560,308.00.
8. Court of Appeals affirmed Trial court's decision subject to the
modification that defendant-appellant UCPB is not liable for attorney’s
fees or the costs of suit.

ISSUES:
1. Whether or not interest rate stipulated was void
Yes, stipulated interest rate is void because it contravenes on the principle of
mutuality of contracts and it violates the Truth in lending Act.

The provision stating that the interest shall be at the “rate indicative of DBD
retail rate or as determined by the Branch Head” is indeed dependent solely on
the will of petitioner UCPB. Under such provision, petitioner UCPB has two
choices on what the interest rate shall be: (1) a rate indicative of the DBD retail
rate; or (2) a rate as determined by the Branch Head. As UCPB is given this
choice, the rate should be categorically determinable in both choices. If either
of these two choices presents an opportunity for UCPB to fix the rate at will, the
bank can easily choose such an option, thus making the entire interest rate
provision violative of the principle of mutuality of contracts.

In addition, the promissory notes, the copies of which were presented to the
spouses Beluso after execution, are not sufficient notification from UCPB. As
earlier discussed, the interest rate provision therein does not sufficiently
 indicate with particularity the interest rate to be applied to the loan covered by
said promissory notes which is required in TRuth in Lending Act

2. Whether or not Spouses Beluso are subject to 12% interest and

compounding interest stipulations even if declared amount by UCPB was
excessive.

Yes. Default commences upon judicial or extrajudicial demand.[26] The excess

amount in such a demand does not nullify the demand itself, which is valid with
respect to the proper amount. There being a valid demand on the part of UCPB,
albeit excessive, the spouses Beluso are considered in default with respect to
the proper amount and, therefore, the interests and the penalties began to run
at that point. As regards the award of 12% legal interest in favor of petitioner,
the RTC actually recognized that said legal interest should be imposed, thus:
“There being no valid stipulation as to interest, the legal rate of interest shall be
charged.”[27] It seems that the RTC inadvertently overlooked its non-inclusion in
its computation. It must likewise uphold the contract stipulation providing the
compounding of interest. The provisions in the Credit Agreement and in the
promissory notes providing for the compounding of interest were neither
nullified by the RTC or the Court of Appeals, nor assailed by the spouses Beluso
in their petition with the RTC. The compounding of interests has furthermore
been declared by this Court to be legal.

3. Whether or not foreclosure was void

No. The foreclosure proceedings are valid since there was a valid demand made
by UCPB upon the spouses Beluso. Despite being excessive, the spouses Beluso
are considered in default with respect to the proper amount of their obligation
to UCPB and, thus, the property they mortgaged to secure such amounts may
be foreclosed. Consequently, proceeds of the foreclosure sale should be applied
to the extent of the amounts to which UCPB is rightfully entitled.

25. BPI Employees Union-Davao City FUBU vs. Bank of the

Philippine Islands GR. No. 174912, July 24, 2013

G.R. No. 174912 July 24, 2013

BPI EMPLOYEES UNION-DAVAO CITY-FUBU (BPIEU-DAVAO CITY-
FUBU), Petitioner,
vs.
BANK OF THE PHILIPPINE ISLANDS (BPI), and BPI OFFICERS CLARO
M. REYES, CECIL CONANAN and GEMMA VELEZ, Respondents.

DECISION

MENDOZA, J.:

Before the Court is a petition for review on certiorari under Rule 45 of the
1997 Rules of Civil Procedure, assailing the April 5, 2006 Decision1 and
August 17, 2006 Resolution2 of the Court of Appeals (CA) in CA-G.R. SP
No. 74595 affirming the December 21, 20013 and August 23,
20024 Resolutions of the National Labor Relations Commission (NLRC) in
declaring as valid and legal the action of respondent Bank of the Philippine
Islands-Davao City (BPI-Davao) in contracting out certain functions to BPI
Operations Management Corporation (BOMC).

The Factual Antecedents

BOMC, which was created pursuant to Central Bank5 Circular No. 1388,
Series of 1993 (CBP Circular No. 1388, 1993), and primarily engaged in
providing and/or handling support services for banks and other financial
institutions, is a subsidiary of the Bank of Philippine Islands (BPI) operating
and functioning as an entirely separate and distinct entity.

A service agreement between BPI and BOMC was initially implemented in

BPI’s Metro Manila branches. In this agreement, BOMC undertook to
provide services such as check clearing, delivery of bank statements, fund
transfers, card production, operations accounting and control, and cash
servicing, conformably with BSP Circular No. 1388. Not a single BPI
employee was displaced and those performing the functions, which were
transferred to BOMC, were given other assignments.

The Manila chapter of BPI Employees Union (BPIEU-Metro ManilaFUBU)

then filed a complaint for unfair labor practice (ULP). The Labor Arbiter (LA)
decided the case in favor of the union. The decision was, however,
reversed on appeal by the NLRC. BPIEU-Metro Manila-FUBU filed a
petition for certiorari before the CA which denied it, holding that BPI
transferred the employees in the affected departments in the pursuit of its
legitimate business. The employees were neither demoted nor were their
salaries, benefits and other privileges diminished.6

On January 1, 1996, the service agreement was likewise implemented in

Davao City. Later, a merger between BPI and Far East Bank and Trust
Company (FEBTC) took effect on April 10, 2000 with BPI as the surviving
corporation. Thereafter, BPI’s cashiering function and FEBTC’s cashiering,
distribution and bookkeeping functions were handled by BOMC.
Consequently, twelve (12) former FEBTC employees were transferred to
BOMC to complete the latter’s service complement.

BPI Davao’s rank and file collective bargaining agent, BPI Employees
Union-Davao City-FUBU (Union), objected to the transfer of the functions
and the twelve (12) personnel to BOMC contending that the functions
rightfully belonged to the BPI employees and that the Union was deprived
of membership of former FEBTC personnel who, by virtue of the merger,
would have formed part of the bargaining unit represented by the Union
pursuant to its union shop provision in the CBA.7

The Union then filed a formal protest on June 14, 2000 addressed to BPI
Vice Presidents Claro M. Reyes and Cecil Conanan reiterating its
objection. It requested the BPI management to submit the BOMC issue to
the grievance procedure under the CBA, but BPI did not consider it as
"grievable." Instead, BPI proposed a Labor Management Conference
(LMC) between the parties.8

During the LMC, BPI invoked management prerogative stating that the
creation of the BOMC was to preserve more jobs and to designate it as an
agency to place employees where they were most needed. On the other
hand, the Union charged that BOMC undermined the existence of the union
since it reduced or divided the bargaining unit. While BOMC employees
perform BPI functions, they were beyond the bargaining unit’s coverage. In
contracting out FEBTC functions to BOMC, BPI effectively deprived the
union of the membership of employees handling said functions as well as
curtailed the right of those employees to join the union.

Thereafter, the Union demanded that the matter be submitted to the

grievance machinery as the resort to the LMC was unsuccessful. As BPI
allegedly ignored the demand, the Union filed a notice of strike before the
National Conciliation and Mediation Board (NCMB) on the following
grounds:

a) Contracting out services/functions performed by union members

that interfered with, restrained and/or coerced the employees in the
exercise of their right to self-organization;

b) Violation of duty to bargain; and

c) Union busting.9

BPI then filed a petition for assumption of jurisdiction/certification with the

Secretary of the Department of Labor and Employment (DOLE), who
subsequently issued an order certifying the labor dispute to the NLRC for
compulsory arbitration. The DOLE Secretary directed the parties to cease
and desist from committing any act that might exacerbate the situation.

On October 27, 2000, a hearing was conducted. Thereafter, the parties

were required to submit their respective position papers. On November 29,
2000, the Union filed its Urgent Omnibus Motion to Cease and Desist with
a prayer that BPI-Davao and/or Mr. Claro M. Reyes and Mr. Cecil Conanan
be held in contempt for the following alleged acts of BPI:

1. The Bank created a Task Force Committee on November 20, 2000

composed of six (6) former FEBTC employees to handle the
Cashiering, Distributing, Clearing, Tellering and Accounting functions
of the former FEBTC branches but the "task force" conducts its
business at the office of the BOMC using the latter’s equipment and
facilities.

2. On November 27, 2000, the bank integrated the clearing

operations of the BPI and the FEBTC. The clearing function of BPI,
then solely handled by the BPI Processing Center prior to the labor
dispute, is now encroached upon by the BOMC because with the
merger, differences between BPI and FEBTC operations were
diminished or deleted. What the bank did was simply to get the total
of all clearing transactions under BPI but the BOMC employees
process the clearing of checks at the Clearing House as to checks
coming from former FEBTC branches. Prior to the labor dispute, the
run-up and distribution of the checks of BPI were returned to the BPI
processing center, now all checks whether of BPI or of FEBTC were
 brought to the BOMC. Since the clearing operations were previously
done by the BPI processing center with BPI employees, said function
should be performed by BPI employees and not by BOMC.10

On December 21, 2001, the NLRC came out with a resolution upholding
the validity of the service agreement between BPI and BOMC and
dismissing the charge of ULP. It ruled that the engagement by BPI of
BOMC to undertake some of its activities was clearly a valid exercise of its
management prerogative.11 It further stated that the spinning off by BPI to
BOMC of certain services and functions did not interfere with, restrain or
coerce employees in the exercise of their right to self-organization.12 The
Union did not present even an iota of evidence showing that BPI had
terminated employees, who were its members. In fact, BPI exerted utmost
diligence, care and effort to see to it that no union member was
terminated.13 The NLRC also stressed that Department Order (D.O.) No. 10
series of 1997, strongly relied upon by the Union, did not apply in this case
as BSP Circular No. 1388, series of 1993, was the applicable rule.

After the denial of its motion for reconsideration, the Union elevated its
grievance to the CA via a petition for certiorari under Rule 65. The CA,
however, affirmed the NLRC’s December 21, 2001 Resolution with
modification that the enumeration of functions listed under BSP Circular
No. 1388 in the said resolution be deleted. The CA noted at the outset that
the petition must be dismissed as it merely touched on factual matters
which were beyond the ambit of the remedy availed of.14 Be that as it may,
the CA found that the factual findings of the NLRC were supported by
substantial evidence and, thus, entitled to great respect and finality. To the
CA, the NLRC did not act with grave abuse of discretion as to merit the
reversal of the resolution.15

Furthermore, the CA ratiocinated that, considering the ramifications of the

corporate merger, it was well within BPI’s prerogatives "to determine what
additional tasks should be performed, who should best perform it and what
should be done to meet the exigencies of business."16 It pointed out that the
Union did not, by the mere fact of the merger, become the bargaining agent
of the merged employees17 as the Union’s right to represent said
employees did not arise until it was chosen by them.18
As to the applicability of D.O. No. 10, the CA agreed with the NLRC that the
said order did not apply as BPI, being a commercial bank, its transactions
were subject to the rules and regulations of the BSP.

Not satisfied, the Union filed a motion for reconsideration which was,
however, denied by the CA. 1âwphi1

Hence, the present petition with the following

ASSIGNMENT OF ERRORS:

A. THE PETITION BEFORE THE COURT OF APPEALS INVOLVED

QUESTIONS OF LAW AND ITS DECISION DID NOT ADDRESS
THE ISSUE OF WHETHER BPI’S ACT OF OUTSOURCING
FUNCTIONS FORMERLY PERFORMED BY UNION MEMBERS
VIOLATES THE CBA.

B. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING

THAT DOLE DEPARTMENT ORDER NO. 10 DOES NOT APPLY IN
THIS CASE.

The Union is of the position that the outsourcing of jobs included in the
existing bargaining unit to BOMC is a breach of the union-shop agreement
in the CBA. In transferring the former employees of FEBTC to BOMC
instead of absorbing them in BPI as the surviving corporation in the merger,
the number of positions covered by the bargaining unit was decreased,
resulting in the reduction of the Union’s membership. For the Union, BPI’s
act of arbitrarily outsourcing functions formerly performed by the Union
members and, in fact, transferring a number of its members beyond the
ambit of the Union, is a violation of the CBA and interfered with the
employees’ right to self organization. The Union insists that the CBA covers
the agreement with respect, not only to wages and hours of work, but to all
other terms and conditions of work. The union shop clause, being part of
these conditions, states that the regular employees belonging to the
bargaining unit, including those absorbed by way of the corporate merger,
were required to join the bargaining union "as a condition for employment."
Simply put, the transfer of former FEBTC employees to BOMC removed
them from the coverage of unionized establishment. While the Union
admitted that BPI has the prerogative to determine what should be done to
meet the exigencies of business in accordance with the case of Sime
Darby Pilipinas, Inc. v. NLRC,19 it insisted that the exercise of management
prerogative is not absolute, thus, requiring good faith and adherence to the
law and the CBA. Citing the case of Shell Oil Workers’ Union v. Shell
Company of the Philippines, Ltd.,20 the Union claims that it is unfair labor
practice for an employer to outsource the positions in the existing
bargaining unit.

Position of BPI-Davao

For its part, BPI defended the validity of its service agreement with BOMC
on three (3) grounds: 1] that it was pursuant to the prevailing law at that
time, CBP Circular No. 1388; 2] that the creation of BOMC was within
management prerogatives intended to streamline the operations and
provide focus for BPI’s core activities; and 3] that the Union recognized, in
its CBA, the exclusive right and prerogative of BPI to conduct the
management and operation of its business.21

BPI argues that the case of Shell Oil Workers’ Union v. Shell Company of
the Philippines, Ltd.,22 cited by the Union, is not on all fours with the present
case. In said case, the company dissolved its security guard section and
replaced it with an outside agency, claiming that such act was a valid
exercise of management prerogative. The Court, however, ruled against
the said outsourcing because there was an express assurance in the CBA
that the security guard section would continue to exist. Having failed to
reserve its right to effect a dissolution, the company’s act of outsourcing
and transferring security guards was invalidated by the Court, ruling that
the unfair labor practice strike called by the Union did have the impression
of validity. In contrast, there is no provision in the CBA between BPI and
the Union expressly stipulating the continued existence of any position
within the bargaining unit. For BPI, the absence of this peculiar fact is
enough reason to prevent the application of Shell to this case.

BPI likewise invokes settled jurisprudence,23 where the Court upheld the
acts of management to contract out certain functions held by employees,
and even notably those held by union members. In these cases, the
decision to outsource certain functions was a justifiable business judgment
which deserved no judicial interference. The only requisite of this act is
good faith on the part of the employer and the absence of malicious and
arbitrary action in the outsourcing of functions to BOMC.
On the issue of the alleged curtailment of the right of the employees to self-
organization, BPI refutes the Union’s allegation that ULP was committed
when the number of positions in the bargaining was reduced. It cites as
correct the CA ruling that the representation of the Union’s prospective
members is contingent on the choice of the employee, that is, whether or
not to join the Union. Hence, it was premature for the Union to claim that
the rights of its prospective members to self-organize were restrained by
the transfer of the former FEBTC employees to BOMC.

The Court’s Ruling

In essence, the primordial issue in this case is whether or not the act of BPI
to outsource the cashiering, distribution and bookkeeping functions to
BOMC is in conformity with the law and the existing CBA. Particularly in
dispute is the validity of the transfer of twelve (12) former FEBTC
employees to BOMC, instead of being absorbed in BPI after the corporate
merger. The Union claims that a union shop agreement is stipulated in the
existing CBA. It is unfair labor practice for employer to outsource the
positions in the existing bargaining unit, citing the case of Shell Oil

Workers’ Union v. Shell Company of the Philippines, Ltd.24

The Union’s reliance on the Shell Case is misplaced. The rule now is
covered by Article 261 of the Labor Code, which took effect on November
1, 1974.25 Article 261 provides:

ART. 261. Jurisdiction of Voluntary Arbitrators or panel of Voluntary

Arbitrators. – x x x Accordingly, violations of a Collective Bargaining
Agreement, except those which are gross in character, shall no longer be
treated as unfair labor practice and shall be resolved as grievances under
the Collective Bargaining Agreement. For purposes of this article, gross
violations of Collective Bargaining Agreement shall mean flagrant and/or
malicious refusal to comply with the economic provisions of such
agreement. [Emphases supplied]

Clearly, only gross violations of the economic provisions of the CBA are
treated as ULP. Otherwise, they are mere grievances.

In the present case, the alleged violation of the union shop agreement in
the CBA, even assuming it was malicious and flagrant, is not a violation of
an economic provision in the agreement. The provisions relied upon by the
Union were those articles referring to the recognition of the union as the
sole and exclusive bargaining representative of all rank-and-file employees,
as well as the articles on union security, specifically, the maintenance of
membership in good standing as a condition for continued employment and
the union shop clause.26 It failed to take into consideration its recognition of
the bank’s exclusive rights and prerogatives, likewise provided in the CBA,
which included the hiring of employees, promotion, transfers, and
dismissals for just cause and the maintenance of order, discipline and
efficiency in its operations.27

The Union, however, insists that jobs being outsourced to BOMC were
included in the existing bargaining unit, thus, resulting in a reduction of a
number of positions in such unit. The reduction interfered with the
employees’ right to self-organization because the power of a union
primarily depends on its strength in number.28

It is incomprehensible how the "reduction of positions in the collective

bargaining unit" interferes with the employees’ right to self-organization
because the employees themselves were neither transferred nor dismissed
from the service. As the NLRC clearly stated:

In the case at hand, the union has not presented even an iota of evidence
that petitioner bank has started to terminate certain employees, members
of the union. In fact, what appears is that the Bank has exerted utmost
diligence, care and effort to see to it that no union member has been
terminated. In the process of the consolidation or merger of the two banks
which resulted in increased diversification of functions, some of these non-
banking functions were merely transferred to the BOMC without affecting
the union membership.29

BPI stresses that not a single employee or union member was or would be
dislocated or terminated from their employment as a result of the Service
Agreement.30 Neither had it resulted in any diminution of salaries and
benefits nor led to any reduction of union membership.31

As far as the twelve (12) former FEBTC employees are concerned, the
Union failed to substantially prove that their transfer, made to complete
BOMC’s service complement, was motivated by ill will, anti-unionism or bad
faith so as to affect or interfere with the employees’ right to self-
organization.
It is to be emphasized that contracting out of services is not illegal
perse. It is an exercise of business judgment or management
1âwphi1

prerogative. Absent proof that the management acted in a malicious or

arbitrary manner, the Court will not interfere with the exercise of judgment
by an employer.32 In this case, bad faith cannot be attributed to BPI
because its actions were authorized by CBP Circular No. 1388, Series of
199333 issued by the Monetary Board of the then Central Bank of the
Philippines (now Bangko Sentral ng Pilipinas). The circular covered
amendments in Book I of the Manual of Regulations for Banks and Other
Financial Intermediaries, particularly on the matter of bank service
contracts. A finding of ULP necessarily requires the alleging party to prove
it with substantial evidence. Unfortunately, the Union failed to discharge
this burden.

Much has been said about the applicability of D.O. No. 10. Both the NLRC
and the CA agreed with BPI that the said order does not apply. With BPI,
as a commercial bank, its transactions are subject to the rules and
regulations of the governing agency which is the Bangko Sentral ng
Pilipinas.34 The Union insists that D.O. No. 10 should prevail.

The Court is of the view, however, that there is no conflict between D.O.
No. 10 and CBP Circular No. 1388. In fact, they complement each other.

Consistent with the maxim, interpretare et concordare leges legibus est

optimus interpretandi modus, a statute should be construed not only to be
consistent with itself but also to harmonize with other laws on the same
subject matter, as to form a complete, coherent and intelligible system of
jurisprudence.35 The seemingly conflicting provisions of a law or of two laws
must be harmonized to render each effective.36 It is only when
harmonization is impossible that resort must be made to choosing which
law to apply.37

In the case at bench, the Union submits that while the Central Bank
regulates banking, the Labor Code and its implementing rules regulate the
employment relationship. To this, the Court agrees. The fact that banks are
of a specialized industry must, however, be taken into account. The
competence in determining which banking functions may or may not be
outsourced lies with the BSP. This does not mean that banks can simply
outsource banking functions allowed by the BSP through its circulars,
without giving regard to the guidelines set forth under D.O. No. 10 issued
by the DOLE.

While D.O. No. 10, Series of 1997, enumerates the permissible contracting
or subcontracting activities, it is to be observed that, particularly in Sec.
6(d) invoked by the Union, the provision is general in character – "x x x
Works or services not directly related or not integral to the main business or
operation of the principal… x x x." This does not limit or prohibit the
appropriate government agency, such as the BSP, to issue rules,
regulations or circulars to further and specifically determine the permissible
services to be contracted out. CBP Circular No. 138838enumerated
functions which are ancillary to the business of banks, hence, allowed to be
outsourced. Thus, sanctioned by said circular, BPI outsourced the
cashiering (i.e., cash-delivery and deposit pick-up) and accounting
requirements of its Davao City branches.39 The Union even described the
extent of BPI’s actual and intended contracting out to BOMC as follows:

"As an initiatory move, the functions of the Cashiering Unit of the

Processing Center of BPI, handled by its regular rank and file employees
who are members of the Union, xxx [were] transferred to BOMC with the
Accounting Department as next in line. The Distributing, Clearing and
Bookkeeping functions of the Processing Center of the former FEBTC were
likewise contracted out to BOMC."40

Thus, the subject functions appear to be not in any way directly related to
the core activities of banks. They are functions in a processing center of
BPI which does not handle or manage deposit transactions. Clearly, the
functions outsourced are not inherent banking functions, and, thus, are well
within the permissible services under the circular.

The Court agrees with BPI that D.O. No. 10 is but a guide to determine
what functions may be contracted out, subject to the rules and established
jurisprudence on legitimate job contracting and prohibited labor-only
contracting.41 Even if the Court considers D.O. No. 10 only, BPI would still
be within the bounds of D.O. No. 10 when it contracted out the subject
functions. This is because the subject functions were not related or not
integral to the main business or operation of the principal which is the
lending of funds obtained in the form of deposits.42 From the very definition
of "banks" as provided under the General Banking Law, it can easily be
discerned that banks perform only two (2) main or basic functions – deposit
and loan functions. Thus, cashiering, distribution and bookkeeping are but
ancillary functions whose outsourcing is sanctioned under CBP Circular No.
1388 as well as D.O. No. 10. Even BPI itself recognizes that deposit and
loan functions cannot be legally contracted out as they are directly related
or integral to the main business or operation of banks. The CBP's Manual
of Regulations has even categorically stated and emphasized on the
prohibition against outsourcing inherent banking functions, which refer to
any contract between the bank and a service provider for the latter to
supply, or any act whereby the latter supplies, the manpower to service the
deposit transactions of the former.43

In one case, the Court held that it is management prerogative to farm out
any of its activities, regardless of whether such activity is peripheral or core
in nature.44 What is of primordial importance is that the service agreement
does not violate the employee's right to security of tenure and payment of
benefits to which he is entitled under the law. Furthermore, the outsourcing
must not squarely fall under labor-only contracting where the contractor or
sub-contractor merely recruits, supplies or places workers to perform a job,
work or service for a principal or if any of the following elements are
present:

i) The contractor or subcontractor does not have substantial capital or

investment which relates to the job, work or service to be performed
and the employees recruited, supplied or placed by such contractor
or subcontractor are performing activities which are directly related to
the main business of the principal; or

ii) The contractor does not exercise the right to control over the
performance of the work of the contractual employee.45

WHEREFORE, the petition is DENIED.

SO ORDERED.

JOSE CATRAL MENDOZA

Associate Justice

BPI EMPLOYEES UNION-DAVAO CITY-FUBU v. BANK OF

PHILIPPINE ISLANDS, GR No. 174912, 2013-07-24
Facts:
A service agreement between BPI and BOMC was initially implemented
in BPI's Metro Manila branches. In this agreement, BOMC undertook to
provide services such as check clearing, delivery of bank statements,
fund transfers, card production, operations accounting and control,... and
cash servicing, conformably with BSP Circular No. 1388. Not a single
BPI employee was displaced and those performing the functions, which
were transferred to BOMC, were given other assignments.
On January 1, 1996, the service agreement was likewise implemented in
Davao City. Later, a merger between BPI and Far East Bank and Trust
Company (FEBTC) took effect on April 10, 2000 with BPI as the
surviving corporation. Thereafter, BPI's cashiering function and
FEBTC's... cashiering, distribution and bookkeeping functions were
handled by BOMC. Consequently, twelve (12) former FEBTC employees
were transferred to BOMC to complete the latter's service complement.
BPI Davao's rank and file collective bargaining agent, BPI Employees
Union-Davao City-FUBU (Union), objected to the transfer of the
functions and the twelve (12) personnel to BOMC contending that the
functions rightfully belonged to the BPI employees and that the Union...
was deprived of membership of former FEBTC personnel who, by virtue
of the merger, would have formed part of the bargaining unit represented
by the Union pursuant to its union shop provision in the CBA.
Issues:
During the LMC, BPI invoked management prerogative stating that the
creation of the BOMC was to preserve more jobs and to designate it as
an agency to place employees where they were most needed. On the
other hand, the Union charged that BOMC undermined the existence of
the... union since it reduced or divided the bargaining unit. While BOMC
employees perform BPI functions, they were beyond the bargaining
unit's coverage. In contracting out FEBTC functions to BOMC, BPI
effectively deprived the union of the membership of employees handling
said... functions as well as curtailed the right of those employees to join
the union.
While the Union admitted that BPI has the prerogative to determine what
should be done to meet the exigencies of business in accordance with
the case of Sime Darby Pilipinas,... Inc. v. NLRC,[19] it insisted that the
exercise of management prerogative is not absolute, thus, requiring
good faith and adherence to the law and the CBA. Citing the case of
Shell Oil Workers' Union v. Shell Company of the Philippines,... Ltd.,[20]
the Union claims that it is unfair labor practice for an employer to
outsource the positions in the existing bargaining unit
Ruling:
It is to be emphasized that contracting out of services is not illegal per
se. It is an exercise of business judgment or management prerogative.
Absent proof that the management acted in a malicious or arbitrary
manner, the Court will not interfere with the exercise of... judgment by an
employer
In one case, the Court held that it is management prerogative to farm out
any of its activities, regardless of whether such activity is peripheral or
core in nature.[44] What is of primordial importance is that the service
agreement does not violate... the employee's right to security of tenure
and payment of benefits to which he is entitled under the law.
Furthermore, the outsourcing must not squarely fall under labor-only
contracting

BPI Employees Union-Davao City-FUBU vs. BPI, G.R. No. 174912, July
24, 2013
BOMC, primarily engaged in providing and/or handling support
services for banks and other financial institutions, is a subsidiary of
the Bank of Philippine Islands (BPI) operating and functioning as an
entirely separate and distinct entity.

A service agreement between BPI and BOMC was initially

implemented in BPI’s Metro Manila branches. In this agreement,
BOMC undertook to provide services such as check clearing, delivery
of bank statements, fund transfers, card production, operations
accounting and control, and cash servicing, Not a single BPI employee
was displaced and those performing the functions, which were
transferred to BOMC, were given other assignments.

The Manila chapter of BPI Employees Union (BPIEU-Metro Manila-

FUBU) then filed a complaint for unfair labor practice (ULP). (LA)
decided the case in favor of the union. The decision was, however,
reversed on appeal by the NLRC. BPIEU-Metro Manila-FUBU filed a
petition forcertiorari before the CA which denied it, holding that BPI
transferred the employees in the affected departments in the pursuit
of its legitimate business. The employees were neither demoted nor
were their salaries, benefits and other privileges diminished.6
the service agreement was likewise implemented in Davao City. Later,
a merger between BPI and Far East Bank and Trust Company (FEBTC)
took effect on April 10, 2000 with BPI as the surviving corporation.
Thereafter, BPIs cashiering function and FEBTCs cashiering,
distribution and bookkeeping functions were handled by BOMC.
Consequently, twelve (12) former FEBTC employees were transferred
to BOMC to complete the latters service complement.

BPI Davaos rank and file collective bargaining agent, BPI Employees
Union-Davao City-FUBU (Union), objected to the transfer of the
functions and the twelve (12) personnel to BOMC contending that the
functions rightfully belonged to the BPI employees and that the Union
was deprived of membership of former FEBTC personnel who, by
virtue of the merger, would have formed part of the bargaining unit
represented by the Union pursuant to its union shop provision in the
CBA.
Union filed a notice of strike before the National Conciliation and
Mediation Board (NCMB) on the following grounds:
a) Contracting out services/functions performed by union members
that interfered with, restrained and/or coerced the employees in the
exercise of their right to self-organization;

The Union is of the position that the outsourcing of jobs included in

the existing bargaining unit to BOMC is a breach of the union-shop
agreement in the CBA. In transferring the former employees of FEBTC
to BOMC instead of absorbing them in BPI as the surviving
corporation in the merger, the number of positions covered by the
bargaining unit was decreased, resulting in the reduction of the
Union’s membership. For the Union, BPI’s act of arbitrarily
outsourcing functions formerly performed by the Union members
and, in fact, transferring a number of its members beyond the ambit
of the Union, is a violation of the CBA and interfered with the
employees’ right to self organization. The Union insists that the CBA
covers the agreement with respect, not only to wages and hours of
work, but to all other terms and conditions of work. The union shop
clause, being part of these conditions, states that the regular
employees belonging to the bargaining unit, including those absorbed
by way of the corporate merger, were required to join the bargaining
union “as a condition for employment.” Simply put, the transfer of
former FEBTC employees to BOMC removed them from the coverage
of unionized establishment. While the Union admitted that BPI has
the prerogative to determine what should be done to meet the
exigencies of business in accordance with the case of Sime Darby
Pilipinas, Inc. v. NLRC,19 it insisted that the exercise of management
prerogative is not absolute, thus, requiring good faith and adherence
to the law and the CBA. Citing the case of Shell Oil Workers’ Union v.
Shell Company of the Philippines, Ltd.,20 the Union claims that it is
unfair labor practice for an employer to outsource the positions in the
existing bargaining unit.

ISSUE: Whether or not the act of BPI to outsource the cashiering,

distribution and bookkeeping functions to BOMC is in conformity with
the law and the existing CBA.
HELD:yes
The Union, however, insists that jobs being outsourced to BOMC were
included in the existing bargaining unit, thus, resulting in a reduction
of a number of positions in such unit. The reduction interfered with
the employees’ right to self-organization because the power of a
union primarily depends on its strength in number.28

It is incomprehensible how the “reduction of positions in the

collective bargaining unit” interferes with the employees’ right to self-
organization because the employees themselves were neither
transferred nor dismissed from the service. As the NLRC clearly
stated:cralavvonlinelawlibrary
In the case at hand, the union has not presented even an iota of
evidence that petitioner bank has started to terminate certain
employees, members of the union. In fact, what appears is that the
Bank has exerted utmost diligence, care and effort to see to it that no
union member has been terminated. In the process of the
consolidation or merger of the two banks which resulted in increased
diversification of functions, some of these non-banking functions
were merely transferred to the BOMC without affecting the union
membership.29

BPI stresses that not a single employee or union member was or

would be dislocated or terminated from their employment as a result
of the Service Agreement.30 Neither had it resulted in any diminution
of salaries and benefits nor led to any reduction of union
membership.31

As far as the twelve (12) former FEBTC employees are concerned, the
Union failed to substantially prove that their transfer, made to
complete BOMC’s service complement, was motivated by ill will, anti-
unionism or bad faith so as to affect or interfere with the employees’
right to self-organization.
It is to be emphasized that contracting out of services is not illegal per
se. It is an exercise of business judgment or management prerogative.
Absent proof that the management acted in a malicious or arbitrary
manner, the Court will not interfere with the exercise of judgment by
an employer.32 In this case, bad faith cannot be attributed to BPI
because its actions were authorized by CBP Circular No. 1388, Series
of 199333 issued by the Monetary Board of the then Central Bank of
the Philippines (now Bangko Sentral ng Pilipinas). The circular covered
amendments in Book I of the Manual of Regulations for Banks and
Other Financial Intermediaries, particularly on the matter of bank
service contracts. A finding of ULP necessarily requires the alleging
party to prove it with substantial evidence. Unfortunately, the Union
failed to discharge this burden.