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G.R. No. L-66826 August 19, 1988

BANK OF THE PHILIPPINE ISLANDS, petitioner,

vs.
THE INTERMEDIATE APPELLATE COURT and ZSHORNACK respondents.

Pacis & Reyes Law Office for petitioner.

Ernesto T. Zshornack, Jr. for private respondent.

CORTES, J.:

The original parties to this case were Rizaldy T. Zshornack and the Commercial Bank and Trust Company of the Philippines [hereafter referred to as "COMTRUST."] In 1980,
the Bank of the Philippine Islands (hereafter referred to as BPI absorbed COMTRUST through a corporate merger, and was substituted as party to the case.

Rizaldy Zshornack initiated proceedings on June 28,1976 by filing in the Court of First Instance of Rizal — Caloocan City a
complaint against COMTRUST alleging four causes of action. Except for the third cause of action, the CFI ruled in favor of
Zshornack. The bank appealed to the Intermediate Appellate Court which modified the CFI decision absolving the bank
from liability on the fourth cause of action. The pertinent portions of the judgment, as modified, read:

IN VIEW OF THE FOREGOING, the Court renders judgment as follows:

1. Ordering the defendant COMTRUST to restore to the dollar savings account of plaintiff (No. 25-4109)
the amount of U.S $1,000.00 as of October 27, 1975 to earn interest together with the remaining balance
of the said account at the rate fixed by the bank for dollar deposits under Central Bank Circular 343;

2. Ordering defendant COMTRUST to return to the plaintiff the amount of U.S. $3,000.00 immediately
upon the finality of this decision, without interest for the reason that the said amount was merely held in
custody for safekeeping, but was not actually deposited with the defendant COMTRUST because being
cash currency, it cannot by law be deposited with plaintiffs dollar account and defendant's only obligation
is to return the same to plaintiff upon demand;

xxx xxx xxx

5. Ordering defendant COMTRUST to pay plaintiff in the amount of P8,000.00 as damages in the concept
of litigation expenses and attorney's fees suffered by plaintiff as a result of the failure of the defendant
bank to restore to his (plaintiffs) account the amount of U.S. $1,000.00 and to return to him (plaintiff) the
U.S. $3,000.00 cash left for safekeeping.

Costs against defendant COMTRUST.

SO ORDERED. [Rollo, pp. 47-48.]

Undaunted, the bank comes to this Court praying that it be totally absolved from any liability to Zshornack. The latter not
having appealed the Court of Appeals decision, the issues facing this Court are limited to the bank's liability with regard to
the first and second causes of action and its liability for damages.

1. We first consider the first cause of action, On the dates material to this case, Rizaldy Zshornack and his wife, Shirley
Gorospe, maintained in COMTRUST, Quezon City Branch, a dollar savings account and a peso current account.

On October 27, 1975, an application for a dollar draft was accomplished by Virgilio V. Garcia, Assistant Branch Manager of
COMTRUST Quezon City, payable to a certain Leovigilda D. Dizon in the amount of $1,000.00. In the application, Garcia
indicated that the amount was to be charged to Dollar Savings Acct. No. 25-4109, the savings account of the Zshornacks;
the charges for commission, documentary stamp tax and others totalling P17.46 were to be charged to Current Acct. No.
 Cred Trans | 2

210465-29, again, the current account of the Zshornacks. There was no indication of the name of the purchaser of the
dollar draft.

On the same date, October 27,1975, COMTRUST, under the signature of Virgilio V. Garcia, issued a check payable to the
order of Leovigilda D. Dizon in the sum of US $1,000 drawn on the Chase Manhattan Bank, New York, with an indication
that it was to be charged to Dollar Savings Acct. No. 25-4109.

When Zshornack noticed the withdrawal of US$1,000.00 from his account, he demanded an explanation from the bank. In
answer, COMTRUST claimed that the peso value of the withdrawal was given to Atty. Ernesto Zshornack, Jr., brother of
Rizaldy, on October 27, 1975 when he (Ernesto) encashed with COMTRUST a cashier's check for P8,450.00 issued by the
Manila Banking Corporation payable to Ernesto.

Upon consideration of the foregoing facts, this Court finds no reason to disturb the ruling of both the trial court and the
Appellate Court on the first cause of action. Petitioner must be held liable for the unauthorized withdrawal of US$1,000.00
from private respondent's dollar account.

In its desperate attempt to justify its act of withdrawing from its depositor's savings account, the bank has adopted
inconsistent theories. First, it still maintains that the peso value of the amount withdrawn was given to Atty. Ernesto
Zshornack, Jr. when the latter encashed the Manilabank Cashier's Check. At the same time, the bank claims that the
withdrawal was made pursuant to an agreement where Zshornack allegedly authorized the bank to withdraw from his
dollar savings account such amount which, when converted to pesos, would be needed to fund his peso current account.
If indeed the peso equivalent of the amount withdrawn from the dollar account was credited to the peso current account,
why did the bank still have to pay Ernesto?

At any rate, both explanations are unavailing. With regard to the first explanation, petitioner bank has not shown how the
transaction involving the cashier's check is related to the transaction involving the dollar draft in favor of Dizon financed
by the withdrawal from Rizaldy's dollar account. The two transactions appear entirely independent of each other.
Moreover, Ernesto Zshornack, Jr., possesses a personality distinct and separate from Rizaldy Zshornack. Payment made to
Ernesto cannot be considered payment to Rizaldy.

As to the second explanation, even if we assume that there was such an agreement, the evidence do not show that the
withdrawal was made pursuant to it. Instead, the record reveals that the amount withdrawn was used to finance a dollar
draft in favor of Leovigilda D. Dizon, and not to fund the current account of the Zshornacks. There is no proof whatsoever
that peso Current Account No. 210-465-29 was ever credited with the peso equivalent of the US$1,000.00 withdrawn on
October 27, 1975 from Dollar Savings Account No. 25-4109.

2. As for the second cause of action, the complaint filed with the trial court alleged that on December 8, 1975, Zshornack
entrusted to COMTRUST, thru Garcia, US $3,000.00 cash (popularly known as greenbacks) for safekeeping, and that the
agreement was embodied in a document, a copy of which was attached to and made part of the complaint. The document
reads:

Makati Cable Address:

Philippines "COMTRUST"

COMMERCIAL BANK AND TRUST COMPANY

of the Philippines

Quezon City Branch

Dec
emb
er
8,
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197
5

MR. RIZALDY T. ZSHORNACK

&/OR MRS SHIRLEY E. ZSHORNACK

Sir/Madam:

We acknowledged (sic) having received from you today the sum of US DOLLARS: THREE
THOUSAND ONLY (US$3,000.00) for safekeeping.

Received by:

(Sgd.) VIRGILIO V.
GARCIA

It was also alleged in the complaint that despite demands, the bank refused to return the money.

In its answer, COMTRUST averred that the US$3,000 was credited to Zshornack's peso current account at prevailing
conversion rates.

It must be emphasized that COMTRUST did not deny specifically under oath the authenticity and due execution of the
above instrument.

During trial, it was established that on December 8, 1975 Zshornack indeed delivered to the bank US $3,000 for
safekeeping. When he requested the return of the money on May 10, 1976, COMTRUST explained that the sum was
disposed of in this manner: US$2,000.00 was sold on December 29, 1975 and the peso proceeds amounting to P14,920.00
were deposited to Zshornack's current account per deposit slip accomplished by Garcia; the remaining US$1,000.00 was
sold on February 3, 1976 and the peso proceeds amounting to P8,350.00 were deposited to his current account per
deposit slip also accomplished by Garcia.

Aside from asserting that the US$3,000.00 was properly credited to Zshornack's current account at prevailing conversion
rates, BPI now posits another ground to defeat private respondent's claim. It now argues that the contract embodied in
the document is the contract of depositum (as defined in Article 1962, New Civil Code), which banks do not enter into. The
bank alleges that Garcia exceeded his powers when he entered into the transaction. Hence, it is claimed, the bank cannot
be liable under the contract, and the obligation is purely personal to Garcia.

Before we go into the nature of the contract entered into, an important point which arises on the pleadings, must be
considered.

The second cause of action is based on a document purporting to be signed by COMTRUST, a copy of which document was
attached to the complaint. In short, the second cause of action was based on an actionable document. It was therefore
incumbent upon the bank to specifically deny under oath the due execution of the document, as prescribed under Rule 8,
Section 8, if it desired: (1) to question the authority of Garcia to bind the corporation; and (2) to deny its capacity to enter
into such contract. [See, E.B. Merchant v. International Banking Corporation, 6 Phil. 314 (1906).] No sworn answer denying
the due execution of the document in question, or questioning the authority of Garcia to bind the bank, or denying the
bank's capacity to enter into the contract, was ever filed. Hence, the bank is deemed to have admitted not only Garcia's
authority, but also the bank's power, to enter into the contract in question.

In the past, this Court had occasion to explain the reason behind this procedural requirement.

The reason for the rule enunciated in the foregoing authorities will, we think, be readily appreciated. In
dealing with corporations the public at large is bound to rely to a large extent upon outward
appearances. If a man is found acting for a corporation with the external indicia of authority, any person,
not having notice of want of authority, may usually rely upon those appearances; and if it be found that
 Cred Trans | 4

the directors had permitted the agent to exercise that authority and thereby held him out as a person
competent to bind the corporation, or had acquiesced in a contract and retained the benefit supposed to
have been conferred by it, the corporation will be bound, notwithstanding the actual authority may never
have been granted

... Whether a particular officer actually possesses the authority which he assumes to exercise is
frequently known to very few, and the proof of it usually is not readily accessible to the stranger who
deals with the corporation on the faith of the ostensible authority exercised by some of the corporate
officers. It is therefore reasonable, in a case where an officer of a corporation has made a contract in its
name, that the corporation should be required, if it denies his authority, to state such defense in its
answer. By this means the plaintiff is apprised of the fact that the agent's authority is contested; and he is
given an opportunity to adduce evidence showing either that the authority existed or that the contract
was ratified and approved. [Ramirez v. Orientalist Co. and Fernandez, 38 Phil. 634, 645- 646 (1918).]

Petitioner's argument must also be rejected for another reason. The practical effect of absolving a corporation from
liability every time an officer enters into a contract which is beyond corporate powers, even without the proper allegation
or proof that the corporation has not authorized nor ratified the officer's act, is to cast corporations in so perfect a mold
that transgressions and wrongs by such artificial beings become impossible [Bissell v. Michigan Southern and N.I.R. Cos 22
N.Y 258 (1860).] "To say that a corporation has no right to do unauthorized acts is only to put forth a very plain truism but
to say that such bodies have no power or capacity to err is to impute to them an excellence which does not belong to any
created existence with which we are acquainted. The distinction between power and right is no more to be lost sight of in
respect to artificial than in respect to natural persons." [Ibid.]

Having determined that Garcia's act of entering into the contract binds the corporation, we now determine the correct
nature of the contract, and its legal consequences, including its enforceability.

The document which embodies the contract states that the US$3,000.00 was received by the bank for safekeeping. The
subsequent acts of the parties also show that the intent of the parties was really for the bank to safely keep the dollars
and to return it to Zshornack at a later time, Thus, Zshornack demanded the return of the money on May 10, 1976, or over
five months later.

The above arrangement is that contract defined under Article 1962, New Civil Code, which reads:

Art. 1962. A deposit is constituted from the moment a person receives a thing belonging to another, with
the obligation of safely keeping it and of returning the same. If the safekeeping of the thing delivered is
not the principal purpose of the contract, there is no deposit but some other contract.

Note that the object of the contract between Zshornack and COMTRUST was foreign exchange. Hence, the transaction
was covered by Central Bank Circular No. 20, Restrictions on Gold and Foreign Exchange Transactions, promulgated on
December 9, 1949, which was in force at the time the parties entered into the transaction involved in this case. The
circular provides:

xxx xxx xxx

2. Transactions in the assets described below and all dealings in them of whatever nature, including,
where applicable their exportation and importation, shall NOT be effected, except with respect to deposit
accounts included in sub-paragraphs (b) and (c) of this paragraph, when such deposit accounts are owned
by and in the name of, banks.

(a) Any and all assets, provided they are held through, in, or with banks or banking
institutions located in the Philippines, including money, checks, drafts, bullions bank
drafts, deposit accounts (demand, time and savings), all debts, indebtedness or
obligations, financial brokers and investment houses, notes, debentures, stocks, bonds,
coupons, bank acceptances, mortgages, pledges, liens or other rights in the nature of
security, expressed in foreign currencies, or if payable abroad, irrespective of the
currency in which they are expressed, and belonging to any person, firm, partnership,
 Cred Trans | 5

association, branch office, agency, company or other unincorporated body or

corporation residing or located within the Philippines;

(b) Any and all assets of the kinds included and/or described in subparagraph (a) above,
whether or not held through, in, or with banks or banking institutions, and existent
within the Philippines, which belong to any person, firm, partnership, association,
branch office, agency, company or other unincorporated body or corporation not
residing or located within the Philippines;

(c) Any and all assets existent within the Philippines including money, checks, drafts,
bullions, bank drafts, all debts, indebtedness or obligations, financial securities
commonly dealt in by bankers, brokers and investment houses, notes, debentures,
stock, bonds, coupons, bank acceptances, mortgages, pledges, liens or other rights in
the nature of security expressed in foreign currencies, or if payable abroad, irrespective
of the currency in which they are expressed, and belonging to any person, firm,
partnership, association, branch office, agency, company or other unincorporated body
or corporation residing or located within the Philippines.

xxx xxx xxx

4. (a) All receipts of foreign exchange shall be sold daily to the Central Bank by those authorized to deal in
foreign exchange. All receipts of foreign exchange by any person, firm, partnership, association, branch
office, agency, company or other unincorporated body or corporation shall be sold to the authorized
agents of the Central Bank by the recipients within one business day following the receipt of such foreign
exchange. Any person, firm, partnership, association, branch office, agency, company or other
unincorporated body or corporation, residing or located within the Philippines, who acquires on and after
the date of this Circular foreign exchange shall not, unless licensed by the Central Bank, dispose of such
foreign exchange in whole or in part, nor receive less than its full value, nor delay taking ownership
thereof except as such delay is customary; Provided, further, That within one day upon taking ownership,
or receiving payment, of foreign exchange the aforementioned persons and entities shall sell such foreign
exchange to designated agents of the Central Bank.

xxx xxx xxx

8. Strict observance of the provisions of this Circular is enjoined; and any person, firm or corporation,
foreign or domestic, who being bound to the observance thereof, or of such other rules, regulations or
directives as may hereafter be issued in implementation of this Circular, shall fail or refuse to comply
with, or abide by, or shall violate the same, shall be subject to the penal sanctions provided in the Central
Bank Act.

xxx xxx xxx

Paragraph 4 (a) above was modified by Section 6 of Central Bank Circular No. 281, Regulations on Foreign Exchange,
promulgated on November 26, 1969 by limiting its coverage to Philippine residents only. Section 6 provides:

SEC. 6. All receipts of foreign exchange by any resident person, firm, company or corporation shall be sold
to authorized agents of the Central Bank by the recipients within one business day following the receipt
of such foreign exchange. Any resident person, firm, company or corporation residing or located within
the Philippines, who acquires foreign exchange shall not, unless authorized by the Central Bank, dispose
of such foreign exchange in whole or in part, nor receive less than its full value, nor delay taking
ownership thereof except as such delay is customary; Provided, That, within one business day upon
taking ownership or receiving payment of foreign exchange the aforementioned persons and entities
shall sell such foreign exchange to the authorized agents of the Central Bank.

As earlier stated, the document and the subsequent acts of the parties show that they intended the bank to safekeep the
foreign exchange, and return it later to Zshornack, who alleged in his complaint that he is a Philippine resident. The parties
 Cred Trans | 6

did not intended to sell the US dollars to the Central Bank within one business day from receipt. Otherwise, the contract
of depositum would never have been entered into at all.

Since the mere safekeeping of the greenbacks, without selling them to the Central Bank within one business day from
receipt, is a transaction which is not authorized by CB Circular No. 20, it must be considered as one which falls under the
general class of prohibited transactions. Hence, pursuant to Article 5 of the Civil Code, it is void, having been executed
against the provisions of a mandatory/prohibitory law. More importantly, it affords neither of the parties a cause of action
against the other. "When the nullity proceeds from the illegality of the cause or object of the contract, and the act
constitutes a criminal offense, both parties being in pari delicto, they shall have no cause of action against each other. . ."
[Art. 1411, New Civil Code.] The only remedy is one on behalf of the State to prosecute the parties for violating the law.

We thus rule that Zshornack cannot recover under the second cause of action.

3. Lastly, we find the P8,000.00 awarded by the courts a quo as damages in the concept of litigation expenses and
attorney's fees to be reasonable. The award is sustained.

WHEREFORE, the decision appealed from is hereby MODIFIED. Petitioner is ordered to restore to the dollar savings
account of private respondent the amount of US$1,000.00 as of October 27, 1975 to earn interest at the rate fixed by the
bank for dollar savings deposits. Petitioner is further ordered to pay private respondent the amount of P8,000.00 as
damages. The other causes of action of private respondent are ordered dismissed.

SO ORDERED.
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G.R. No. 142591. April 30, 2003

JOSEPH CHAN, WILSON CHAN and LILY CHAN, Petitioners, v.BONIFACIO S. MACEDA, JR., respondent.

DECISION

SANDOVAL-GUTIERREZ, J.:

A judgment of default does not automatically imply admission by the defendant of the facts and causes of
action of the plaintiff. The Rules of Court require the latter to adduce evidence in support of his allegations
as an indispensable condition before final judgment could be given in his favor. [1 The trial judge has to
evaluate the allegations with the highest degree of objectivity and certainty. He may sustain an allegation
for which the plaintiff has adduced sufficient evidence, otherwise, he has to reject it. In the case at bar,
judicial review is imperative to avert the award of damages that is unreasonable and without evidentiary
support.

Assailed in this petition for review under Rule 45 of the 1997 Rules of Civil Procedure, as amended, is the
Decision2 dated June 17, 1999 of the Court of Appeals in CA-G.R. CV No. 57323, entitled Bonifacio S.
Maceda, Jr. versus Joseph Chan, et. al., affirming in toto the Decision3dated December 26, 1996 of the
Regional Trial Court, Branch 160, Pasig City, in Civil Case No. 53044.

The essential antecedents are as follows:

On July 28, 1976, Bonifacio S. Maceda, Jr., herein respondent, obtained a P7.3 million loan from the
Development Bank of the Philippines for the construction of his New Gran Hotel Project in Tacloban City.

Thereafter, on September 29, 1976, respondent entered into a building construction contract with
Moreman Builders Co., Inc., (Moreman). They agreed that the construction would be finished not later
than December 22, 1977.

Respondent purchased various construction materials and equipment in Manila. Moreman, in turn,
deposited them in the warehouse of Wilson and Lily Chan, herein petitioners. The deposit was free of
charge.

Unfortunately, Moreman failed to finish the construction of the hotel at the stipulated time. Hence, on
February 1, 1978, respondent filed with the then Court of First Instance (CFI, now Regional Trial Court),
Branch 39, Manila, an action for rescission and damages against Moreman, docketed as Civil Case No.
113498.

On November 28, 1978, the CFI rendered its Decision 4 rescinding the contract between Moreman and
respondent and awarding to the latter P 445,000.00 as actual, moral and liquidated damages; P20,000.00
representing the increase in the construction materials; and P35,000.00 as attorneys fees. Moreman
interposed an appeal to the Court of Appeals but the same was dismissed on March 7, 1989 for being
dilatory. He elevated the case to this Court via a petition for review on certiorari. In a Decision5 dated
February 21, 1990, we denied the petition. On April 23, 1990,6 an Entry of Judgment was issued.

Meanwhile, during the pendency of the case, respondent ordered petitioners to return to him the
construction materials and equipment which Moreman deposited in their warehouse. Petitioners,
however, told them that Moreman withdrew those construction materials in 1977.
 Cred Trans | 8

Hence, on December 11, 1985, respondent filed with the Regional Trial Court, Branch 160, Pasig City, an
action for damages with an application for a writ of preliminary attachment against petitioners, 7docketed
as Civil Case No. 53044.

In the meantime, on October 30, 1986, respondent was appointed Judge of the Regional Trial Court,
Branch 12, San Jose Antique.8 cräläwvirtualibräry

On August 25, 1989, or after almost four (4) years, the trial court dismissed respondents complaint for his
failure to prosecute and for lack of interest.9 On September 6, 1994, or five years thereafter, respondent
filed a motion for reconsideration, but the same was denied in the Order dated September 9, 1994
because of the failure of respondent and his counsel to appear on the scheduled hearing.10 cräläwvirtualibräry

On October 14, 1994, respondent filed a second motion for reconsideration. This time, the motion was
granted and the case was ordered reinstated on January 10, 1995, or ten (10) years from the time the
action was originally filed.11 Thereafter, summons, together with the copies of the complaint and its
annexes, were served on petitioners.

On March 2, 1995, counsel for petitioners filed a motion to dismiss on several grounds. 12 Respondent, on
the other hand, moved to declare petitioners in default on the ground that their motion to dismiss was
filed out of time and that it did not contain any notice of hearing.13 cräläwvirtualibräry

On April 27, 1995, the trial court issued an order declaring petitioners in default. 14 cräläwvirtualibräry

Petitioners filed with the Court of Appeals a petition for certiorari 15 to annul the trial courts order of
default, but the same was dismissed in its Order16 dated August 31, 1995. The case reached this Court, and
in a Resolution dated October 25, 1995,17 we affirmed the assailed order of the Court of Appeals. On
November 29, 1995,18 the corresponding Entry of Judgment was issued.

Thus, upon the return of the records to the RTC, Branch 160, Pasig City, respondent was allowed to present
his evidence ex-parte.

Upon motion of respondent, which was granted by the trial court in its Order dated April 29, 1996,19 the
depositions of his witnesses, namely, Leonardo Conge, Alfredo Maceda and Engr. Damiano Nadera were
taken in the Metropolitan Trial Court in Cities, Branch 2, Tacloban City. 20 Deponent Leonardo Conge, a
labor contractor, testified that on December 14 up to December 24, 1977, he was contracted by petitioner
Lily Chan to get bags of cement from the New Gran Hotel construction site and to store the same into the
latters warehouse in Tacloban City. Aside from those bags of cement, deponent also hauled about 400
bundles of steel bars from the same construction site, upon order of petitioners. Corresponding delivery
receipts were presented and marked as Exhibits A, A-1,A-2,A-3 and A-4.21 cräläwvirtualibräry

Deponent Alfredo Maceda testified that he was respondents Disbursement and Payroll Officer who
supervised the construction and kept inventory of the properties of the New Gran Hotel. While conducting
the inventory on November 23, 1977, he found that the approximate total value of the materials stored in
petitioners warehouse was P214,310.00. This amount was accordingly reflected in the certification signed
by Mario Ramos, store clerk and representative of Moreman who was present during the inventory.22 cräläwvirtualibräry

Deponent Damiano Nadera testified on the current cost of the architectural and structural requirements
needed to complete the construction of the New Gran Hotel.23 cräläwvirtualibräry

On December 26, 1996, the trial court rendered a decision in favor of respondent, thus:
 Cred Trans | 9

WHEREFORE, foregoing considered, judgment is hereby rendered ordering defendants to jointly and
severally pay plaintiff:

1) P1,930,000.00 as actual damages;

2) P2,549,000.00 as actual damages;

3) Moral damages of P150,000.00; exemplary damages of P50,000.00 and attorneys fees of P50,000.00 and
to pay the costs.

SO ORDERED.

The trial court ratiocinated as follows:

The inventory of other materials, aside from the steel bars and cement is found highly reliable based on
first, the affidavit of Arthur Edralin dated September 15, 1979, personnel officer of Moreman Builders that
he was assigned with others to guard the warehouse; (Exhs. M & O); secondly, the inventory (Exh. C) dated
November 23, 1977 shows (sic) deposit of assorted materials; thirdly, that there were items in the
warehouse as of February 3, 1978 as shown in the balance sheet of Moremans stock clerk Jose Cedilla.

Plaintiff is entitled to payment of damages for the overhauling of materials from the construction site by
Lily Chan without the knowledge and consent of its owner. Article 20 of the Civil Code provides:

Art. 20. Every person who contrary to law, willfully or negligently caused damage to another, shall
indemnify the latter for the same.

As to the materials stored inside the bodega of defendant Wilson Chan, the inventory (Exh. C) show (sic),
that the same were owned by the New Gran Hotel. Said materials were stored by Moreman Builders Co.,
Inc. since it was attested to by the warehouseman as without any lien or encumbrances, the defendants
are duty bound to release it. Article 21 of the Civil Code provides:

Art. 21. Any person who willfully caused loss or injury to another in a manner that is contrary to morals,
good customs or public policy shall compensate the latter for the damage.

Plaintiff is entitled to payment of actual damages based on the inventory as of November 23, 1977
amounting to P1,930,080.00 (Exhs. Q & Q-1). The inventory was signed by the agent Moreman Builders
Corporation and defendants.

Plaintiff is likewise entitled to payment of 12,500 bags of cement and 400 bundles of steel bars
totaling P2,549,000.00 (Exhs. S & S-1; Exhs. B & B-3).

Defendants should pay plaintiff moral damages of P150,000.00; exemplary damages of P50,000.00 and
attorneys fees of P50,000.00 and to pay the costs.

The claim of defendant for payment of damages with respect to the materials appearing in the balance
sheets as of February 3, 1978 in the amount of P3,286,690.00, not having been established with enough
preponderance of evidence cannot be given weight.24 cräläwvirtualibräry

Petitioners then elevated the case to the Court of Appeals, docketed as CA-G.R. CV No. 57323. On June 17,
1999, the Appellate Court rendered the assailed Decision25 affirming in toto the trial courts judgment,
ratiocinating as follows:
 Cred Trans | 10

Moreover, although the prayer in the complaint did not specify the amount of damages sought, the same
was satisfactorily proved during the trial. For damages to be awarded, it is essential that the claimant
satisfactorily prove during the trial the existence of the factual basis thereof and its causal connection with
the adverse partys act (PAL, Inc. vs. NLRC, 259 SCRA 459. In sustaining appellees claim for damages, the
court a quo held as follows:

The Court finds the contention of plaintiff that materials and equipment of plaintiff were stored in the
warehouse of defendants and admitted by defendants in the certification issued to Sheriff Borja. x x x

Evidence further revealed that assorted materials owned by the New Gran Hotel (Exh. C) were deposited in
the bodega of defendant Wilson Chan with a total market value of P1,930,000.00, current price.

The inventory of other materials, aside from the steel bars and cement, is highly reliable based on first, the
affidavit of Arthur Edralin dated September 15, 1979, personnel officer of Moreman Builders; that he was
assigned, with others to guard the warehouse (Exhs. M & O); secondly, the inventory (Exh. C) November
23, 1977 shows deposit of assorted materials; thirdly, that there were items in the warehouse as of
February 3, 1978, as shown in the balance sheet of Moremans stock clerk, Jose Cedilla (pp. 60-61, Rollo).

The Court affirms the above findings.

Well settled is the rule that absent any proper reason to depart from the rule, factual conclusions reached
by the trial court are not to be disturbed (People vs. Dupali, 230 SCRA 62). Hence, in the absence of any
showing that serious and substantial errors were committed by the lower court in the appraisal of the
evidence, the trial judges assessment of the credibility of the witnesses is accorded great weight and
respect (People vs. Jain, 254 SCRA 686). And, there being absolutely nothing on record to show that the
court a quo overlooked, disregarded, or misinterpreted facts of weight and significance, its factual findings
and conclusions must be given great weight and should not be disturbed on appeal.

WHEREFORE, being in accord with law and evidence, the appealed decision is hereby AFFIRMED in toto.

Hence, this petition for review on certiorari anchored on the following grounds:

The Court of Appeals acted with grave abuse of discretion and under a misapprehension of the law and
the facts when it affirmed in toto the award of actual damages made by the trial court in favor of
respondent in this case.

II

The awards of moral and exemplary damages of the trial court to respondent in this case and
affirmed in toto by the Court of Appeals are unwarranted by the evidence presented by respondent at
the ex parte hearing of this case and should, therefore, be eliminated or at least reduced.

III

The award of attorneys fees by the trial court to respondent in this case and affirmed by the Court of
Appeals should be deleted because of the failure of the trial court to state the legal and factual basis of
such award.
 Cred Trans | 11

Petitioners contend inter alia that the actual damages claimed by respondent in the present case were
already awarded to him in Civil Case No. 11349826 and hence, cannot be recovered by him again. Even
assuming that respondent is entitled to damages, he can not recover P4,479,000.00 which is eleven (11)
times more than the total actual damages of P365,000.00 awarded to him in Civil Case No. 113498.27 cräläwvirtualibräry

In his comment on the petition, respondent maintains that petitioners, as depositaries under the law, have
both the fiduciary and extraordinary obligations not only to safely keep the construction material
deposited, but also to return them with all their products, accessories and accessions, pursuant to Articles
1972,28 1979,291983,30 and 198831 of the Civil Code. Considering that petitioners duty to return the
construction materials in question has already become impossible, it is only proper that the prices of those
construction materials in 1996 should be the basis of the award of actual damages. This is the only way to
fulfill the duty to returncontemplated in the applicable laws.32 Respondent further claims that petitioners
must bear the increase in market prices from 1977 to 1996 because liability for fraud includes all damages
which may be reasonably attributed to the non-performance of the obligation. Lastly, respondent insists
that there can be no double recovery because in Civil Case No. 113498,33 the parties were respondent
himself and Moreman and the cause of action was the rescission of their building contract. In the present
case, however, the parties are respondent and petitioners and the cause of action between them is for
recovery of damages arising from petitioners failure to return the construction materials and equipment.

Obviously, petitioners assigned errors call for a review of the lower courts findings of fact.

Succinct is the rule that this Court is not a trier of facts and does not normally undertake the re-
examination of the evidence submitted by the contending parties during the trial of the case considering
that findings of fact of the Court of Appeals are generally binding and conclusive on this Court. 34 The
jurisdiction of this Court in a petition for review on certiorari is limited to reviewing only errors of
law,35 not of fact, unless it is shown, inter alia, that: (1) the conclusion is a finding grounded on
speculations, surmises or conjectures; (2) the inference is manifestly mistaken, absurd and
impossible; (3) there is grave abuse of discretion; (4) the judgment is based on misapprehension of
facts; (5) the findings of fact are conflicting; and (6) the Court of Appeals, in making its findings went
beyond the issues of the case and the same is contrary to the admission of both parties. 36 cräläwvirtualibräry

Petitioners submit that this case is an exception to the general rule since both the trial court and the Court
of Appeals based their judgments on misapprehension of facts.

We agree.

At the outset, the case should have been dismissed outright by the trial court because of patent procedural
infirmities. It bears stressing that the case was originally filed on December 11, 1985. Four (4) years
thereafter, or on August 25, 1989, the case was dismissed for respondents failure to prosecute. Five (5)
years after, or on September 6, 1994, respondent filed his motion for reconsideration. From here, the trial
court already erred in its ruling because it should have dismissed the motion for reconsideration outright
as it was filed far beyond the fifteen-day reglementary period.37 Worse, when respondent filed his second
motion for reconsideration on October 14, 1994, a prohibited pleading, 38 the trial court still granted the
same and reinstated the case on January 10, 1995. This is a glaring gross procedural error committed by
both the trial court and the Court of Appeals.

Even without such serious procedural flaw, the case should also be dismissed for utter lack of merit.
 Cred Trans | 12

It must be stressed that respondents claim for damages is based on petitioners failure to return or to
release to him the construction materials and equipment deposited by Moreman to their warehouse.
Hence, the essential issues to be resolved are: (1) Has respondent presented proof that the construction
materials and equipment were actually in petitioners warehouse when he asked that the same be turned
over to him? (2) If so, does respondent have the right to demand the release of the said materials and
equipment or claim for damages?

Under Article 1311 of the Civil Code, contracts are binding upon the parties (and their assigns and heirs)
who execute them. When there is no privity of contract, there is likewise no obligation or liability to speak
about and thus no cause of action arises. Specifically, in an action against the depositary, the burden is on
the plaintiff to prove the bailment or deposit and the performance of conditions precedent to the right of
action.39 A depositary is obliged to return the thing to the depositor, or to his heirs or successors, or to the
person who may have been designated in the contract. 40 cräläwvirtualibräry

In the present case, the record is bereft of any contract of deposit, oral or written, between petitioners and
respondent. If at all, it was only between petitioners and Moreman. And granting arguendo that there was
indeed a contract of deposit between petitioners and Moreman, it is still incumbent upon respondent to
prove its existence and that it was executed in his favor. However, respondent miserably failed to do so.
The only pieces of evidence respondent presented to prove the contract of deposit were the delivery
receipts.41Significantly, they are unsigned and not duly received or authenticated by either Moreman,
petitioners or respondent or any of their authorized representatives. Hence, those delivery receipts have
no probative value at all. While our laws grant a person the remedial right to prosecute or institute a civil
action against another for the enforcement or protection of a right, or the prevention or redress of a
wrong,42 every cause of action ex-contractu must be founded upon a contract, oral or written, express or
implied.

Moreover, respondent also failed to prove that there were construction materials and equipment in
petitioners warehouse at the time he made a demand for their return.

Considering that respondent failed to prove (1) the existence of any contract of deposit between him and
petitioners, nor between the latter and Moreman in his favor, and (2) that there were construction
materials in petitioners warehouse at the time of respondents demand to return the same, we hold that
petitioners have no corresponding obligation or liability to respondent with respect to those construction
materials.

Anent the issue of damages, petitioners are still not liable because, as expressly provided for in Article
2199 of the Civil Code,43 actual or compensatory damages cannot be presumed, but must be proved with
reasonable degree of certainty. A court cannot rely on speculations, conjectures, or guesswork as to the
fact and amount of damages, but must depend upon competent proof that they have been suffered by the
injured party and on the best obtainable evidence of the actual amount thereof. It must point out specific
facts which could afford a basis for measuring whatever compensatory or actual damages are borne. 44 cräläwvirtualibräry

Considering our findings that there was no contract of deposit between petitioners and respondent or
Moreman and that actually there were no more construction materials or equipment in petitioners
warehouse when respondent made a demand for their return, we hold that he has no right whatsoever to
claim for damages.

As we stressed in the beginning, a judgment of default does not automatically imply admission by the
defendant of plaintiffs causes of action. Here, the trial court merely adopted respondents allegations in his
complaint and evidence without evaluating them with the highest degree of objectivity and certainty.
 Cred Trans | 13

WHEREFORE, the petition isGRANTED. The challenged Decision of the Court of Appeals dated June 17,
1999 is REVERSEDand SET ASIDE. Costs against respondent.

SO ORDERED.

Puno, (Chairman), Panganiban, Corona, and Carpio-Morales, JJ., concur.

 Cred Trans | 14

G.R. No. 90027 March 3, 1993

CA AGRO-INDUSTRIAL DEVELOPMENT CORP., petitioner,

vs.
THE HONORABLE COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY, respondents.

Dolorfino & Dominguez Law Offices for petitioner.

Danilo B. Banares for private respondent.

DAVIDE, JR., J.:

Is the contractual relation between a commercial bank and another party in a contract of rent of a safety deposit box with
respect to its contents placed by the latter one of bailor and bailee or one of lessor and lessee?

This is the crux of the present controversy.

On 3 July 1979, petitioner (through its President, Sergio Aguirre) and the spouses Ramon and Paula Pugao entered into an
agreement whereby the former purchased from the latter two (2) parcels of land for a consideration of P350,625.00. Of
this amount, P75,725.00 was paid as downpayment while the balance was covered by three (3) postdated checks. Among
the terms and conditions of the agreement embodied in a Memorandum of True and Actual Agreement of Sale of Land
were that the titles to the lots shall be transferred to the petitioner upon full payment of the purchase price and that the
owner's copies of the certificates of titles thereto, Transfer Certificates of Title (TCT) Nos. 284655 and 292434, shall be
deposited in a safety deposit box of any bank. The same could be withdrawn only upon the joint signatures of a
representative of the petitioner and the Pugaos upon full payment of the purchase price. Petitioner, through Sergio
Aguirre, and the Pugaos then rented Safety Deposit Box No. 1448 of private respondent Security Bank and Trust Company,
a domestic banking corporation hereinafter referred to as the respondent Bank. For this purpose, both signed a contract
of lease (Exhibit "2") which contains, inter alia, the following conditions:

13. The bank is not a depositary of the contents of the safe and it has neither the possession nor control
of the same.

14. The bank has no interest whatsoever in said contents, except herein expressly provided, and it
assumes absolutely no liability in connection therewith.1

After the execution of the contract, two (2) renter's keys were given to the renters — one to Aguirre (for the petitioner)
and the other to the Pugaos. A guard key remained in the possession of the respondent Bank. The safety deposit box has
two (2) keyholes, one for the guard key and the other for the renter's key, and can be opened only with the use of both
keys. Petitioner claims that the certificates of title were placed inside the said box.

Thereafter, a certain Mrs. Margarita Ramos offered to buy from the petitioner the two (2) lots at a price of P225.00 per
square meter which, as petitioner alleged in its complaint, translates to a profit of P100.00 per square meter or a total of
P280,500.00 for the entire property. Mrs. Ramos demanded the execution of a deed of sale which necessarily entailed the
production of the certificates of title. In view thereof, Aguirre, accompanied by the Pugaos, then proceeded to the
respondent Bank on 4 October 1979 to open the safety deposit box and get the certificates of title. However, when
opened in the presence of the Bank's representative, the box yielded no such certificates. Because of the delay in the
reconstitution of the title, Mrs. Ramos withdrew her earlier offer to purchase the lots; as a consequence thereof, the
petitioner allegedly failed to realize the expected profit of P280,500.00. Hence, the latter filed on 1 September 1980 a
complaint2 for damages against the respondent Bank with the Court of First Instance (now Regional Trial Court) of Pasig,
Metro Manila which docketed the same as Civil Case No. 38382.

In its Answer with Counterclaim,3 respondent Bank alleged that the petitioner has no cause of action because of
paragraphs 13 and 14 of the contract of lease (Exhibit "2"); corollarily, loss of any of the items or articles contained in the
 Cred Trans | 15

box could not give rise to an action against it. It then interposed a counterclaim for exemplary damages as well as
attorney's fees in the amount of P20,000.00. Petitioner subsequently filed an answer to the counterclaim.4

In due course, the trial court, now designated as Branch 161 of the Regional Trial Court (RTC) of Pasig, Metro Manila,
rendered a decision5 adverse to the petitioner on 8 December 1986, the dispositive portion of which reads:

WHEREFORE, premises considered, judgment is hereby rendered dismissing plaintiff's complaint.

On defendant's counterclaim, judgment is hereby rendered ordering plaintiff to pay defendant the
amount of FIVE THOUSAND (P5,000.00) PESOS as attorney's fees.

With costs against plaintiff.6

The unfavorable verdict is based on the trial court's conclusion that under paragraphs 13 and 14 of the contract of lease,
the Bank has no liability for the loss of the certificates of title. The court declared that the said provisions are binding on
the parties.

Its motion for reconsideration7 having been denied, petitioner appealed from the adverse decision to the respondent
Court of Appeals which docketed the appeal as CA-G.R. CV No. 15150. Petitioner urged the respondent Court to reverse
the challenged decision because the trial court erred in (a) absolving the respondent Bank from liability from the loss, (b)
not declaring as null and void, for being contrary to law, public order and public policy, the provisions in the contract for
lease of the safety deposit box absolving the Bank from any liability for loss, (c) not concluding that in this jurisdiction, as
well as under American jurisprudence, the liability of the Bank is settled and (d) awarding attorney's fees to the Bank and
denying the petitioner's prayer for nominal and exemplary damages and attorney's fees.8

In its Decision promulgated on 4 July 1989,9 respondent Court affirmed the appealed decision principally on the theory
that the contract (Exhibit "2") executed by the petitioner and respondent Bank is in the nature of a contract of lease by
virtue of which the petitioner and its co-renter were given control over the safety deposit box and its contents while the
Bank retained no right to open the said box because it had neither the possession nor control over it and its contents. As
such, the contract is governed by Article 1643 of the Civil Code 10 which provides:

Art. 1643. In the lease of things, one of the parties binds himself to give to another the enjoyment or use
of a thing for a price certain, and for a period which may be definite or indefinite. However, no lease for
more than ninety-nine years shall be valid.

It invoked Tolentino vs. Gonzales 11 — which held that the owner of the property loses his control over the
property leased during the period of the contract — and Article 1975 of the Civil Code which provides:

Art. 1975. The depositary holding certificates, bonds, securities or instruments which earn interest shall
be bound to collect the latter when it becomes due, and to take such steps as may be necessary in order
that the securities may preserve their value and the rights corresponding to them according to law.

The above provision shall not apply to contracts for the rent of safety deposit boxes.

and then concluded that "[c]learly, the defendant-appellee is not under any duty to maintain the contents of the
box. The stipulation absolving the defendant-appellee from liability is in accordance with the nature of the
contract of lease and cannot be regarded as contrary to law, public order and public policy." 12 The appellate court
was quick to add, however, that under the contract of lease of the safety deposit box, respondent Bank is not
completely free from liability as it may still be made answerable in case unauthorized persons enter into the vault
area or when the rented box is forced open. Thus, as expressly provided for in stipulation number 8 of the
contract in question:

8. The Bank shall use due diligence that no unauthorized person shall be admitted to any rented safe and
beyond this, the Bank will not be responsible for the contents of any safe rented from it. 13
 Cred Trans | 16

Its motion for reconsideration 14 having been denied in the respondent Court's Resolution of 28 August 1989, 15petitioner
took this recourse under Rule 45 of the Rules of Court and urges Us to review and set aside the respondent Court's ruling.
Petitioner avers that both the respondent Court and the trial court (a) did not properly and legally apply the correct law in
this case, (b) acted with grave abuse of discretion or in excess of jurisdiction amounting to lack thereof and (c) set a
precedent that is contrary to, or is a departure from precedents adhered to and affirmed by decisions of this Court and
precepts in American jurisprudence adopted in the Philippines. It reiterates the arguments it had raised in its motion to
reconsider the trial court's decision, the brief submitted to the respondent Court and the motion to reconsider the latter's
decision. In a nutshell, petitioner maintains that regardless of nomenclature, the contract for the rent of the safety deposit
box (Exhibit "2") is actually a contract of deposit governed by Title XII, Book IV of the Civil Code of the
Philippines. 16 Accordingly, it is claimed that the respondent Bank is liable for the loss of the certificates of title pursuant to
Article 1972 of the said Code which provides:

Art. 1972. The depositary is obliged to keep the thing safely and to return it, when required, to the
depositor, or to his heirs and successors, or to the person who may have been designated in the contract.
His responsibility, with regard to the safekeeping and the loss of the thing, shall be governed by the
provisions of Title I of this Book.

If the deposit is gratuitous, this fact shall be taken into account in determining the degree of care that the
depositary must observe.

Petitioner then quotes a passage from American Jurisprudence 17 which is supposed to expound on the prevailing
rule in the United States, to wit:

The prevailing rule appears to be that where a safe-deposit company leases a safe-deposit box or safe
and the lessee takes possession of the box or safe and places therein his securities or other valuables, the
relation of bailee and bail or is created between the parties to the transaction as to such securities or
other valuables; the fact that the
safe-deposit company does not know, and that it is not expected that it shall know, the character or
description of the property which is deposited in such safe-deposit box or safe does not change that
relation. That access to the contents of the safe-deposit box can be had only by the use of a key retained
by the lessee ( whether it is the sole key or one to be used in connection with one retained by the lessor)
does not operate to alter the foregoing rule. The argument that there is not, in such a case, a delivery of
exclusive possession and control to the deposit company, and that therefore the situation is entirely
different from that of ordinary bailment, has been generally rejected by the courts, usually on the ground
that as possession must be either in the depositor or in the company, it should reasonably be considered
as in the latter rather than in the former, since the company is, by the nature of the contract, given
absolute control of access to the property, and the depositor cannot gain access thereto without the
consent and active participation of the company. . . . (citations omitted).

and a segment from Words and Phrases 18 which states that a contract for the rental of a bank safety deposit box
in consideration of a fixed amount at stated periods is a bailment for hire.

Petitioner further argues that conditions 13 and 14 of the questioned contract are contrary to law and public policy and
should be declared null and void. In support thereof, it cites Article 1306 of the Civil Code which provides that parties to a
contract may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are
not contrary to law, morals, good customs, public order or public policy.

After the respondent Bank filed its comment, this Court gave due course to the petition and required the parties to
simultaneously submit their respective Memoranda.

The petition is partly meritorious.

We agree with the petitioner's contention that the contract for the rent of the safety deposit box is not an ordinary
contract of lease as defined in Article 1643 of the Civil Code. However, We do not fully subscribe to its view that the same
is a contract of deposit that is to be strictly governed by the provisions in the Civil Code on deposit; 19 the contract in the
case at bar is a special kind of deposit. It cannot be characterized as an ordinary contract of lease under Article 1643
because the full and absolute possession and control of the safety deposit box was not given to the joint renters — the
 Cred Trans | 17

petitioner and the Pugaos. The guard key of the box remained with the respondent Bank; without this key, neither of the
renters could open the box. On the other hand, the respondent Bank could not likewise open the box without the renter's
key. In this case, the said key had a duplicate which was made so that both renters could have access to the box.

Hence, the authorities cited by the respondent Court 20 on this point do not apply. Neither could Article 1975, also relied
upon by the respondent Court, be invoked as an argument against the deposit theory. Obviously, the first paragraph of
such provision cannot apply to a depositary of certificates, bonds, securities or instruments which earn interest if such
documents are kept in a rented safety deposit box. It is clear that the depositary cannot open the box without the renter
being present.

We observe, however, that the deposit theory itself does not altogether find unanimous support even in American
jurisprudence. We agree with the petitioner that under the latter, the prevailing rule is that the relation between a bank
renting out safe-deposit boxes and its customer with respect to the contents of the box is that of a bail or and bailee, the
bailment being for hire and mutual benefit. 21 This is just the prevailing view because:

There is, however, some support for the view that the relationship in question might be more properly
characterized as that of landlord and tenant, or lessor and lessee. It has also been suggested that it
should be characterized as that of licensor and licensee. The relation between a bank, safe-deposit
company, or storage company, and the renter of a safe-deposit box therein, is often described as
contractual, express or implied, oral or written, in whole or in part. But there is apparently no jurisdiction
in which any rule other than that applicable to bailments governs questions of the liability and rights of
the parties in respect of loss of the contents of safe-deposit boxes. 22 (citations omitted)

In the context of our laws which authorize banking institutions to rent out safety deposit boxes, it is clear that in this
jurisdiction, the prevailing rule in the United States has been adopted. Section 72 of the General Banking Act 23pertinently
provides:

Sec. 72. In addition to the operations specifically authorized elsewhere in this Act, banking institutions
other than building and loan associations may perform the following services:

(a) Receive in custody funds, documents, and valuable objects, and rent safety deposit
boxes for the safeguarding of such effects.

xxx xxx xxx

The banks shall perform the services permitted under subsections (a), (b) and (c) of this section
as depositories or as agents. . . . 24 (emphasis supplied)

Note that the primary function is still found within the parameters of a contract of deposit, i.e., the receiving in custody of
funds, documents and other valuable objects for safekeeping. The renting out of the safety deposit boxes is not
independent from, but related to or in conjunction with, this principal function. A contract of deposit may be entered into
orally or in writing 25 and, pursuant to Article 1306 of the Civil Code, the parties thereto may establish such stipulations,
clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs,
public order or public policy. The depositary's responsibility for the safekeeping of the objects deposited in the case at bar
is governed by Title I, Book IV of the Civil Code. Accordingly, the depositary would be liable if, in performing its obligation,
it is found guilty of fraud, negligence, delay or contravention of the tenor of the agreement. 26 In the absence of any
stipulation prescribing the degree of diligence required, that of a good father of a family is to be observed. 27 Hence, any
stipulation exempting the depositary from any liability arising from the loss of the thing deposited on account of fraud,
negligence or delay would be void for being contrary to law and public policy. In the instant case, petitioner maintains that
conditions 13 and 14 of the questioned contract of lease of the safety deposit box, which read:

13. The bank is not a depositary of the contents of the safe and it has neither the possession nor control
of the same.

14. The bank has no interest whatsoever in said contents, except herein expressly provided, and it
assumes absolutely no liability in connection therewith. 28
 Cred Trans | 18

are void as they are contrary to law and public policy. We find Ourselves in agreement with this proposition for
indeed, said provisions are inconsistent with the respondent Bank's responsibility as a depositary under Section
72(a) of the General Banking Act. Both exempt the latter from any liability except as contemplated in condition 8
thereof which limits its duty to exercise reasonable diligence only with respect to who shall be admitted to any
rented safe, to wit:

8. The Bank shall use due diligence that no unauthorized person shall be admitted to any rented safe and
beyond this, the Bank will not be responsible for the contents of any safe rented from it. 29

Furthermore, condition 13 stands on a wrong premise and is contrary to the actual practice of the Bank. It is not
correct to assert that the Bank has neither the possession nor control of the contents of the box since in fact, the
safety deposit box itself is located in its premises and is under its absolute control; moreover, the respondent
Bank keeps the guard key to the said box. As stated earlier, renters cannot open their respective boxes unless the
Bank cooperates by presenting and using this guard key. Clearly then, to the extent above stated, the foregoing
conditions in the contract in question are void and ineffective. It has been said:

With respect to property deposited in a safe-deposit box by a customer of a safe-deposit company, the
parties, since the relation is a contractual one, may by special contract define their respective duties or
provide for increasing or limiting the liability of the deposit company, provided such contract is not in
violation of law or public policy. It must clearly appear that there actually was such a special contract,
however, in order to vary the ordinary obligations implied by law from the relationship of the parties;
liability of the deposit company will not be enlarged or restricted by words of doubtful meaning. The
company, in renting
safe-deposit boxes, cannot exempt itself from liability for loss of the contents by its own fraud or
negligence or that of its agents or servants, and if a provision of the contract may be construed as an
attempt to do so, it will be held ineffective for the purpose. Although it has been held that the lessor of a
safe-deposit box cannot limit its liability for loss of the contents thereof through its own negligence, the
view has been taken that such a lessor may limits its liability to some extent by agreement or
stipulation. 30 (citations omitted)

Thus, we reach the same conclusion which the Court of Appeals arrived at, that is, that the petition should be dismissed,
but on grounds quite different from those relied upon by the Court of Appeals. In the instant case, the respondent Bank's
exoneration cannot, contrary to the holding of the Court of Appeals, be based on or proceed from a characterization of
the impugned contract as a contract of lease, but rather on the fact that no competent proof was presented to show that
respondent Bank was aware of the agreement between the petitioner and the Pugaos to the effect that the certificates of
title were withdrawable from the safety deposit box only upon both parties' joint signatures, and that no evidence was
submitted to reveal that the loss of the certificates of title was due to the fraud or negligence of the respondent Bank. This
in turn flows from this Court's determination that the contract involved was one of deposit. Since both the petitioner and
the Pugaos agreed that each should have one (1) renter's key, it was obvious that either of them could ask the Bank for
access to the safety deposit box and, with the use of such key and the Bank's own guard key, could open the said box,
without the other renter being present.

Since, however, the petitioner cannot be blamed for the filing of the complaint and no bad faith on its part had been
established, the trial court erred in condemning the petitioner to pay the respondent Bank attorney's fees. To this extent,
the Decision (dispositive portion) of public respondent Court of Appeals must be modified.

WHEREFORE, the Petition for Review is partially GRANTED by deleting the award for attorney's fees from the 4 July 1989
Decision of the respondent Court of Appeals in CA-G.R. CV No. 15150. As modified, and subject to the pronouncement We
made above on the nature of the relationship between the parties in a contract of lease of safety deposit boxes, the
dispositive portion of the said Decision is hereby AFFIRMED and the instant Petition for Review is otherwise DENIED for
lack of merit.

No pronouncement as to costs.

SO ORDERED.
 Cred Trans | 19

G.R. No. 102970 May 13, 1993

LUZAN SIA, petitioner,

vs.
COURT OF APPEALS and SECURITY BANK and TRUST COMPANY, respondents.

Asuncion Law Offices for petitioner.

Cauton, Banares, Carpio & Associates for private respondent.

DAVIDE, JR., J.:

The Decision of public respondent Court of Appeals in CA-G.R. CV No. 26737, promulgated on 21 August 1991,1reversing
and setting aside the Decision, dated 19 February 1990, 2 of Branch 47 of the Regional Trial Court (RTC) of Manila in Civil
Case No. 87-42601, entitled "LUZAN SIA vs. SECURITY BANK and TRUST CO.," is challenged in this petition for review
on certiorari under Rule 45 of the Rules Court.

Civil Case No. 87-42601 is an action for damages arising out of the destruction or loss of the stamp collection of the
plaintiff (petitioner herein) contained in Safety Deposit Box No. 54 which had been rented from the defendant pursuant to
a contract denominated as a Lease Agreement. 3 Judgment therein was rendered in favor of the dispositive portion of
which reads:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff and against the
defendant, Security Bank & Trust Company, ordering the defendant bank to pay the plaintiff the sum of
—

a) Twenty Thousand Pesos (P20,000.00), Philippine Currency, as actual damages;

b) One Hundred Thousand Pesos (P100,000.00), Philippine Currency, as moral damages; and

c) Five Thousand Pesos (P5,000.00), Philippine Currency, as attorney's fees and legal expenses.

The counterclaim set up by the defendant are hereby dismissed for lack of merit.

No costs.

SO ORDERED.4

The antecedent facts of the present controversy are summarized by the public respondent in its challenged decision as
follows:

The plaintiff rented on March 22, 1985 the Safety Deposit Box No. 54 of the defendant bank at its
Binondo Branch located at the Fookien Times Building, Soler St., Binondo, Manila wherein he placed his
collection of stamps. The said safety deposit box leased by the plaintiff was at the bottom or at the
lowest level of the safety deposit boxes of the defendant bank at its aforesaid Binondo Branch.

During the floods that took place in 1985 and 1986, floodwater entered into the defendant bank's
premises, seeped into the safety deposit box leased by the plaintiff and caused, according to the plaintiff,
damage to his stamps collection. The defendant bank rejected the plaintiff's claim for compensation for
his damaged stamps collection, so, the plaintiff instituted an action for damages against the defendant
bank.
 Cred Trans | 20

The defendant bank denied liability for the damaged stamps collection of the plaintiff on the basis of the
"Rules and Regulations Governing the Lease of Safe Deposit Boxes" (Exhs. "A-1", "1-A"), particularly
paragraphs 9 and 13, which reads (sic):

"9. The liability of the Bank by reason of the lease, is limited to the exercise of the diligence to prevent
the opening of the safe by any person other than the Renter, his authorized agent or legal representative;

xxx xxx xxx

"13. The Bank is not a depository of the contents of the safe and it has neither the possession nor the
control of the same. The Bank has no interest whatsoever in said contents, except as herein provided,
and it assumes absolutely no liability in connection therewith."

The defendant bank also contended that its contract with the plaintiff over safety deposit box No. 54 was
one of lease and not of deposit and, therefore, governed by the lease agreement (Exhs. "A", "L") which
should be the applicable law; that the destruction of the plaintiff's stamps collection was due to a
calamity beyond obligation on its part to notify the plaintiff about the floodwaters that inundated its
premises at Binondo branch which allegedly seeped into the safety deposit box leased to the plaintiff.

The trial court then directed that an ocular inspection on (sic) the contents of the safety deposit box be
conducted, which was done on December 8, 1988 by its clerk of court in the presence of the parties and
their counsels. A report thereon was then submitted on December 12, 1988 (Records, p. 98-A) and
confirmed in open court by both parties thru counsel during the hearing on the same date (Ibid., p. 102)
stating:

"That the Safety Box Deposit No. 54 was opened by both plaintiff Luzan Sia and the
Acting Branch Manager Jimmy B. Ynion in the presence of the undersigned, plaintiff's
and defendant's counsel. Said Safety Box when opened contains two albums of different
sizes and thickness, length and width and a tin box with printed word 'Tai Ping Shiang
Roast Pork in pieces with Chinese designs and character."

Condition of the above-stated Items —

"Both albums are wet, moldy and badly damaged.

1. The first album measures 10 1/8 inches in length, 8 inches in width and 3/4 in thick. The leaves of the
album are attached to every page and cannot be lifted without destroying it, hence the stamps contained
therein are no longer visible.

2. The second album measure 12 1/2 inches in length, 9 3/4 in width 1 inch thick. Some of its pages can
still be lifted. The stamps therein can still be distinguished but beyond restoration. Others have lost its
original form.

3. The tin box is rusty inside. It contains an album with several pieces of papers stuck up to the cover of
the box. The condition of the album is the second abovementioned album."5

The SECURITY BANK AND TRUST COMPANY, hereinafter referred to as SBTC, appealed the trial court's decision to the
public respondent Court of Appeals. The appeal was docketed as CA-G.R. CV No. 26737.

In urging the public respondent to reverse the decision of the trial court, SBTC contended that the latter erred in (a)
holding that the lease agreement is a contract of adhesion; (b) finding that the defendant had failed to exercise the
required diligence expected of a bank in maintaining the safety deposit box; (c) awarding to the plaintiff actual damages in
the amount of P20,000.00, moral damages in the amount of P100,000.00 and attorney's fees and legal expenses in the
amount of P5,000.00; and (d) dismissing the counterclaim.

On 21 August 1991, the respondent promulgated its decision the dispositive portion of which reads:
 Cred Trans | 21

WHEREFORE, the decision appealed from is hereby REVERSED and instead the appellee's complaint is
hereby DISMISSED. The appellant bank's counterclaim is likewise DISMISSED. No costs.6

In reversing the trial court's decision and absolving SBTC from liability, the public respondent found and ruled that:

a) the fine print in the "Lease Agreement " (Exhibits "A" and "1" ) constitutes the terms and conditions of the contract of
lease which the appellee (now petitioner) had voluntarily and knowingly executed with SBTC;

b) the contract entered into by the parties regarding Safe Deposit Box No. 54 was not a contract of deposit wherein the
bank became a depositary of the subject stamp collection; hence, as contended by SBTC, the provisions of Book IV, Title
XII of the Civil Code on deposits do not apply;

c) The following provisions of the questioned lease agreement of the safety deposit box limiting SBTC's liability:

9. The liability of the bank by reason of the lease, is limited to the exercise of the diligence to prevent the
opening of the Safe by any person other than the Renter, his authorized agent or legal representative.

xxx xxx xxx

13. The bank is not a depository of the contents of the Safe and it has neither the possession nor the
control of the same. The Bank has no interest whatsoever in said contents, except as herein provided,
and it assumes absolutely no liability in connection therewith.

are valid since said stipulations are not contrary to law, morals, good customs, public order or public policy; and

d) there is no concrete evidence to show that SBTC failed to exercise the required diligence in maintaining the safety
deposit box; what was proven was that the floods of 1985 and 1986, which were beyond the control of SBTC, caused the
damage to the stamp collection; said floods were fortuitous events which SBTC should not be held liable for since it was
not shown to have participated in the aggravation of the damage to the stamp collection; on the contrary, it offered its
services to secure the assistance of an expert in order to save most of the stamps, but the appellee refused; appellee must
then bear the lose under the principle of "res perit domino."

Unsuccessful in his bid to have the above decision reconsidered by the public respondent, 7 petitioner filed the instant
petition wherein he contends that:

IT WAS A GRAVE ERROR OR AN ABUSE OF DISCRETION ON THE PART OF THE RESPONDENT COURT WHEN
IT RULED THAT RESPONDENT SBTC DID NOT FAIL TO EXERCISE THE REQUIRED DILIGENCE IN
MAINTAINING THE SAFETY DEPOSIT BOX OF THE PETITIONER CONSIDERING THAT SUBSTANTIAL
EVIDENCE EXIST (sic) PROVING THE CONTRARY.

II

THE RESPONDENT COURT SERIOUSLY ERRED IN EXCULPATING PRIVATE RESPONDENT FROM ANY
LIABILITY WHATSOEVER BY REASON OF THE PROVISIONS OF PARAGRAPHS 9 AND 13 OF THE AGREEMENT
(EXHS. "A" AND "A-1").

III

THE RESPONDENT COURT SERIOUSLY ERRED IN NOT UPHOLDING THE AWARDS OF THE TRIAL COURT FOR
ACTUAL AND MORAL DAMAGES, INCLUDING ATTORNEY'S FEES AND LEGAL EXPENSES, IN FAVOR OF THE
PETITIONER.8

We subsequently gave due course the petition and required both parties to submit their respective memoranda, which
they complied with.9
 Cred Trans | 22

Petitioner insists that the trial court correctly ruled that SBTC had failed "to exercise the required diligence expected of a
bank maintaining such safety deposit box . . . in the light of the environmental circumstance of said safety deposit box
after the floods of 1985 and 1986." He argues that such a conclusion is supported by the evidence on record, to wit: SBTC
was fully cognizant of the exact location of the safety deposit box in question; it knew that the premises were inundated
by floodwaters in 1985 and 1986 and considering that the bank is guarded twenty-four (24) hours a day , it is safe to
conclude that it was also aware of the inundation of the premises where the safety deposit box was located; despite such
knowledge, however, it never bothered to inform the petitioner of the flooding or take any appropriate measures to
insure the safety and good maintenance of the safety deposit box in question.

SBTC does not squarely dispute these facts; rather, it relies on the rule that findings of facts of the Court of Appeals, when
supported by substantial exidence, are not reviewable on appeal by certiorari. 10

The foregoing rule is, of course, subject to certain exceptions such as when there exists a disparity between the factual
findings and conclusions of the Court of Appeals and the trial court. 11 Such a disparity obtains in the present case.

As We see it, SBTC's theory, which was upheld by the public respondent, is that the "Lease Agreement " covering Safe
Deposit Box No. 54 (Exhibit "A and "1") is just that — a contract of lease — and not a contract of deposit, and that
paragraphs 9 and 13 thereof, which expressly limit the bank's liability as follows:

9. The liability of the bank by reason of the lease, is limited to the exercise of the diligence to prevent the
opening of the Safe by any person other than the Renter, his autliorized agent or legal representative;

xxx xxx xxx

13. The bank is not a depository of the contents of the Safe and it has neither the possession nor the
control of the same. The Bank has no interest whatsoever said contents, except as herein provided, and it
assumes absolutely no liability in connection therewith. 12

are valid and binding upon the parties. In the challenged decision, the public respondent further avers that even without
such a limitation of liability, SBTC should still be absolved from any responsibility for the damage sustained by the
petitioner as it appears that such damage was occasioned by a fortuitous event and that the respondent bank was free
from any participation in the aggravation of the injury.

We cannot accept this theory and ratiocination. Consequently, this Court finds the petition to be impressed with merit.

In the recent case CA Agro-Industrial Development Corp. vs. Court of Appeals, 13 this Court explicitly rejected the
contention that a contract for the use of a safety deposit box is a contract of lease governed by Title VII, Book IV of the
Civil Code. Nor did We fully subscribe to the view that it is a contract of deposit to be strictly governed by the Civil Code
provision on deposit; 14 it is, as We declared, a special kind of deposit. The prevailing rule in American jurisprudence — that
the relation between a bank renting out safe deposit boxes and its customer with respect to the contents of the box is
that of a bailor and bailee, the bailment for hire and mutual benefit 15 — has been adopted in this jurisdiction, thus:

In the context of our laws which authorize banking institutions to rent out safety deposit boxes, it is clear
that in this jurisdiction, the prevailing rule in the United States has been adopted. Section 72 of the
General Banking Act [R.A. 337, as amended] pertinently provides:

"Sec. 72. In addition to the operations specifically authorized elsewhere in this Act, banking institutions
other than building and loan associations may perform the following services:

(a) Receive in custody funds, documents, and valuable objects, and rent safety deposit
boxes for the safequarding of such effects.

xxx xxx xxx

The banks shall perform the services permitted under subsections (a), (b) and (c) of this section
as depositories or as agents. . . ."(emphasis supplied)
 Cred Trans | 23

Note that the primary function is still found within the parameters of a contract of deposit, i.e., the
receiving in custody of funds, documents and other valuable objects for safekeeping. The renting out of
the safety deposit boxes is not independent from, but related to or in conjunction with, this principal
function. A contract of deposit may be entered into orally or in writing (Art. 1969, Civil Code] and,
pursuant to Article 1306 of the Civil Code, the parties thereto may establish such stipulations, clauses,
terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good
customs, public order or public policy. The depositary's responsibility for the safekeeping of the objects
deposited in the case at bar is governed by Title I, Book IV of the Civil Code. Accordingly, the depositary
would be liable if, in performing its obligation, it is found guilty of fraud, negligence, delay or
contravention of the tenor of the agreement [Art. 1170, id.]. In the absence of any stipulation prescribing
the degree of diligence required, that of a good father of a family is to be observed [Art. 1173, id.].
Hence, any stipulation exempting the depositary from any liability arising from the loss of the thing
deposited on account of fraud, negligence or delay would be void for being contrary to law and public
policy. In the instant case, petitioner maintains that conditions 13 and l4 of the questioned contract of
lease of the safety deposit box, which read:

"13. The bank is a depositary of the contents of the safe and it has neither the possession nor control of
the same.

"14. The bank has no interest whatsoever in said contents, except as herein expressly provided, and it
assumes absolutely no liability in connection therewith."

are void as they are contrary to law and public policy. We find Ourselves in agreement with this
proposition for indeed, said provisions are inconsistent with the respondent Bank's responsibility as a
depositary under Section 72 (a) of the General Banking Act. Both exempt the latter from any liability
except as contemplated in condition 8 thereof which limits its duty to exercise reasonable diligence only
with respect to who shall be admitted to any rented safe, to wit:

"8. The Bank shall use due diligence that no unauthorized person shall be admitted to
any rented safe and beyond this, the Bank will not be responsible for the contents of any
safe rented from it."

Furthermore condition 13 stands on a wrong premise and is contrary to the actual practice of the Bank. It
is not correct to assert that the Bank has neither the possession nor control of the contents of the box
since in fact, the safety deposit box itself is located in its premises and is under its absolute control;
moreover, the respondent Bank keeps the guard key to the said box. As stated earlier, renters cannot
open their respective boxes unless the Bank cooperates by presenting and using this guard key. Clearly
then, to the extent above stated, the foregoing conditions in the contract in question are void and
ineffective. It has been said:

"With respect to property deposited in a safe-deposit box by a customer of a safe-

deposit company, the parties, since the relation is a contractual one, may by special
contract define their respective duties or provide for increasing or limiting the liability of
the deposit company, provided such contract is not in violation of law or public policy. It
must clearly appear that there actually was such a special contract, however, in order to
vary the ordinary obligations implied by law from the relationship of the parties; liability
of the deposit company will not be enlarged or restricted by words of doubtful meaning.
The company, in renting safe-deposit boxes, cannot exempt itself from liability for loss of
the contents by its own fraud or negligence or that, of its agents or servants, and if a
provision of the contract may be construed as an attempt to do so, it will be held
ineffective for the purpose. Although it has been held that the lessor of a safe-deposit
box cannot limit its liability for loss of the contents thereof through its own negligence,
the view has been taken that such a lessor may limit its liability to some extent by
agreement or stipulation ."[10 AM JUR 2d., 466]. (citations omitted) 16

It must be noted that conditions No. 13 and No. 14 in the Contract of Lease of Safety Deposit Box in CA Agro-Industrial
Development Corp. are strikingly similar to condition No. 13 in the instant case. On the other hand, both condition No. 8
 Cred Trans | 24

in CA Agro-Industrial Development Corp. and condition No. 9 in the present case limit the scope of the exercise of due
diligence by the banks involved to merely seeing to it that only the renter, his authorized agent or his legal representative
should open or have access to the safety deposit box. In short, in all other situations, it would seem that SBTC is not bound
to exercise diligence of any kind at all. Assayed in the light of Our aforementioned pronouncements in CA Agro-lndustrial
Development Corp., it is not at all difficult to conclude that both conditions No. 9 and No. 13 of the "Lease Agreement"
covering the safety deposit box in question (Exhibits "A" and "1") must be stricken down for being contrary to law and
public policy as they are meant to exempt SBTC from any liability for damage, loss or destruction of the contents of the
safety deposit box which may arise from its own or its agents' fraud, negligence or delay. Accordingly, SBTC cannot take
refuge under the said conditions.

Public respondent further postulates that SBTC cannot be held responsible for the destruction or loss of the stamp
collection because the flooding was a fortuitous event and there was no showing of SBTC's participation in the aggravation
of the loss or injury. It states:

Article 1174 of the Civil Code provides:

"Except in cases expressly specified by the law, or when it is otherwise declared by

stipulation, or when the nature of the obligation requires the assumption of risk, no
person shall be responsible for those events which could not be foreseen, or which,
though foreseen, were inevitable.'

In its dissertation of the phrase "caso fortuito" the Enciclopedia Jurisdicada Española 17 says: "In a legal sense and,
consequently, also in relation to contracts, a "caso fortuito" prevents (sic) 18 the following essential characteristics: (1) the cause of the unforeseen
ands unexpected occurrence, or of the failure of the debtor to comply with his obligation, must be independent of the human will; (2) it must be
impossible to foresee the event which constitutes the "caso fortuito," or if it can be foreseen, it must be impossible to avoid; (3) the occurrence
must be such as to render it impossible for one debtor to fulfill his obligation in a normal manner; and (4) the obligor must be free from any
participation in the aggravation of the injury resulting to the creditor." (cited in Servando vs. Phil., Steam Navigation Co., supra). 19

Here, the unforeseen or unexpected inundating floods were independent of the will of the appellant
bank and the latter was not shown to have participated in aggravating damage (sic) to the stamps
collection of the appellee. In fact, the appellant bank offered its services to secure the assistance of an
expert to save most of the then good stamps but the appelle refused and let (sic) these recoverable
stamps inside the safety deposit box until they were ruined. 20

Both the law and authority cited are clear enough and require no further elucidation. Unfortunately, however, the public
respondent failed to consider that in the instant case, as correctly held by the trial court, SBTC was guilty of negligence.
The facts constituting negligence are enumerated in the petition and have been summarized in thisponencia. SBTC's
negligence aggravated the injury or damage to the stamp collection. SBTC was aware of the floods of 1985 and 1986; it
also knew that the floodwaters inundated the room where Safe Deposit Box No. 54 was located. In view thereof, it should
have lost no time in notifying the petitioner in order that the box could have been opened to retrieve the stamps, thus
saving the same from further deterioration and loss. In this respect, it failed to exercise the reasonable care and prudence
expected of a good father of a family, thereby becoming a party to the aggravation of the injury or loss. Accordingly, the
aforementioned fourth characteristic of a fortuitous event is absent Article 1170 of the Civil Code, which reads:

Those who in the performance of their obligation are guilty of fraud, negligence, or delay, and those who
in any manner contravene the tenor thereof, are liable for damages,

thus comes to the succor of the petitioner. The destruction or loss of the stamp collection which was, in the language of
the trial court, the "product of 27 years of patience and diligence" 21 caused the petitioner pecuniary loss; hence, he must
be compensated therefor.

We cannot, however, place Our imprimatur on the trial court's award of moral damages. Since the relationship between
the petitioner and SBTC is based on a contract, either of them may be held liable for moral damages for breach thereof
only if said party had acted fraudulently or in bad faith. 22 There is here no proof of fraud or bad faith on the part of SBTC.

WHEREFORE, the instant petition is hereby GRANTED. The challenged Decision and Resolution of the public respondent
Court of Appeals of 21 August 1991 and 21 November 1991, respectively, in CA-G.R. CV No. 26737, are hereby SET ASIDE
 Cred Trans | 25

and the Decision of 19 February 1990 of Branch 47 of the Regional Trial Court of Manila in Civil Case No. 87-42601 is
hereby REINSTATED in full, except as to the award of moral damages which is hereby set aside.

Costs against the private respondent.

SO ORDERED.
 Cred Trans | 26

G.R. Nos. L-26948 and L-26949 October 8, 1927

SILVESTRA BARON, plaintiff-appellant,

vs.
PABLO DAVID, defendant-appellant.

And

GUILLERMO BARON, plaintiff-appellant,

vs.
PABLO DAVID, defendant-appellant.

Jose Gutierrez David for plaintiff-appellant in case of No. 26948.

Gregorio Perfecto for defendant-appellant in both cases.
Francisco, Lualhati & Lopez and Jose Gutierrez David for plaintiff-appellant in case No. 26949.

STREET, J.:

These two actions were instituted in the Court of First Instance of the Province of Pampanga by the respective plaintiffs,
Silvestra Baron and Guillermo Baron, for the purpose of recovering from the defendant, Pablo David, the value of palay
alleged to have been sold by the plaintiffs to the defendant in the year 1920. Owing to the fact that the defendant is the
same in both cases and that the two cases depend in part upon the same facts, the cases were heard together in the trial
court and determined in a single opinion. The same course will accordingly be followed here.

In the first case, i. e., that which Silvestra Baron is plaintiff, the court gave judgment for her to recover of the defendant
the sum of P5,238.51, with costs. From this judgment both the plaintiff and the defendant appealed.

In the second case, i. e., that in which Guillermo Baron, is plaintiff, the court gave judgment for him to recover of the
defendant the sum of P5,734.60, with costs, from which judgment both the plaintiff and the defendant also appealed. In
the same case the defendant interposed a counterclaim in which he asked credit for the sum of P2,800 which he had
advanced to the plaintiff Guillermo Baron on various occasions. This credit was admitted by the plaintiff and allowed by
the trial court. But the defendant also interposed a cross-action against Guillermo Baron in which the defendant claimed
compensation for damages alleged to have Ben suffered by him by reason of the alleged malicious and false statements
made by the plaintiff against the defendant in suing out an attachment against the defendant's property soon after the
institution of the action. In the same cross-action the defendant also sought compensation for damages incident to the
shutting down of the defendant's rice mill for the period of one hundred seventy days during which the above-mentioned
attachment was in force. The trial judge disallowed these claims for damages, and from this feature of the decision the
defendant appealed. We are therefore confronted with five distinct appeals in this record.

Prior to January 17, 1921, the defendant Pablo David has been engaged in running a rice mill in the municipality of
Magalang, in the Province of Pampanga, a mill which was well patronized by the rice growers of the vicinity and almost
constantly running. On the date stated a fire occurred that destroyed the mill and its contents, and it was some time
before the mill could be rebuilt and put in operation again. Silvestra Baron, the plaintiff in the first of the actions before
us, is an aunt of the defendant; while Guillermo Baron, the plaintiff in the other action; is his uncle. In the months of
March, April, and May, 1920, Silvestra Baron placed a quantity of palay in the defendant's mill; and this, in connection
with some that she took over from Guillermo Baron, amounted to 1,012 cavans and 24 kilos. During approximately the
same period Guillermo Baron placed other 1,865 cavans and 43 kilos of palay in the mill. No compensation has ever been
received by Silvestra Baron upon account of the palay delivered by Guillermo Baron, he has received from the defendant
advancements amounting to P2,800; but apart from this he has not been compensated. Both the plaintiffs claim that the
palay which was delivered by them to the defendant was sold to the defendant; while the defendant, on the other hand,
claims that the palay was deposited subject to future withdrawal by the depositors or subject to some future sale which
was never effected. He therefore supposes himself to be relieved from all responsibility by virtue of the fire of January 17,
1921, already mentioned.
 Cred Trans | 27

The plaintiff further say that their palay was delivered to the defendant at his special request, coupled with a promise on
his part to pay for the same at the highest price per cavan at which palay would sell during the year 1920; and they say
that in August of that year the defendant promised to pay them severally the price of P8.40 per cavan, which was about
the top of the market for the season, provided they would wait for payment until December. The trial judge found that no
such promise had been given; and the incredulity of the court upon this point seems to us to be justified. A careful
examination of the proof, however, leads us to the conclusion that the plaintiffs did, some time in the early part of August,
1920, make demand upon the defendant for a settlement, which he evaded or postponed leaving the exact amount due
to the plaintiffs undetermined.

It should be stated that the palay in question was place by the plaintiffs in the defendant's mill with the understanding
that the defendant was at liberty to convert it into rice and dispose of it at his pleasure. The mill was actively running
during the entire season, and as palay was daily coming in from many customers and as rice was being constantly shipped
by the defendant to Manila, or other rice markets, it was impossible to keep the plaintiffs' palay segregated. In fact the
defendant admits that the plaintiffs' palay was mixed with that of others. In view of the nature of the defendant's
activities and the way in which the palay was handled in the defendant's mill, it is quite certain that all of the plaintiffs'
palay, which was put in before June 1, 1920, been milled and disposed of long prior to the fire of January 17, 1921.
Furthermore, the proof shows that when the fire occurred there could not have been more than about 360 cavans of
palay in the mill, none of which by any reasonable probability could have been any part of the palay delivered by the
plaintiffs. Considering the fact that the defendant had thus milled and doubtless sold the plaintiffs' palay prior to the date
of the fire, it result that he is bound to account for its value, and his liability was not extinguished by the occurence of the
fire. In the briefs before us it seems to have been assumed by the opposing attorneys that in order for the plaintiffs to
recover, it is necessary that they should be able to establish that the plaintiffs' palay was delivered in the character of a
sale, and that if, on the contrary, the defendant should prove that the delivery was made in the character of deposit, the
defendant should be absolved. But the case does not depend precisely upon this explicit alternative; for even supposing
that the palay may have been delivered in the character of deposit, subject to future sale or withdrawal at plaintiffs'
election, nevertheless if it was understood that the defendant might mill the palay and he has in fact appropriated it to his
own use, he is of course bound to account for its value. Under article 1768 of the Civil Code, when the depository has
permission to make use of the thing deposited, the contract loses the character of mere deposit and becomes a loan or
a commodatum; and of course by appropriating the thing, the bailee becomes responsible for its value. In this connection
we wholly reject the defendant's pretense that the palay delivered by the plaintiffs or any part of it was actually consumed
in the fire of January, 1921. Nor is the liability of the defendant in any wise affected by the circumstance that, by a custom
prevailing among rice millers in this country, persons placing palay with them without special agreement as to price are at
liberty to withdraw it later, proper allowance being made for storage and shrinkage, a thing that is sometimes done,
though rarely.

In view of what has been said it becomes necessary to discover the price which the defendant should be required to pay
for the plaintiffs' palay. Upon this point the trial judge fixed upon P6.15 per cavan; and although we are not exactly in
agreement with him as to the propriety of the method by which he arrived at this figure, we are nevertheless of the
opinion that, all things considered, the result is approximately correct. It appears that the price of palay during the months
of April, May, and June, 1920, had been excessively high in the Philippine Islands and even prior to that period the
Government of the Philippine Islands had been attempting to hold the price in check by executive regulation. The highest
point was touched in this season was apparently about P8.50 per cavan, but the market began to sag in May or June and
presently entered upon a precipitate decline. As we have already stated, the plaintiffs made demand upon the defendant
for settlement in the early part of August; and, so far as we are able to judge from the proof, the price of P6.15 per cavan,
fixed by the trial court, is about the price at which the defendant should be required to settle as of that date. It was the
date of the demand of the plaintiffs for settlement that determined the price to be paid by the defendant, and this is true
whether the palay was delivered in the character of sale with price undetermined or in the character of deposit subject to
use by the defendant. It results that the plaintiffs are respectively entitle to recover the value of the palay which they had
placed with the defendant during the period referred to, with interest from the date of the filing of their several
complaints.

As already stated, the trial court found that at the time of the fire there were about 360 cavans of palay in the mill and
that this palay was destroyed. His Honor assumed that this was part of the palay delivered by the plaintiffs, and he held
that the defendant should be credited with said amount. His Honor therefore deducted from the claims of the plaintiffs
their respective proportionate shares of this amount of palay. We are unable to see the propriety of this feature of the
decision. There were many customers of the defendant's rice mill who had placed their palay with the defendant under
the same conditions as the plaintiffs, and nothing can be more certain than that the palay which was burned did not
 Cred Trans | 28

belong to the plaintiffs. That palay without a doubt had long been sold and marketed. The assignments of error of each of
the plaintiffs-appellants in which this feature of the decision is attacked are therefore well taken; and the appealed
judgments must be modified by eliminating the deductions which the trial court allowed from the plaintiffs' claims.

The trial judge also allowed a deduction from the claim of the plaintiff Guillermo Baron of 167 cavans of palay, as
indicated in Exhibit 12, 13, 14, and 16. This was also erroneous. These exhibits relate to transactions that occurred nearly
two years after the transactions with which we are here concerned, and they were offered in evidence merely to show the
character of subsequent transactions between the parties, it appearing that at the time said exhibits came into existence
the defendant had reconstructed his mill and that business relations with Guillermo Baron had been resumed. The
transactions shown by these exhibits (which relate to palay withdrawn by the plaintiff from the defendant's mill) were not
made the subject of controversy in either the complaint or the cross-complaint of the defendant in the second case. They
therefore should not have been taken into account as a credit in favor of the defendant. Said credit must therefore be
likewise of course be without prejudice to any proper adjustment of the rights of the parties with respect to these
subsequent transactions that they have heretofore or may hereafter effect.

The preceding discussion disposes of all vital contentions relative to the liability of the defendant upon the causes of
action stated in the complaints. We proceed therefore now to consider the question of the liability of the plaintiff
Guillermo Baron upon the cross-complaint of Pablo David in case R. G. No. 26949. In this cross-action the defendant seek,
as the stated in the third paragraph of this opinion, to recover damages for the wrongful suing out of an attachment by
the plaintiff and the levy of the same upon the defendant's rice mill. It appears that about two and one-half months after
said action was begun, the plaintiff, Guillermo Baron, asked for an attachment to be issued against the property of the
defendant; and to procure the issuance of said writ the plaintiff made affidavit to the effect that the defendant was
disposing, or attempting the plaintiff. Upon this affidavit an attachment was issued as prayed, and on March 27, 1924, it
was levied upon the defendant's rice mill, and other property, real and personal. 1awph!l.net

Upon attaching the property the sheriff closed the mill and placed it in the care of a deputy. Operations were not resumed
until September 13, 1924, when the attachment was dissolved by an order of the court and the defendant was permitted
to resume control. At the time the attachment was levied there were, in the bodega, more than 20,000 cavans of palay
belonging to persons who held receipts therefor; and in order to get this grain away from the sheriff, twenty-four of the
depositors found it necessary to submit third-party claims to the sheriff. When these claims were put in the sheriff
notified the plaintiff that a bond in the amount of P50,000 must be given, otherwise the grain would be released. The
plaintiff, being unable or unwilling to give this bond, the sheriff surrendered the palay to the claimants; but the
attachment on the rice mill was maintained until September 13, as above stated, covering a period of one hundred
seventy days during which the mill was idle. The ground upon which the attachment was based, as set forth in the
plaintiff's affidavit was that the defendant was disposing or attempting to dispose of his property for the purpose of
defrauding the plaintiff. That this allegation was false is clearly apparent, and not a word of proof has been submitted in
support of the assertion. On the contrary, the defendant testified that at the time this attachment was secured he was
solvent and could have paid his indebtedness to the plaintiff if judgment had been rendered against him in ordinary
course. His financial conditions was of course well known to the plaintiff, who is his uncle. The defendant also states that
he had not conveyed away any of his property, nor had intended to do so, for the purpose of defrauding the plaintiff. We
have before us therefore a case of a baseless attachment, recklessly sued out upon a false affidavit and levied upon the
defendant's property to his great and needless damage. That the act of the plaintiff in suing out the writ was wholly
unjustifiable is perhaps also indicated in the circumstance that the attachment was finally dissolved upon the motion of
the plaintiff himself.

The defendant testified that his mill was accustomed to clean from 400 to 450 cavans of palay per day, producing 225
cavans of rice of 57 kilos each. The price charged for cleaning each cavan rice was 30 centavos. The defendant also stated
that the expense of running the mill per day was from P18 to P25, and that the net profit per day on the mill was more
than P40. As the mill was not accustomed to run on Sundays and holiday, we estimate that the defendant lost the profit
that would have been earned on not less than one hundred forty work days. Figuring his profits at P40 per day, which
would appear to be a conservative estimate, the actual net loss resulting from his failure to operate the mill during the
time stated could not have been less than P5,600. The reasonableness of these figures is also indicated in the fact that the
twenty-four customers who intervened with third-party claims took out of the camarin 20,000 cavans of palay, practically
all of which, in the ordinary course of events, would have been milled in this plant by the defendant. And of course other
grain would have found its way to this mill if it had remained open during the one hundred forty days when it was closed.
 Cred Trans | 29

But this is not all. When the attachment was dissolved and the mill again opened, the defendant found that his customers
had become scattered and could not be easily gotten back. So slow, indeed, was his patronage in returning that during the
remainder of the year 1924 the defendant was able to mill scarcely more than the grain belonging to himself and his
brothers; and even after the next season opened many of his old customers did not return. Several of these individuals,
testifying as witnesses in this case, stated that, owing to the unpleasant experience which they had in getting back their
grain from the sheriff to the mill of the defendant, though they had previously had much confidence in him.

As against the defendant's proof showing the facts above stated the plaintiff submitted no evidence whatever. We are
therefore constrained to hold that the defendant was damaged by the attachment to the extent of P5,600, in profits lost
by the closure of the mill, and to the extent of P1,400 for injury to the good-will of his business, making a total of P7,000.
For this amount the defendant must recover judgment on his cross-complaint.

The trial court, in dismissing the defendant's cross-complaint for damages resulting from the wrongful suing out of the
attachment, suggested that the closure of the rice mill was a mere act of the sheriff for which the plaintiff was not
responsible and that the defendant might have been permitted by the sheriff to continue running the mill if he had
applied to the sheriff for permission to operate it. This singular suggestion will not bear a moment's criticism. It was of
course the duty of the sheriff, in levying the attachment, to take the attached property into his possession, and the closure
of the mill was a natural, and even necessary, consequence of the attachment. For the damage thus inflicted upon the
defendant the plaintiff is undoubtedly responsible.

One feature of the cross-complaint consist in the claim of the defendant (cross-complaint) for the sum of P20,000 as
damages caused to the defendant by the false and alleged malicious statements contained in the affidavit upon which the
attachment was procured. The additional sum of P5,000 is also claimed as exemplary damages. It is clear that with respect
to these damages the cross-action cannot be maintained, for the reason that the affidavit in question was used in course
of a legal proceeding for the purpose of obtaining a legal remedy, and it is therefore privileged. But though the affidavit is
not actionable as a libelous publication, this fact in no obstacle to the maintenance of an action to recover the damage
resulting from the levy of the attachment.

Before closing this opinion a word should be said upon the point raised in the first assignment of error of Pablo David as
defendant in case R. G. No. 26949. In this connection it appears that the deposition of Guillermo Baron was presented in
court as evidence and was admitted as an exhibit, without being actually read to the court. It is supposed in the
assignment of error now under consideration that the deposition is not available as evidence to the plaintiff because it
was not actually read out in court. This connection is not well founded. It is true that in section 364 of the Code of Civil
Procedure it is said that a deposition, once taken, may be read by either party and will then be deemed the evidence of
the party reading it. The use of the word "read" in this section finds its explanation of course in the American practice of
trying cases for the most part before juries. When a case is thus tried the actual reading of the deposition is necessary in
order that the jurymen may become acquainted with its contents. But in courts of equity, and in all courts where judges
have the evidence before them for perusal at their pleasure, it is not necessary that the deposition should be actually read
when presented as evidence.

From what has been said it result that judgment of the court below must be modified with respect to the amounts
recoverable by the respective plaintiffs in the two actions R. G. Nos. 26948 and 26949 and must be reversed in respect to
the disposition of the cross-complaint interposed by the defendant in case R. G. No. 26949, with the following result: In
case R. G. No. 26948 the plaintiff Silvestra Baron will recover of the Pablo David the sum of P6,227.24, with interest from
November 21, 1923, the date of the filing of her complaint, and with costs. In case R. G. No. 26949 the plaintiff Guillermo
Baron will recover of the defendant Pablo David the sum of P8,669.75, with interest from January 9, 1924. In the same
case the defendant Pablo David, as plaintiff in the cross-complaint, will recover of Guillermo Baron the sum of P7,000,
without costs. So ordered.
 Cred Trans | 30

G.R. No. 4015 August 24, 1908

ANGEL JAVELLANA, plaintiff-appellee,

vs.
JOSE LIM, ET AL., defendants-appellants.

R. Zaldarriaga for appellants.

B. Montinola for appellee.

TORRES, J.:

The attorney for the plaintiff, Angel Javellana, file a complaint on the 30th of October, 1906, with the Court of First
Instance of Iloilo, praying that the defendants, Jose Lim and Ceferino Domingo Lim, he sentenced to jointly and severally
pay the sum of P2,686.58, with interest thereon at the rate of 15 per cent per annum from the 20th of January, 1898, until
full payment should be made, deducting from the amount of interest due the sum of P1,102.16, and to pay the costs of
the proceedings.

Authority from the court having been previously obtained, the complaint was amended on the 10th of January, 1907; it
was then alleged, on the 26th of May, 1897, the defendants executed and subscribed a document in favor of the plaintiff
reading as follows:

We have received from Angel Javellana, as a deposit without interest, the sum of two thousand six hundred and eighty-six
cents of pesos fuertes, which we will return to the said gentleman, jointly and severally, on the 20th of January, 1898. —
Jaro, 26th of May, 1897. — Signed Jose Lim. — Signed: Ceferino Domingo Lim.

That, when the obligation became due, the defendants begged the plaintiff for an extension of time for the payment
thereof, building themselves to pay interest at the rate of 15 per cent on the amount of their indebtedness, to which the
plaintiff acceded; that on the 15th of May, 1902, the debtors paid on account of interest due the sum of P1,000 pesos,
with the exception of either capital or interest, had thereby been subjected to loss and damages.

A demurrer to the original complaint was overruled, and on the 4th of January, 1907, the defendants answered the
original complaint before its amendment, setting forth that they acknowledged the facts stated in Nos. 1 and 2 of the
complaint; that they admitted the statements of the plaintiff relative to the payment of 1,102.16 pesos made on the 15th
of November, 1902, not, however, as payment of interest on the amount stated in the foregoing document, but on
account of the principal, and denied that there had been any agreement as to an extension of the time for payment and
the payment of interest at the rate of 15 per cent per annum as alleged in paragraph 3 of the complaint, and also denied
all the other statements contained therein.

As a counterclaim, the defendants alleged that they had paid to the plaintiff sums which, together with the P1,102.16
acknowledged in the complaint, aggregated the total sum of P5,602.16, and that, deducting therefrom the total sum of
P2,686.58 stated in the document transcribed in the complaint, the plaintiff still owed the defendants P2,915.58;
therefore, they asked that judgment be entered absolving them, and sentencing the plaintiff to pay them the sum of
P2,915.58 with the costs.

Evidence was adduced by both parties and, upon their exhibits, together with an account book having been made of
record, the court below rendered judgment on the 15th of January, 1907, in favor of the plaintiff for the recovery of the
sum of P5,714.44 and costs.

The defendants excepted to the above decision and moved for a new trial. This motion was overruled and was also
excepted to by them; the bill of exceptions presented by the appellants having been approved, the same was in due
course submitted to this court.

The document of indebtedness inserted in the complaint states that the plaintiff left on deposit with the defendants a
given sum of money which they were jointly and severally obliged to return on a certain date fixed in the document; but
that, nevertheless, when the document appearing as Exhibits 2, written in the Visayan dialect and followed by a
translation into Spanish was executed, it was acknowledged, at the date thereof, the 15th of November, 1902, that the
 Cred Trans | 31

amount deposited had not yet been returned to the creditor, whereby he was subjected to losses and damages
amounting to 830 pesos since the 20th of January, 1898, when the return was again stipulated with the further agreement
that the amount deposited should bear interest at the rate of 15 per cent per annum, from the aforesaid date of January
20, and that the 1,000 pesos paid to the depositor on the 15th of May, 1900, according to the receipt issued by him to the
debtors, would be included, and that the said rate of interest would obtain until the debtors on the 20th of May, 1897, it is
called a deposit consisted, and they could have accomplished the return agreed upon by the delivery of a sum equal to the
one received by them. For this reason it must be understood that the debtors were lawfully authorized to make use of the
amount deposited, which they have done, as subsequent shown when asking for an extension of the time for the return
thereof, inasmuch as, acknowledging that they have subjected the letter, their creditor, to losses and damages for not
complying with what had been stipulated, and being conscious that they had used, for their own profit and gain, the
money that they received apparently as a deposit, they engaged to pay interest to the creditor from the date named until
the time when the refund should be made. Such conduct on the part of the debtors is unquestionable evidence that the
transaction entered into between the interested parties was not a deposit, but a real contract of loan.

Article 1767 of the Civil Code provides that —

The depository can not make use of the thing deposited without the express permission of the depositor.

Otherwise he shall be liable for losses and damages.

Article 1768 also provides that —

When the depository has permission to make use of the thing deposited, the contract loses the character of a
deposit and becomes a loan or bailment.

The permission shall not be presumed, and its existence must be proven.

When on one of the latter days of January, 1898, Jose Lim went to the office of the creditor asking for an extension of one
year, in view of the fact the money was scare, and because neither himself nor the other defendant were able to return
the amount deposited, for which reason he agreed to pay interest at the rate of 15 per cent per annum, it was because, as
a matter of fact, he did not have in his possession the amount deposited, he having made use of the same in his business
and for his own profit; and the creditor, by granting them the extension, evidently confirmed the express permission
previously given to use and dispose of the amount stated as having bee deposited, which, in accordance with the loan, to
all intents and purposes gratuitously, until the 20th of January, 1898, and from that dated with interest at 15 per cent per
annum until its full payment, deducting from the total amount of interest the sum of 1,000 pesos, in accordance with the
provisions of article 1173 of the Civil Code.

Notwithstanding that it does not appear that Jose Lim signed the document (Exhibit 2) executed in the presence of three
witnesses on the 15th of November, 1902, by Ceferino Domingo Lim on behalf of himself and the former, nevertheless,
the said document has not been contested as false, either by a criminal or by a civil proceeding, nor has any doubt been
cast upon the authenticity of the signatures of the witnesses who attested the execution of the same; and from the
evidence in the case one is sufficiently convinced that the said Jose Lim was perfectly aware of and authorized his joint
codebtor to liquidate the interest, to pay the sum of 1,000 pesos, on account thereof, and to execute the aforesaid
document No. 2. A true ratification of the original document of deposit was thus made, and not the least proof is shown in
the record that Jose Lim had ever paid the whole or any part of the capital stated in the original document, Exhibit 1.

If the amount, together with interest claimed in the complaint, less 1,000 pesos appears as fully established, such is not
the case with the defendant's counterclaim for P5,602.16, because the existence and certainty of said indebtedness
imputed to the plaintiff has not been proven, and the defendants, who call themselves creditors for the said amount have
not proven in a satisfactory manner that the plaintiff had received partial payments on account of the same; the latter
alleges with good reason, that they should produce the receipts which he may have issued, and which he did issue
whenever they paid him any money on account. The plaintiffs allegation that the two amounts of 400 and 1,200 pesos,
referred to in documents marked "C" and "D" offered in evidence by the defendants, had been received from Ceferino
Domingo Lim on account of other debts of his, has not been contradicted, and the fact that in the original complaint the
sum of 1,102.16 pesos, was expressed in lieu of 1,000 pesos, the only payment made on account of interest on the
amount deposited according to documents No. 2 and letter "B" above referred to, was due to a mistake.
 Cred Trans | 32

Moreover, for the reason above set forth it may, as a matter of course, be inferred that there was no renewal of the
contract deposited converted into a loan, because, as has already been stated, the defendants received said amount by
virtue of real loan contract under the name of a deposit, since the so-called bailees were forthwith authorized to dispose
of the amount deposited. This they have done, as has been clearly shown.

The original joint obligation contracted by the defendant debtor still exists, and it has not been shown or proven in the
proceedings that the creditor had released Joe Lim from complying with his obligation in order that he should not be sued
for or sentenced to pay the amount of capital and interest together with his codebtor, Ceferino Domingo Lim, because the
record offers satisfactory evidence against the pretension of Jose Lim, and it further appears that document No. 2 was
executed by the other debtor, Ceferino Domingo Lim, for himself and on behalf of Jose Lim; and it has also been proven
that Jose Lim, being fully aware that his debt had not yet been settled, took steps to secure an extension of the time for
payment, and consented to pay interest in return for the concession requested from the creditor.

In view of the foregoing, and adopting the findings in the judgment appealed from, it is our opinion that the same should
be and is hereby affirmed with the costs of this instance against the appellant, provided that the interest agreed upon
shall be paid until the complete liquidation of the debt. So ordered.

Arellano, C.J., Carson, Willard and Tracey, JJ., concur.

 Cred Trans | 33

G.R. No. L-4347 March 9, 1908

JOSE ROGERS, plaintiff-appellant,

vs.
SMITH, BELL, & CO., defendants-appellees.

Chicote and Miranda for appellant.

Kinney and Lawrence for appellees.

WILLARD, J.:

The plaintiff brought this action in the Court of First Instance of the city of Manila upon the following
document:

No. 1418. $12,000.

The sum of pesos twelve thousand has been deposited with us, received from Jose Rogers, which
sum we will pay on the last day of the six months after the presentation of this document, to the
order of Mr. Jose Rogers.

Manila, February 17, 1876.

SMITH, BELL & CO.

The said sum of twelve thousand pesos shall bear interest at the rate of eight per centum (8%) per
annum from this date, February 17, 1876.

SMITH, BELL & CO.

When this document was delivered by the defendants to the plaintiff the former delivered to the latter the
following letter:

MANILA, 17 February, 1876.

JOSE ROGERS, Esq., Present.

DEAR SIR: We have this day signed a receipt (quedan No. 1418) in your favor for twelve thousand
dollars, deposited in our hands, at interest of 8% per annum, commencing from to-day.

This interest will be paid to your order every three months, either in Manila or in London, as you
may wish.

If at any time you should desire to receive said deposit of twelve thousand dollars in London it will
be paid to you, or your order, by Messrs. Smith, Wood and Co., of that place, after two months'
notice, and on presentation of said receipt or quedan No. 1418.

We are, dear sir, yours, truly,

SMITH, BELL & CO.

 Cred Trans | 34

The only question in the case is, whether upon these documents the plaintiff is entitled to recover 12,000
pesos or 24,000 pesos. The court below held that he was entitled to recover only 12,000 pesos, and the
defendants having deposited that amount in court, judgment was ordered in their favor, from which
judgment the plaintiff has appealed.

The facts in the case are disputed. When this document was delivered 12,000 pesos in silver were worth
more than 12,000 pesos in gold. the plaintiff delivered to the defendants in consideration of the execution
of the document 12,000 in gold. Soon thereafter the plaintiff removed to Barcelona and has since resided
there. The defendants remitted the interest to him every three months at the rate of 8 per cent per annum
until the 30th day of January, 1888, when they notified him that thereafter the interest would be 6 per
cent. The plaintiff accepted this reduction and interest at that rate was remitted to him by the defendants
until the 10th of February, 1904. This interest was remitted in silver; that is to say, every three months the
defendants took 180 pesos in silver and with it bought exchange on Barcelona or other European point
converted into pesetas. The plaintiff received this payments in silver without any protest whatever until
the 10th day of February, 1904. He then, in his letter of that date, called the attention of the defendants to
the fact that by the new American law in force in the Philippines the gold standard had been introduced
and that by reason thereof he was entitled to receive his interest in gold, in view of the fact that when he
delivered the money to the defendants in 1876 he delivered it in gold coin. In another letter of the 15th of
December, 1904, he expressly refers to the act of Congress of March 2, 1903, and to the subsequent
proclamations of the Governor-General relating to coinage. These are practically all the fat in the case, and
the claim of the plaintiff is that, having paid to the defendants 12,000 pesos in gold coin, he is now entitled
to receive from them the value of 12,000 pesos in gold coin; that is to say, 24,000 pesos in silver.

It is necessary to determine in the first place the nature of the contract evidenced by the document of the
17th of February, 1876.

The important, and to our minds decisive, question in the case is, whether or not this document is
evidence of an ordinary loan which created between the plaintiff and the defendants the simple relation of
debtor and creditor. The appellant in his brief repeatedly calls it a deposit, but we do not understand that
he claims that it is or ever was a deposit in the technical sense of the term; that is, that he ownership of
the particular coin which was delivered by him to Smith, Bell & Co. did not pass to Smith, Bell & Co. but
remained in him and that Smith, Bell & Co. was bound to return to him the identical coin which they had
received. It is apparent that no such claim could be maintained in view of that part of the instrument which
provides for the payment of interest.

It is claimed, however, by the appellant, that while not a deposit in the strict sense of the word, the
document evidences what is known as an "irregular deposit." The parties agree that the case must be
decided in this respect in view of the legislation in force prior to the adoption of the Civil Code, and the
appellant says that the definition of an irregular deposit is found in Law II, Title III of the Fifth Partida.
Manresa, in his Commentaries on the Civil Code (vol. 11, p. 664), states that there are three points of
difference between a loan and an irregular deposit. The first difference which he points out consists in the
fact that in an irregular deposit the only benefit is that which accrues to the depositor, while in loan the
essential cause for the transaction is the necessity of the borrower. The contract in question does not fulfill
this requirement of an irregular deposit. It is very apparent that is was not for the sole benefit of Rogers. It,
like any other loan of money, was for the benefit of both parties. The benefit which Smith, Bell & Co.
received was the use of the money; the benefit which Rogers received was the interest of his money. In the
letter which Smith, Bell & Co. on the 30th of June, 1888, notified the plaintiff of the reduction of the
interest, they said: "We call your attention to this matter in order that you may if you think best employ
your money in some other place."
 Cred Trans | 35

Nor does the contract in question fulfill the third requisite indicated by Manresa, which is, in an irregular
deposit, the depositor can demand the return of the article at any time, while a lender is bound by the
provisions of the contract and can not seek restitution until the time for payment, as provided in the
contract, has arisen. It is apparent from the terms of this document that the plaintiff could not demand his
money at any time. He was bound to give notice of his desire for its return and then to wait for six months
before he could insist upon payment.

The second difference which exists, according to Manresa, between an irregular deposit and a loan lies in
the fact that in an irregular deposit the depositor has a preference over other creditors in the distribution
of the debtor's property. That this preference may exist and the transaction be still a loan, appears from
the decision of the supreme court of Spain of the 8th of April, 1881. The court there said:

Whereas, although the irregular deposit is considered as mutual, with respect to the repayment
between the depositor and the depositary, notwithstanding this, the latter retains the original
status of personal creditor and is simply privileged, in concurrence with other creditors against the
former, and he must be paid after the mortgage creditors and before the creditors whose right
appears only by written instruments, in accordance with Law XII, Title XIV, fifth Partida.

It is apparent, therefore, that this document does not state those requisites which are essential to an
irregular deposit.

But even if it did, it seems that the appellant's contention could not be sustained. He claims that in
accordance with said Law II, title III, Fifth Partida, the defendants are bound to return to him the same kind
of money which was received. That law is in part as follows:

And the ownership of the thing given in deposit is not transferred to the one who receives the
same; but, should the thing be one of those which can be counted, weighed, or measured, if, when
receiving it, the same were given by count, weight, or measure, then the ownership would be
transferred to him. Yet he would be obliged to return the same thing, or the same quantity, or
another similar to the one received, to him who gave it to him in deposit.

An examination, however, of Law II, Title I, of the Fifth Partida, which relates to loans, will show that the
obligation of the borrower in such case is stated in almost exactly the same words. That law is in part as
follows:

A man may loan to another any of the things mentioned in the last law which are susceptible of
being counted, weighed, or measured. And this is understood with regard to things belonging to
him who lends them, or which are loaned by another by authority of his principal; provided,
however, that once the thing is in the possession of him who secures the loan, he may dispose of it
as though it were his own. But he must return to the owner of the thing equal amount of the same
kind and quality, although the creditor should not specify either of the conditions.

The supreme court of Spain in the judgment of the 27th of October, 1868, speaking of the obligation of the
borrower in such case, says:

Whereas the principle in Laws I and II of Title I of the Fifth Partida, according to which the
borrower, acquires ownership of the thing and is bound to return an equal amount of the same
kind and quality, have special application to cases relating to loans of money or its equivalent;
whereas the thing loaned not being in such cases what properly constitutes the material or the
object of deposit, as happens with other perishable things, but rather the value that the coins or
the paper money represents, the obligation of the depository in this kind of contracts is to return
 Cred Trans | 36

the sum or amount therein expressed, whatever may have been the increase or depreciation
suffered by the specific kind of coin or paper, unless the contrary be stipulated.

It seems clear from these citations that the document in question is evidence of an ordinary loan and
created between the plaintiff and defendants the relation of debtor and creditor. The two judgments of
the supreme court of Spain cited by the appellant in his brief have no bearing upon the question. In that of
the 9th of July, 1889, it appeared that the Bank of Havana returned to the plaintiff the same kind of money
which it had received from him. The other judgment, of the 7th of February, 1891, simply held that a
servant who had left her money with her master and had taken a written obligation from him to pay the
same was not, in the distribution of his property, entitled to preference over other creditors on the ground
that her debt was for personal labor.

It having been determined that the contract between the parties created the common relation of debtor
and creditor, the case is easily resolved. Section 3 of the act of Congress of March 2, 1903, entitled "An act
to establish a standard of value and to provide for a coinage system in the Philippine Islands," is as follows:

That the silver Philippine pesos authorized by this act shall be legal tender in the Philippine Islands
for all debts, public and private, unless otherwise specifically provided by contract: Provided, That
debts contracted prior to the thirty-first day of December, nineteen hundred and three, may be
paid in the legal tender currency of said Islands existing at the time of the making of said contracts,
unless otherwise expressly provided by contract.

That this case falls within the terms of this section is very clear. The debt in question is a private debt,
calling for the payment of 12,000 pesos. This section authorizes the payment of that debt in the Philippine
pesos authorized by the act. That the act applies as well to debts created prior to its passage as to those
created after, appears from the proviso. The effect of that proviso is to give the debtor and not the creditor
the option as to the kind of money with which the debt shall be paid.

The only possible way to avoid the application of this section to the case at bar is by saying that Congress
had no power to pass the act and that sa to debts created prior to its passage it is therefore null and void.
That the act can not be declared void on this ground is well settled by the decisions of the Supreme Court
of the United States. (Legal Tender Cases, 12 Wall., 457; Dooley vs. Smith, 13 Wall., 604; Railroad
Company vs. Johnson, 15 Wall., 195;; Maryland vs. Railroad Company, 22 Wall., 105 and Julliard vs.
Greenman, 110 U. S., 421.) In the first four of those cases it was held that debts created when the only
legal-tender money was gold and silver could be paid in paper money issued by the Government and which
had no intrinsic value.

The appellant in his brief discusses at length the meaning of the word "dollars." We do not see how such a
discussion is material. The contract provides for the payment of "pesos," not "dollars." It is very evident
that the contract was not changed nor intended to be changed by the use of the word "dollars" in the
letter of February 17, 1876. That in English houses especially the word "dollars" was, until very recently,
used to indicate pesos of local currency, whether Mexican, Spanish, or Hongkong, is well known.

In conclusion it may be said that the plaintiff, in 1876, delivered to the defendants the cheapest kind of
money then in use. If he had desired to be repaid in the same money which he delivered, he should have
so provided expressly in the contract. He had a perfect right to do so, and if he had done so he could now,
by reason of the provisions of the said act of Congress, demand payment in gold.

That the plaintiff's protest in 1904 was based entirely upon his construction of this act of Congress admits
of no doubt; that he delivered that by the terms of the contract, without the act of Congress, Smith, Bell &
Co. had the right to pay him in silver is beyond question. This belief is shown not only by his letters of
 Cred Trans | 37

protest which expressly refer to the act of Congress as the basis of his claim but also by his conduct during
more than twenty-five years in receiving interest in silver without a sign of protest. That he would have
received the principal also in silver had the defendants tendered it to him at any time prior to 1903 is also
free from doubt. In making his protest in 1904 he evidently believed that the act of Congress required the
payment of the 12,000 pesos in gold and that he thereby has acquired additional rights. His construction of
the act is, as we have seen, wrong.

The judgment of the court below is affirmed, with the costs of this instance against the appellant. So
ordered.

Arellano, C.J., Torres, Mapa, Johnson, Carson, and Tracey, JJ., concur.
 Cred Trans | 38

G.R. No. L-32778 November 14, 1930

Involuntary insolvency of Mariano Velasco and Co., et al. COMPAÑIA AGRICOLA DE

ULTRAMAR, claimant-appellee,
vs.
VICENTE NEPOMUCENO, assignee-appellant.

The appellant in his own behalf.

Eusebio Orense and Nicolas Belmonte for appellee.

OSTRAND, J.:

It appears from the record that on March 17, 1927, the registered partnerships, Mariano Velasco & Co.,
Mariano Velasco, Sons, & Co., and Mariano Velasco & Co., Inc., were, on petition of the creditors, declared
insolvent by the Court of First Instance of Manila.

On the 16th day of April, 1927, the Compania Agricola de Ultramar filed a claim against one of the
insolvents Mariano Velasco & Co., claiming the sum of P10,000, with the agreed interest thereon at the
rate of 6 per cent per annum from April 5, 1918, until its full payment was a deposit with said Mariano
Velasco & Co. and asked the court to declare it a preferred claim.

The assignee of the insolvency answered the claim by interposing a general denial. The claim was
thereupon referred by the court to a Commissioner to receive the evidence, and on September 23, 1929,
the court rendered a decision declaring that the alleged deposit was a preferred claim for the sum
mentioned, with interest at 6 per cent per annum from April 5, 1918, until paid. From this decision the
assignee appealed.

The evidence presented by the claimant Compania Agricola de Ultramar consisted of a receipt in writing,
and the testimony of Jose Velasco who was manager of Mariano Velasco & Co. at the time the note was
executed. The receipt reads as follow (translation):

MANILA, P. I., April 5, 1918.

Received from the "Compania Agricola de Ultramar" the sum of ten thousand Philippine
pesos as a deposit at the interest of six per cent annually, for the term of three months from
date.

In witness thereof, I sign the present.

MARIANO VELASCO & CO.

By (Sgd.) JOSE VELASCO
Manager.

P10,000.00.

In his testimony, Jose Velasco stated that his signature on the receipt was authentic and that he received
the said sum of P10,000 from the appellee and deposited it with the bank in the current account of
Mariano Velasco & Co.
 Cred Trans | 39

In our opinion the court below erred in finding that the claim of the appellee should be considered a
deposit and a preferred claim. In the case of Gavieres vs. De Tavera (1 Phil., 17), very similar to the present
case, this court held that the transaction therein involved was a loan and not a deposit. The facts of the
case were that in 1859 Ignacia de Gorricho delivered P3,000 to Felix Pardo de Tavera. The agreement
between them read as follows (translation):

Received of Señorita Ignacia de Gorricho the sum of 3,000 pesos, gold (3,000 pesos), as a deposit
payable on two months' notice in advance, with interest at 6 percent per annum with a
hypothecation of the goods now owned by me or which may be owned hereafter, as security of the
payment.

In witness whereof I sign in Binondo, January 31, 1859.

FELIX PARDO DE TAVERA

After the death of both parties, Gavieres, as plaintiff and successor in interest of the deceased Ignacia de
Gorricho, brought the action against Trinidad H. Pardo de Tavera, the successor in interest of the deceased
Felix Pardo de Tavera, for the collection of the sum of P1,423.75, the remaining portion of the 3,000 pesos.
The plaintiff Gavieres alleged that the money was delivered to Felix Pardo de Tavera as a deposit, but the
defendant insisted that the agreement above quoted was not a contract of deposit but one of loan. This
court said:

Although in the document in question a deposit is spoken of, nevertheless from an examination of
the entire document it clearly appears that the contract was a loan and that such was the intention
of the parties. It is unnecessary to recur to the cannons of interpretation to arrive at this
conclusion. The obligation of the depository to pay interest at the rate of 6 per cent to the
depositor suffices to cause the obligation to be considered as a loan and makes it likewise evident
that it was the intention of the parties that the depository should have the right to make use of the
amount deposited, since it was stipulated that the amount could be collected after notice of two
months in advance. Such being the case, the contract lost the character of a deposit and acquired
that of a loan. (Art. 1768, Civil Code.)

In the case of Javellana vs. Lim (11 Phil., 141) this court, speaking through Justice Torres said:

Authority from the court having been previously obtained, the complaint was amended on the 10th
of January, 1907; it was then alleged, that on the 26th of May, 1897, the defendants executed and
subscribed a document in favor of the plaintiff reading as follows:

We have received from Angel Javellana, as a deposit without interest, the sum of two thousand six
hundred and eighty-six pesos and fifty-eight cents of pesos fuertes, which we will return to the said
gentleman, jointly and severally on the 20th of January, 1898. — Jaro, 26th of May 1879. — Signed:
JOSE LIM. — Signed: CEFERINO DOMINGO LIM.

That, when the obligation became due, the defendants begged the plaintiff for an extension of time
for the payment thereof binding themselves to pay interest at the rate of 15 per cent on the
amount of their indebtedness, to which the plaintiff acceded; that on the 15th of May, 1902, the
debtors paid on account of interest due the sum of 1,000 pesos, with the exception of which they
had not paid any other sum on account of either capital or interest, notwithstanding the requests
made by the plaintiff, who had thereby been subjected to loss and damages.

xxx xxx xxx

 Cred Trans | 40

The document of indebtedness inserted in the complaint states that the plaintiff left on deposit
with the defendants a given sum of money which they were jointly and severally obliged to return
on a certain date fixed in the document; but that, nevertheless, when the document appearing as
Exhibit 2, written in the Visayan dialect and followed by a translation into Spanish was executed, it
was acknowledged, at the date thereof, the 15th of November, 1902 that the amount deposited
had not yet been returned to the creditor, whereby he was subjected to losses and damages
amounting to 830 pesos since the 20th of January, 1898, when the return was again stipulated with
the further agreement that the amount deposited should bear interest at the rate of 15 per cent
per annum from the aforesaid date of January 20, and that the 1,000 pesos paid to the depositor on
the 15th of May, 1900, according to the receipt issued by him to the debtors, would be included,
and that the said rate of interest would obtain until the debtors paid the creditor the said amount
in full. In this second document the contract between the parties, which is a real loan of money
with interest, appears perfectly defined, notwithstanding the fact that in the original document
executed by the debtors on the 26th of May, 1897, it is called a deposit; so that when they bound
themselves jointly and severally to refund the sum of 2,686.58 pesos to the depositor, Javellana,
they did not engage to return the same coins received and of which the amount deposited
consisted, and they could have accomplished the return agreed upon by the delivery of a sum equal
to the one received by them. For this reason it must be understood that the debtors were lawfully
authorized to make use of the amount deposited, which they have done, as subsequently shown
when asking for an extension of the time for the return thereof, inasmuch as, acknowledging that
they have subjected the lender, their creditor, to losses and damages for not complying with what
had been stipulated, and being conscious that they had used, for their own profit and gain, the
money that they received apparently as a deposit, they engaged to pay interest to the creditor from
the date named until the time when the refund should be made. Such conduct on the part of the
debtors is unquestionable evidence that the transaction entered in to between the interested
parties was not a deposit, but a real contract of loan.

Article 1767 of the Civil Code provides that —

"The depository cannot make use of the thing deposited without the express permission of
the depositor."

"Otherwise he shall be liable for losses and damages."

Article 1768 also provides that —

"When the depository has permission to make use of the thing deposited, the contract loses
the character of a deposit and becomes a loan or bailment."

"The permission not be presumed, and its existence must be proven."

xxx xxx xxx

Moreover, for the reasons above set forth it may, as a matter of course, be inferred that there was
no renewal of the contract of deposit converted into a loan, because, as has already been stated,
the defendants received said amount by virtue of a real loan contract under the name of a deposit,
since the so-called bailees were forthwith authorized to dispose of the amount deposited. This they
have done, as has been clearly shown.lawphil.net

The two cases quoted are sufficient to show that the ten thousand pesos delivered by the appellee to
Mariano Velasco & Co. cannot de regarded as a technical deposit. But the appellee argues that it is at least
 Cred Trans | 41

an "irregular deposit." This argument is, we think, sufficiently answered in the case of Rogers vs. Smith, Bell
& Co. (10 Phil., 319). There this court said:

. . . Manresa, in his Commentaries on the Civil Code (vol. 11, p. 664), states that there are three
points of difference between a loan and an irregular deposit. The first difference which he points
out consists in the fact that in an irregular deposit the only benefit is that which accrues to the
depositor, while in a loan the essential cause for the transaction is the necessity of the borrower.
The contract in question does not fulfill this requirement of an irregular deposit. It is very apparent
that it was not for the sole benefit of Rogers. It, like any other loan of money, was for the benefit of
both parties. The benefit which Smith, Bell & Co. received was the use of the money; the benefit
which Rogers received was the interest on his money. In the letter in which Smith, Bell & Co. on the
30th of June, 1888, notified the plaintiff of the reduction of the interest, they said: "We call your
attention to this matter in order that you may if you think best employ your money in some other
place."

Nor does the contract in question fulfill the third requisite indicated by Manresa, which is, that in
an irregular deposit, the depositor can demand the return of the article at any time, while a lender
is bound by the provisions of the contract and cannot seek restitution until the time for payment,
as provided in the contract, has arisen. It is apparent from the terms of this documents that the
plaintiff could not demand his money at any time. He was bound to give notice of his desire for its
return and then to wait for six months before he could insist upon payment.

In the present case the transaction in question was clearly not for the sole benefit of the Compania
Agricola de Ultramar; it was evidently for the benefit of both parties. Neither could the alleged depositor
demand payment until the expiration of the term of three months.

For the reasons stated, the appealed judgment is reversed, and we hold that the transaction in question
must be regarded as a loan, without preference. Without costs. So ordered.

Johnson, Street, Malcolm, Villamor, Johns and Villa-Real, JJ., concur.

Separate Opinions

ROMUALDEZ, J., dissenting:

We are here concerned, I take it, with an irregular deposit and following Manresa's commentaries on this
point (11 Manresa, 694-697, 3d edition), as well as the case he cites from the Supreme Court of Spain,
decided on April 8, 1881, I am of the opinion that although the deposit in question earned interest, it was a
preferred credit .The judgment appealed from should therefore, as I think, be affirmed.

Avanceña, C.J., concurs.

 Cred Trans | 42

G.R. No. 104612 May 10, 1994

BANK OF THE PHILIPPINE ISLANDS (successor-in- interest of COMMERCIAL AND TRUST CO.), petitioner,
vs.
HON. COURT OF APPEALS, EASTERN PLYWOOD CORP. and BENIGNO D. LIM, respondents.

Leonen, Ramirez & Associates for petitioner.

Constante A. Ancheta for private respondents.

DAVIDE, JR., J.:

The petitioner urges us to review and set aside the amended Decision 1 of 6 March 1992 of respondent
Court of Appeals in CA- G.R. CV No. 25739 which modified the Decision of 15 November 1990 of Branch 19
of the Regional Trial Court (RTC) of Manila in Civil Case No. 87-42967, entitled Bank of the Philippine Islands
(successor-in-interest of Commercial Bank and Trust Company) versus Eastern Plywood Corporation and
Benigno D. Lim. The Court of Appeals had affirmed the dismissal of the complaint but had granted the
defendants' counterclaim for P331,261.44 which represents the outstanding balance of their account with
the plaintiff.

As culled from the records and the pleadings of the parties, the following facts were duly established:

Private respondents Eastern Plywood Corporation (Eastern) and

Benigno D. Lim (Lim), an officer and stockholder of Eastern, held at least one joint bank account ("and/or"
account) with the Commercial Bank and Trust Co. (CBTC), the predecessor-in-interest of petitioner Bank of
the Philippine Islands (BPI). Sometime in March 1975, a joint checking account ("and" account) with Lim in
the amount of P120,000.00 was opened by Mariano Velasco with funds withdrawn from the account of
Eastern and/or Lim. Various amounts were later deposited or withdrawn from the joint account of Velasco
and Lim. The money therein was placed in the money market.

Velasco died on 7 April 1977. At the time of his death, the outstanding balance of the account stood at
P662,522.87. On 5 May 1977, by virtue of an Indemnity Undertaking executed by Lim for himself and as
President and General Manager of Eastern, 2 one-half of this amount was provisionally released and
transferred to one of the bank accounts of Eastern with CBTC. 3

Thereafter, on 18 August 1978, Eastern obtained a loan of P73,000.00 from CBTC as "Additional Working
Capital," evidenced by the "Disclosure Statement on Loan/Credit Transaction" (Disclosure Statement)
signed by CBTC through its branch manager, Ceferino Jimenez, and Eastern, through Lim, as its President
and General Manager. 4The loan was payable on demand with interest at 14% per annum.

For this loan, Eastern issued on the same day a negotiable promissory note for P73,000.00 payable on
demand to the order of CBTC with interest at 14% per annum. 5 The note was signed by Lim both in his
own capacity and as President and General Manager of Eastern. No reference to any security for the loan
appears on the note. In the Disclosure Statement, the box with the printed word "UNSECURED" was
marked with "X" — meaning unsecured, while the line with the words "this loan is wholly/partly secured
by" is followed by the typewritten words "Hold-Out on a 1:1 on C/A No. 2310-001-42," which refers to the
joint account of Velasco and Lim with a balance of P331,261.44.
 Cred Trans | 43

In addition, Eastern and Lim, and CBTC signed another document entitled "Holdout Agreement," also dated
18 August 1978, 6 wherein it was stated that "as security for the Loan [Lim and Eastern] have offered
[CBTC] and the latter accepts a holdout on said [Current Account No. 2310-011-42 in the joint names of
Lim and Velasco] to the full extent of their alleged interests therein as these may appear as a result of final
and definitive judicial action or a settlement between and among the contesting parties
thereto." 7 Paragraph 02 of the Agreement provides as follows:

Eastply [Eastern] and Mr. Lim hereby confer upon Comtrust [CBTC], when and if their
alleged interests in the Account Balance shall have been established with finality, ample and
sufficient power as shall be necessary to retain said Account Balance and enable Comtrust
to apply the Account Balance for the purpose of liquidating the Loan in respect of principal
and/or accrued interest.

And paragraph 05 thereof reads:

The acceptance of this holdout shall not impair the right of Comtrust to declare the loan
payable on demand at any time, nor shall the existence hereof and the non-resolution of
the dispute between the contending parties in respect of entitlement to the Account
Balance, preclude Comtrust from instituting an action for recovery against Eastply and/or
Mr. Lim in the event the Loan is declared due and payable and Eastply and/or Mr. Lim shall
default in payment of all obligations and liabilities thereunder.

In the meantime, a case for the settlement of Velasco's estate was filed with Branch 152 of the RTC of
Pasig, entitled "In re Intestate Estate of Mariano Velasco," and docketed as Sp. Proc. No. 8959. In the said
case, the whole balance of P331,261.44 in the aforesaid joint account of Velasco and Lim was being
claimed as part of Velasco's estate. On 9 September 1986, the intestate court granted the urgent motion of
the heirs of Velasco to withdraw the deposit under the joint account of Lim and Velasco and authorized the
heirs to divide among themselves the amount withdrawn. 8

Sometime in 1980, CBTC was merged with BPI. 9 On 2 December 1987, BPI filed with the RTC of Manila a
complaint against Lim and Eastern demanding payment of the promissory note for P73,000.00. The
complaint was docketed as Civil Case No. 87- 42967 and was raffled to Branch 19 of the said court, then
presided over by Judge Wenceslao M. Polo. Defendants Lim and Eastern, in turn, filed a counterclaim
against BPI for the return of the balance in the disputed account subject of the Holdout Agreement and the
interests thereon after deducting the amount due on the promissory note.

After due proceedings, the trial court rendered its decision on

15 November 1990 dismissing the complaint because BPI failed to make out its case. Furthermore, it ruled
that "the promissory note in question is subject to the 'hold-out' agreement," 10 and that based on this
agreement, "it was the duty of plaintiff Bank [BPI] to debit the account of the defendants under the
promissory note to set off the loan even though the same has no fixed maturity." 11 As to the defendants'
counterclaim, the trial court, recognizing the fact that the entire amount in question had been withdrawn
by Velasco's heirs pursuant to the order of the intestate court in Sp. Proc. No. 8959, denied it because the
"said claim cannot be awarded without disturbing the resolution" of the intestate court. 12

Both parties appealed from the said decision to the Court of Appeals. Their appeal was docketed as CA-
G.R. CV No. 25739.

On 23 January 1991, the Court of Appeals rendered a decision affirming the decision of the trial court. It,
however, failed to rule on the defendants' (private respondents') partial appeal from the trial court's denial
of their counterclaim. Upon their motion for reconsideration, the Court of Appeals promulgated on 6
 Cred Trans | 44

March 1992 an Amended Decision 13 wherein it ruled that the settlement of Velasco's estate had nothing
to do with the claim of the defendants for the return of the balance of their account with CBTC/BPI as they
were not privy to that case, and that the defendants, as depositors of CBTC/BPI, are the latter's creditors;
hence, CBTC/BPI should have protected the defendants' interest in Sp. Proc. No. 8959 when the said
account was claimed by Velasco's estate. It then ordered BPI "to pay defendants the amount of
P331,261.44 representing the outstanding balance in the bank account of defendants." 14

On 22 April 1992, BPI filed the instant petition alleging therein that the Holdout Agreement in question was
subject to a suspensive condition stated therein, viz., that the "P331,261.44 shall become a security for
respondent Lim's promissory note only if respondents' Lim and Eastern Plywood Corporation's interests to
that amount are established as a result of a final and definitive judicial action or a settlement between and
among the contesting parties thereto." 15 Hence, BPI asserts, the Court of Appeals erred in affirming the
trial court's decision dismissing the complaint on the ground that it was the duty of CBTC to debit the
account of the defendants to set off the amount of P73,000.00 covered by the promissory note.

Private respondents Eastern and Lim dispute the "suspensive condition" argument of the petitioner. They
interpret the findings of both the trial and appellate courts that the money deposited in the joint account
of Velasco and Lim came from Eastern and Lim's own account as a finding that the money deposited in the
joint account of Lim and Velasco "rightfully belong[ed] to Eastern Plywood Corporation and/or Benigno
Lim." And because the latter are the rightful owners of the money in question, the suspensive condition
does not find any application in this case and the bank had the duty to set off this deposit with the loan.
They add that the ruling of the lower court that they own the disputed amount is the final and definitive
judicial action required by the Holdout Agreement; hence, the petitioner can only hold the amount of
P73,000.00 representing the security required for the note and must return the rest. 16

The petitioner filed a Reply to the aforesaid Comment. The private respondents filed a Rejoinder thereto.

We gave due course to the petition and required the parties to submit simultaneously their memoranda.

The key issues in this case are whether BPI can demand payment of the loan of P73,000.00 despite the
existence of the Holdout Agreement and whether BPI is still liable to the private respondents on the
account subject of the Holdout Agreement after its withdrawal by the heirs of Velasco.

The collection suit of BPI is based on the promissory note for P73,000.00. On its face, the note is an
unconditional promise to pay the said amount, and as stated by the respondent Court of Appeals, "[t]here
is no question that the promissory note is a negotiable instrument." 17 It further correctly ruled that BPI
was not a holder in due course because the note was not indorsed to BPI by the payee, CBTC. Only a
negotiation by indorsement could have operated as a valid transfer to make BPI a holder in due course. It
acquired the note from CBTC by the contract of merger or sale between the two banks. BPI, therefore,
took the note subject to the Holdout Agreement.

We disagree, however, with the Court of Appeals in its interpretation of the Holdout Agreement. It is clear
from paragraph 02 thereof that CBTC, or BPI as its successor-in-interest, had every right to demand that
Eastern and Lim settle their liability under the promissory note. It cannot be compelled to retain and apply
the deposit in Lim and Velasco's joint account to the payment of the note. What the agreement conferred
on CBTC was a power, not a duty. Generally, a bank is under no duty or obligation to make the
application. 18 To apply the deposit to the payment of a loan is a privilege, a right of set-off which the bank
has the option to exercise. 19

Also, paragraph 05 of the Holdout Agreement itself states that notwithstanding the agreement, CBTC was
not in any way precluded from demanding payment from Eastern and from instituting an action to recover
 Cred Trans | 45

payment of the loan. What it provides is an alternative, not an exclusive, method of enforcing its claim on
the note. When it demanded payment of the debt directly from Eastern and Lim, BPI had opted not to
exercise its right to apply part of the deposit subject of the Holdout Agreement to the payment of the
promissory note for P73,000.00. Its suit for the enforcement of the note was then in order and it was error
for the trial court to dismiss it on the theory that it was set off by an equivalent portion in C/A No. 2310-
001-42 which BPI should have debited. The Court of Appeals also erred in affirming such dismissal.

The "suspensive condition" theory of the petitioner is, therefore, untenable.

The Court of Appeals correctly decided on the counterclaim. The counterclaim of Eastern and Lim for the
return of the P331,261.44 20 was equivalent to a demand that they be allowed to withdraw their deposit
with the bank. Article 1980 of the Civil Code expressly provides that "[f]ixed, savings, and current deposits
of money in banks and similar institutions shall be governed by the provisions concerning simple loan."
In Serrano vs. Central Bank of the Philippines, 21 we held that bank deposits are in the nature of irregular
deposits; they are really loans because they earn interest. The relationship then between a depositor and a
bank is one of creditor and debtor. The deposit under the questioned account was an ordinary bank
deposit; hence, it was payable on demand of the depositor. 22

The account was proved and established to belong to Eastern even if it was deposited in the names of Lim
and Velasco. As the real creditor of the bank, Eastern has the right to withdraw it or to demand payment
thereof. BPI cannot be relieved of its duty to pay Eastern simply because it already allowed the heirs of
Velasco to withdraw the whole balance of the account. The petitioner should not have allowed such
withdrawal because it had admitted in the Holdout Agreement the questioned ownership of the money
deposited in the account. As early as 12 May 1979, CBTC was notified by the Corporate Secretary of
Eastern that the deposit in the joint account of Velasco and Lim was being claimed by them and that one-
half was being claimed by the heirs of Velasco.23

Moreover, the order of the court in Sp. Proc. No. 8959 merely authorized the heirs of Velasco to withdraw
the account. BPI was not specifically ordered to release the account to the said heirs; hence, it was under
no judicial compulsion to do so. The authorization given to the heirs of Velasco cannot be construed as a
final determination or adjudication that the account belonged to Velasco. We have ruled that when the
ownership of a particular property is disputed, the determination by a probate court of whether that
property is included in the estate of a deceased is merely provisional in character and cannot be the
subject of execution. 24

Because the ownership of the deposit remained undetermined, BPI, as the debtor with respect thereto,
had no right to pay to persons other than those in whose favor the obligation was constituted or whose
right or authority to receive payment is indisputable. The payment of the money deposited with BPI that
will extinguish its obligation to the creditor-depositor is payment to the person of the creditor or to one
authorized by him or by the law to receive it. 25 Payment made by the debtor to the wrong party does not
extinguish the obligation as to the creditor who is without fault or negligence, even if the debtor acted in
utmost good faith and by mistake as to the person of the creditor, or through error induced by fraud of a
third person. 26 The payment then by BPI to the heirs of Velasco, even if done in good faith, did not
extinguish its obligation to the true depositor, Eastern.

In the light of the above findings, the dismissal of the petitioner's complaint is reversed and set aside. The
award on the counterclaim is sustained subject to a modification of the interest.

WHEREFORE, the instant petition is partly GRANTED. The challenged amended decision in CA-G.R. CV No.
25735 is hereby MODIFIED. As modified:
 Cred Trans | 46

(1) Private respondents are ordered to pay the petitioner the promissory note for
P73,000.00 with interest at:

(a) 14% per annum on the principal, computed from

18 August 1978 until payment;

(b) 12% per annum on the interest which had accrued up to the date of the
filing of the complaint, computed from that date until payment pursuant to
Article 2212 of the Civil Code.

(2) The award of P331,264.44 in favor of the private respondents shall bear interest at the
rate of 12%per annum computed from the filing of the counterclaim.

No pronouncement as to costs.

SO ORDERED.
 Cred Trans | 47

G.R. No. 179952 December 4, 2009

METROPOLITAN BANK AND TRUST COMPANY (formerly ASIANBANK CORPORATION), Petitioner,

vs.
BA FINANCE CORPORATION and MALAYAN INSURANCE CO., INC., Respondents.

DECISION

CARPIO MORALES, J.:

Lamberto Bitanga (Bitanga) obtained from respondent BA Finance Corporation (BA Finance) a
₱329,2801 loan to secure which, he mortgaged his car to respondent BA Finance.2 The mortgage contained
the following stipulation:

The MORTGAGOR covenants and agrees that he/it will cause the property(ies) hereinabove mortgaged to
be insured against loss or damage by accident, theft and fire for a period of one year from date hereof with
an insurance company or companies acceptable to the MORTGAGEE in an amount not less than the
outstanding balance of mortgage obligations and that he/it will make all loss, if any, under such policy or
policies, payable to the MORTGAGEE or its assigns as its interest may appear x x x.3 (emphasis and
underscoring supplied)

Bitanga thus had the mortgaged car insured by respondent Malayan Insurance Co., Inc. (Malayan
Insurance)4which issued a policy stipulating that, inter alia,

Loss, if any shall be payable to BA FINANCE CORP. as its interest may appear. It is hereby expressly
understood that this policy or any renewal thereof, shall not be cancelled without prior notification and
conformity by BA FINANCE CORPORATION.5 (emphasis and underscoring supplied)

The car was stolen. On Bitanga’s claim, Malayan Insurance issued a check payable to the order of "B.A.
Finance Corporation and Lamberto Bitanga" for ₱224,500, drawn against China Banking Corporation (China
Bank). The check was crossed with the notation "For Deposit Payees’ Account Only." 6

Without the indorsement or authority of his co-payee BA Finance, Bitanga deposited the check to his
account with the Asianbank Corporation (Asianbank), now merged with herein petitioner Metropolitan
Bank and Trust Company (Metrobank). Bitanga subsequently withdrew the entire proceeds of the check.

In the meantime, Bitanga’s loan became past due, but despite demands, he failed to settle it.

BA Finance eventually learned of the loss of the car and of Malayan Insurance’s issuance of a crossed check
payable to it and Bitanga, and of Bitanga’s depositing it in his account at Asianbank and withdrawing the
entire proceeds thereof.

BA Finance thereupon demanded the payment of the value of the check from Asianbank 7 but to no avail,
prompting it to file a complaint before the Regional Trial Court (RTC) of Makati for sum of money and
damages against Asianbank and Bitanga,8 alleging that, inter alia, it is entitled to the entire proceeds of the
check.

In its Answer with Counterclaim,9 Asianbank alleged that BA Finance "instituted [the] complaint in bad
faith to coerce [it] into paying the whole amount of the CHECK knowing fully well that its rightful claim, if
any, is against Malayan [Insurance]."10
 Cred Trans | 48

Asianbank thereafter filed a cross-claim against Bitanga,11 alleging that he fraudulently induced its
personnel to release to him the full amount of the check; and that on being later informed that the entire
amount of the check did not belong to Bitanga, it took steps to get in touch with him but he had changed
residence without leaving any forwarding address.12

And Asianbank filed a third-party complaint against Malayan Insurance,13 alleging that Malayan Insurance
was grossly negligent in issuing the check payable to both Bitanga and BA Finance and delivering it to
Bitanga without the consent of BA Finance.14

Bitanga was declared in default in Asianbank’s cross-claim.15

Branch 137 of the Makati RTC, finding that Malayan Insurance was not privy to the contract between BA
Finance and Bitanga, and noting the claim of Malayan Insurance that it is its policy to issue checks to both
the insured and the financing company, held that Malayan Insurance cannot be faulted for negligence for
issuing the check payable to both BA Finance and Bitanga.

The trial court, holding that Asianbank was negligent in allowing Bitanga to deposit the check to his
account and to withdraw the proceeds thereof, without his co-payee BA Finance having either indorsed it
or authorized him to indorse it in its behalf,16 found Asianbank and Bitanga jointly and severally liable to BA
Finance following Section 41 of the Negotiable Instruments Law and Associated Bank v. Court of Appeals.17

Thus the trial court disposed:

WHEREFORE, premises considered, judgment is hereby rendered ordering defendants Asian Bank
Corporation and Lamberto Bitanga:

1) To pay plaintiff jointly and severally the sum of P224,500.00 with interest thereon at the rate of
12% from September 25, 1992 until fully paid;

2) To pay plaintiff the sum of P50,000.00 as exemplary damages; P20,000.00 as actual damages;
P30,000.00 as attorney’s fee; and

3) To pay the costs of suit.

Asianbank’s and Bitanga’s [sic] counterclaims are dismissed.

The third party complaint of defendant/third party plaintiff against third-party defendant Malayan
Insurance, Co., Inc. is hereby dismissed. Asianbank is ordered to pay Malayan attorney’s fee of P50,000.00
and a per appearance fee of P500.00.

On the cross-claim of defendant Asianbank, co-defendant Lamberto Bitanga is ordered to pay the former
the amounts the latter is ordered to pay the plaintiff in Nos. 1, 2 and 3 above-mentioned.

SO ORDERED.18 (emphasis and underscoring supplied)

Before the Court of Appeals, Asianbank, in its Appellant’s Brief, submitted the following issues for
consideration:

3.01.1.1 Whether BA Finance has a cause of action against Asianbank.

 Cred Trans | 49

3.01.1.2 Assuming that BA Finance has a valid cause of action, may it claim from Asianbank more than one-
half of the value of the check considering that it is a mere co-payee or joint payee of the check?

3.01.1.3 Whether BA Finance is liable to Asianbank for actual and exemplary damages for wrongfully
bringing the case to court.

3.01.1.4 Whether Malayan is liable to Asianbank for reimbursement of any sum of money which this
Honorable Court may award to BA Finance in this case.19 (underscoring supplied)

And it proffered the following arguments:

A. BA Finance has no cause of action against Asianbank as it has no legal right and title to the check
considering that the check was not delivered to BA Finance. Hence, BA Finance is not a holder
thereof under the Negotiable Instruments Law.

B. Asianbank, as collecting bank, is not liable to BA Finance as there was no privity of contract
between them.

C. Asianbank, as collecting bank, is not liable to BA Finance, considering that, as the intermediary
between the payee and the drawee Chinabank, it merely acted on the instructions of drawee
Chinabank to pay the amount of the check to Bitanga, hence, the consequent damage to BA
Finance was due to the negligence of Chinabank.

D. Malayan’s act of issuing and delivering the check solely to Bitanga in violation of the "loss payee"
clause in the Policy, is the proximate cause of the alleged damage to BA Finance.

E. Assuming Asianbank is liable, BA Finance can claim only his proportionate interest on the check
as it is a joint payee thereof.

F. Bitanga alone is liable for the amount to BA Finance on the ground of unjust enrichment or
solutio indebiti.

G. BA Finance is liable to pay Asianbank actual and exemplary damages.20 (underscoring supplied)

The appellate court, "summarizing" the errors attributed to the trial court by Asianbank to be
"whether…BA Finance has a cause of action against [it] even if the subject check had not been delivered
to…BA Finance by the issuer itself," held in the affirmative and accordingly affirmed the trial court’s
decision but deleted the award of ₱20,000 as actual damages.21

Hence, the present Petition for Review on Certiorari22 filed by Metrobank (hereafter petitioner) to which
Asianbank was, as earlier stated, merged, faulting the appellate court

I. x x x in applying the case of Associated Bank v. Court of Appeals, in the absence of factual
similarity and of the legal relationships necessary for the application of the desirable shortcut rule.
xxx

II. x x x in not finding that x x x the general rule that the payee has no cause of action against the
collecting bank absent delivery to him must be applied.

III. x x x in finding that all the elements of a cause of action by BA Finance Corporation against
Asianbank Corporation are present.
 Cred Trans | 50

IV. x x x in finding that Article 1208 of the Civil Code is not applicable.

V. x x x in awarding of exemplary damages even in the absence of moral, temperate, liquidated or

compensatory damages and a finding of fact that Asianbank acted in a wanton, fraudulent, reckless,
oppressive or malevolent manner.

xxxx

VII. x x x in dismissing Asianbank’s counterclaim and Third Party complaint [against Malayan
Insurance].23(italics in the original; underscoring supplied)

Petitioner proffers the following arguments against the application of Associated Bank v. CA to the case:

x x x [T]he rule established in the Associated Bank case has provided a speedier remedy for the payee to
recover from erring collecting banks despite the absence of delivery of the negotiable instrument.
However, the application of the rule demands careful consideration of the factual settings and issues
raised in the case x x x.

One of the relevant circumstances raised in Associated Bank is the existence of forgery or unauthorized
indorsement. x x x

xxxx

In the case at bar, Bitanga is authorized to indorse the check as the drawer names him as one of the
payees. Moreover, his signature is not a forgery nor has he or anyone forged the signature of the
representative of BA Finance Corporation. No unauthorized indorsement appears on the check.

xxxx

Absent the indispensable fact of forgery or unauthorized indorsement, the desirable shortcut rule cannot
be applied,24 (underscoring supplied)

The petition fails.

Section 41 of the Negotiable Instruments Law provides:

Where an instrument is payable to the order of two or more payees or indorsees who are not partners, all
must indorse unless the one indorsing has authority to indorse for the others. (emphasis and underscoring
supplied)

Bitanga alone endorsed the crossed check, and petitioner allowed the deposit and release of the proceeds
thereof, despite the absence of authority of Bitanga’s co-payee BA Finance to endorse it on its behalf.25

Denying any irregularity in accepting the check, petitioner maintains that it followed normal banking
procedure. The testimony of Imelda Cruz, Asianbank’s then accounting head, shows otherwise, however,
viz:

Q Now, could you be familiar with a particular policy of the bank with respect to checks with joined
(sic) payees?

A Yes, sir.
 Cred Trans | 51

Q And what would be the particular policy of the bank regarding this transaction?

A The bank policy and procedure regarding the joint checks. Once it is deposited to a single
account, we are not accepting joint checks for single account, depositing to a single account (sic).

Q What happened to the bank employee who allowed this particular transaction to occur?

A Once the branch personnel, the bank personnel (sic) accepted it, he is liable.

Q What do you mean by the branch personnel being held liable?

A Because since (sic) the bank policy, we are not supposed to accept joint checks to a [single]
account, so we mean that personnel would be held liable in the sense that (sic) once it is
withdrawn or encashed, it will not be allowed.

Q In your experience, have you encountered any bank employee who was subjected to disciplinary
action by not following bank policies?

A The one that happened in that case, since I really don’t know who that personnel is, he is no
longer connected with the bank.

Q What about in general, do you know of any disciplinary action, Madam witness?

A Since there’s a negligence on the part of the bank personnel, it will be a ground for his
separation [from] the bank.26 (emphasis, italics and underscoring supplied)

Admittedly, petitioner dismissed the employee who allowed the deposit of the check in Bitanga’s account.

Petitioner’s argument that since there was neither forgery, nor unauthorized indorsement because Bitanga
was a co-payee in the subject check, the dictum in Associated Bank v. CA does not apply in the present
case fails. The payment of an instrument over a missing indorsement is the equivalent of payment on a
forged indorsement27 or an unauthorized indorsement in itself in the case of joint payees.28

Clearly, petitioner, through its employee, was negligent when it allowed the deposit of the crossed check,
despite the lone endorsement of Bitanga, ostensibly ignoring the fact that the check did not, it bears
repeating, carry the indorsement of BA Finance.29

As has been repeatedly emphasized, the banking business is imbued with public interest such that the
highest degree of diligence and highest standards of integrity and performance are expected of banks in
order to maintain the trust and confidence of the public in general in the banking sector. 30 Undoubtedly,
BA Finance has a cause of action against petitioner.

Is petitioner liable to BA Finance for the full value of the check?

Petitioner, at all events, argue that its liability to BA Finance should only be one-half of the amount
covered by the check as there is no indication in the check that Bitanga and BA Finance are solidary
creditors to thus make them presumptively joint creditors under Articles 1207 and 1208 of the Civil Code
which respectively provide:

Art. 1207. The concurrence of two or more creditors or of two or more debtors in one and the same
obligation does not imply that each one of the former has a right to demand, or that each one of the latter
 Cred Trans | 52

is bound to render, entire compliance with the prestations. There is a solidary liability only when the
obligation expressly so states, or when the law or the nature of the obligation requires solidarity.

Art. 1208. If from the law, or the nature or wording of the obligations to which the preceding article refers
to the contrary does not appear, the credit or debt shall be presumed to be divided into as many equal
shares as there are creditors or debtors, the debts or credits being considered distinct from one another,
subject to the Rules of Court governing the multiplicity of suits.

Petitioner’s argument is flawed.

The provisions of the Negotiable Instruments Law and underlying jurisprudential teachings on the black-
letter law provide definitive justification for petitioner’s full liability on the value of the check.

To be sure, a collecting bank, Asianbank in this case, where a check is deposited and which indorses the
check upon presentment with the drawee bank, is an indorser. [31] This is because in indorsing a check to
the drawee bank, a collecting bank stamps the back of the check with the phrase "all prior endorsements
and/or lack of endorsement guaranteed"32 and, for all intents and purposes, treats the check as a
negotiable instrument, hence, assumes the warranty of an indorser.33 Without Asianbank’s warranty, the
drawee bank (China Bank in this case) would not have paid the value of the subject check.

Petitioner, as the collecting bank or last indorser, generally suffers the loss because it has the duty to
ascertain the genuineness of all prior indorsements considering that the act of presenting the check for
payment to the drawee is an assertion that the party making the presentment has done its duty to
ascertain the genuineness of prior indorsements.34

Accordingly, one who credits the proceeds of a check to the account of the indorsing payee is liable in
conversion to the non-indorsing payee for the entire amount of the check.35

It bears noting that in petitioner’s cross-claim against Bitanga, the trial court ordered Bitanga to return to
petitioner the entire value of the check ─ ₱224,500.00 ─ with interest as well as damages and cost of suit.
Petitioner never questioned this aspect of the trial court’s disposition, yet it now prays for the modification
of its liability to BA Finance to only one-half of said amount. To pander to petitioner’s supplication would
certainly amount to unjust enrichment at BA Finance’s expense. Petitioner’s remedy—which is the
reimbursement for the full amount of the check from the perpetrator of the irregularity — lies with
Bitanga.

Articles 1207 and 1208 of the Civil Code cannot be applied to the present case as these are completely
irrelevant. The drawer, Malayan Insurance in this case, issued the check to answer for an underlying
contractual obligation (payment of insurance proceeds). The obligation is merely reflected in the
instrument and whether the payees would jointly share in the proceeds or not is beside the point.

Moreover, granting petitioner’s appeal for partial liability would run counter to the existing principles on
the liabilities of parties on negotiable instruments, particularly on Section 68 of the Negotiable Instruments
Law which instructs that joint payees who indorse are deemed to indorse jointly and severally.36 Recall that
when the maker dishonors the instrument, the holder thereof can turn to those secondarily liable — the
indorser — for recovery.37 And since the law explicitly mandates a solidary liability on the part of the joint
payees who indorse the instrument, the holder thereof (assuming the check was further negotiated) can
turn to either Bitanga or BA Finance for full recompense.

Respecting petitioner’s challenge to the award by the appellate court of exemplary damages to BA Finance,
the same fails. Contrary to petitioner’s claim that no moral, temperate, liquidated or compensatory
 Cred Trans | 53

damages were awarded by the trial court,38 the RTC did in fact award compensatory or actual damages of
₱224,500, the value of the check, plus interest thereon.

Petitioner argues, however, that assuming arguendo that compensatory damages had been awarded, the
same contravened Article 2232 of the Civil Code which provides that in contracts or quasi-contracts, the
court may award exemplary damages only if the defendant acted in a wanton, fraudulent, reckless,
oppressive, or malevolent manner. Since, so petitioner concludes, there was no finding that it acted in a
wanton, fraudulent, reckless, oppressive, or malevolent manner,39 it is not liable for exemplary damages.

The argument fails. To reiterate, petitioner’s liability is based not on contract or quasi-contract but
on quasi-delictsince there is no pre-existing contractual relation between the parties.40 Article 2231 of the
Civil Code, which provides that in quasi-delict, exemplary damages may be granted if the defendant acted
with gross negligence, thus applies. For "gross negligence" implies a want or absence of or failure to
exercise even slight care or diligence, or the entire absence of care,41 evincing a thoughtless disregard of
consequences without exerting any effort to avoid them.42

x x x The law allows the grant of exemplary damages to set an example for the public good. The business of
a bank is affected with public interest; thus it makes a sworn profession of diligence and meticulousness in
giving irreproachable service. For this reason, the bank should guard against in injury attributable to
negligence or bad faith on its part. The award of exemplary damages is proper as a warning to [the
petitioner] and all concerned not to recklessly disregard their obligation to exercise the highest and
strictest diligence in serving their depositors.43(Italics and underscoring supplied)

As for the dismissal by the appellate court of petitioner’s third-party complaint against Malayan Insurance,
the same is well-taken. Petitioner based its third-party complaint on Malayan Insurance’s alleged gross
negligence in issuing the check payable to both BA Finance and Bitanga, despite the stipulation in the
mortgage and in the insurance policy that liability for loss shall be payable to BA Finance.44 Malayan
Insurance countered, however, that it

x x x paid the amount of ₱224,500 to ‘BA Finance Corporation and Lamberto Bitanga’ in compliance with
the decision in the case of "Lamberto Bitanga versus Malayan Insurance Co., Inc., Civil Case No. 88-2802,
RTC-Makati Br. 132, and affirmed on appeal by the Supreme Court [3rd Division], G.R. no. 101964, April 8,
1992 x x x.45(underscoring supplied)

It is noted that Malayan Insurance, which stated that it was a matter of company policy to issue checks in
the name of the insured and the financing company, presented a witness to rebut its supposed
negligence. 46 Perforce, it thus wrote a crossed check with joint payees so as to serve warning that the
check was issued for a definite purpose.47Petitioner never ever disputed these assertions.

The Court takes exception, however, to the appellate court’s affirmance of the trial court’s grant of legal
interest of 12% per annum on the value of the check. For the obligation in this case did not arise out of a
loan or forbearance of money, goods or credit. While Article 1980 of the Civil Code provides that:

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

said provision does not find application in this case since the nature of the relationship between BA
Finance and petitioner is one of agency whereby petitioner, as collecting bank, is to collect for BA Finance
the corresponding proceeds from the check.48 Not being a loan or forbearance of money, the interest
should be 6% per annum computed from the date of extrajudicial demand on September 25, 1992 until
 Cred Trans | 54

finality of judgment; and 12% per annum from finality of judgment until payment, conformably with
Eastern Shipping Lines, Inc. v. Court of Appeals.[49]

WHEREFORE, the Decision of the Court of Appeals dated May 18, 2007 is AFFIRMED with MODIFICATION in
that the rate of interest on the judgment obligation of ₱224,500 should be 6% per annum, computed from
the time of extrajudicial demand on September 25, 1992 until its full payment before finality of judgment;
thereafter, if the amount adjudged remains unpaid, the interest rate shall be 12% per annum computed
from the time the judgment becomes final and executory until fully satisfied.

Costs against petitioner.

SO ORDERED.
 Cred Trans | 55

G.R. No. 118492 August 15, 2001

GREGORIO H. REYES and CONSUELO PUYAT-REYES, petitioners,

vs.
THE HON. COURT OF APPEALS and FAR EAST BANK AND TRUST COMPANY, respondents.

DE LEON, JR., J.:

Before us is a petition for review of the Decision1 dated July 22, 1994 and Resolution2 dated December 29,
1994 of the Court of Appeals3 affirming with modification the Decision4 dated November 12, 1992 of the
Regional Trial Court of Makati, Metro Manila, Branch 64, which dismissed the complaint for damages of
petitioners spouses Gregorio H. Reyes and Consuelo Puyat-Reyes against respondent Far East Bank and
Trust Company.

The undisputed facts of the case are as follows:

In view of the 20th Asian Racing Conference then scheduled to be held in September, 1988 in Sydney,
Australia, the Philippine Racing Club, Inc. (PRCI, for brevity) sent four (4) delegates to the said conference.
Petitioner Gregorio H. Reyes, as vice-president for finance, racing manager, treasurer, and director of PRCI,
sent Godofredo Reyes, the club's chief cashier, to the respondent bank to apply for a foreign exchange
demand draft in Australian dollars.

Godofredo went to respondent bank's Buendia Branch in Makati City to apply for a demand draft in the
amount One Thousand Six Hundred Ten Australian Dollars (AU$1,610.00) payable to the order of the
20th Asian Racing Conference Secretariat of Sydney, Australia. He was attended to by respondent bank's
assistant cashier, Mr. Yasis, who at first denied the application for the reason that respondent bank did not
have an Australian dollar account in any bank in Sydney. Godofredo asked if there could be a way for
respondent bank to accommodate PRCI's urgent need to remit Australian dollars to Sydney. Yasis of
respondent bank then informed Godofredo of a roundabout way of effecting the requested remittance to
Sydney thus: the respondent bank would draw a demand draft against Westpac Bank in Sydney, Australia
(Westpac-Sydney for brevity) and have the latter reimburse itself from the U.S. dollar account of the
respondent in Westpac Bank in New York, U.S.A. (Westpac-New York for brevity). This arrangement has
been customarily resorted to since the 1960's and the procedure has proven to be problem-free. PRCI and
the petitioner Gregorio H. Reyes, acting through Godofredo, agreed to this arrangement or approach in
order to effect the urgent transfer of Australian dollars payable to the Secretariat of the 20 th Asian Racing
Conference.

On July 28, 1988, the respondent bank approved the said application of PRCI and issued Foreign Exchange
Demand Draft (FXDD) No. 209968 in the sum applied for, that is, One Thousand Six Hundred Ten Australian
Dollars (AU$ 1,610.00), payable to the order of the 20th Asian Racing Conference Secretariat of Sydney,
Australia, and addressed to Westpac-Sydney as the drawee bank.1âwphi1.nêt

On August 10, 1988, upon due presentment of the foreign exchange demand draft, denominated as FXDD
No. 209968, the same was dishonored, with the notice of dishonor stating the following: "xxx No account
held with Westpac." Meanwhile, on August 16, 1988, Wespac-New York sent a cable to respondent bank
informing the latter that its dollar account in the sum of One Thousand Six Hundred Ten Australian Dollars
(AU$ 1,610.00) was debited. On August 19, 1988, in response to PRCI's complaint about the dishonor of
the said foreign exchange demand draft, respondent bank informed Westpac-Sydney of the issuance of the
said demand draft FXDD No. 209968, drawn against the Wespac-Sydney and informing the latter to be
reimbursed from the respondent bank's dollar account in Westpac-New York. The respondent bank on the
same day likewise informed Wespac-New York requesting the latter to honor the reimbursement claim of
 Cred Trans | 56

Wespac-Sydney. On September 14, 1988, upon its second presentment for payment, FXDD No. 209968 was
again dishonored by Westpac-Sydney for the same reason, that is, that the respondent bank has no
deposit dollar account with the drawee Wespac-Sydney.

On September 17, 1988 and September 18, 1988, respectively, petitioners spouses Gregorio H. Reyes and
Consuelo Puyat-Reyes left for Australia to attend the said racing conference. When petitioner Gregorio H.
Reyes arrived in Sydney in the morning of September 18, 1988, he went directly to the lobby of Hotel
Regent Sydney to register as a conference delegate. At the registration desk, in the presence of other
delegates from various member of the conference secretariat that he could not register because the
foreign exchange demand draft for his registration fee had been dishonored for the second time. A
discussion ensued in the presence and within the hearing of many delegates who were also registering.
Feeling terribly embarrassed and humiliated, petitioner Gregorio H. Reyes asked the lady member of the
conference secretariat that he be shown the subject foreign exchange demand draft that had been
dishonored as well as the covering letter after which he promised that he would pay the registration fees
in cash. In the meantime he demanded that he be given his name plate and conference kit. The lady
member of the conference secretariat relented and gave him his name plate and conference kit. It was
only two (2) days later, or on September 20, 1988, that he was given the dishonored demand draft and a
covering letter. It was then that he actually paid in cash the registration fees as he had earlier promised.

Meanwhile, on September 19, 1988, petitioner Consuelo Puyat-Reyes arrived in Sydney. She too was
embarassed and humiliated at the registration desk of the conference secretariat when she was told in the
presence and within the hearing of other delegates that she could not be registered due to the dishonor of
the subject foreign exchange demand draft. She felt herself trembling and unable to look at the people
around her. Fortunately, she saw her husband, coming toward her. He saved the situation for her by telling
the secretariat member that he had already arranged for the payment of the registration fee in cash once
he was shown the dishonored demand draft. Only then was petitioner Puyat-Reyes given her name plate
and conference kit.

At the time the incident took place, petitioner Consuelo Puyat-Reyes was a member of the House of
Representatives representing the lone Congressional District of Makati, Metro Manila. She has been an
officer of the Manila Banking Corporation and was cited by Archbishop Jaime Cardinal Sin as the top lady
banker of the year in connection with her conferment of the Pro-Ecclesia et Pontifice Award. She has also
been awarded a plaque of appreciation from the Philippine Tuberculosis Society for her extraordinary
service as the Society's campaign chairman for the ninth (9th) consecutive year.

On November 23, 1988, the petitioners filed in the Regional Trial Court of Makati, Metro Manila, a
complaint for damages, docketed as Civil Case No. 88-2468, against the respondent bank due to the
dishonor of the said foreign exchange demand draft issued by the respondent bank. The petitioners claim
that as a result of the dishonor of the said demand draft, they were exposed to unnecessary shock, social
humiliation, and deep mental anguish in a foreign country, and in the presence of an international
audience.

On November 12, 1992, the trial court rendered judgment in favor of the defendant (respondent bank) and
against the plaintiffs (herein petitioners), the dispositive portion of which states:

WHEREFORE, judgment is hereby rendered in favor of the defendant, dismissing plaintiff's

complaint, and ordering plaintiffs to pay to defendant, on its counterclaim, the amount of
P50,000.00, as reasonable attorney's fees. Costs against the plaintiff.

SO ORDERED.5
 Cred Trans | 57

The petitioners appealed the decision of the trial court to the Court of Appeals. On July 22, 1994, the
appellate court affirmed the decision of the trial court but in effect deleted the award of attorney's fees to
the defendant (herein respondent bank) and the pronouncement as to the costs. The decretal portion of
the decision of the appellate court states:

WHEREFORE, the judgment appealed from, insofar as it dismissed plaintiff's complaint, is hereby
AFFIRMED, but is hereby REVERSED and SET ASIDE in all other respect. No special pronouncement
as to costs.

SO ORDERED.6

According to the appellate court, there is no basis to hold the respondent bank liable for damages for the
reason that it exerted every effort for the subject foreign exchange demand draft to be honored. The
appellate court found and declared that:

xxx xxx xxx

Thus, the Bank had every reason to believe that the transaction finally went through smoothly,
considering that its New York account had been debited and that there was no miscommunication
between it and Westpac-New York. SWIFT is a world wide association used by almost all banks and
is known to be the most reliable mode of communication in the international banking business.
Besides, the above procedure, with the Bank as drawer and Westpac-Sydney as drawee, and with
Westpac-New York as the reimbursement Bank had been in place since 1960s and there was no
reason for the Bank to suspect that this particular demand draft would not be honored by Westpac-
Sydney.

From the evidence, it appears that the root cause of the miscommunications of the Bank's SWIFT
message is the erroneous decoding on the part of Westpac-Sydney of the Bank's SWIFT message as
an MT799 format. However, a closer look at the Bank's Exhs. "6" and "7" would show that despite
what appears to be an asterick written over the figure before "99", the figure can still be distinctly
seen as a number "1" and not number "7", to the effect that Westpac-Sydney was responsible for
the dishonor and not the Bank.

Moreover, it is not said asterisk that caused the misleading on the part of the Westpac-Sydney of
the numbers "1" to "7", since Exhs. "6" and "7" are just documentary copies of the cable message
sent to Wespac-Sydney. Hence, if there was mistake committed by Westpac-Sydney in decoding the
cable message which caused the Bank's message to be sent to the wrong department, the mistake
was Westpac's, not the Bank's. The Bank had done what an ordinary prudent person is required to
do in the particular situation, although appellants expect the Bank to have done more. The Bank
having done everything necessary or usual in the ordinary course of banking transaction, it cannot
be held liable for any embarrassment and corresponding damage that appellants may have
incurred.7

xxx xxx xxx

Hence, this petition, anchored on the following assignment of errors:

I
 Cred Trans | 58

THE HONORABLE COURT OF APPEALS ERRED IN FINDING PRIVATE RESPONDENT NOT NEGLIGENT
BY ERRONEOUSLY APPLYING THE STANDARD OF DILIGENCE OF AN "ORDINARY PRUDENT PERSON"
WHEN IN TRUTH A HIGHER DEGREE OF DILIGENCE IS IMPOSED BY LAW UPON THE BANKS.

II

THE HONORABLE COURT OF APPEALS ERRED IN ABSOLVING PRIVATE RESPONDENT FROM LIABILITY
BY OVERLOOKING THE FACT THAT THE DISHONOR OF THE DEMAND DRAFT WAS A BREACH OF
PRIVATE RESPONDENT'S WARRANTY AS THE DRAWER THEREOF.

III

THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT AS SHOWN

OVERWHELMINGLY BY THE EVIDENCE, THE DISHONOR OF THE DEMAND DRAFT AS DUE TO PRIVATE
RESPONDENT'S NEGLIGENCE AND NOT THE DRAWEE BANK.8

The petitioners contend that due to the fiduciary nature of the relationship between the respondent bank
and its clients, the respondent should have exercised a higher degree of diligence than that expected of an
ordinary prudent person in the handling of its affairs as in the case at bar. The appellate court, according to
petitioners, erred in applying the standard of diligence of an ordinary prudent person only. Petitioners also
claim that the respondent bank violate Section 61 of the Negotiable Instruments Law 9 which provides the
warranty of a drawer that "xxx on due presentment, the instrument will be accepted or paid, or both,
according to its tenor xxx." Thus, the petitioners argue that respondent bank should be held liable for
damages for violation of this warranty. The petitioners pray this Court to re-examine the facts to cite
certain instances of negligence.

It is our view and we hold that there is no reversible error in the decision of the appellate court.

Section 1 of Rule 45 of the Revised Rules of Court provides that "(T)he petition (for review) shall raise only
questions of law which must be distinctly set forth." Thus, we have ruled that factual findings of the Court
of Appeals are conclusive on the parties and not reviewable by this Court – and they carry even more
weight when the Court of Appeals affirms the factual findings of the trial court. 10

The courts a quo found that respondent bank did not misrepresent that it was maintaining a deposit
account with Westpac-Sydney. Respondent bank's assistant cashier explained to Godofredo Reyes,
representing PRCI and petitioner Gregorio H. Reyes, how the transfer of Australian dollars would be
effected through Westpac-New York where the respondent bank has a dollar account to Westpac-Sydney
where the subject foreign exchange demand draft (FXDD No. 209968) could be encashed by the payee, the
20th Asian Racing Conference Secretariat. PRCI and its Vice-President for finance, petitioner Gregorio H.
Reyes, through their said representative, agreed to that arrangement or procedure. In other words, the
petitioners are estopped from denying the said arrangement or procedure. Similar arrangements have
been a long standing practice in banking to facilitate international commercial transactions. In fact, the
SWIFT cable message sent by respondent bank to the drawee bank, Westpac-Sydney, stated that it may
claim reimbursement from its New York branch, Westpac-New York, where respondent bank has a deposit
dollar account. The facts as found by the courts a quo show that respondent bank did not cause an
erroneous transmittal of its SWIFT cable message to Westpac-Sydney. It was the erroneous decoding of the
cable message on the part of Westpac-Sydney that caused the dishonor of the subject foreign exchange
demand draft. An employee of Westpac-Sydney in Sydney, Australia mistakenly read the printed figures in
the SWIFT cable message of respondent bank as "MT799" instead of as "MT199". As a result, Westpac-
Sydney construed the said cable message as a format for a letter of credit, and not for a demand draft. The
appellate court correct found that "the figure before '99' can still be distinctly seen as a number '1' and not
 Cred Trans | 59

number '7'." Indeed, the line of a "7" is in a slanting position while the line of a "1" is in a horizontal
position. Thus, the number "1" in "MT199" cannot be construed as "7".11

The evidence also shows that the respondent bank exercised that degree of diligence expected of an
ordinary prudent person under the circumstances obtaining. Prior to the first dishonor of the subject
foreign exchange demand draft, the respondent bank advised Westpac-New York to honor the
reimbursement claim of Westpac-Sydney and to debit the dollar account12 of respondent bank with the
former. As soon as the demand draft was dishonored, the respondent bank, thinking that the problem was
with the reimbursement and without any idea that it was due to miscommunication, re-confirmed the
authority of Westpac-New York to debit its dollar account for the purpose of reimbursing Westpac-
Sydney.13 Respondent bank also sent two (2) more cable messages to Westpac-New York inquiring why the
demand draft was not honored.14

With these established facts, we now determine the degree of diligence that banks are required to exert in
their commercial dealings. In Philippine Bank of Commerce v. Court of Appeals15 upholding a long standing
doctrine, we ruled that the degree of diligence required of banks, is more than that of a good father of a
family where the fiduciary nature of their relationship with their depositors is concerned. In other words
banks are duty bound to treat the deposit accounts of their depositors with the highest degree of care. But
the said ruling applies only to cases where banks act under their fiduciary capacity, that is, as depositary of
the deposits of their depositors. But the same higher degree of diligence is not expected to be exerted by
banks in commercial transactions that do not involve their fiduciary relationship with their depositors.

Considering the foregoing, the respondent bank was not required to exert more than the diligence of a
good father of a family in regard to the sale and issuance of the subject foreign exchange demand draft.
The case at bar does not involve the handling of petitioners' deposit, if any, with the respondent bank.
Instead, the relationship involved was that of a buyer and seller, that is, between the respondent bank as
the seller of the subject foreign exchange demand draft, and PRCI as the buyer of the same, with the
20th Asian Racing conference Secretariat in Sydney, Australia as the payee thereof. As earlier mentioned,
the said foreign exchange demand draft was intended for the payment of the registration fees of the
petitioners as delegates of the PRCI to the 20th Asian Racing Conference in Sydney.

The evidence shows that the respondent bank did everything within its power to prevent the dishonor of
the subject foreign exchange demand draft. The erroneous reading of its cable message to Westpac-
Sydney by an employee of the latter could not have been foreseen by the respondent bank. Being unaware
that its employee erroneously read the said cable message, Westpac-Sydney merely stated that the
respondent bank has no deposit account with it to cover for the amount of One Thousand Six Hundred Ten
Australian Dollar (AU $1610.00) indicated in the foreign exchange demand draft. Thus, the respondent
bank had the impression that Westpac-New York had not yet made available the amount for
reimbursement to Westpac-Sydney despite the fact that respondent bank has a sufficient deposit dollar
account with Westpac-New York. That was the reason why the respondent bank had to re-confirm and
repeatedly notify Westpac-New York to debit its (respondent bank's) deposit dollar account with it and to
transfer or credit the corresponding amount to Westpac-Sydney to cover the amount of the said demand
draft.

In view of all the foregoing, and considering that the dishonor of the subject foreign exchange demand
draft is not attributable to any fault of the respondent bank, whereas the petitioners appeared to be under
estoppel as earlier mentioned, it is no longer necessary to discuss the alleged application of Section 61 of
the Negotiable Instruments Law to the case at bar. In any event, it was established that the respondent
bank acted in good faith and that it did not cause the embarrassment of the petitioners in Sydney,
Australia. Hence, the Court of Appeals did not commit any reversable error in its challenged decision.
 Cred Trans | 60

WHEREFORE, the petition is hereby DENIED, and the assailed decision of the Court of Appeals
is AFFIRMED. Costs against the petitioners.

SO ORDERED.1âwphi1.nêt
 Cred Trans | 61

G.R. No. L-60033 April 4, 1984

TEOFISTO GUINGONA, JR., ANTONIO I. MARTIN, and TERESITA SANTOS, petitioners,

vs.
THE CITY FISCAL OF MANILA, HON. JOSE B. FLAMINIANO, ASST. CITY FISCAL FELIZARDO N. LOTA and
CLEMENT DAVID, respondents.

MAKASIAR, Actg. C.J.:ñé+.£ªwph!1

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

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

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

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

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

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

"From March 20, 1979 to March, 1981, David invested with the Nation
Savings and Loan Association, (hereinafter called NSLA) the sum of
P1,145,546.20 on nine deposits, P13,531.94 on savings account deposits
(jointly with his sister, Denise Kuhne), US$10,000.00 on time deposit,
US$15,000.00 under a receipt and guarantee of payment and US$50,000.00
under a receipt dated June 8, 1980 (au jointly with Denise Kuhne), that David
was induced into making the aforestated investments by Robert Marshall an
Australian national who was allegedly a close associate of petitioner
Guingona Jr., then NSLA President, petitioner Martin, then NSLA Executive
 Cred Trans | 62

Vice-President of NSLA and petitioner Santos, then NSLA General Manager;

that on March 21, 1981 N LA was placed under receivership by the Central
Bank, so that David filed claims therewith for his investments and those of his
sister; that on July 22, 1981 David received a report from the Central Bank
that only P305,821.92 of those investments were entered in the records of
NSLA; that, therefore, the respondents in I.S. No. 81-31938 misappropriated
the balance of the investments, at the same time violating Central Bank
Circular No. 364 and related Central Bank regulations on foreign exchange
transactions; that after demands, petitioner Guingona Jr. paid only
P200,000.00, thereby reducing the amounts misappropriated to P959,078.14
and US$75,000.00."

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

"That Martin became President of NSLA in March 1978 (after the resignation
of Guingona, Jr.) and served as such until October 30, 1980, while Santos was
General Manager up to November 1980; that because NSLA was urgently in
need of funds and at David's insistence, his investments were treated as
special- accounts with interest above the legal rate, an recorded in separate
confidential documents only a portion of which were to be reported because
he did not want the Australian government to tax his total earnings (nor) to
know his total investments; that all transactions with David were recorded
except the sum of US$15,000.00 which was a personal loan of Santos; that
David's check for US$50,000.00 was cleared through Guingona, Jr.'s dollar
account because NSLA did not have one, that a draft of US$30,000.00 was
placed in the name of one Paz Roces because of a pending transaction with
her; that the Philippine Deposit Insurance Corporation had already
reimbursed David within the legal limits; that majority of the stockholders of
NSLA had filed Special Proceedings No. 82-1695 in the Court of First Instance
to contest its (NSLA's) closure; that after NSLA was placed under receivership,
Martin executed a promissory note in David's favor and caused the transfer
to him of a nine and on behalf (9 1/2) carat diamond ring with a net value of
P510,000.00; and, that the liabilities of NSLA to David were civil in nature."

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

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

NSLA since he (Guingona Jr.) had resigned as NSLA president in March 1978,
or prior to those transactions; that he assumed a portion o; the liabilities of
NSLA to David because of the latter's insistence that he placed his
investments with NSLA because of his faith in Guingona, Jr.; that in a
Promissory Note dated June 17, 1981 (Petition, Annex "D") he (Guingona, Jr.)
bound himself to pay David the sums of P668.307.01 and US$37,500.00 in
stated installments; that he (Guingona, Jr.) secured payment of those
amounts with second mortgages over two (2) parcels of land under a deed of
Second Real Estate Mortgage (Petition, Annex "E") in which it was provided
that the mortgage over one (1) parcel shall be cancelled upon payment of
one-half of the obligation to David; that he (Guingona, Jr.) paid P200,000.00
 Cred Trans | 63

and tendered another P300,000.00 which David refused to accept, hence, he

(Guingona, Jr.) filed Civil Case No. Q-33865 in the Court of First Instance of
Rizal at Quezon City, to effect the release of the mortgage over one (1) of the
two parcels of land conveyed to David under second mortgages."

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

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

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

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

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

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

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

Thereafter, or on July 17, 1981, petitioners Guingona and Martin agreed to divide the said indebtedness,
and petitioner Guingona executed another promissory note antedated to June 17, 1981 whereby he
 Cred Trans | 64

personally acknowledged an indebtedness of P668,307.01 (1/2 of P1,336,614.02) and US$37,500.00 (1/2 of

US$75,000.00) in favor of private respondent (p. 25, rec.). The aforesaid promissory notes were executed
as a result of deposits made by Clement David and Denise Kuhne with the Nation Savings and Loan
Association.

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

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

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

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

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

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

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

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

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

 Cred Trans | 65

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

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

"Art. 1933. — By the contract of loan, one of the parties delivers to another,
either something not consumable so that the latter may use the same for a
certain time- and return it, in which case the contract is called a
commodatum; or money or other consumable thing, upon the condition that
the same amount of the same kind and quality shall he paid in which case the
contract is simply called a loan or mutuum.

"Commodatum is essentially gratuitous.

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

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

"Art. 1953. — A person who receives a loan of money or any other fungible
thing acquires the ownership thereof, and is bound to pay to the creditor an
equal amount of the same kind and quality."

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

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

Moreover, while it is true that novation does not extinguish criminal liability, it may however, prevent the
rise of criminal liability as long as it occurs prior to the filing of the criminal information in court. Thus,
in Gonzales vs. Serrano ( 25 SCRA 64, 69 [1968]) We held that:têñ.£îhqwâ£

As pointed out in People vs. Nery, novation prior to the filing of the criminal information —
as in the case at bar — may convert the relation between the parties into an ordinary
 Cred Trans | 66

creditor-debtor relation, and place the complainant in estoppel to insist on the original
transaction or "cast doubt on the true nature" thereof.

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

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

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

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

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

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

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

1. It appears from the records that when respondent David was about to make a deposit of bank draft
issued in his name in the amount of US$50,000.00 with the Nation Savings and Loan Association, the same
had to be cleared first and converted into Philippine currency. Accordingly, the bank draft was endorsed by
respondent David to petitioner Guingona, who in turn deposited it to his dollar account with the Security
Bank and Trust Company. Petitioner Guingona merely accommodated the request of the Nation Savings
and loan Association in order to clear the bank draft through his dollar account because the bank did not
have a dollar account. Immediately after the bank draft was cleared, petitioner Guingona authorized
Nation Savings and Loan Association to withdraw the same in order to be utilized by the bank for its
operations.
 Cred Trans | 67

2. It is safe to assume that the U.S. dollars were converted first into Philippine pesos before they were
accepted and deposited in Nation Savings and Loan Association, because the bank is presumed to have
followed the ordinary course of the business which is to accept deposits in Philippine currency only, and
that the transaction was regular and fair, in the absence of a clear and convincing evidence to the contrary
(see paragraphs p and q, Sec. 5, Rule 131, Rules of Court).

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

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

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

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

"1. for the orderly administration of justice;

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

"3. to avoid multiplicity of actions;

"4. to afford adequate protection to constitutional rights;

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

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

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

The writs of certiorari and prohibition, as extraordinary legal remedies, are in the ultimate
analysis, intended to annul void proceedings; to prevent the unlawful and oppressive
exercise of legal authority and to provide for a fair and orderly administration of justice.
Thus, in Yu Kong Eng vs. Trinidad, 47 Phil. 385, We took cognizance of a petition for
certiorari and prohibition although the accused in the case could have appealed in due time
 Cred Trans | 68

from the order complained of, our action in the premises being based on the public welfare
policy the advancement of public policy. In Dimayuga vs. Fajardo, 43 Phil. 304, We also
admitted a petition to restrain the prosecution of certain chiropractors although, if
convicted, they could have appealed. We gave due course to their petition for the orderly
administration of justice and to avoid possible oppression by the strong arm of the law. And
in Arevalo vs. Nepomuceno, 63 Phil. 627, the petition for certiorari challenging the trial
court's action admitting an amended information was sustained despite the availability of
appeal at the proper time.

WHEREFORE, THE PETITION IS HEREBY GRANTED; THE TEMPORARY RESTRAINING ORDER PREVIOUSLY
ISSUED IS MADE PERMANENT. COSTS AGAINST THE PRIVATE RESPONDENT.

SO ORDERED.1äwphï1.