Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
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. 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.

1
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
December 8, 1975
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

2
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 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

3
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, 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 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

4
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.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 126780 February 17, 2005
YHT REALTY CORPORATION, ERLINDA LAINEZ and ANICIA PAYAM, petitioners,
vs.
THE COURT OF APPEALS and MAURICE McLOUGHLIN, respondents.
DECISION
TINGA, J.:
The primary question of interest before this Court is the only legal issue in the case: It is
whether a hotel may evade liability for the loss of items left with it for safekeeping by its guests,
by having these guests execute written waivers holding the establishment or its employees free
from blame for such loss in light of Article 2003 of the Civil Code which voids such waivers.
Before this Court is a Rule 45 petition for review of the Decision1 dated 19 October 1995 of the
Court of Appeals which affirmed the Decision2 dated 16 December 1991 of the Regional Trial
Court (RTC), Branch 13, of Manila, finding YHT Realty Corporation, Brunhilda Mata-Tan (Tan),
Erlinda Lainez (Lainez) and Anicia Payam (Payam) jointly and solidarily liable for damages in an
action filed by Maurice McLoughlin (McLoughlin) for the loss of his American and Australian
dollars deposited in the safety deposit box of Tropicana Copacabana Apartment Hotel, owned
and operated by YHT Realty Corporation.
The factual backdrop of the case follow.
Private respondent McLoughlin, an Australian businessman-philanthropist, used to stay at
Sheraton Hotel during his trips to the Philippines prior to 1984 when he met Tan. Tan befriended
McLoughlin by showing him around, introducing him to important people, accompanying him in
visiting impoverished street children and assisting him in buying gifts for the children and in
distributing the same to charitable institutions for poor children. Tan convinced McLoughlin to
transfer from Sheraton Hotel to Tropicana where Lainez, Payam and Danilo Lopez were
employed. Lopez served as manager of the hotel while Lainez and Payam had custody of the
keys for the safety deposit boxes of Tropicana. Tan took care of McLoughlin's booking at the
Tropicana where he started staying during his trips to the Philippines from December 1984 to
September 1987.3
On 30 October 1987, McLoughlin arrived from Australia and registered with Tropicana. He
rented a safety deposit box as it was his practice to rent a safety deposit box every time he
registered at Tropicana in previous trips. As a tourist, McLoughlin was aware of the procedure
observed by Tropicana relative to its safety deposit boxes. The safety deposit box could only be
opened through the use of two keys, one of which is given to the registered guest, and the other
remaining in the possession of the management of the hotel. When a registered guest wished to
open his safety deposit box, he alone could personally request the management who then
would assign one of its employees to accompany the guest and assist him in opening the safety
deposit box with the two keys.4
McLoughlin allegedly placed the following in his safety deposit box: Fifteen Thousand US
Dollars (US$15,000.00) which he placed in two envelopes, one envelope containing Ten
Thousand US Dollars (US$10,000.00) and the other envelope Five Thousand US Dollars
(US$5,000.00); Ten Thousand Australian Dollars (AUS$10,000.00) which he also placed in
another envelope; two (2) other envelopes containing letters and credit cards; two (2)
bankbooks; and a checkbook, arranged side by side inside the safety deposit box.5
On 12 December 1987, before leaving for a brief trip to Hongkong, McLoughlin opened his
safety deposit box with his key and with the key of the management and took therefrom the

5
envelope containing Five Thousand US Dollars (US$5,000.00), the envelope containing Ten
Thousand Australian Dollars (AUS$10,000.00), his passports and his credit cards.6 McLoughlin
left the other items in the box as he did not check out of his room at the Tropicana during his
short visit to Hongkong. When he arrived in Hongkong, he opened the envelope which
contained Five Thousand US Dollars (US$5,000.00) and discovered upon counting that only
Three Thousand US Dollars (US$3,000.00) were enclosed therein.7 Since he had no idea
whether somebody else had tampered with his safety deposit box, he thought that it was just a
result of bad accounting since he did not spend anything from that envelope.8
After returning to Manila, he checked out of Tropicana on 18 December 1987 and left for
Australia. When he arrived in Australia, he discovered that the envelope with Ten Thousand US
Dollars (US$10,000.00) was short of Five Thousand US Dollars (US$5,000). He also noticed
that the jewelry which he bought in Hongkong and stored in the safety deposit box upon his
return to Tropicana was likewise missing, except for a diamond bracelet.9
When McLoughlin came back to the Philippines on 4 April 1988, he asked Lainez if some
money and/or jewelry which he had lost were found and returned to her or to the management.
However, Lainez told him that no one in the hotel found such things and none were turned over
to the management. He again registered at Tropicana and rented a safety deposit box. He
placed therein one (1) envelope containing Fifteen Thousand US Dollars (US$15,000.00),
another envelope containing Ten Thousand Australian Dollars (AUS$10,000.00) and other
envelopes containing his traveling papers/documents. On 16 April 1988, McLoughlin requested
Lainez and Payam to open his safety deposit box. He noticed that in the envelope containing
Fifteen Thousand US Dollars (US$15,000.00), Two Thousand US Dollars (US$2,000.00) were
missing and in the envelope previously containing Ten Thousand Australian Dollars
(AUS$10,000.00), Four Thousand Five Hundred Australian Dollars (AUS$4,500.00) were
missing.10
When McLoughlin discovered the loss, he immediately confronted Lainez and Payam who
admitted that Tan opened the safety deposit box with the key assigned to him.11 McLoughlin
went up to his room where Tan was staying and confronted her. Tan admitted that she had
stolen McLoughlin's key and was able to open the safety deposit box with the assistance of
Lopez, Payam and Lainez.12 Lopez also told McLoughlin that Tan stole the key assigned to
McLoughlin while the latter was asleep.13
McLoughlin requested the management for an investigation of the incident. Lopez got in touch
with Tan and arranged for a meeting with the police and McLoughlin. When the police did not
arrive, Lopez and Tan went to the room of McLoughlin at Tropicana and thereat, Lopez wrote on
a piece of paper a promissory note dated 21 April 1988. The promissory note reads as follows:
I promise to pay Mr. Maurice McLoughlin the amount of AUS$4,000.00 and US$2,000.00 or its
equivalent in Philippine currency on or before May 5, 1988.14
Lopez requested Tan to sign the promissory note which the latter did and Lopez also signed as
a witness. Despite the execution of promissory note by Tan, McLoughlin insisted that it must be
the hotel who must assume responsibility for the loss he suffered. However, Lopez refused to
accept the responsibility relying on the conditions for renting the safety deposit box entitled
"Undertaking For the Use Of Safety Deposit Box,"15 specifically paragraphs (2) and (4) thereof,
to wit:
2. To release and hold free and blameless TROPICANA APARTMENT HOTEL from any liability
arising from any loss in the contents and/or use of the said deposit box for any cause
whatsoever, including but not limited to the presentation or use thereof by any other person
should the key be lost;
...
4. To return the key and execute the RELEASE in favor of TROPICANA APARTMENT HOTEL
upon giving up the use of the box.16
On 17 May 1988, McLoughlin went back to Australia and he consulted his lawyers as to the
validity of the abovementioned stipulations. They opined that the stipulations are void for being
violative of universal hotel practices and customs. His lawyers prepared a letter dated 30 May
1988 which was signed by McLoughlin and sent to President Corazon Aquino.17 The Office of
the President referred the letter to the Department of Justice (DOJ) which forwarded the same
to the Western Police District (WPD).18
After receiving a copy of the indorsement in Australia, McLoughlin came to the Philippines and
registered again as a hotel guest of Tropicana. McLoughlin went to Malacaang to follow up on
his letter but he was instructed to go to the DOJ. The DOJ directed him to proceed to the WPD
for documentation. But McLoughlin went back to Australia as he had an urgent business matter
to attend to.
For several times, McLoughlin left for Australia to attend to his business and came back to the

6
Philippines to follow up on his letter to the President but he failed to obtain any concrete
assistance.19
McLoughlin left again for Australia and upon his return to the Philippines on 25 August 1989 to
pursue his claims against petitioners, the WPD conducted an investigation which resulted in the
preparation of an affidavit which was forwarded to the Manila City Fiscal's Office. Said affidavit
became the basis of preliminary investigation. However, McLoughlin left again for Australia
without receiving the notice of the hearing on 24 November 1989. Thus, the case at the Fiscal's
Office was dismissed for failure to prosecute. Mcloughlin requested the reinstatement of the
criminal charge for theft. In the meantime, McLoughlin and his lawyers wrote letters of demand
to those having responsibility to pay the damage. Then he left again for Australia.
Upon his return on 22 October 1990, he registered at the Echelon Towers at Malate, Manila.
Meetings were held between McLoughlin and his lawyer which resulted to the filing of a
complaint for damages on 3 December 1990 against YHT Realty Corporation, Lopez, Lainez,
Payam and Tan (defendants) for the loss of McLoughlin's money which was discovered on 16
April 1988. After filing the complaint, McLoughlin left again for Australia to attend to an urgent
business matter. Tan and Lopez, however, were not served with summons, and trial proceeded
with only Lainez, Payam and YHT Realty Corporation as defendants.
After defendants had filed their Pre-Trial Brief admitting that they had previously allowed and
assisted Tan to open the safety deposit box, McLoughlin filed an Amended/Supplemental
Complaint20 dated 10 June 1991 which included another incident of loss of money and jewelry in
the safety deposit box rented by McLoughlin in the same hotel which took place prior to 16 April
1988.21 The trial court admitted the Amended/Supplemental Complaint.
During the trial of the case, McLoughlin had been in and out of the country to attend to urgent
business in Australia, and while staying in the Philippines to attend the hearing, he incurred
expenses for hotel bills, airfare and other transportation expenses, long distance calls to
Australia, Meralco power expenses, and expenses for food and maintenance, among others.22
After trial, the RTC of Manila rendered judgment in favor of McLoughlin, the dispositive portion
of which reads:
WHEREFORE, above premises considered, judgment is hereby rendered by this Court in favor
of plaintiff and against the defendants, to wit:
1. Ordering defendants, jointly and severally, to pay plaintiff the sum of US$11,400.00 or its
equivalent in Philippine Currency of P342,000.00, more or less, and the sum of AUS$4,500.00
or its equivalent in Philippine Currency of P99,000.00, or a total of P441,000.00, more or less,
with 12% interest from April 16 1988 until said amount has been paid to plaintiff (Item 1, Exhibit
CC);
2. Ordering defendants, jointly and severally to pay plaintiff the sum of P3,674,238.00 as actual
and consequential damages arising from the loss of his Australian and American dollars and
jewelries complained against and in prosecuting his claim and rights administratively and
judicially (Items II, III, IV, V, VI, VII, VIII, and IX, Exh. "CC");
3. Ordering defendants, jointly and severally, to pay plaintiff the sum of P500,000.00 as moral
damages (Item X, Exh. "CC");
4. Ordering defendants, jointly and severally, to pay plaintiff the sum of P350,000.00 as
exemplary damages (Item XI, Exh. "CC");
5. And ordering defendants, jointly and severally, to pay litigation expenses in the sum of
P200,000.00 (Item XII, Exh. "CC");
6. Ordering defendants, jointly and severally, to pay plaintiff the sum of P200,000.00 as
attorney's fees, and a fee of P3,000.00 for every appearance; and
7. Plus costs of suit.
SO ORDERED.23
The trial court found that McLoughlin's allegations as to the fact of loss and as to the amount of
money he lost were sufficiently shown by his direct and straightforward manner of testifying in
court and found him to be credible and worthy of belief as it was established that McLoughlin's
money, kept in Tropicana's safety deposit box, was taken by Tan without McLoughlin's consent.
The taking was effected through the use of the master key which was in the possession of the
management. Payam and Lainez allowed Tan to use the master key without authority from
McLoughlin. The trial court added that if McLoughlin had not lost his dollars, he would not have
gone through the trouble and personal inconvenience of seeking aid and assistance from the
Office of the President, DOJ, police authorities and the City Fiscal's Office in his desire to
recover his losses from the hotel management and Tan.24
As regards the loss of Seven Thousand US Dollars (US$7,000.00) and jewelry worth
approximately One Thousand Two Hundred US Dollars (US$1,200.00) which allegedly occurred
during his stay at Tropicana previous to 4 April 1988, no claim was made by McLoughlin for

7
such losses in his complaint dated 21 November 1990 because he was not sure how they were
lost and who the responsible persons were. But considering the admission of the defendants in
their pre-trial brief that on three previous occasions they allowed Tan to open the box, the trial
court opined that it was logical and reasonable to presume that his personal assets consisting of
Seven Thousand US Dollars (US$7,000.00) and jewelry were taken by Tan from the safety
deposit box without McLoughlin's consent through the cooperation of Payam and Lainez.25
The trial court also found that defendants acted with gross negligence in the performance and
exercise of their duties and obligations as innkeepers and were therefore liable to answer for the
losses incurred by McLoughlin.26
Moreover, the trial court ruled that paragraphs (2) and (4) of the "Undertaking For The Use Of
Safety Deposit Box" are not valid for being contrary to the express mandate of Article 2003 of
the New Civil Code and against public policy.27 Thus, there being fraud or wanton conduct on
the part of defendants, they should be responsible for all damages which may be attributed to
the non-performance of their contractual obligations.28
The Court of Appeals affirmed the disquisitions made by the lower court except as to the
amount of damages awarded. The decretal text of the appellate court's decision reads:
THE FOREGOING CONSIDERED, the appealed Decision is hereby AFFIRMED but modified
as follows:
The appellants are directed jointly and severally to pay the plaintiff/appellee the following
amounts:
1) P153,200.00 representing the peso equivalent of US$2,000.00 and AUS$4,500.00;
2) P308,880.80, representing the peso value for the air fares from Sidney [sic] to Manila and
back for a total of eleven (11) trips;
3) One-half of P336,207.05 or P168,103.52 representing payment to Tropicana Apartment
Hotel;
4) One-half of P152,683.57 or P76,341.785 representing payment to Echelon Tower;
5) One-half of P179,863.20 or P89,931.60 for the taxi xxx transportation from the residence to
Sidney [sic] Airport and from MIA to the hotel here in Manila, for the eleven (11) trips;
6) One-half of P7,801.94 or P3,900.97 representing Meralco power expenses;
7) One-half of P356,400.00 or P178,000.00 representing expenses for food and maintenance;
8) P50,000.00 for moral damages;
9) P10,000.00 as exemplary damages; and
10) P200,000 representing attorney's fees.
With costs.
SO ORDERED.29
Unperturbed, YHT Realty Corporation, Lainez and Payam went to this Court in this appeal by
certiorari.
Petitioners submit for resolution by this Court the following issues: (a) whether the appellate
court's conclusion on the alleged prior existence and subsequent loss of the subject money and
jewelry is supported by the evidence on record; (b) whether the finding of gross negligence on
the part of petitioners in the performance of their duties as innkeepers is supported by the
evidence on record; (c) whether the "Undertaking For The Use of Safety Deposit Box"
admittedly executed by private respondent is null and void; and (d) whether the damages
awarded to private respondent, as well as the amounts thereof, are proper under the
circumstances.30
The petition is devoid of merit.
It is worthy of note that the thrust of Rule 45 is the resolution only of questions of law and any
peripheral factual question addressed to this Court is beyond the bounds of this mode of review.
Petitioners point out that the evidence on record is insufficient to prove the fact of prior
existence of the dollars and the jewelry which had been lost while deposited in the safety
deposit boxes of Tropicana, the basis of the trial court and the appellate court being the sole
testimony of McLoughlin as to the contents thereof. Likewise, petitioners dispute the finding of
gross negligence on their part as not supported by the evidence on record.
We are not persuaded.l^vvphi1.net We adhere to the findings of the trial court as affirmed by the
appellate court that the fact of loss was established by the credible testimony in open court by
McLoughlin. Such findings are factual and therefore beyond the ambit of the present
petition.1awphi1.nt
The trial court had the occasion to observe the demeanor of McLoughlin while testifying which
reflected the veracity of the facts testified to by him. On this score, we give full credence to the
appreciation of testimonial evidence by the trial court especially if what is at issue is the
credibility of the witness. The oft-repeated principle is that where the credibility of a witness is an
issue, the established rule is that great respect is accorded to the evaluation of the credibility of

8
witnesses by the trial court.31 The trial court is in the best position to assess the credibility of
witnesses and their testimonies because of its unique opportunity to observe the witnesses
firsthand and note their demeanor, conduct and attitude under grilling examination.32
We are also not impressed by petitioners' argument that the finding of gross negligence by the
lower court as affirmed by the appellate court is not supported by evidence. The evidence
reveals that two keys are required to open the safety deposit boxes of Tropicana. One key is
assigned to the guest while the other remains in the possession of the management. If the guest
desires to open his safety deposit box, he must request the management for the other key to
open the same. In other words, the guest alone cannot open the safety deposit box without the
assistance of the management or its employees. With more reason that access to the safety
deposit box should be denied if the one requesting for the opening of the safety deposit box is a
stranger. Thus, in case of loss of any item deposited in the safety deposit box, it is inevitable to
conclude that the management had at least a hand in the consummation of the taking, unless
the reason for the loss is force majeure.
Noteworthy is the fact that Payam and Lainez, who were employees of Tropicana, had custody
of the master key of the management when the loss took place. In fact, they even admitted that
they assisted Tan on three separate occasions in opening McLoughlin's safety deposit box. 33
This only proves that Tropicana had prior knowledge that a person aside from the registered
guest had access to the safety deposit box. Yet the management failed to notify McLoughlin of
the incident and waited for him to discover the taking before it disclosed the matter to him.
Therefore, Tropicana should be held responsible for the damage suffered by McLoughlin by
reason of the negligence of its employees.
The management should have guarded against the occurrence of this incident considering that
Payam admitted in open court that she assisted Tan three times in opening the safety deposit
box of McLoughlin at around 6:30 A.M. to 7:30 A.M. while the latter was still asleep. 34 In light of
the circumstances surrounding this case, it is undeniable that without the acquiescence of the
employees of Tropicana to the opening of the safety deposit box, the loss of McLoughlin's
money could and should have been avoided.
The management contends, however, that McLoughlin, by his act, made its employees believe
that Tan was his spouse for she was always with him most of the time. The evidence on record,
however, is bereft of any showing that McLoughlin introduced Tan to the management as his
wife. Such an inference from the act of McLoughlin will not exculpate the petitioners from liability
in the absence of any showing that he made the management believe that Tan was his wife or
was duly authorized to have access to the safety deposit box. Mere close companionship and
intimacy are not enough to warrant such conclusion considering that what is involved in the
instant case is the very safety of McLoughlin's deposit. If only petitioners exercised due
diligence in taking care of McLoughlin's safety deposit box, they should have confronted him as
to his relationship with Tan considering that the latter had been observed opening McLoughlin's
safety deposit box a number of times at the early hours of the morning. Tan's acts should have
prompted the management to investigate her relationship with McLoughlin. Then, petitioners
would have exercised due diligence required of them. Failure to do so warrants the conclusion
that the management had been remiss in complying with the obligations imposed upon hotel-
keepers under the law.
Under Article 1170 of the New Civil Code, those who, in the performance of their obligations,
are guilty of negligence, are liable for damages. As to who shall bear the burden of paying
damages, Article 2180, paragraph (4) of the same Code provides that the owners and
managers of an establishment or enterprise are likewise responsible for damages caused by
their employees in the service of the branches in which the latter are employed or on the
occasion of their functions. Also, this Court has ruled that if an employee is found negligent, it is
presumed that the employer was negligent in selecting and/or supervising him for it is hard for
the victim to prove the negligence of such employer.35 Thus, given the fact that the loss of
McLoughlin's money was consummated through the negligence of Tropicana's employees in
allowing Tan to open the safety deposit box without the guest's consent, both the assisting
employees and YHT Realty Corporation itself, as owner and operator of Tropicana, should be
held solidarily liable pursuant to Article 2193.36
The issue of whether the "Undertaking For The Use of Safety Deposit Box" executed by
McLoughlin is tainted with nullity presents a legal question appropriate for resolution in this
petition. Notably, both the trial court and the appellate court found the same to be null and void.
We find no reason to reverse their common conclusion. Article 2003 is controlling, thus:
Art. 2003. The hotel-keeper cannot free himself from responsibility by posting notices to the
effect that he is not liable for the articles brought by the guest. Any stipulation between the
hotel-keeper and the guest whereby the responsibility of the former as set forth in Articles 1998

9
to 200137 is suppressed or diminished shall be void.
Article 2003 was incorporated in the New Civil Code as an expression of public policy precisely
to apply to situations such as that presented in this case. The hotel business like the common
carrier's business is imbued with public interest. Catering to the public, hotelkeepers are bound
to provide not only lodging for hotel guests and security to their persons and belongings. The
twin duty constitutes the essence of the business. The law in turn does not allow such duty to
the public to be negated or diluted by any contrary stipulation in so-called "undertakings" that
ordinarily appear in prepared forms imposed by hotel keepers on guests for their signature.
In an early case,38 the Court of Appeals through its then Presiding Justice (later Associate
Justice of the Court) Jose P. Bengzon, ruled that to hold hotelkeepers or innkeeper liable for the
effects of their guests, it is not necessary that they be actually delivered to the innkeepers or
their employees. It is enough that such effects are within the hotel or inn. 39 With greater reason
should the liability of the hotelkeeper be enforced when the missing items are taken without the
guest's knowledge and consent from a safety deposit box provided by the hotel itself, as in this
case.
Paragraphs (2) and (4) of the "undertaking" manifestly contravene Article 2003 of the New Civil
Code for they allow Tropicana to be released from liability arising from any loss in the contents
and/or use of the safety deposit box for any cause whatsoever.40 Evidently, the undertaking was
intended to bar any claim against Tropicana for any loss of the contents of the safety deposit
box whether or not negligence was incurred by Tropicana or its employees. The New Civil Code
is explicit that the responsibility of the hotel-keeper shall extend to loss of, or injury to, the
personal property of the guests even if caused by servants or employees of the keepers of
hotels or inns as well as by strangers, except as it may proceed from any force majeure.41 It is
the loss through force majeure that may spare the hotel-keeper from liability. In the case at bar,
there is no showing that the act of the thief or robber was done with the use of arms or through
an irresistible force to qualify the same as force majeure.42
Petitioners likewise anchor their defense on Article 200243 which exempts the hotel-keeper from
liability if the loss is due to the acts of his guest, his family, or visitors. Even a cursory reading of
the provision would lead us to reject petitioners' contention. The justification they raise would
render nugatory the public interest sought to be protected by the provision. What if the
negligence of the employer or its employees facilitated the consummation of a crime committed
by the registered guest's relatives or visitor? Should the law exculpate the hotel from liability
since the loss was due to the act of the visitor of the registered guest of the hotel? Hence, this
provision presupposes that the hotel-keeper is not guilty of concurrent negligence or has not
contributed in any degree to the occurrence of the loss. A depositary is not responsible for the
loss of goods by theft, unless his actionable negligence contributes to the loss.44
In the case at bar, the responsibility of securing the safety deposit box was shared not only by
the guest himself but also by the management since two keys are necessary to open the safety
deposit box. Without the assistance of hotel employees, the loss would not have occurred.
Thus, Tropicana was guilty of concurrent negligence in allowing Tan, who was not the
registered guest, to open the safety deposit box of McLoughlin, even assuming that the latter
was also guilty of negligence in allowing another person to use his key. To rule otherwise would
result in undermining the safety of the safety deposit boxes in hotels for the management will be
given imprimatur to allow any person, under the pretense of being a family member or a visitor
of the guest, to have access to the safety deposit box without fear of any liability that will attach
thereafter in case such person turns out to be a complete stranger. This will allow the hotel to
evade responsibility for any liability incurred by its employees in conspiracy with the guest's
relatives and visitors.
Petitioners contend that McLoughlin's case was mounted on the theory of contract, but the trial
court and the appellate court upheld the grant of the claims of the latter on the basis of tort.45
There is nothing anomalous in how the lower courts decided the controversy for this Court has
pronounced a jurisprudential rule that tort liability can exist even if there are already contractual
relations. The act that breaks the contract may also be tort.46
As to damages awarded to McLoughlin, we see no reason to modify the amounts awarded by
the appellate court for the same were based on facts and law. It is within the province of lower
courts to settle factual issues such as the proper amount of damages awarded and such finding
is binding upon this Court especially if sufficiently proven by evidence and not unconscionable
or excessive. Thus, the appellate court correctly awarded McLoughlin Two Thousand US
Dollars (US$2,000.00) and Four Thousand Five Hundred Australian dollars (AUS$4,500.00) or
their peso equivalent at the time of payment,47 being the amounts duly proven by evidence.48
The alleged loss that took place prior to 16 April 1988 was not considered since the amounts
alleged to have been taken were not sufficiently established by evidence. The appellate court

10
also correctly awarded the sum of P308,880.80, representing the peso value for the air fares
from Sydney to Manila and back for a total of eleven (11) trips; 49 one-half of P336,207.05 or
P168,103.52 representing payment to Tropicana;50 one-half of P152,683.57 or P76,341.785
representing payment to Echelon Tower;51 one-half of P179,863.20 or P89,931.60 for the taxi or
transportation expenses from McLoughlin's residence to Sydney Airport and from MIA to the
hotel here in Manila, for the eleven (11) trips;52 one-half of P7,801.94 or P3,900.97 representing
Meralco power expenses;53 one-half of P356,400.00 or P178,000.00 representing expenses for
food and maintenance.54
The amount of P50,000.00 for moral damages is reasonable. Although trial courts are given
discretion to determine the amount of moral damages, the appellate court may modify or
change the amount awarded when it is palpably and scandalously excessive.l^vvphi1.net Moral
damages are not intended to enrich a complainant at the expense of a defendant.l^vvphi1.net
They are awarded only to enable the injured party to obtain means, diversion or amusements
that will serve to alleviate the moral suffering he has undergone, by reason of defendants'
culpable action.55
The awards of P10,000.00 as exemplary damages and P200,000.00 representing attorney's
fees are likewise sustained.
WHEREFORE, foregoing premises considered, the Decision of the Court of Appeals dated 19
October 1995 is hereby AFFIRMED. Petitioners are directed, jointly and severally, to pay private
respondent the following amounts:
(1) US$2,000.00 and AUS$4,500.00 or their peso equivalent at the time of payment;
(2) P308,880.80, representing the peso value for the air fares from Sydney to Manila and back
for a total of eleven (11) trips;
(3) One-half of P336,207.05 or P168,103.52 representing payment to Tropicana Copacabana
Apartment Hotel;
(4) One-half of P152,683.57 or P76,341.785 representing payment to Echelon Tower;
(5) One-half of P179,863.20 or P89,931.60 for the taxi or transportation expense from
McLoughlin's residence to Sydney Airport and from MIA to the hotel here in Manila, for the
eleven (11) trips;
(6) One-half of P7,801.94 or P3,900.97 representing Meralco power expenses;
(7) One-half of P356,400.00 or P178,200.00 representing expenses for food and maintenance;
(8) P50,000.00 for moral damages;
(9) P10,000.00 as exemplary damages; and
(10) P200,000 representing attorney's fees.
With costs.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION

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

11
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. 4 The 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.
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

12
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 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 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

13
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:
(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.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION

G.R. No. 90027 March 3, 1993

CA AGRO-INDUSTRIAL DEVELOPMENT CORP., petitioner,

14
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
complaint 2 for damages against the respondent Bank with the Court of First Instance (now
Regional Trial Court) of Pasig, Metro Manila which docketed the same as Civil Case No. 38382.
In its Answer with Counterclaim, 3 respondent Bank alleged that the petitioner has no cause of
action because of paragraphs 13 and 14 of the contract of lease (Exhibit "2"); corollarily, loss of
any of the items or articles contained in the box could not give rise to an action against it. It then
interposed a counterclaim for exemplary damages as well as attorney's fees in the amount of
P20,000.00. Petitioner subsequently filed an answer to the counterclaim. 4
In due course, the trial court, now designated as Branch 161 of the Regional Trial Court (RTC)
of Pasig, Metro Manila, rendered a decision 5 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.

15
Its motion for reconsideration 7 having been denied, petitioner appealed from the adverse
decision to the respondent Court of Appeals which docketed the appeal as CA-G.R. CV No.
15150. Petitioner urged the respondent Court to reverse the challenged decision because the
trial court erred in (a) absolving the respondent Bank from liability from the loss, (b) not
declaring as null and void, for being contrary to law, public order and public policy, the
provisions in the contract for lease of the safety deposit box absolving the Bank from any liability
for loss, (c) not concluding that in this jurisdiction, as well as under American jurisprudence, the
liability of the Bank is settled and (d) awarding attorney's fees to the Bank and denying the
petitioner's prayer for nominal and exemplary damages and attorney's fees. 8
In its Decision promulgated on 4 July 1989, 9 respondent Court affirmed the appealed decision
principally on the theory that the contract (Exhibit "2") executed by the petitioner and respondent
Bank is in the nature of a contract of lease by virtue of which the petitioner and its co-renter
were given control over the safety deposit box and its contents while the Bank retained no right
to open the said box because it had neither the possession nor control over it and its contents.
As such, the contract is governed by Article 1643 of the Civil Code 10 which provides:
Art. 1643. In the lease of things, one of the parties binds himself to give to another the
enjoyment or use of a thing for a price certain, and for a period which may be definite or
indefinite. However, no lease for more than ninety-nine years shall be valid.
It invoked Tolentino vs. Gonzales 11 which held that the owner of the property loses his
control over the property leased during the period of the contract and Article 1975 of the Civil
Code which provides:
Art. 1975. The depositary holding certificates, bonds, securities or instruments which earn
interest shall be bound to collect the latter when it becomes due, and to take such steps as may
be necessary in order that the securities may preserve their value and the rights corresponding
to them according to law.
The above provision shall not apply to contracts for the rent of safety deposit boxes.
and then concluded that "[c]learly, the defendant-appellee is not under any duty to maintain the
contents of the box. The stipulation absolving the defendant-appellee from liability is in
accordance with the nature of the contract of lease and cannot be regarded as contrary to law,
public order and public policy." 12 The appellate court was quick to add, however, that under the
contract of lease of the safety deposit box, respondent Bank is not completely free from liability
as it may still be made answerable in case unauthorized persons enter into the vault area or
when the rented box is forced open. Thus, as expressly provided for in stipulation number 8 of
the contract in question:
8. The Bank shall use due diligence that no unauthorized person shall be admitted to any rented
safe and beyond this, the Bank will not be responsible for the contents of any safe rented from
it. 13
Its motion for reconsideration 14 having been denied in the respondent Court's Resolution of 28
August 1989, 15 petitioner 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

16
transaction as to such securities or other valuables; the fact that the
safe-deposit company does not know, and that it is not expected that it shall know, the character
or description of the property which is deposited in such safe-deposit box or safe does not
change that relation. That access to the contents of the safe-deposit box can be had only by the
use of a key retained by the lessee ( whether it is the sole key or one to be used in connection
with one retained by the lessor) does not operate to alter the foregoing rule. The argument that
there is not, in such a case, a delivery of exclusive possession and control to the deposit
company, and that therefore the situation is entirely different from that of ordinary bailment, has
been generally rejected by the courts, usually on the ground that as possession must be either
in the depositor or in the company, it should reasonably be considered as in the latter rather
than in the former, since the company is, by the nature of the contract, given absolute control of
access to the property, and the depositor cannot gain access thereto without the consent and
active participation of the company. . . . (citations omitted).
and a segment from Words and Phrases 18 which states that a contract for the rental of a bank
safety deposit box in consideration of a fixed amount at stated periods is a bailment for hire.
Petitioner further argues that conditions 13 and 14 of the questioned contract are contrary to law
and public policy and should be declared null and void. In support thereof, it cites Article 1306 of
the Civil Code which provides that parties to a contract may establish such stipulations, clauses,
terms and conditions as they may deem convenient, provided they are not contrary to law,
morals, good customs, public order or public policy.
After the respondent Bank filed its comment, this Court gave due course to the petition and
required the parties to simultaneously submit their respective Memoranda.
The petition is partly meritorious.
We agree with the petitioner's contention that the contract for the rent of the safety deposit box
is not an ordinary contract of lease as defined in Article 1643 of the Civil Code. However, We do
not fully subscribe to its view that the same is a contract of deposit that is to be strictly governed
by the provisions in the Civil Code on deposit; 19 the contract in the case at bar is a special kind
of deposit. It cannot be characterized as an ordinary contract of lease under Article 1643
because the full and absolute possession and control of the safety deposit box was not given to
the joint renters the petitioner and the Pugaos. The guard key of the box remained with the
respondent Bank; without this key, neither of the renters could open the box. On the other hand,
the respondent Bank could not likewise open the box without the renter's key. In this case, the
said key had a duplicate which was made so that both renters could have access to the box.
Hence, the authorities cited by the respondent Court 20 on this point do not apply. Neither could
Article 1975, also relied upon by the respondent Court, be invoked as an argument against the
deposit theory. Obviously, the first paragraph of such provision cannot apply to a depositary of
certificates, bonds, securities or instruments which earn interest if such documents are kept in a
rented safety deposit box. It is clear that the depositary cannot open the box without the renter
being present.
We observe, however, that the deposit theory itself does not altogether find unanimous support
even in American jurisprudence. We agree with the petitioner that under the latter, the prevailing
rule is that the relation between a bank renting out safe-deposit boxes and its customer with
respect to the contents of the box is that of a bail or and bailee, the bailment being for hire and
mutual benefit. 21 This is just the prevailing view because:
There is, however, some support for the view that the relationship in question might be more
properly characterized as that of landlord and tenant, or lessor and lessee. It has also been
suggested that it should be characterized as that of licensor and licensee. The relation between
a bank, safe-deposit company, or storage company, and the renter of a safe-deposit box
therein, is often described as contractual, express or implied, oral or written, in whole or in part.
But there is apparently no jurisdiction in which any rule other than that applicable to bailments
governs questions of the liability and rights of the parties in respect of loss of the contents of
safe-deposit boxes. 22 (citations omitted)
In the context of our laws which authorize banking institutions to rent out safety deposit boxes, it
is clear that in this jurisdiction, the prevailing rule in the United States has been adopted.
Section 72 of the General Banking Act 23 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 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)

17
Note that the primary function is still found within the parameters of a contract of deposit, i.e.,
the receiving in custody of funds, documents and other valuable objects for safekeeping. The
renting out of the safety deposit boxes is not independent from, but related to or in conjunction
with, this principal function. A contract of deposit may be entered into orally or in writing 25 and,
pursuant to Article 1306 of the Civil Code, the parties thereto may establish such stipulations,
clauses, terms and conditions as they may deem convenient, provided they are not contrary to
law, morals, good customs, public order or public policy. The depositary's responsibility for the
safekeeping of the objects deposited in the case at bar is governed by Title I, Book IV of the
Civil Code. Accordingly, the depositary would be liable if, in performing its obligation, it is found
guilty of fraud, negligence, delay or contravention of the tenor of the agreement. 26 In the
absence of any stipulation prescribing the degree of diligence required, that of a good father of a
family is to be observed. 27 Hence, any stipulation exempting the depositary from any liability
arising from the loss of the thing deposited on account of fraud, negligence or delay would be
void for being contrary to law and public policy. In the instant case, petitioner maintains that
conditions 13 and 14 of the questioned contract of lease of the safety deposit box, which read:
13. The bank is not a depositary of the contents of the safe and it has neither the possession
nor control of the same.
14. The bank has no interest whatsoever in said contents, except herein expressly provided,
and it assumes absolutely no liability in connection therewith. 28
are void as they are contrary to law and public policy. We find Ourselves in agreement with this
proposition for indeed, said provisions are inconsistent with the respondent Bank's responsibility
as a depositary under Section 72(a) of the General Banking Act. Both exempt the latter from
any liability except as contemplated in condition 8 thereof which limits its duty to exercise
reasonable diligence only with respect to who shall be admitted to any rented safe, to wit:
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

18
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.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION

G.R. No. L-25012 July 22, 1975

REPUBLIC OF THE PHILIPPINES, petitioner,
vs.
THE HON. COURT OF APPEALS and LUIS D. CUAYCONG (substituted by LUIS E.
CUAYCONG, JR.), respondents.
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor GeneralIsidro C. Borromeo
and Solicitor Camilo D. Quiason for petitioner.
Hilado Hilado for respondents.

CASTRO, J.:
The Republic of the Philippines brought suit against Luis D. Cuaycong (now deceased and
substituted by his son, Luis E. Cuaycong, Jr.) in the Court of First Instance of Manila, for
recovery of the value of twenty promissory notes executed by the deceased Cuaycong in favor
of the Bank of Taiwan during the Japanese occupation of the Philippines. After hearing duly
had, the trial court adjudged in favor of the Government and ordered Cuaycong to pay the sum
of P14,634.17, plus interest at 6% per annum, compounded quarterly, from October 1, 1961
until payment shall have been fully made. Cuaycong was likewise ordered to pay the
Government attorney's fees in the sum equivalent to 10% of the total obligation and to bear the
costs. On appeal by Cuaycong, the respondent Court of Appeals dismissed the Government's
complaint. Hence, this appeal by certiorari by the Republic of the Philippines.
Shortly after the liberation of the Philippines in 1945, all the assets belonging to the enemy
government, its agencies and institutions, were confiscated by the Government of the United
States. The assets located in the Philippines were subsequently turned over to the Government
of the Republic of the Philippines by agreement between the two Governments. Among these
assets are certain promissory notes secured by a chattel mortgage executed by Cuaycong in
favor of the Bank of Taiwan. Based on the Ballyntine schedule, the money value of these
promissory notes adds up to P4,986, and, including the stipulated interest accumulated up to
September 30, 1961, the total indebtedness amounts to P14,654.17.
The Philippine Government commenced action against Cuaycong only on December 4, 1961.
Considering the many years that had elapsed since the execution of the promissory notes
subject of the suit, the evidence on both sides leaves much to be desired. Based on the findings
of the trial court which were adopted by the Court of Appeals, it would appear that during the
Japanese occupation of Negros Occidental, the military administration commandeered all
available stocks of sugar in that province, including those belonging to Cuaycong; that no record
of the precise amount of sugar taken from Cuaycong has survived the war but Cuaycong
claimed that the same was valued at P10,242.60; and that Cuaycong's stocks of sugar were
mortgaged at the time with the Philippine National Bank (the PNB, at the beginning of the
Japanese occupation, was taken over by the Bank of Taiwan) to guarantee payment of a
likewise undetermined amount of crop loan(s) granted prior to the outbreak of the war.
At all events, the taking of the sugar by the Japanese armed forces appears to have been
governed by a program of acquisition highlighted by the following points: .
It had been decided that the stock of sugar in Negros shall be purchased according to the
"Purchase Plan of Surplus Sugar in the Philippines."
In connection with this purchase, all quedans which have been issued by the Sugar Centrals in
Negros and mortgaged to Banks or other financing firms by the owner of the sugar shall be

19
considered "null and void," as soon as the sugar in existence are purchased by the purchasing
agents according to records of each central.
The purchasing agent should pay the cost of sugar to the vendors in the checks of the Bank of
Taiwan including those not covered by quedans, and let them deposit the proceeds of their sale
of sugar in the same bank.
The Bank of Taiwan who shall act for the above-mentioned financing banks and firms, shall
receive the proceeds and set off the old crop loans of planters to which the sugar was
mortgaged, and keep the same proceeds as "Farmers Rehabilitation Fund."
The Bank of Taiwan shall allow new crop loans to planters within the limit of the proceeds of
sugar sale of each planter out of his "Farmers Rehabilitation Fund." 1
Thus, the stocks of sugar belonging to Cuaycong were sold by the Victories Planters'
Association, acting as agent for the Bank of Taiwan, to the Mitsui Bussan Kaisha of Japan. The
proceeds of this sale were, in effect, retained by the Bank of Taiwan to constitute a deposit of
Cuaycong and made part of the so-called "Farmers Rehabilitation Fund" mentioned in the
military directive. The Fund allowed the planters to borrow money therefrom, against their
respective deposits, in order to finance new plantings of sugar cane and cotton in their
haciendas. The twenty promissory notes subject of the present action by the Government were
executed by Cuaycong between April 16, 1943 and March 25, 1944 under the above-mentioned
financing scheme.
Upon the foregoing facts, the Court of Appeals held, among others, that (a) the right of action of
the Government against Cuaycong has already prescribed, and (b) Cuaycong's indebtedness to
the Bank of Taiwan may be considered set off against the proceeds of the sale of his sugar
retained by the same bank. The Government disputes these rulings.
1. On the matter of prescription, our ruling in Republic vs. Grijaldo, 2 wherein the Government
brought action in 1961 to recover the value of certain promissory notes executed in favor of the
Bank of Taiwan in 1943, has laid the question to rest. We there held that the statute of
limitations does not operate against the Government as to bar it from collecting the sums owing
to the Bank of Taiwan during the last war for, in recovering these loans, the Government is
merely acting "in the exercise of its sovereign functions to protect the interests of the State over
a public property."
2. Nonetheless, the Court of Appeals is correct in allowing a set-off of Cuaycong's indebtedness
to the Bank of Taiwan against his money-deposit with the same bank. No record of Cuaycong's
deposit is available but the inference drawn by the Court of Appeals as to the existence and
extent of such deposit cannot be flawed. The fact is clear that all the proceeds derived from the
sale or confiscation of the sugar stocks belonging to the planters in Negros Occidental were
retained as deposits by the Bank of Taiwan and made part of the "Farmers Rehabilitation Fund."
Planters like Cuaycong were allowed to borrow money from the Fund but only to the extent of
their deposits with the Bank of Taiwan or, as the military directive adverted to states, "Within the
limit of the proceeds of sugar sale of each planter." The conclusion is logical and inevitable that
the sums covered by the promissory notes drawn by Cuaycong were well within the size of his
then existing deposit.
And since the relation between a depositor in a bank and the bank is that of creditor and debtor,
3
Cuaycong has every right to apply his credit with the Bank of Taiwan against the loans he had
obtained from his deposit. All the elements necessary for a set-off are present, and under the
law then obtaining, 4 compensation takes place ipso jure from the day all the necessary
requisites concur, without need of any conscious intent on the part of the parties.
Moreover, the Court is satisfied with the explanation proffered by Cuaycong that, under the
abnormal conditions then prevailing, the only way by which he could utilize the proceeds from
the sale of the stocks of sugar seized from him was for him to make use of the loans made
available by the very agency that arbitrarily retained the said proceeds. In ultimate effect, it was
as though Cuaycong had merely withdrawn his deposits with the Bank of Taiwan.
ACCORDINGLY, the judgment of the Court of Appeals is affirmed. No pronouncement as to
costs.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-43682 March 31, 1938
In Re Liquidation of Mercantile Bank of China. TAN TIONG TICK, claimant-appellant,
vs.
AMERICAN APOTHECARIES CO., ET AL., claimants-appellees.

20
Cirilo Lim and Antonio Gonzalez for appellant. Eusebio Orense and Carmelino G. Alvendia for
appellees Chinese Grocers Asso., et al. Marcelo Nubla for appellees Ang Cheng Lian, et al.
IMPERIAL, J.:
In the proceedings for the liquidation of the Mercantile Bank of China, the appellant presented a
written claim alleging: that when this bank ceased to operate on September 19, 1931, his
current account in said bank showed a balance of P9,657.50 in his favor; that on the same date
his savings account in the said bank also showed a balance in his favor of P20,000 plus interest
then due amounting to P194.78; that on the other hand, he owed the bank in the amount of
P13,262.58, the amount of the trust receipts which he signed because of his withdrawal from
the bank of certain merchandise consigned to him without paying the drafts drawn upon him by
the remittors thereof; that the credits thus described should be set off against each other
according to law, and on such set off being made it appeared that he was still the creditor of the
bank in the sum of P16,589.70. And he asked that the court order the Bank Commissioner to
pay him the aforesaid balance and that the same be declared as preferred credit. The claim was
referred to the commissioner appointed by the court, who at the same time acted as referee,
and this officer recommended that the balance claimed be paid without interest and as an
ordinary credit. The court approved the recommendation and entered judgment in the
accordance therewith. The claimant took an appeal.
In his report the commissioner classified the claims presented under the following six groups:
"(First) Current accounts, savings and fixed deposits. (Second) Checks or drafts sold by the
Mercantile Bank of China and not paid by the correspondents or banks against which they were
drawn. (Third) Checks or drafts issued by the Mercantile Bank of China in payment or
reimbursement of drafts or goods sent to it for collection by banks and foreign commercial
houses against merchants or commercial entities of Manila. (Fourth) Drafts for collection
received by the Mercantile Bank of China to be collected from merchants and commercial
entities in Manila and which were pending collection on the date of the suspension of payments.
(Fifth) Claims of depositors who are at the same time debtor of the Mercantile Bank of
China.(Sixth Various claims." And referring to the claims of the appellant, he states:
Mr. Tan Tiong Tick claims from the Mercantile Bank of China the amount of P 27,597.80, the
total amount of the following sums which he has in his favor in said bank including the
corresponding interest:
Balance on the current account . . . . . . . . . . . P7,390.11
Balance of savings account No. 2266 . . . . . 20,000.00

Total . . . . . . . . . . . . . . . . . . 27,390.11
Adding to this total the interest also claimed by Mr. Tan Tiong Tick, that is, P194.78 on the
saving account and P12.91 on the current account, the amount claimed makes a total of
P27,597.80.
Notwithstanding the fact that the Bank Commissioner found the claim in accordance with the
books of the Mercantile Bank of China, he declined to issue the corresponding certificate of
proof of claim because the said claimant has pending in the said bank obligations for accepting
draft amounting to a total of $6 631.29.
At the hearing of this claim, the claimant admitted such pending obligations, alleging at the
same time that to guarantee the payment of drafts accepted by him, he pledged his bank book
No. 2266, which also answered for the payment of any credit which the said bank may extend to
him.
In Exhibit A presented by the claimant as evidence, consisting of a letter dated November 4,
1931 addressed by Mr. H. J. Belden to the then Bank Commissioner, Mr. Leo. H. Martin it
appears that the said savings account was constituted for the sole purpose of securing the
payment of drafts against the claimants, the bill of lading of where delivered to him upon trust-
receipts and that according to the records of that bank Mr. Tan Tiong Tick did not obtain any
other accomodation from the bank except the trust-receipts.
RECOMMENDATION
Having established the existence of such deposits in the name of the bank alleged by the Bank
Commissioner, for the securities of which he constituted the savings deposit in the amount of
P20,000, it is recommended that from this amount there be deducted the amount of the
obligation of P13,778.90 which the claimant acknowledge in favor of the Mercantile Bank of
China, and that the difference, plus the other current account deposit of P7,390.11, be
considered as ordinary credits subject to the equal division of the funds of the said bank.
As to the interest on said deposits also claimed by Mr. Tan Tiong Tick, the rejection thereof is
recommended in view of the fact that the Bank Commissioner has not credited any interest to
the current and savings account of the Merchantile Bank of China, and would be unfair that

21
interest, not credited to the others, be allowed to this claimant.
It will be noted that in the report of the commissioner the credit of the claimant for the balance of
his deposit on current account has been reduced to P7,390.11, instead of P9,657.50 alleged in
his claim, the total balance recommended in favor of the appellant being P13,611.21, without
including interest, instead of P16,589.70. In his brief the appellant admits the figures appearing
in the report, with the exception of the interest on which we shall presently dwell.
1. Resolving the claims under the first group the recommendation of this official to the effect that
they declared ordinary credits only, and approved them as preferred credits. However, in
considering the other claims among them that of that of the appellant, classified under the fifth
group, the court approved the recommendation of the commissioner that they be declared
ordinary credits; in otherwords, the court considered and declared the claim of the appellant as
an ordinary credit just because the latter is at the same time a debtor of the bank,
notwithstanding the fact that his claim is of the same kind as those classified under the first
group, inasmuch as they are also current account and savings deposits. To this part of the
decision is addressed the appellant's first assignment of error.
In truth if the current account, savings, and fixed deposits are preferred credits for the reason
states by the court in its decision, we see no reason why the preference should disappear when
the depositors are at the same time debtors of the bank less than their credits. If the ground to
declare them preferred credits is sound, the balances resulting after the set should likewise be
preferred, unless there be a law providing that a set off, when it take place, produces such an
effect, a law which does not exist as far as we know.
But we are of the opinion, for the reason presently to be stated, that current account and
savings deposits are not preferred credits in the cases, like the present, involving the insolvency
and liquidation of a bank, where there are various creditors and it becomes necessary to
ascertain the preference of various credits.
The court held that these deposits should be governed by the Civil Code, and applying articles
1758 and 1868 of the said Code, ruled that the so-called irregular deposits being still in vogue,
as Manresa, the commentator, maintain and as held by this court in the case Rogers vs. Smith,
Bell & Co. (10 Phil., 319), the former are preferred credits because partaking of the nature of the
irregular deposits.
In our opinion, these deposits are essentially merchantile contracts and should, therefore, be
governed by the provisions of the Code of Commerce, pursuant to its article 2 reading:
ART. 2 Commercial transactions, be they performed by merchants or not, whether they are
specified in this Code or not, shall be governed by the provisions contained in the same; in the
absence of such provisions, by the commercial customs generally observed in each place; and
in the absence of such provisions, by the commercial customs generally observed in each
place; and in the absence of both, by those of the common law.
Commercial transactions shall be considered those enumerated in this Code and any others of
a similar character.
There is cited in support of the application of the Civil Code to these deposits article 310 of the
Code of Commerce providing:
ART. 310. Notwithstanding the provisions of the foregoing articles, deposits made banks, with
general warehouse, with loan or any other associations, shall be governed in the place by the
by-laws of the same in the second by the provisions of this Code, and finally by the rules of
common law, which are applicable to all deposits.
But apparently there was a failure to consider that, according to the order established by the
article, the Civil Code or the common law is mentioned after Code of Commerce, which means
that the provisions of the latter Code should first be applied before resorting to those of the Civil
Code which are supplementary in character.
The Code of Commerce contains express provisions regulating deposits of the nature under
consideration, and they are articles 303 to 310. The first and the second to the last of the said
articles are as follows:
ART. 303. In order that a deposit may be considered commercial, it is necessary
1. That the depositary, at least, be a merchant.
2. That the things deposited be commercial objects.
3. That the deposit constitute in itself a commercial transaction, or be made by reason or as a
consequently of commercial transaction.
ART. 309. Whatever, with the consent of the depositor, the depositary disposes of the articles
on deposit either for himself or for his business, or for transactions intrusted to him by the
former, the rights and obligations of the depositary and of the depositor shall cease, and the
rules and provisions applicable to the commercial loans, commissions, or contract which took
the place of the deposit shall be observed.

22
In accordance with article 309, the so-called current account and savings deposits have lost the
character of deposits properly so-called, and are converted into simple commercial loans,
because the bank disposed of the funds deposited by the claimant for its ordinary transactions
and for the banking business in which it was engaged. That the bank had the authority of the
claimant to make use of the money deposited on current and savings account is deducible from
the fact that the bank has been paying interest on both deposits, and the claimant himself asks
that he be allowed interest up to the time when the bank ceased its operations. Moreover,
according to section 125 of the Corporation Law and 9 of Act No. 3154, said bank is authorized
to make use of the current account, savings, and fixed deposits provided it retains in its treasury
a certain percentage of the amounts of said deposits. Said sections read:
SEC. 125. Every such commercial banking corporation shall at all times have on hand in lawful
money of the Philippines Islands or of the United States, an amount equal to at least eighteen
per centum of the aggregate amount of its deposits in current which are payable on demand
and of its fixed deposits coming due within thirty days. Such commercial banking corporations
shall also at all times maintain equal in amount to at least five per centum of its total savings
deposits. The said reserve may be maintained in the form of lawful money of the Philippines
Islands of the United States, or in bonds issued or guaranteed by the Government of the
Philippines Islands or to the United States. . . .
The percentage of reserve to deposits in the case of the Philippine National Bank and Bank of
the Philippine Islands is hereby fixed at eighteen per centum of demand deposits and fixed
deposits payable within thirty days and five per centum of savings deposits, in the same manner
as is prescribed in this section for commercial banking corporations in general, which reserve
against savings deposit may consists of Philippine Government of United States Government
Bonds.
SEC. 9. Every bank organized under this Act shall at all times have on hand, in lawful money of
the Philippine Islands of the United States, an amount equal to at least twenty per centum of the
aggregate amount of its deposits. The Treasury certificates authorized by Act Numbered Three
thousand and fifty-eight, and the term lawful money of the United States shall include gold and
silver certificates of the United States and bank notes issued by the Federal Reserve Bank.
Therefore, the bank, without the necessity of the claimant consent, was by law authorized to
dispose of the deposits, subject to the limitations indicated.
We, therefore, conclude that the law applicable to the appellant's claim is the Code of
Commerce and that his current and savings account have converted into simple commercial
loans.
2. The next point to decide is the applicable law, if any, to determine the preference of the
appellant's credits, considering that there happens to be other creditors. Section V of Title I
Book IV of the Code of Commerce contains provisions relative to the rights of creditors in case
of bankruptcy and their respective gradations, but these provisions have been repealed by
section 524 of the Code of Civil Procedure reading as follows:
SEC. 524. No new proceedings to be instituted. No new bankrupt proceedings shall be
instituted until a new bankruptcy law shall come into force in the Islands. All existing laws and
other relating to bankruptcy and proceedings therein are hereby repealed: Provided, That
nothing in this section shall be deemed in any manner to affect pending litigation in bankruptcy
proceedings.
The Philippine Legislature subsequently enacted Act No. 1956, also known as the Insolvency
Law, which took effect on May 20, 1909, containing provisions regarding preference of credits;
but its section 52 provides that all the provisions of the law shall not apply to corporations
engaged principally in the banking business, and among them should be understood included
the Merchantile Bank of China. Said section provide:
SEC. 48. Merchantile, effect, and any other kind of property found among the property of the
insolvent, the ownership of which has not been conveyed to him by a legal and irrevocable title,
shall be considered to be the property of other persons shall be placed at the disposal of its
lawful owners on order of the court made at the hearing in section forty-three or at any ordinary
hearing, if the assignee or any creditor whose right in the estate of the insolvent has been
established shall petition in writing for such hearing and the court in its discretion shall so order,
the creditors, however, retaining such rights in said property as belong to the insolvent, and
subrogating him whenever they shall have with all obligations concerning said property.
The following shall be included in this section:
1. Drowy property inestimado and such property estimado which may remain in the possession
of the husband where the receipt thereof is matter of record in a public instrument registered
under the provisions of section twenty-one and twenty-seven of the Code of Commerce in force.
2. Paraphernal property which the wife may have acquired by inheritance, legacy, or donation

23
whether remaining in the form in which it was received or subrogated or invested in other
property, provided that such investment or subrogation has been registered in the registro
mercantile in accordance with the provisions of the sections of the Code of Commerce
mentioned in the next preceding paragraph.
3. Property and effects deposited with the bankrupt, or administered, least, rented, or held in
usufruct by him.
4. Merchandise in the possession of the bankrupt, on commission, for purchase, sale,
forwarding, or delivery.
5. Bills of exchange or promissory notes without indorsement or other expression transferring
ownership remitted to the insolvent for collection and all other acquired by him for the account of
another person, drawn or indorsed to the remitter direct.
6. Money remitted to the insolvent, otherwise than on current account, and which is in his
possession for delivery to a definite person in the name and for the account of the remitter or for
the settlement of claims which are to be met at the insolvent domicile.
7. Amounts due the insolvent for sales of merchandise on commission, and bills of exchange
and promissory notes delivered therefrom in his possession, even when the same are not made
payable to the owner of the merchandise sold, provided it is proven that the obligation to the
insolvent is derived therefrom and that said bills of exchange and promissory notes were in the
possession of the insolvent for account of the owner of the merchandise to be cashed and
remitted, in due time, to the said owners; all of which shall be a legal presumption when the
amount involved in any such shall not been credited on the book of both the owner of the
merchantile and of the insolvent.
8. Merchandise bought on credit by the insolvent so long as the actual thereof has not been
made to him at his store at any other place stipulated for such delivery, and merchandise the
bills of lading or shipping receipts of which have been sent him after the same has been loaded
by order of the purchaser and for his account and risk.
In all cases arising under this paragraph assignees may retain the merchandise so purchased
or claim it for the creditors by paying the price thereof to the vendor.
9. Goods or chattels wrongfully taken, converted, or withheld by the insolvent if still existing in
his possession or the amount of the value thereof.
SEC. 49. All creditors, except those whose debts are duly proved and allowed shall be entitled
to share in the property and estate pro rata, after the property belonging to other persons
referred to in the last preceding section has been deducted therefrom, without priority or
preference whatever: Provided, That any debt proved by any person liable as bail, surety,
guarantor, or otherwise, for the debtor, shall not be paid to the person so providing the same
until satisfactory evidence shall be produced of the payment of such debt by such person so
liable, and the share to which such debt would be entitled may be paid into court, or otherwise
held, for the benefit of the party entitled thereto, as the court may direct.
SEC. 50. The following are preferred claims which shall be paid in the order named:
(a) Necessary funeral expenses of the debtor, or of his wife, or children who are under their
parental authority and have no property of their own, when approved by the court;
(b) Debts due for personal services rendered the insolvent by employees, laborers, or domestic
servants immediately preceding the commencement of proceedings in insolvency;
(c) Compensation due the laborers or their dependents under the provisions of Act Numbered
Thirty-four hundred and twenty-eight, known as the Workmen's Compensation Act, as amended
by Act Numbered Thirty-eight hundred and twelve, and under the provisions of Act Numbered
Eighteen hundred and seventy-four known as the Employers' Liability Act, and of the other laws
providing for payment of indemnity for damages in cases of labor accidents;
(d) Legal expenses, and expenses incurred in the administration of the insolvent estate for the
common interest of the creditors, when properly authorized and approved by the court;
(e) Debts, taxes and assessments due the Insular Government;
(f ) Debts, taxes and assessments due to any province of provinces of the Philippines Islands;
(g) Debts, taxes and assessment due to any municipality or municipalities of the Philippine
Islands;
All other creditors shall be paid pro rata. (As amended by Act No. 3962.)
ART. 52 . . . The provisions of this Act shall not apply to corporations engaged principally in the
banking business, or to any other corporation as to which there is any special provisions of law
for its liquidation in case of insolvency.
It appears that even after the enactment of the Insolvency Law there was no law in this
jurisdiction governing the order or preference of credits in case of insolvency and liquidation of a
bank. But the Philippine Legislature subsequently enacted Act No. 3519, amended various
sections of the Revised Administrative Code, which took effect on February 20, 1929, and

24
section 1641 of this latter Code. as amended by said Act provides:
SEC. 1641. Distribution of assets. In the case of the liquidation of a bank or banking
institution, after payment of the costs of the proceeding, including reasonable expenses,
commissions and fees of the Bank Commissioner, to be allowed by the court, the Bank
Commissioner shall pay the debts of the institution, under of the court in the order of their legal
priority.
From this section 1641 we deduce that the intention of the Philippine Legislature, in providing
that the Bank Commissioner shall pay the debts of the company by virtue of an order of the
court in the order of their priority, was to enforce the provisions of section 48, 49 and 50 of the
Insolvency Law in the sense that they are made applicable to cases of insolvency or bankruptcy
and liquidation of banks. No other deduction can be made from the phrase "in the order of their
legal priority" employed by the law, for there being no law establishing any priority in the order of
payment of credits, the legislature could not reasonably refer to any legislation upon the subject,
unless the interpretation above stated is accepted.
Examining now the claims of the appellant, it appears that none of them falls under any of the
cases specified by section 48, 49 and 50 of the Insolvency Law; wherefore, we conclude that
the appellant's claims, consisting of his current and savings account, are not preferred credits.
3. The commissioner set off the claims of the appellant against what the bank had against him.
The court approved this set off over the objection of the appellant. The appellees contend that
the set off does not lie in this case because otherwise it would prejudice them and the other
creditors in the liquidation. We hold that the court's ruling is not error. "It may be stated as a
general rule that when a depositor is indebted to a bank, and the debts are mutual that is,
between the same parties and in the same right the bank may apply the deposit, or such
portion thereof as may be necessary, to the payment of the debt due it by the depositor,
provided there is no express agreement to the contrary and the deposit is not specially
applicable to some other particular purposes." (7 Am. Jur., par. 629, p.455; United States vs.
Butterworth-Judson Corp., 267 U.S., 387; National Bank vs. Morgan, 207 Ala.., 65; Bank of
Guntersville vs. Crayter, 199 Ala., 699; Tatum vs. Commercial Bank & T. Co., 193 Ala., 120;
Desha Bank & T. Co. vs. Quilling, 118 Ark., 114; Holloway vs. First Nat. Bank, 45 Idaho, 746;
Wyman vs. Ft. Dearborn Nat Bank, 181 Ill., 279; Niblack vs. Park Nat. Bank, 169 Ill., 517; First
Nat Bank vs. Stapf., 165 Ind., 162; Bedford Bank vs. Acoam, 125 Ind., 584.) The situation
referred to by the appellees is inevitable because section 1639 of the Revised Administrative
Code, as amended by Act No. 3519, provides that the Bank Commissioner shall reduce the
assets of the bank into cash and this cannot be done without first liquidating individually the
accounts of the debtors of said bank, and in making this individual liquidation the debtors are
entitled to set off, by way of compensation, their claims against the bank.
4. The court held that the appellant is not entitled to charge interest on the amounts of his
claims, and this is the object of the second assignment of error. Upon this point a distinction
must be made between the interest which the deposits should ear from their existence until the
bank ceased to operate, and that which they may earn from the time the bank's operations were
stopped until the date of payment of the deposits. As to the first class, we hold that it should be
paid because such interest has been earned in the ordinary course of the bank's business and
before the latter has been declared in a state or liquidation. Moreover, the bank being
authorized by law to make us of the deposits, with the limitation stated, to invest the same in its
business and other operations, it may be presumed that it bound itself to pay interest to the
depositors as in fact it paid interest prior to the date of the said claims. As to the interest which
may be charged from the date the bank ceased to do business because it was declared in a
state of liquidation, we hold that the said interest should not be paid. Under articles 1101 and
1108 of the Civil Code, interest is allowed by way of indemnity for damages suffered, in the
cases wherein the obligation consists in the payment of money. In view of this, we hold that in
the absence of any express law or any applicable provision of the Code of Commerce, it is not
proper to pay this last kind of interest to the appellant upon his deposits in the bank, for this
would be anomalous and unjustified in a liquidation or insolvency of a bank. This rule should be
strictly observed in the instant case because it is understood that the assets should be prorated
among all the creditors as they are insufficient to pay all the obligations of the bank.
5. The last assignment of error has to do with the denial by the court of the claimant's motion for
new trial. No new arguments have been made in its support and it appears that the assigned
error was inserted as a mere corollary of the preceding ones.
In view of all the foregoing considerations, we affirm the part of the appealed decision for the
reasons stated herein, and it is ordered that the net claim of the appellant, amounting to
P13,611.21, is an ordinary and not a preferred credit, and that he is entitled to charge interest

25
on said amount up to September 19, 1931, without special pronouncement up to September 19,
1931, without special pronouncement as to the costs. So ordered.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-6913 November 21, 1913
THE ROMAN CATHOLIC BISHOP OF JARO, plaintiff-appellee,
vs.
GREGORIO DE LA PEA, administrator of the estate of Father Agustin de la Pea,
defendant-appellant.
J. Lopez Vito, for appellant. Arroyo and Horrilleno, for appellee.

MORELAND, J.:
This is an appeal by the defendant from a judgment of the Court of First Instance of Iloilo,
awarding to the plaintiff the sum of P6,641, with interest at the legal rate from the beginning of
the action.
It is established in this case that the plaintiff is the trustee of a charitable bequest made for the
construction of a leper hospital and that father Agustin de la Pea was the duly authorized
representative of the plaintiff to receive the legacy. The defendant is the administrator of the
estate of Father De la Pea.
In the year 1898 the books Father De la Pea, as trustee, showed that he had on hand as such
trustee the sum of P6,641, collected by him for the charitable purposes aforesaid. In the same
year he deposited in his personal account P19,000 in the Hongkong and Shanghai Bank at
Iloilo. Shortly thereafter and during the war of the revolution, Father De la Pea was arrested by
the military authorities as a political prisoner, and while thus detained made an order on said
bank in favor of the United States Army officer under whose charge he then was for the sum
thus deposited in said bank. The arrest of Father De la Pea and the confiscation of the funds in
the bank were the result of the claim of the military authorities that he was an insurgent and that
the funds thus deposited had been collected by him for revolutionary purposes. The money was
taken from the bank by the military authorities by virtue of such order, was confiscated and
turned over to the Government.
While there is considerable dispute in the case over the question whether the P6,641 of trust
funds was included in the P19,000 deposited as aforesaid, nevertheless, a careful examination
of the case leads us to the conclusion that said trust funds were a part of the funds deposited
and which were removed and confiscated by the military authorities of the United States.
That branch of the law known in England and America as the law of trusts had no exact
counterpart in the Roman law and has none under the Spanish law. In this jurisdiction,
therefore, Father De la Pea's liability is determined by those portions of the Civil Code which
relate to obligations. (Book 4, Title 1.)
Although the Civil Code states that "a person obliged to give something is also bound to
preserve it with the diligence pertaining to a good father of a family" (art. 1094), it also provides,
following the principle of the Roman law, major casus est, cui humana infirmitas resistere non
potest, that "no one shall be liable for events which could not be foreseen, or which having been
foreseen were inevitable, with the exception of the cases expressly mentioned in the law or
those in which the obligation so declares." (Art. 1105.)
By placing the money in the bank and mixing it with his personal funds De la Pea did not
thereby assume an obligation different from that under which he would have lain if such deposit
had not been made, nor did he thereby make himself liable to repay the money at all hazards. If
the had been forcibly taken from his pocket or from his house by the military forces of one of the
combatants during a state of war, it is clear that under the provisions of the Civil Code he would
have been exempt from responsibility. The fact that he placed the trust fund in the bank in his
personal account does not add to his responsibility. Such deposit did not make him a debtor
who must respond at all hazards.
We do not enter into a discussion for the purpose of determining whether he acted more or less
negligently by depositing the money in the bank than he would if he had left it in his home; or
whether he was more or less negligent by depositing the money in his personal account than he
would have been if he had deposited it in a separate account as trustee. We regard such
discussion as substantially fruitless, inasmuch as the precise question is not one of negligence.
There was no law prohibiting him from depositing it as he did and there was no law which
changed his responsibility be reason of the deposit. While it may be true that one who is under

26
obligation to do or give a thing is in duty bound, when he sees events approaching the results of
which will be dangerous to his trust, to take all reasonable means and measures to escape or, if
unavoidable, to temper the effects of those events, we do not feel constrained to hold that, in
choosing between two means equally legal, he is culpably negligent in selecting one whereas
he would not have been if he had selected the other.
The court, therefore, finds and declares that the money which is the subject matter of this action
was deposited by Father De la Pea in the Hongkong and Shanghai Banking Corporation of
Iloilo; that said money was forcibly taken from the bank by the armed forces of the United States
during the war of the insurrection; and that said Father De la Pea was not responsible for its
loss.
The judgment is therefore reversed, and it is decreed that the plaintiff shall take nothing by his
complaint.
Arellano, C.J., Torres and Carson, JJ., concur.

Separate Opinions

TRENT, J., dissenting:

I dissent. Technically speaking, whether Father De la Pea was a trustee or an agent of the
plaintiff his books showed that in 1898 he had in his possession as trustee or agent the sum of
P6,641 belonging to the plaintiff as the head of the church. This money was then clothed with all
the immunities and protection with which the law seeks to invest trust funds. But when De la
Pea mixed this trust fund with his own and deposited the whole in the bank to his personal
account or credit, he by this act stamped on the said fund his own private marks and unclothed
it of all the protection it had. If this money had been deposited in the name of De la Pea as
trustee or agent of the plaintiff, I think that it may be presumed that the military authorities would
not have confiscated it for the reason that they were looking for insurgent funds only. Again, the
plaintiff had no reason to suppose that De la Pea would attempt to strip the fund of its identity,
nor had he said or done anything which tended to relieve De la Pea from the legal reponsibility
which pertains to the care and custody of trust funds.
The Supreme Court of the United States in the United State vs. Thomas (82 U. S., 337), at page
343, said: "Trustees are only bound to exercise the same care and solicitude with regard to the
trust property which they would exercise with regard to their own. Equity will not exact more of
them. They are not liable for a loss by theft without their fault. But this exemption ceases when
they mix the trust-money with their own, whereby it loses its identity, and they become mere
debtors."
If this proposition is sound and is applicable to cases arising in this jurisdiction, and I entertain
no doubt on this point, the liability of the estate of De la Pea cannot be doubted. But this court
in the majority opinion says: "The fact that he (Agustin de la Pea) placed the trust fund in the
bank in his personal account does not add to his responsibility. Such deposit did not make him a
debtor who must respond at all hazards. . . . There was no law prohibiting him from depositing it
as he did, and there was no law which changed his responsibility, by reason of the deposit."
I assume that the court in using the language which appears in the latter part of the above
quotation meant to say that there was no statutory law regulating the question. Questions of this
character are not usually governed by statutory law. The law is to be found in the very nature of
the trust itself, and, as a general rule, the courts say what facts are necessary to hold the
trustee as a debtor.
If De la Pea, after depositing the trust fund in his personal account, had used this money for
speculative purposes, such as the buying and selling of sugar or other products of the country,
thereby becoming a debtor, there would have been no doubt as to the liability of his estate.
Whether he used this money for that purpose the record is silent, but it will be noted that a
considerable length of time intervened from the time of the deposit until the funds were
confiscated by the military authorities. In fact the record shows that De la Pea deposited on
June 27, 1898, P5,259, on June 28 of that year P3,280, and on August 5 of the same year
P6,000. The record also shows that these funds were withdrawn and again deposited all
together on the 29th of May, 1900, this last deposit amounting to P18,970. These facts strongly
indicate that De la Pea had as a matter of fact been using the money in violation of the trust
imposed in him. lawph!1.net

27
If the doctrine announced in the majority opinion be followed in cases hereafter arising in this
jurisdiction trust funds will be placed in precarious condition. The position of the trustee will
cease to be one of trust.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-30511 February 14, 1980
MANUEL M. SERRANO, petitioner,
vs.
CENTRAL BANK OF THE PHILIPPINES; OVERSEAS BANK OF MANILA; EMERITO M.
RAMOS, SUSANA B. RAMOS, EMERITO B. RAMOS, JR., JOSEFA RAMOS DELA RAMA,
HORACIO DELA RAMA, ANTONIO B. RAMOS, FILOMENA RAMOS LEDESMA, RODOLFO
LEDESMA, VICTORIA RAMOS TANJUATCO, and TEOFILO TANJUATCO, respondents.
Rene Diokno for petitioner.
F.E. Evangelista & Glecerio T. Orsolino for respondent Central Bank of the Philippines.
Feliciano C. Tumale, Pacifico T. Torres and Antonio B. Periquet for respondent Overseas Bank
of Manila.
Josefina G. Salonga for all other respondents.

CONCEPCION, JR., J.:

Petition for mandamus and prohibition, with preliminary injunction, that seeks the establishment
of joint and solidary liability to the amount of Three Hundred Fifty Thousand Pesos, with interest,
against respondent Central Bank of the Philippines and Overseas Bank of Manila and its
stockholders, on the alleged failure of the Overseas Bank of Manila to return the time deposits
made by petitioner and assigned to him, on the ground that respondent Central Bank failed in its
duty to exercise strict supervision over respondent Overseas Bank of Manila to protect
depositors and the general public. 1 Petitioner also prays that both respondent banks be ordered
to execute the proper and necessary documents to constitute all properties fisted in Annex "7"
of the Answer of respondent Central Bank of the Philippines in G.R. No. L-29352, entitled
"Emerita M. Ramos, et al vs. Central Bank of the Philippines," into a trust fund in favor of
petitioner and all other depositors of respondent Overseas Bank of Manila. It is also prayed that
the respondents be prohibited permanently from honoring, implementing, or doing any act
predicated upon the validity or efficacy of the deeds of mortgage, assignment. and/or
conveyance or transfer of whatever nature of the properties listed in Annex "7" of the Answer of
respondent Central Bank in G.R. No. 29352. 2
A sought for ex-parte preliminary injunction against both respondent banks was not given by this
Court.
Undisputed pertinent facts are:
On October 13, 1966 and December 12, 1966, petitioner made a time deposit, for one year with
6% interest, of One Hundred Fifty Thousand Pesos (P150,000.00) with the respondent
Overseas Bank of Manila. 3 Concepcion Maneja also made a time deposit, for one year with 6-
% interest, on March 6, 1967, of Two Hundred Thousand Pesos (P200,000.00) with the same
respondent Overseas Bank of Manila. 4
On August 31, 1968, Concepcion Maneja, married to Felixberto M. Serrano, assigned and
conveyed to petitioner Manuel M. Serrano, her time deposit of P200,000.00 with respondent
Overseas Bank of Manila. 5
Notwithstanding series of demands for encashment of the aforementioned time deposits from
the respondent Overseas Bank of Manila, dating from December 6, 1967 up to March 4, 1968,
not a single one of the time deposit certificates was honored by respondent Overseas Bank of
Manila. 6
Respondent Central Bank admits that it is charged with the duty of administering the banking
system of the Republic and it exercises supervision over all doing business in the Philippines,
but denies the petitioner's allegation that the Central Bank has the duty to exercise a most rigid
and stringent supervision of banks, implying that respondent Central Bank has to watch every
move or activity of all banks, including respondent Overseas Bank of Manila. Respondent
Central Bank claims that as of March 12, 1965, the Overseas Bank of Manila, while operating,
was only on a limited degree of banking operations since the Monetary Board decided in its
Resolution No. 322, dated March 12, 1965, to prohibit the Overseas Bank of Manila from
making new loans and investments in view of its chronic reserve deficiencies against its deposit
liabilities. This limited operation of respondent Overseas Bank of Manila continued up to 1968. 7

28
Respondent Central Bank also denied that it is guarantor of the permanent solvency of any
banking institution as claimed by petitioner. It claims that neither the law nor sound banking
supervision requires respondent Central Bank to advertise or represent to the public any
remedial measures it may impose upon chronic delinquent banks as such action may inevitably
result to panic or bank "runs". In the years 1966-1967, there were no findings to declare the
respondent Overseas Bank of Manila as insolvent. 8
Respondent Central Bank likewise denied that a constructive trust was created in favor of
petitioner and his predecessor in interest Concepcion Maneja when their time deposits were
made in 1966 and 1967 with the respondent Overseas Bank of Manila as during that time the
latter was not an insolvent bank and its operation as a banking institution was being salvaged by
the respondent Central Bank. 9
Respondent Central Bank avers no knowledge of petitioner's claim that the properties given by
respondent Overseas Bank of Manila as additional collaterals to respondent Central Bank of the
Philippines for the former's overdrafts and emergency loans were acquired through the use of
depositors' money, including that of the petitioner and Concepcion Maneja. 10
In G.R. No. L-29362, entitled "Emerita M. Ramos, et al. vs. Central Bank of the Philippines," a
case was filed by the petitioner Ramos, wherein respondent Overseas Bank of Manila sought to
prevent respondent Central Bank from closing, declaring the former insolvent, and liquidating its
assets. Petitioner Manuel Serrano in this case, filed on September 6, 1968, a motion to
intervene in G.R. No. L-29352, on the ground that Serrano had a real and legal interest as
depositor of the Overseas Bank of Manila in the matter in litigation in that case. Respondent
Central Bank in G.R. No. L-29352 opposed petitioner Manuel Serrano's motion to intervene in
that case, on the ground that his claim as depositor of the Overseas Bank of Manila should
properly be ventilated in the Court of First Instance, and if this Court were to allow Serrano to
intervene as depositor in G.R. No. L-29352, thousands of other depositors would follow and
thus cause an avalanche of cases in this Court. In the resolution dated October 4, 1968, this
Court denied Serrano's, motion to intervene. The contents of said motion to intervene are
substantially the same as those of the present petition. 11
This Court rendered decision in G.R. No. L-29352 on October 4, 1971, which became final and
executory on March 3, 1972, favorable to the respondent Overseas Bank of Manila, with the
dispositive portion to wit:
WHEREFORE, the writs prayed for in the petition are hereby granted and respondent Central
Bank's resolution Nos. 1263, 1290 and 1333 (that prohibit the Overseas Bank of Manila to
participate in clearing, direct the suspension of its operation, and ordering the liquidation of said
bank) are hereby annulled and set aside; and said respondent Central Bank of the Philippines is
directed to comply with its obligations under the Voting Trust Agreement, and to desist from
taking action in violation therefor. Costs against respondent Central Bank of the Philippines. 12
Because of the above decision, petitioner in this case filed a motion for judgment in this case,
praying for a decision on the merits, adjudging respondent Central Bank jointly and severally
liable with respondent Overseas Bank of Manila to the petitioner for the P350,000 time deposit
made with the latter bank, with all interests due therein; and declaring all assets assigned or
mortgaged by the respondents Overseas Bank of Manila and the Ramos groups in favor of the
Central Bank as trust funds for the benefit of petitioner and other depositors. 13
By the very nature of the claims and causes of action against respondents, they in reality are
recovery of time deposits plus interest from respondent Overseas Bank of Manila, and recovery
of damages against respondent Central Bank for its alleged failure to strictly supervise the acts
of the other respondent Bank and protect the interests of its depositors by virtue of the
constructive trust created when respondent Central Bank required the other respondent to
increase its collaterals for its overdrafts said emergency loans, said collaterals allegedly
acquired through the use of depositors money. These claims shoud be ventilated in the Court of
First Instance of proper jurisdiction as We already pointed out when this Court denied
petitioner's motion to intervene in G.R. No. L-29352. Claims of these nature are not proper in
actions for mandamus and prohibition as there is no shown clear abuse of discretion by the
Central Bank in its exercise of supervision over the other respondent Overseas Bank of Manila,
and if there was, petitioner here is not the proper party to raise that question, but rather the
Overseas Bank of Manila, as it did in G.R. No. L-29352. Neither is there anything to prohibit in
this case, since the questioned acts of the respondent Central Bank (the acts of dissolving and
liquidating the Overseas Bank of Manila), which petitioner here intends to use as his basis for
claims of damages against respondent Central Bank, had been accomplished a long time ago.
Furthermore, both parties overlooked one fundamental principle in the nature of bank deposits
when the petitioner claimed that there should be created a constructive trust in his favor when
the respondent Overseas Bank of Manila increased its collaterals in favor of respondent Central

29
Bank for the former's overdrafts and emergency loans, since these collaterals were acquired by
the use of depositors' money.
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. 14 Current and savings deposit are loans to a bank
because it can use the same. The petitioner here in making time deposits that earn interests
with respondent Overseas Bank of Manila was in reality a creditor of the respondent Bank and
not a depositor. The respondent Bank was in turn a debtor of petitioner. Failure of he
respondent Bank to honor the time deposit is failure to pay s obligation as a debtor and not a
breach of trust arising from depositary's failure to return the subject matter of the deposit
WHEREFORE, the petition is dismissed for lack of merit, with costs against petitioner.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
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.:+.wph!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:t.hqw
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"):t.hqw
"From March 20, 1979 to March, 1981, David invested with the Nation Savings and Loan
Association, (hereinafter called NSLA) the sum of P1,145,546.20 on nine deposits, P13,531.94
on savings account deposits (jointly with his sister, Denise Kuhne), US$10,000.00 on time
deposit, US$15,000.00 under a receipt and guarantee of payment and US$50,000.00 under a
receipt dated June 8, 1980 (au jointly with Denise Kuhne), that David was induced into making
the aforestated investments by Robert Marshall an Australian national who was allegedly a
close associate of petitioner Guingona Jr., then NSLA President, petitioner Martin, then NSLA
Executive Vice-President of NSLA and petitioner Santos, then NSLA General Manager; that on
March 21, 1981 N LA was placed under receivership by the Central Bank, so that David filed
claims therewith for his investments and those of his sister; that on July 22, 1981 David received
a report from the Central Bank that only P305,821.92 of those investments were entered in the

30
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.t.hqw
"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:t.hqw
"That he had no hand whatsoever in the transactions between David and NSLA since he
(Guingona Jr.) had resigned as NSLA president in March 1978, or prior to those transactions;
that he assumed a portion o; the liabilities of NSLA to David because of the latter's insistence
that he placed his investments with NSLA because of his faith in Guingona, Jr.; that in a
Promissory Note dated June 17, 1981 (Petition, Annex "D") he (Guingona, Jr.) bound himself to
pay David the sums of P668.307.01 and US$37,500.00 in stated installments; that he
(Guingona, Jr.) secured payment of those amounts with second mortgages over two (2) parcels
of land under a deed of Second Real Estate Mortgage (Petition, Annex "E") in which it was
provided that the mortgage over one (1) parcel shall be cancelled upon payment of one-half of
the obligation to David; that he (Guingona, Jr.) paid P200,000.00 and tendered another
P300,000.00 which David refused to accept, hence, he (Guingona, Jr.) filed Civil Case No. Q-
33865 in the Court of First Instance of Rizal at Quezon City, to effect the release of the
mortgage over one (1) of the two parcels of land conveyed to David under second mortgages."
At the inception of the preliminary investigation before respondent Lota, petitioners moved to
dismiss the charges against them for lack of jurisdiction because David's claims allegedly
comprised a purely civil obligation which was itself novated. Fiscal Lota denied the motion to
dismiss (Petition, p. 8).
But, after the presentation of David's principal witness, petitioners filed the instant petition
because: (a) the production of the Promisory Notes, Banker's Acceptance, Certificates of Time
Deposits and Savings Account allegedly showed that the transactions between David and NSLA
were simple loans, i.e., civil obligations on the part of NSLA which were novated when
Guingona, Jr. and Martin assumed them; and (b) David's principal witness allegedly testified
that the duplicate originals of the aforesaid instruments of indebtedness were all on file with
NSLA, contrary to David's claim that some of his investments were not record (Petition, pp. 8-9).
Petitioners alleged that they did not exhaust available administrative remedies because to do so
would be futile (Petition, p. 9) [pp. 153-157, rec.].
As correctly pointed out by the Solicitor General, the sole issue for resolution is whether public
respondents acted without jurisdiction when they investigated the charges (estafa and violation
of CB Circular No. 364 and related regulations regarding foreign exchange transactions) subject
matter of I.S. No. 81-31938.
There is merit in the contention of the petitioners that their liability is civil in nature and therefore,
public respondents have no jurisdiction over the charge of estafa.
A casual perusal of the December 23, 1981 affidavit. complaint filed in the Office of the City
Fiscal of Manila by private respondent David against petitioners Teopisto Guingona, Jr., Antonio
I. Martin and Teresita G. Santos, together with one Robert Marshall and the other directors of
the Nation Savings and Loan Association, will show that from March 20, 1979 to March, 1981,
private respondent David, together with his sister, Denise Kuhne, invested with the Nation

31
Savings and Loan Association the sum of P1,145,546.20 on time deposits covered by Bankers
Acceptances and Certificates of Time Deposits and the sum of P13,531.94 on savings account
deposits covered by passbook nos. 6-632 and 29-742, or a total of P1,159,078.14 (pp. 15-16,
roc.). It appears further that private respondent David, together with his sister, made
investments in the aforesaid bank in the amount of US$75,000.00 (p. 17, rec.).
Moreover, the records reveal that when the aforesaid bank was placed under receivership on
March 21, 1981, petitioners Guingona and Martin, upon the request of private respondent
David, assumed the obligation of the bank to private respondent David by executing on June 17,
1981 a joint promissory note in favor of private respondent acknowledging an indebtedness of
Pl,336,614.02 and US$75,000.00 (p. 80, rec.). This promissory note was based on the
statement of account as of June 30, 1981 prepared by the private respondent (p. 81, rec.). The
amount of indebtedness assumed appears to be bigger than the original claim because of the
added interest and the inclusion of other deposits of private respondent's sister in the amount of
P116,613.20.
Thereafter, or on July 17, 1981, petitioners Guingona and Martin agreed to divide the said
indebtedness, and petitioner Guingona executed another promissory note antedated to June 17,
1981 whereby he personally acknowledged an indebtedness of P668,307.01 (1/2 of
P1,336,614.02) and US$37,500.00 (1/2 of US$75,000.00) in favor of private respondent (p. 25,
rec.). The aforesaid promissory notes were executed as a result of deposits made by Clement
David and Denise Kuhne with the Nation Savings and Loan Association.
Furthermore, the various pleadings and documents filed by private respondent David, before
this Court indisputably show that he has indeed invested his money on time and savings
deposits with the Nation Savings and Loan Association.
It must be pointed out that when private respondent David invested his money on nine. and
savings deposits with the aforesaid bank, the contract that was perfected was a contract of
simple loan or mutuum and not a contract of deposit. Thus, Article 1980 of the New Civil Code
provides that:t.hqw
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:t.hqw
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:t.hqw
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:t.hqw
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,

32
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.t.hqw
"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:t.hqw
As pointed out in People vs. Nery, novation prior to the filing of the criminal information as in
the case at bar may convert the relation between the parties into an ordinary creditor-debtor
relation, and place the complainant in estoppel to insist on the original transaction or "cast doubt
on the true nature" thereof.
Again, in the latest case of Ong vs. Court of Appeals (L-58476, 124 SCRA 578, 580-581 [1983]
), this Court reiterated the ruling in People vs. Nery ( 10 SCRA 244 [1964] ), declaring
that:t.hqw
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.

33
Consequently, as aforestated, any incipient criminal liability would be avoided but there will still
be a civil liability on the part of petitioners Guingona and Martin to pay the assumed obligation.
Petitioners herein were likewise charged with violation of Section 3 of Central Bank Circular No.
364 and other related regulations regarding foreign exchange transactions by accepting foreign
currency deposit in the amount of US$75,000.00 without authority from the Central Bank. They
contend however, that the US dollars intended by respondent David for deposit were all
converted into Philippine currency before acceptance and deposit into Nation Savings and Loan
Association.
Petitioners' contention is worthy of behelf for the following reasons:
1. It appears from the records that when respondent David was about to make a deposit of bank
draft issued in his name in the amount of US$50,000.00 with the Nation Savings and Loan
Association, the same had to be cleared first and converted into Philippine currency.
Accordingly, the bank draft was endorsed by respondent David to petitioner Guingona, who in
turn deposited it to his dollar account with the Security Bank and Trust Company. Petitioner
Guingona merely accommodated the request of the Nation Savings and loan Association in
order to clear the bank draft through his dollar account because the bank did not have a dollar
account. Immediately after the bank draft was cleared, petitioner Guingona authorized Nation
Savings and Loan Association to withdraw the same in order to be utilized by the bank for its
operations.
2. It is safe to assume that the U.S. dollars were converted first into Philippine pesos before they
were accepted and deposited in Nation Savings and Loan Association, because the bank is
presumed to have followed the ordinary course of the business which is to accept deposits in
Philippine currency only, and that the transaction was regular and fair, in the absence of a clear
and convincing evidence to the contrary (see paragraphs p and q, Sec. 5, Rule 131, Rules of
Court).
3. Respondent David has not denied the aforesaid contention of herein petitioners despite the
fact that it was raised. in petitioners' reply filed on May 7, 1982 to private respondent's comment
and in the July 27, 1982 reply to public respondents' comment and reiterated in petitioners'
memorandum filed on October 30, 1982, thereby adding more support to the conclusion that the
US$75,000.00 were really converted into Philippine currency before they were accepted and
deposited into Nation Savings and Loan Association. Considering that this might adversely
affect his case, respondent David should have promptly denied petitioners' allegation.
In conclusion, considering that the liability of the petitioners is purely civil in nature and that
there is no clear showing that they engaged in foreign exchange transactions, We hold that the
public respondents acted without jurisdiction when they investigated the charges against the
petitioners. Consequently, public respondents should be restrained from further proceeding with
the criminal case for to allow the case to continue, even if the petitioners could have appealed to
the Ministry of Justice, would work great injustice to petitioners and would render meaningless
the proper administration of justice.
While as a rule, the prosecution in a criminal offense cannot be the subject of prohibition and
injunction, this court has recognized the resort to the extraordinary writs of prohibition and
injunction in extreme cases, thus:t.hqw
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:t.hqw
"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:t.hqw
The writs of certiorari and prohibition, as extraordinary legal remedies, are in the ultimate
analysis, intended to annul void proceedings; to prevent the unlawful and oppressive exercise of
legal authority and to provide for a fair and orderly administration of justice. Thus, in Yu Kong
Eng vs. Trinidad, 47 Phil. 385, We took cognizance of a petition for certiorari and prohibition
although the accused in the case could have appealed in due time from the order complained
of, our action in the premises being based on the public welfare policy the advancement of
public policy. In Dimayuga vs. Fajardo, 43 Phil. 304, We also admitted a petition to restrain the

34
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.1wph

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-46208 April 5, 1990
FIDELITY SAVINGS AND MORTGAGE BANK, petitioner,
vs.
HON. PEDRO D. CENZON, in his capacity as Presiding Judge of the Court of First
Instance of Manila (Branch XL) and SPOUSES TIMOTEO AND OLIMPIA SANTIAGO,
respondents.
Agapito S. Fajardo and Marino E. Eslao for petitioner. Leovillo C. Agustin Law Offices for
private respondents.

REGALADO, J.:
The instant petition seeks the review, on pure questions of law, of the decision rendered by the
Court of First Instance of Manila (now Regional Trial Court), Branch XL, on December 3, 1976
in Civil Case No. 84800,1 ordering herein petitioner to pay private respondents the following
amounts:
(a) P90,000.00 with accrued interest in accordance with Exhibits A and B until fully paid;
(b) P30,000,00 as exemplary damages; and
(c) P10,000.00 as and for attorney's fees.
The payment by the defendant Fidelity Savings and Mortgage Bank of the aforementioned sums
of money shall be subject to the Bank Liquidation Rules and Regulations embodied in the Order
of the Court of First Instance of Manila, Branch XIII, dated October 3, 1972, Civil Case No.
86005, entitled, "IN RE: Liquidation of the Fidelity Savings Bank versus Central Bank of the
Philippines, Liquidator."
With costs against the defendant Fidelity Savings and Mortgage Bank.
SO ORDERED.
Private respondents instituted this present action for a sum of money with damages against
Fidelity Savings and Mortgage Bank, Central Bank of the Philippines, Eusebio Lopez, Jr.,
Arsenio M. Lopez, Sr., Arsenio S. Lopez, Jr., Bibiana E. Lacuna, Jose C. Morales, Leon P. Cusi,
Pilar Y. Pobre-Cusi and Ernani A. Pacana. On motion of herein private respondents, as
plaintiffs, the amended complaint was dismissed without prejudice against defendants Jose C.
Morales, Leon P. Cusi, Pilar Y. Pobre-Cusi and Ernani A. Pacana. 2 In its aforesaid decision of
December 3, 1976, the court a quo dismissed the complaint as against defendants Central Bank
of the Philippines, Eusebio Lopez, Jr., Arsenio S. Lopez, Jr., Arsenio M. Lopez, Sr. and Bibiana
S. Lacuna.
Back on August 10, 1973, the plaintiffs (herein private respondents) and the defendants Fidelity
Savings and Mortgage Bank (petitioner herein), Central Bank of the Philippines and Bibiana E.
Lacuna had filed in said case in the lower court a partial stipulation of facts, as follows:
COME NOW herein plaintiffs, SPOUSES TIMOTEO M. SANTIAGO and OLIMPIA R.
SANTIAGO, herein defendants FIDELITY SAVINGS AND MORTGAGE BANK and the
CENTRAL BANK OF THE PHILIPPINES, and herein defendant BIBIANA E. LACUNA, through
their respective undersigned counsel, and before this Honorable Court most respectfully submit
the following Partial Stipulation of Facts:
1. That herein plaintiffs are husband and wife, both of legal age, and presently residing at No.
480 C. de la Paz Street, Sta. Elena, Marikina, Rizal;
2. That herein defendant Fidelity Savings and Mortgage Bank is a corporation duly organized
and existing under and by virtue of the laws of the Philippines; that defendant Central Bank of

35
the Philippines is a corporation duly organized and existing under and by virtue of the laws of
the Philippines;
3. That herein defendant Bibiana E. Lacuna is of legal age and a resident of No. 42 East Lawin
Street, Philamlife Homes, Quezon City, said defendant was an assistant Vice-President of the
defendant fidelity Savings and Mortgage Bank,
4. That sometime on May 16, 1968, here in plaintiffs deposited with the defendant Fidelity
Savings Bank the amount of FIFTY THOUSAND PESOS (P50,000.00) under Savings Account
No. 16-0536; that likewise, sometime on July 6, 1968, herein plaintiff,- deposited with the
defendant Fidelity Savings and Mortgage Bank the amount of FIFTY THOUSAND PESOS
(P50,000.00) under Certificate of Time Deposit No. 0210; that the aggregate amount of deposits
of the plaintiffs with the defendant Fidelity Savings and Mortgage Bank is ONE HUNDRED
THOUSAND PESOS (P100,000.00);
5. That on February 18, 1969, the Monetary Board, after finding the report of the Superintendent
of Banks, that the condition of the defendant Fidelity Savings and Mortgage Bank is one of
insolvency, to be true, issued Resolution No. 350 deciding, among others, as follows:
1) To forbid the Fidelity Savings Bank to do business in the Philippines;
2) To instruct the Acting Superintendent of Banks to take charge, in the name of the Monetary
Board, of the Bank's assets
6. That pursuant to the above-cited instructions of the Monetary Board, the Superintendent of
Banks took charge in the name of the Monetary Board, of the assets of defendant Fidelity
Savings Bank on February 19, 1969; and that since that date up to this date, the Superintendent
of Banks (now designated as Director, Department of Commercial and Savings Banks) has
been taking charge of the assets of defendant Fidelity Savings and Mortgage Bank;
7. That sometime on October 10, 1969 the Philippine Deposit Insurance Corporation paid the
plaintiffs the amount of TEN THOUSAND PESOS (P10,000.00) on the aggregate deposits of
P100,000.00 pursuant to Republic Act No. 5517, thereby leaving a deposit balance of
P90,000.00;
8. That on December 9, 1969, the Monetary Board issued its Resolution No. 2124 directing the
liquidation of the affairs of defendant Fidelity Savings Bank;
9. That on January 25, 1972, the Solicitor General of the Philippines filed a "Petition for
Assistance and Supervision in Liquidation" of the affairs of the defendant Fidelity Savings and
Mortgage Bank with the Court of First Instance of Manila, assigned to Branch XIII and docketed
as Civil Case No. 86005;
10. That on October 3, 1972, the Liquidation Court promulgated the Bank Rules and
Regulations to govern the liquidation of the affairs of defendant Fidelity Savings and Mortgage
Bank, prescribing the rules on the conversion of the Bank's assets into money, processing of
claims against it and the manner and time of distributing the proceeds from the assets of the
Bank;
11. That the liquidation proceedings has not been terminated and is still pending up to the
present;
12. That herein plaintiffs, through their counsel, sent demand letters to herein defendants,
demanding the immediate payment of the aforementioned savings and time deposits.
WHEREFORE, it is respectfully prayed that the foregoing Partial Stipulation of Facts be
approved by this Honorable Court, without prejudice to the presentation of additional
documentary or testimonial evidence by herein parties.
Manila, Philippines, August 10, 1973. 3
Assigning error in the judgment of the lower court quoted ab antecedents, petitioner raises two
questions of law, to wit:
1. Whether or not an insolvent bank like the Fidelity Savings and Mortgage Bank may be
adjudged to pay interest on unpaid deposits even after its closure by the Central Bank by
reason of insolvency without violating the provisions of the Civil Code on preference of credits;
and
2. Whether or not an insolvent bank like the Fidelity Savings and Mortgage Bank may be
adjudged to pay moral and exemplary damages, attorney's fees and costs when the insolvency
is caused b the anomalous real estate transactions without violating the provisions of the Civil
Code on preference of credits.
There is merit in the petition.
It is settled jurisprudence that a banking institution which has been declared insolvent and
subsequently ordered closed by the Central Bank of the Philippines cannot be held liable to pay
interest on bank deposits which accrued during the period when the bank is actually closed and
non-operational.
In The Overseas Bank of Manila vs. Court of Appeals and Tony D. Tapia, 4 we held that:

36
It is a matter of common knowledge, which We take judicial notice of, that what enables a bank
to pay stipulated interest on money deposited with it is that thru the other aspects of its
operation it is able to generate funds to cover the payment of such interest. Unless a bank can
lend money, engage in international transactions, acquire foreclosed mortgaged properties or
their proceeds and generally engage in other banking and financing activities from which it can
derive income, it is inconceivable how it can carry on as a depository obligated to pay stipulated
interest. Conventional wisdom dictates this inexorable fair and just conclusion. And it can be
said that all who deposit money in banks are aware of such a simple economic proposition.
Consequently, it should be deemed read into every contract of deposit with a bank that the
obligation to pay interest on the deposit ceases the moment the operation of the bank is
completely suspended by the duly constituted authority, the Central Bank.
This was reiterated in the subsequent case of The Overseas Bank of Manila vs. The Hon. Court
of Appeals and Julian R. Cordero. 5 and in the recent cases of Integrated Realty Corporation, et
al. vs. Philippine National Bank, et al. and the Overseas Bank of Manila vs. Court of appeals, et
al. 6
From the aforecited authorities, it is manifest that petitioner cannot be held liable for interest on
bank deposits which accrued from the time it was prohibited by the Central Bank to continue
with its banking operations, that is, when Resolution No. 350 to that effect was issued on
February 18, 1969.
The order, therefore, of the Central Bank as receiver/liquidator of petitioner bank allowing the
claims of depositors and creditors to earn interest up to the date of its closure on February 18,
1969, 7 in line with the doctrine laid down in the jurisprudence above cited.
Although petitioner's formulation of the second issue that it poses is slightly inaccurate and
defective, we likewise find the awards of moral and exemplary damages and attorney's fees to
be erroneous.
The trial court found, and it is not disputed, that there was no fraud or bad faith on the part of
petitioner bank and the other defendants in accepting the deposits of private respondents.
Petitioner bank could not even be faulted in not immediately returning the amount claimed by
private respondents considering that the demand to pay was made and Civil Case No. 84800
was filed in the trial court several months after the Central Bank had ordered petitioner's
closure. By that time, petitioner bank was no longer in a position to comply with its obligations to
its creditors, including herein private respondents. Even the trial court had to admit that
petitioner bank failed to pay private respondents because it was already insolvent. 8 Further, this
case is not one of the specified or analogous cases wherein moral damages may be recovered.
9

There is no valid basis for the award of exemplary damages which is supposed to serve as a
warning to other banks from dissipating their assets in anomalous transactions. It was not
proven by private respondents, and neither was there a categorical finding made by the trial
court, that petitioner bank actually engaged in anomalous real estate transactions. The same
were raised only during the testimony of the bank examiner of the Central Bank, 10 but no
documentary evidence was ever presented in support thereof. Hence, it was error for the lower
court to impose exemplary damages upon petitioner bank since, in contracts, such sanction
requires that the offending party acted in a wanton, fraudulent, reckless, oppressive or
malevolent manner. 11 Neither does this case present the situation where attorney's fees may be
awarded. 12
In the absence of fraud, bad faith, malice or wanton attitude, petitioner bank may, therefore, not
be held responsible for damages which may be reasonably attributed to the non-performance of
the obligation. 13 Consequently, we reiterate that under the premises and pursuant to the
aforementioned provisions of law, it is apparent that private respondents are not justifiably
entitled to the payment of moral and exemplary damages and attorney's fees.
While we tend to agree with petitioner bank that private respondents' claims should he been
filed in the liquidation proceedings in Civil Case No. 86005, entitled "In Re: Liquidation of the
Fidelity Savings and Mortgage Bank," pending before Branch XIII of the then Court of First
Instance of Manila, we do not believe that the decision rendered in the instant case would be
violative of the legal provisions on preference and concurrence of credits. As the trial court puts
it:
. . . But this order of payment should not be understood as raising these deposits to the
category of preferred credits of the defendant Fidelity Savings and Mortgage Bank but shall be
paid in accordance with the Bank Liquidation Rules and Regulations embodied in the Order of
the. Court of First Instance of Manila, Branch XIII dated October 3, 1972 (Exh. 3). . . . 14
WHEREFORE, the judgment appealed from is hereby MODIFIED. Petitioner Fidelity Savings
and Mortgage Bank is hereby declared liable to pay private respondents Timoteo and Olimpia

37
Santiago the sum of P90,000.00, with accrued interest in accordance with the terms of Savings
Account Deposit No. 16-0536 (Exhibit A) and Certificate of Time Deposit No. 0210 (Exhibit B)
until February 18, 1969. The awards for moral and exemplary damages, and attorney's fees are
hereby DELETED. No costs.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-17449 August 30, 1962
PEOPLE OF THE PHILIPPINES, plaintiff-appellant,
vs.
ZOSIMO MONTEMAYOR and CIRIACO DUCUSIN, appellees-defendants.
Office of the Solicitor General for plaintiff-appellant. Cesar R. Azura for defendant-appellee
Zosimo Montemayor. Melecio C. Guba for defendant-appellee Ciriaco Ducusin.
REYES, J.B.L., J.:
Appeal on questions of law from an order of the Court of First Instance of Bukidnon, entered in
its Criminal Case No. 602, granting the accused's motion to dismiss the charge for illegal use of
public funds, on the ground that the facts alleged in the information do not constitute an
indictable offense.
Zosimo Montemayor, President of the Mindanao Agricultural Colleges, organized and chartered
by Republic Act 807, and Ciriaco Ducusin, property custodian of the same College, was jointly
accused in an information filed by the Provincial Fiscal on 9 July 1956, couched in the following
terms:
That on or about and during the period from August 1, 1953 to December 1, 1953, both dates
inclusive, in barrio Musuan, Municipality of Maramag, province of Bukidnon, Philippines, and
within the jurisdiction of this Honorable Court, the accused Zosimo Montemayor then, and until
now, President of the Mindanao Agricultural College, a government institution established and
existing under the provisions of law, did then and there, wilfully, unlawfully and feloniously
direct, instruct, and order the accused Ciriaco Ducusin to use the students' property deposits for
the purchase of supplies and materials needed by the college, and the latter, then the property
custodian of said college and who had been keeping said fund under his administration, by
virtue of said instruction and order, did then and there willfully, unlawfully and feloniously use,
spend, and apply the amount of P1,911.64 out of said fund for the purchase of 9991.8 gallons of
gasoline, 965.1 gallons of crude oil and 131.5 gallons of SAE 30 for the use of said college,
thereby applying said amount to a public use other than that for which it was appropriated by
Resolution No. 13 of the Board of Trustees of said college namely, for the payment of the losses
and breakages of college instrument and equipments incurred by students.1wph1.t
Upon motion of the accused, the Court dismissed the information by the following order:
Upon consideration of the Motion to Quash, dated January 19, 1960, filed by counsel for the
accused in the above-entitled case and the opposition thereto, dated March 7, 1960, presented
by the Provincial Fiscal, the Court concurs with the arguments stated in the said motion to
quash and finds that the deposits in question are not of the character of public funds which have
been appropriated by law or ordinance within the purview of Article 220, paragraph 2, of the
Revised Penal Code, and applied by the accused for uses other than those intended, so as to
render them liable for the crime of illegal use of public funds under the above-mentioned penal
provisions.
Article 220 of the Revised Penal Code penalizes the illegal use of public funds in the following
terms:
ART. 220. Illegal use of public funds or property. Any public officer who shall apply any public
fund or property under his administration to any public use other than that for which such fund or
property were appropriated by law or ordinance shall suffer the penalty of prision correccional in
its minimum period or a fine ranging from one-half to the total value of the sum misapplied, if by
reason of such misapplication, any damage or embarrassment shall have resulted to the public
service. In either case the offender shall also suffer the penalty of temporary special
disqualification.
If no damage or embarrassment to the public service has resulted, the penalty shall be a fine
from 5 to 50 per cent of the sum misapplied.
The State contends that it is error for the lower court to declare that the amounts deposited by
the students were not public funds. This is undoubtedly correct, for the amounts paid by the
students to the college, in order answer for the value of materials broken, were no more

38
"deposits" in law than bank "deposits" are so. There was no showing that the college undertook
to keep safe the moneys in question and return it later to each student in the very same coins or
bills in which it had been original received. The Mindanao College merely bound itself to
reimburse or repay to each student the amount "deposited" by him or her, after deducting or
setting off the value of broken equipment. The relation thus established between college and
student was one of debtor and creditor, not one of depositor and depository; the transaction was
a loan, not a deposit. As a loan, the College acquired the ownership of the money paid by the
students, subject only to the obligation of reimbursing equivalent amounts, unless a deduction
should happen to be due. Such being the case, the money became public funds, from the time
the College received them, since the College was, and is, a public entity.
But the matter does not end there. To constitute the crime charged, there must be a diversion of
the funds from the purpose for which they had been originally appropriated by law or ordinance
(R.P.C. Art. 220); and, as correctly found by the court below, the students' payments had not
been so appropriated. The resolution of the college authorities that the amounts paid by the
students should be later refunded nowhere implied that the repayment was to be made
precisely out of the money received, and as the refund could be made out of any available funds
of the College, there was no appropriation for a particular purpose that was violated by these
accuse.
WHEREFORE, the order appealed from is affirmed. No costs.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-7097 October 23, 1912
VICENTE DELGADO, defendant-appellee,
vs.
PEDRO BONNEVIE and FRANCISCO ARANDEZ, plaintiffs-appellants.
O' Brien and DeWitt, and A. V. Herrero, for appellants. Roco and Roco, for appellee.

ARELLANO, C.J.:
When Pedro Bonnevie and Francisco Arandez formed in Nueva Caceres, Ambos Camarines, a
regular general partnership for engaging in the business of threshing paddy, Vicente Delgado
undertook to deliver to them paddy for this purpose to be cleaned and returned to him as rice,
with the agreement of payment them 10 centimos for each cavan and to have returned in the
rice one-half the amount received as paddy. The paddy received for this purpose was credited
by receipts made out in this way: "Receipt for (number) cavanes of paddy in favor of (owner of
the paddy), Nueva Caceres, (day) of (month), 1898." And they issued to Vicente Delgado
receipts Nos. 86-99 for a total of 2,003 cavanes and a half of paddy, from April 9 to June 8,
1898.
On February 6, 1909, Vicente Delgado appeared in the Court of First Instance of Ambos
Camarines with said receipts, demanding return of the said 2,003 and a half cavanes of paddy,
or in the absence thereof, of the price of said article at the rate of 3 pesos the cavan of 6,009
pesos and 50 centimos, with the interest thereon at 6 percent a year reckoning from, November
21, 905, until complete payment, and the costs. The plaintiff asked that the interest run from
November 21, 1905, because on that date his counsel demanded of the defendants, Bonnevie
and Arandez, their partnership having been dissolved, that they settle the accounts in this
matter.
The court decided the case by sentencing the defendant, Pedro Bonnevie and Francisco
Arandez, to pay to Vicente Delgado two thousand seven hundred and fifty-four pesos and 81
centimos (2,754.81), the value of 2,003 cavanes of paddy at the rate of 11 reales the cavan
and 6 percent interest on said sum reckoned from November 21, 1905, and the costs.
On appeal to this Supreme Court, the only grounds of error assigned are: (1) Violation of articles
532 and 950 of the Code of Commerce; (2) violation of articles 309 of the Code of Commerce
and 1955 and 1962 of the Civil Code; and (3) violation of section 296 of the Code of Civil
Procedure.
With reference to the first assignment of error it is alleged that the receipts in question, the form
whereof has been set forth, were all issued before July 11, 1898, and being credit paper as
defined in paragraph 2 of article 532 of the Code of Commerce, the right of action arising
therefrom prescribed before July 11, 1901, in accordance with article 950 of the Code of
Commerce.

39
This conclusion is not admissible. It is true that, according to the article 950 of the Code of
Commerce, actions arising from bills of exchange, drafts, notes, checks, securities, dividends,
coupons, and the amounts of the amortization of obligations issued in accordance with said
code, shall extinguish three years after they have fallen due; but it is also true that as the
receipts in question are not documents of any kinds enumerated in said article, the actions
arising therefrom do not extinguish three years from their date (that, after all, they do not fall
due). It is true that paragraph 2 of article 950 also mentions, besides those already stated,
"other instruments of draft or exchange;" but it is also true that the receipts in this case are not
documents of draft or exchange, they are not drafts payable to order, but they are, as the
appellants acknowledge, simple promises to pay, or rather mere documents evidencing the
receipt of some cavanes of paddy for the purpose already stated, which is nothing more than
purely for industrial, and not for mercantile exchange. They are documents such as would be
issued by the thousand so-called rice-mills scattered throughout the Islands, wherein a few poor
women of the people in like manner clean the paddy by pounding it with a pestle and return
hulled rice. The contract whereby one person receives from another a quantity of unhulled rice
to return it hulled, for a fixed compensation or renumeration, is an industrial, not a commercial
act; it is, as the appellant say, a hire of services without mercantile character, for there is
nothing about the operation of washing clothes. Articles 532 and 950 of the Code of Commerce
have not, therefore, been violated, for they are not applicable to the case at bar.
Neither are articles 309 of the Code of Commerce and 1955 and 1962 of the Civil Code
applicable. The first of these articles reads thus:
Whenever, with the consent of the depositor, the depositary disposes of the articles on deposit
either for himself or for his business, or for transactions intrusted to him by the former, the rights
and obligations of the depositary and of the depositor shall cease, and the rules and provisions
applicable to the commercial loans, commission, or contract which took place of the deposit
shall be observed.
The appellants say that, in accordance with this legal provision, the puddy received on deposit
ceased to continue under such character in order to remain in their possession under the
contract of hire of services, in virtue whereof they could change it by returning rice instead of
paddy and a half less than the quantity received. They further say that the ownership of
personal property, according to article 1955 of the Civil Code, prescribes by uninterrupted
possession for six years, without necessity of any other condition, and in accordance with article
1962 of the same Code real actions, with regard to personal property, prescribe after the lapse
of six years from the loss of possession. 1awphil.net
Two questions are presented in these allegations: One regarding the nature of the obligation
contracted by the appellants; and the other regarding prescription, not for a period of three
years, but of six years.
With reference to the first, it is acknowledged that the obligation of the appellants arose primarily
out of the contract of deposit, but this deposit was later converted into a contract of hire of
services, and this is true. But it is also true that, after the object of the hire of services had been
fulfilled, the rice in every way remained as a deposit in the possession of the appellants for them
to return to the depositor at any time they might be required to do so, and nothing has relieved
them of this obligation; neither the dissolution of the partnership that united them, nor the
revolutionary movement of a political character that seems to have occurred in 1898, nor the
fact that they may at some time have lost possession of the rice.
With reference to the second question, or under title of deposit or hire of services, the
possession of the appellants can in no way amount to prescription, for the thing received on
deposit or for hire of services could not prescribe, since for every prescription of ownership the
possession must be in the capacity of an owner, public, peaceful, and uninterrupted (Civil Code,
1941); and the appellants could not possess the rice in the capacity of owners, taking for
granted that the depositor or lessor never could have believed that he had transferred to them
ownership of the thing deposited or leased, but merely the care of the thing on deposit and the
use or profit thereof; which is expressed in legal terms by saying that the possession of the
depositary or of the lessee is not adverse to that of the depositor or lessor, who continues to be
the owner of the thing which is merely held in trust by the depositary or lessee.
In strict law, the deposit, when it is of fungible goods received by weight, number or
measurement, becomes a mutual loan, by reason of the authorization which the depositary may
have from the depositor to make use of the goods deposited. (Civil Code, 1768, and Code of
Commerce, 309.) .
But in the present case neither was there for authorization of the depositor nor did the
depositaries intend to make use of the rice for their own consumption or profit; they were merely
released from the obligation of returning the same thing and contracted in lieu thereof the

40
obligation of delivering something similar to the half of it, being bound by no fixed terms, the
opposite of what happens in a mutual loan, to make the delivery or return when and how it might
please the depositor.
In fact, it has happened that the depositaries have, with the consent of the depositor, as
provided in article 309 of the Code of Commerce, disposed of the paddy "for transactions he
intrusted to them," and that in lieu of the deposit there has been a hire of services, which is one
entered into between the parties to the end that one should return in rice half of the quantity of
paddy delivered by the other, with the obligation on the latter's part of paying 10 centimos for
each cavan of hulled rice. The consequence of this is that the rules and regulations for contract
of hire of services must be applied to the case, one of which is that the thing must be returned
after the operation entrusted and payment of compensation, and the other that the action for
claiming the thing leased, being personal, does not prescribe for fifteen years under article 1964
of the Civil Code. 1awphi1.net
If the action arising from the receipts in question does not prescribe in three years, as does that
from bills of exchange, because they are not drafts payable to order or anything but receipts that
any warehouseman would sign; if the possession of the paddy on the part of those who
received it for threshing is not in the capacity of owner but only in that of depositary or lessor of
services and under such character ownership thereof could not prescribe in six years, or at any
time, because adverse possession and not mere holding in trust is required prescription; if the
action to recover the paddy so delivered is not real with regard to personal property, possession
whereof has been lost, but a personal obligation arising from contract of lease for recovery of
possession that has not been lost but maintained in the lessee in the name of the lessor; if
prescription of any kind can in no way be held, only because there could not have been either
beginning or end of a fixed period for the prescription, it is useless to talk of interruption of the
period for the prescription, to which tends the third assignment of error, wherein it is said that
the court violated article 296 of the Code of Civil Procedure in admitting as proven facts not
alleged in the complaint, justas if by admitting them there would have been a finding with regard
to the computation of the period for timely exercise of the action, taking into consideration the
legal interruptions of the running of the period of prescription. The court has made no finding in
the sense that this or that period of time during which these or those facts occured must be
counted out, and therefore the action has not prescribed, because by eliminating such period of
time and comparing such and such date the action has been brought in due time. Prescription of
three or six years cannot be presupposed in the terms alleged, but only of fifteen years, which is
what is proper to oppose to the exercise of a right of action arising from hire of services and
even of deposit or mutual loan, whether common or mercantile; and such is the prescription
considered possible by the trial court, in conformity with articles 943 of the Code of Commerce
and 1964 of the Civil Code.
The trial judge confined himself to sentencing the defendants to payment of the price of the
paddy, ignoring the thing itself, return whereof ought to have been the subject of judgment in the
first place, because the thing itself appears to have been extinguished and its price has taken its
place. But the assigning of legal interest from November 21, 1905, can have no other ground
than the demand made by plaintiff's counsel upon the defendants to settle this matter. Legal
interest on delinquent debts can only be owed from the time the principal amount constitutes a
clear and certain debt, and in the present case the principal debt has only been clear and
certain since the date of the judgment of the lower court; so the legal interest can be owed. only
since then.
The judgment appealed from is affirmed, except that the legal interest shall be understood to be
owed from the date thereof; with the costs of this instance against the appellants.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 142591 April 30, 2003
JOSEPH CHAN, WILSON CHAN and LILY CHAN, petitioners,
vs.
BONIFACIO S. MACEDA, JR., * respondent.
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

41
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
Decision3 dated 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 Decision4 rescinding the contract between
Moreman and respondent and awarding to the latter P445,000.00 as actual, moral and
liquidated damages; P20,000.00 representing the increase in the construction materials; and
P35,000.00 as attorney's 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.
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,7 docketed 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
On August 25, 1989, or after almost four (4) years, the trial court dismissed respondent's
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
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
On April 27, 1995, the trial court issued an order declaring petitioners in default.14
Petitioners filed with the Court of Appeals a petition for certiorari15 to annul the trial court's 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

42
Hotel construction site and to store the same into the latter's 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
Deponent Alfredo Maceda testified that he was respondent's 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
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
On December 26, 1996, the trial court rendered a decision in favor of respondent, thus:
"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 attorney's 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 Moreman's 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 attorney's 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
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
court's judgment, ratiocinating as follows:
"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 party's act (PAL, Inc. vs. NLRC, 259 SCRA 459). In
sustaining appellee's 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

43
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
Moreman's stock clerk, Jose Cedilla (pp. 6061, 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 judge's 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:
"I
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 attorney's 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."
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
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 1979,29 1983,30 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
return" contemplated 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 court's 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

44
the admission of both parties.36
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 respondent's
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.
It must be stressed that respondent's 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
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.41 Significantly, 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 respondent's 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
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 plaintiff's causes of action. Here, the trial court merely adopted respondent's
allegations in his complaint and evidence without evaluating them with the highest degree of

45
objectivity and certainty.
WHEREFORE, the petition is GRANTED. The challenged Decision of the Court of Appeals
dated June 17, 1999 is REVERSED and SET ASIDE. Costs against respondent.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
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
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

46
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.
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.

47
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.

48