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It is not disputed that the petitioner Bank was under a conservator placed by the

Central Bank of the Philippines during the time that the negotiation and perfection of
the contract of sale took place. Petitioners energetically contended that the
conservator has the power to revoke or overrule actions of the management or the
board of directors of a bank, under Section 28-A of Republic Act No. 265 (otherwise
known as the Central Bank Act) as follows:
Whenever, on the basis of a report submitted by the appropriate supervising or examining
department, the Monetary Board finds that a bank or a non-bank financial intermediary
performing quasi - banking functions is in a state of continuing inability or unwillingness to
maintain a state of liquidity deemed adequate to protect the interest of depositors and creditors,
the Monetary Board may appoint a conservator to take charge of the assets, liabilities, and the
management of that institution, collect all monies and debts due said institution and exercise all
powers necessary to preserve the assets of the institution, reorganize the management thereof,
and restore its viability. He shall have the power to overrule or revoke the actions of the
previous management and board of directors of the bank or non-bank financial intermediary
performing quasi-banking functions, any provision of law to the contrary notwithstanding, and
such other powers as the Monetary Board shall deem necessary.
In the first place, this issue of the Conservators alleged authority to revoke or
repudiate the perfected contract of sale was raised for the first time in this Petition - as
this was not litigated in the trial court or Court of Appeals. As already stated earlier,
issues not raised and/or ventilated in the trial court, let alone in the Court of Appeals,
cannot be raised for the first time on appeal as it would be offensive to the basic rules
of fair play, justice and due process.[43]
In the second place, there is absolutely no evidence that the Conservator, at the
time the contract was perfected, actually repudiated or overruled said contract of sale.
The Banks acting conservator at the time, Rodolfo Romey, never objected to the sale
of the property to Demetria and Janolo. What petitioners are really referring to is the
letter of Conservator Encarnacion, who took over from Romey after the sale was
perfected on September 30, 1987 (Annex V, petition) which unilaterally repudiated not the contract - but the authority of Rivera to make a binding offer - and which
unarguably came months after the perfection of the contract. Said letter dated May 12,
1988 is reproduced hereunder:
In the third place, while admittedly, the Central Bank law gives vast and farreaching powers to the conservator of a bank, it must be pointed out that such powers
must be related to the (preservation of) the assets of the bank, (the reorganization of)
the management thereof and (the restoration of) its viability. Such powers, enormous
and extensive as they are, cannot extend to the post-facto repudiation of perfected

transactions, otherwise they would infringe against the non-impairment clause of the
Constitution. If the legislature itself cannot revoke an existing valid contract, how can it
delegate such non-existent powers to the conservator under Section 28-A of said law?
Obviously, therefore, Section 28-A merely gives the conservator power to
revoke contracts that are, under existing law, deemed to be defective - i.e., void,
voidable, unenforceable or rescissible. Hence, the conservator merely takes the place
of a banks board of directors. What the said board cannot do - such as repudiating a
contract validly entered into under the doctrine of implied authority - the conservator
cannot do either. Ineluctably, his power is not unilateral and he cannot simply
repudiate valid obligations of the Bank. His authority would be only to bring court
actions to assail such contracts - as he has already done so in the instant case. A
contrary understanding of the law would simply not be permitted by the Constitution.
Neither by common sense. To rule otherwise would be to enable a failing bank to
become solvent, at the expense of third parties, by simply getting the conservator to
unilaterally revoke all previous dealings which had one way or another come to be
considered unfavorable to the Bank, yielding nothing to perfected contractual rights
nor vested interests of the third parties who had dealt with the Bank.
RURAL BANK OF BUHI, INC., and HONORABLE JUDGE CARLOS R.
BUENVIAJE, petitioners,
vs.
HONORABLE COURT OF APPEALS, CENTRAL BANK OF THE PHILIPPINES and
CONSOLACION ODRA,
I. Petitioner Rural Bank's position is to the effect that due process was not observed
by the Monetary Board before said bank was placed under receivership. Said Rural
Bank claimed that it was not given the chance to deny and disprove such claim of
insolvency and/or any other ground which the Monetary Board used in justification of
its action.
Relative thereto, the provision of Republic Act No. 265 on the proceedings upon
insolvency reads:
SEC. 29. Proceedings upon insolvency. Whenever, upon
examination by the head of the appropriate supervising and
examining department or his examiners or agents into the
condition of any banking institution, it shall be disclosed that the
condition of the same is one of insolvency, or that its continuance
in business would involve probable loss to its depositors or
creditors, it shall be the duty of the department head concerned

forthwith, in writing, to inform the Monetary Board of the facts, and


the Board may, upon finding the statements of the department
head to be true, forbid the institution to do business in the
Philippines and shall designate an official of the Central Bank, or
a person of recognized competence in banking, as receiver to
immediately take charge of its assets and liabilities, as
expeditiously as possible collect and gather all the assets and
administer the same for the benefit of its creditors, exercising all
the powers necessary for these purposes including, but not
limited to, bringing suits and foreclosing mortgages in the name of
the banking institution.
The Monetary Board shall thereupon determine within sixty days
whether the institution may be recognized or otherwise placed in
such a condition so that it may be permitted to resume business
with safety to its depositors and creditors and the general public
and shall prescribe the conditions under which such redemption
of business shall take place as the time for fulfillment of such
conditions. In such case, the expenses and fees in the collection
and administration of the assets of the institution shall be
determined by the Board and shall be paid to the Central Bank
out of the assets of such banking institution.
If the Monetary Board shall determine and confirm within the said
period that the banking institution is insolvent or cannot resume
business with safety to its depositors, creditors and the general
public, it shall, if the public interest requires, order its liquidation,
indicate the manner of its liquidation and approve a liquidation
plan. The Central Bank shall, by the Solicitor General, file a
petition in the Court of First Instance reciting the proceedings
which have been taken and praying the assistance of the court in
the liquidation of the banking institution. The Court shall have
jurisdiction in the same proceedings to adjudicate disputed claims
against the bank and enforce individual liabilities of the
stockholders and do all that is necessary to preserve the assets of
the banking institution and to implement the liquidation plan
approved by the Monetary Board. The Monetary Board shall
designate an official of the Central Bank or a person of
recognized competence in banking, as liquidator who shall take
over the functions of the receiver previously appointed by the
Monetary Board under this Section. The liquidator shall, with all
convenient speed, convert the assets of the banking institution to
money or sell, assign or otherwise dispose of the same to

creditors and other parties for the purpose of paying the debts of
such bank and he may, in the name of the banking institution,
institute such actions as may be necessary in the appropriate
court to collect and recover accounts and assets of the banking
institution.
The provisions of any law to the contrary notwithstanding the
actions of the Monetary Board under this Section and the second
paragraph of Section 34 of this Act shall be final and executory,
and can be set aside by the court only if there is convincing proof
that the action is plainly arbitrary and made in bad faith. No
restraining order or injunction shall be issued by the court
enjoining the Central Bank from implementing its actions under
this Section and the second paragraph of Section 34 of this Act,
unless there is convincing proof that the action of the Monetary
Board is plainly arbitrary and made in bad faith and the petitioner
or plaintiff files with the clerk or judge of the court in which the
action is pending a bond executed in favor of the Central Bank, in
an amount to be fixed by the court. The restraining order or
injunction shall be refused or, if granted, shall be dissolved upon
filing by the Central Bank of a bond, which shall be in the form of
cash or Central Bank cashier's check, in an amount twice the
amount of the bond of the petitioner, or plaintiff conditioned that it
will pay the damages which the petitioner or plaintiff may suffer by
the refusal or the dissolution of the injunction. The provisions of
Rule 58 of the New Rules of Court insofar as they are applicable
and not inconsistent with the provisions of this Section shall
govern the issuance and dissolution of the restraining order or
injunction contemplated in this Section.
Insolvency, under this Act, shall be understood to mean the
inability of a banking institution to pay its liabilities as they fall due
in the usual and ordinary course of business: Provided, however,
that this shall not include the inability to pay of an otherwise noninsolvent bank caused by extraordinary demands induced by
financial panic commonly evidenced by a run on the banks in the
banking community.
The appointment of a conservator under Section 28-A of this Act
or the appointment of receiver under this Section shall be vested
exclusively with the Monetary Board, the provision of any law,
general or special, to the contrary not withstanding.

It will be observed from the foregoing provision of law, that there is no requirement
whether express or implied, that a hearing be first conducted before a banking
institution may be placed under receivership. On the contrary, the law is explicit as to
the conditions prerequisite to the action of the Monetary Board to forbid the institution
to do business in the Philippines and to appoint a receiver to immediately take charge
of the bank's assets and liabilities. They are: (a) an examination made by the
examining department of the Central Bank; (b) report by said department to the
Monetary Board; and (c) prima facie showing that the bank is in a condition of
insolvency or so situated that its continuance in business would involve probable loss
to its depositors or creditors.
Supportive of this theory is the ruling of this Court, which established the authority of
the Central Bank under the foregoing circumstances, which reads:

Petitioner further argues, that there is also that constitutional guarantee that no
property shall be taken without due process of law, so that Section 29, R.A. 265, as
amended, could not have intended to disregard and do away with such constitutional
requirement when it conferred upon the Monetary Board the power to place Rural
Banks under receivership (Rollo, p. 333).
The contention is without merit. It has long been established and recognized in this
jurisdiction that the closure and liquidation of a bank may be considered as an
exercise of police power. Such exercise may, however, be subject to judicial inquiry
and could be set aside if found to be capricious, discriminatory, whimsical, arbitrary,
unjust or a denial of the due process and equal protection clauses of the Constitution
(Central Bank vs. Court of Appeals, 106 SCRA 155 [1981]).

First, to forbid the institution to do business and appoint a receiver


therefor; and

The evident implication of the law, therefore, is that the appointment of a receiver may
be made by the Monetary Board without notice and hearing but its action is subject to
judicial inquiry to insure the protection of the banking institution. Stated otherwise, due
process does not necessarily require a prior hearing; a hearing or an opportunity to be
heard may be subsequent to the closure. One can just imagine the dire consequences
of a prior hearing: bank runs would be the order of the day, resulting in panic and
hysteria. In the process, fortunes may be wiped out, and disillusionment will run the
gamut of the entire banking community.

Second, to determine, within 60 days, whether or not:

In Mendiola vs. Court of Appeals, (106 SCRA 130), the Supreme Court held:

As will be noted, whenever it shall appear prima facie that a


banking institution is in "a condition of insolvency" or so situated
"that its continuance in business would involved probable loss to
its depositors or creditors," the Monetary Board has authority:

1) the institution may be reorganized and


rehabilitated to such an extent as to be
permitted to resume business with safety to
depositors, creditors and the general public;
or
2) it is indeed insolvent or cannot resume
business with safety to depositors, creditors
and the general public, and public interest
requires that it be liquidated.
In this latter case (i.e., the bank can no longer resume business with safety to
depositors, creditors and the public, etc.) its liquidation will be ordered and a liquidator
appointed by the Monetary Board. The Central Bank shall thereafter file a petition in
the Regional Trial Court praying for the Court's assistance in the liquidation of the
bank." ... (Salud vs. Central Bank, 143 SCRA 590 [1986]).

The pivotal issue raised by petitioner is whether or not the


appointment of a receiver by the Court of First Instance on
January 14, 1969 was in order.
Respondent Court correctly stated that the appointment of a
receiver pendente lite is a matter principally addressed to and
resting largely on the sound discretion of the court to which the
application is made. This Tribunal has so held in a number of
cases. However, receivership being admittedly a harsh remedy, it
should be granted with extreme caution. Sound reasons for
receivership must appear of record, and there should be a clear
showing of a necessity therefor. Before granting the remedy, the
court is advised to consider the consequence or effects thereof in
order to avoid irreparable injustice or injury to others who are
entitled to as much consideration as those seeking it.
xxx xxx xxx

This is not to say that a hearing is an indispensable requirement


for the appointment of a receiver. As petitioner correctly contends
in his first assignment of error, courts may appoint receivers
without prior presentation of evidence and solely on the basis of
the averments of the pleadings. Rule 59 of the Revised Rules of
Court allows the appointment of a receiver upon an ex parte
application.
There is no question that the action of the Monetary Board in this regard may be
subject to judicial review. Thus, it has been held that the courts may interfere with the
Central Bank's exercise of discretion in determining whether or not a distressed bank
shall be supported or liquidated. Discretion has its limits and has never been held to
include arbitrariness, discrimination or bad faith (Ramos vs. Central Bank of the
Philippines, 41 SCRA 567 [1971]).
It has likewise been held that resolutions of the Monetary Board under Section 29 of
the Central Bank Act, such as: forbidding bank institutions to do business on account
of a "condition of insolvency" or because its continuance in business would involve
probable loss to depositors or creditors; or appointing a receiver to take charge of the
bank's assets and liabilities, or determining whether the bank may be rehabilitated or
should be liquidated and appointing a liquidator for that purpose, are under the law
"final and executory" and may be set aside only on one ground, that is "if there is
convincing proof that the action is plainly arbitrary and made in bad faith" (Salud vs.
Central Bank, supra).

was no trial on the merits. Based on the pleadings filed, the Court merely acted on the
Central Bank's Motion to Dismiss and Supplemental Motion to Dismiss, denying both
for lack of sufficient merit. Evidently, the trial court merely acted on an incident and
has not as yet inquired, as mandated by Section 29 of the Central Bank Act, into the
merits of the claim that the Monetary Board's action is plainly arbitrary and made in
bad faith. It has not appreciated certain facts which would render the remedy of
liquidation proper and rehabilitation improper, involving as it does an examination of
the probative value of the evidence presented by the parties properly belonging to the
trial court and not properly cognizable on appeal (Central Bank vs. Court of
Appeals, supra, p. 156).
Still further, without a hearing held for both parties to substantiate their allegations in
their respective pleadings, there is lacking that "convincing proof" prerequisite to justify
the temporary restraining order (mandatory injunction) issued by the trial court in its
Order of March 9, 1982.
G.R. No. 76118 March 30, 1993
THE CENTRAL BANK OF THE PHILIPPINES and RAMON V. TIAOQUI, petitioners,
vs.
COURT OF APPEALS and TRIUMPH SAVINGS BANK, respondents.
Sycip, Salazar, Hernandez & Gatmaitan for petitioners.

There is no dispute that under the above-quoted Section 29 of the Central Bank Act,
the Regional Trial Court has jurisdiction to adjudicate the question of whether or not
the action of the Monetary Board directing the dissolution of the subject Rural Bank is
attended by arbitrariness and bad faith. Such position has been sustained by this
Court in Salud vs. Central Bank of the Philippines (supra).

Quisumbing, Torres & Evangelista for Triumph Savings Bank.

In the same case, the Court ruled further that a banking institution's claim that a
resolution of the Monetary Board under Section 29 of the Central Bank Act should be
set aside as plainly arbitrary and made in bad faith, may be asserted as an affirmative
defense (Sections 1 and 4[b], Rule 6, Rules of Court) or a counterclaim (Section 6,
Rule 6; Section 2, Rule 72 of the Rules of Court) in the proceedings for assistance in
liquidation or as a cause of action in a separate and distinct action where the latter
was filed ahead of the petition for assistance in liquidation (ibid; Central Bank vs.
Court of Appeals, 106 SCRA 143 [1981]).

May a Monetary Board resolution placing a private bank under receivership be


annulled on the ground of lack of prior notice and hearing?

III. It will be noted that in the issuance of the Order of the Court of First Instance of
Camarines Sur, Branch VII, Iriga City, dated March 9, 1982 (Rollo, pp. 72-77), there

BELLOSILLO, J.:

This petition seeks review of the decision of the Court of Appeals in CA G.R. S.P. No.
07867 entitled "The Central Bank of the Philippines and Ramon V. Tiaoqui vs. Hon.
Jose C. de Guzman and Triumph Savings Bank," promulgated 26 September 1986,
which affirmed the twin orders of the Regional Trial Court of Quezon City issued 11
November 1985 1 denying herein petitioners' motion to dismiss Civil Case No. Q45139, and directing petitioner Ramon V. Tiaoqui to restore the private management
of Triumph Savings Bank (TSB) to its elected board of directors and officers, subject to
Central Bank comptrollership. 2

The antecedent facts: Based on examination reports submitted by the Supervision


and Examination Sector (SES), Department II, of the Central Bank (CB) "that the
financial condition of TSB is one of insolvency and its continuance in business would
involve probable loss to its depositors and creditors," 3 the Monetary Board (MB)
issued on 31 May 1985 Resolution No. 596 ordering the closure of TSB, forbidding it
from doing business in the Philippines, placing it under receivership, and appointing
Ramon V. Tiaoqui as receiver. Tiaoqui assumed office on 3 June 1985. 4

Since the orders of the trial court rendered moot the petition for certiorari then pending
before this Court, Central Bank and Tiaoqui moved on 2 December 1985 for the
dismissal of G.R. No. 71465 which We granted on 18 December 1985. 8

On 11 June 1985, TSB filed a complaint with the Regional Trial Court of Quezon City,
docketed as Civil Case No. Q-45139, against Central Bank and Ramon V. Tiaoqui to
annul MB Resolution No. 596, with prayer for injunction, challenging in the process the
constitutionality of Sec. 29 of R.A. 269, otherwise known as "The Central Bank Act,"
as amended, insofar as it authorizes the Central Bank to take over a banking
institution even if it is not charged with violation of any law or regulation, much less
found guilty thereof. 5

Petitioners' motion to dismiss was premised on two grounds,


namely, that the complaint failed to state a cause of action and
that the Triumph Savings Bank was without capacity to sue
except through its appointed receiver.

On 1 July 1985, the trial court temporarily restrained petitioners from implementing MB
Resolution No. 596 "until further orders", thus prompting them to move for the quashal
of the restraining order (TRO) on the ground that it did not comply with said Sec.
29, i.e., that TSB failed to show convincing proof of arbitrariness and bad faith on the
part of petitioners;' and, that TSB failed to post the requisite bond in favor of Central
Bank.
On 19 July 1985, acting on the motion to quash the restraining order, the trial court
granted the relief sought and denied the application of TSB for injunction. Thereafter,
Triumph Savings Bank filed with Us a petition for certiorariunder Rule 65 of the Rules
of Court 6 dated 25 July 1985 seeking to enjoin the continued implementation of the
questioned MB resolution.
Meanwhile, on 9 August 1985; Central Bank and Ramon Tiaoqui filed a motion to
dismiss the complaint before the RTC for failure to state a cause of action, i.e., it did
not allege ultimate facts showing that the action was plainly arbitrary and made in bad
faith, which are the only grounds for the annulment of Monetary Board resolutions
placing a bank under conservatorship, and that TSB was without legal capacity to sue
except through its receiver. 7
On 9 September 1985, TSB filed an urgent motion in the RTC to direct receiver
Ramon V. Tiaoqui to restore TSB to its private management. On 11 November 1985,
the RTC in separate orders denied petitioners' motion to dismiss and ordered receiver
Tiaoqui to restore the management of TSB to its elected board of directors and
officers, subject to CB comptrollership.

Instead of proceeding to trial, petitioners elevated the twin orders of the RTC to the
Court of Appeals on a petition for certiorari and prohibition under Rule 65. 9 On 26
September 1986, the appellate court, upheld the orders of the trial court thus

Concerning the first ground, petitioners themselves admit that the


Monetary Board resolution placing the Triumph Savings Bank
under the receivership of the officials of the Central Bank was
done without prior hearing, that is, without first hearing the side of
the bank. They further admit that said resolution can be the
subject of judicial review and may be set aside should it be found
that the same was issued with arbitrariness and in bad faith.
The charge of lack of due process in the complaint may be taken
as constitutive of allegations of arbitrariness and bad faith. This is
not of course to be taken as meaning that there must be previous
hearing before the Monetary Board may exercise its powers
under Section 29 of its Charter. Rather, judicial review of such
action not being foreclosed, it would be best should private
respondent be given the chance to show and prove arbitrariness
and bad faith in the issuance of the questioned resolution,
especially so in the light of the statement of private respondent
that neither the bank itself nor its officials were even informed of
any charge of violating banking laws.
In regard to lack of capacity to sue on the part of Triumph Savings
Bank, we view such argument as being specious, for if we get the
drift of petitioners' argument, they mean to convey the impression
that only the CB appointed receiver himself may question the CB
resolution appointing him as such. This may be asking for the
impossible, for it cannot be expected that the master, the CB, will
allow the receiver it has appointed to question that very
appointment. Should the argument of petitioners be given
circulation, then judicial review of actions of the CB would be

effectively checked and foreclosed to the very bank officials who


may feel, as in the case at bar, that the CB action ousting them
from the bank deserves to be set aside.

want of due process; consequently, the bank's management should be restored to its
board of directors and officers. 13

On the questioned restoration order, this Court must say that it


finds nothing whimsical, despotic, capricious, or arbitrary in its
issuance, said action only being in line and congruent to the
action of the Supreme Court in the Banco Filipino Case (G.R. No.
70054) where management of the bank was restored to its duly
elected directors and officers, but subject to the Central Bank
comptrollership. 10

Petitioners claim that it is the essence of Sec. 29 of R.A. 265 that prior notice and
hearing in cases involving bank closures should not be required since in all probability
a hearing would not only cause unnecessary delay but also provide bank "insiders"
and stockholders the opportunity to further dissipate the bank's resources, create
liabilities for the bank up to the insured amount of P40,000.00, and even destroy
evidence of fraud or irregularity in the bank's operations to the prejudice of its
depositors and creditors. 14 Petitioners further argue that the legislative intent of Sec.
29 is to repose in the Monetary Board exclusive power to determine the existence of
statutory grounds for the closure and liquidation of banks, having the required
expertise and specialized competence to do so.

On 15 October 1986, Central Bank and its appointed receiver, Ramon V. Tiaoqui, filed
this petition under Rule 45 of the Rules of Court praying that the decision of the Court
of Appeals in CA-G.R. SP No. 07867 be set aside, and that the civil case pending
before
the
RTC
of
Quezon
City,
Civil
Case
No.
Q-45139, be dismissed. Petitioners allege that the Court of Appeals erred

The first issue raised before Us is whether absence of prior notice and hearing may be
considered acts of arbitrariness and bad faith sufficient to annul a Monetary Board
resolution enjoining a bank from doing business and placing it under receivership.
Otherwise stated, is absence of prior notice and hearing constitutive of acts of
arbitrariness and bad faith?

(1) in affirming that an insolvent bank that had been summarily


closed by the Monetary Board should be restored to its private
management supposedly because such summary closure was
"arbitrary and in bad faith" and a denial of "due process";

Under Sec. 29 of R.A. 265, 15 the Central Bank, through the Monetary Board, is vested
with exclusive authority to assess, evaluate and determine the condition of any bank,
and finding such condition to be one of insolvency, or that its continuance in business
would involve probable loss to its depositors or creditors, forbid the bank or non-bank
financial institution to do business in the Philippines; and shall designate an official of
the CB or other competent person as receiver to immediately take charge of its assets
and liabilities. The fourth paragraph, 16 which was then in effect at the time the action
was commenced, allows the filing of a case to set aside the actions of the Monetary
Board which are tainted with arbitrariness and bad faith.

xxx xxx xxx

(2) in holding that the "charge of lack of due process" for "want of
prior hearing" in a complaint to annul a Monetary Board
receivership resolution under Sec. 29 of R.A. 265 "may be taken
as . . allegations of arbitrariness and bad faith"; and
(3) in holding that the owners and former officers of an insolvent
bank may still act or sue in the name and corporate capacity of
such bank, even after it had been ordered closed and placed
under receivership. 11
The respondents, on the other hand, allege inter alia that in the Banco
Filipino case, 12 We held that CB violated the rule on administrative due process laid
down in Ang Tibay vs. CIR (69 Phil. 635) and Eastern Telecom Corp. vs. Dans, Jr.
(137 SCRA 628) which requires that prior notice and hearing be afforded to all parties
in administrative proceedings. Since MB Resolution No. 596 was adopted without TSB
being previously notified and heard, according to respondents, the same is void for

Contrary to the notion of private respondent, Sec. 29 does not contemplate prior
notice and hearing before a bank may be directed to stop operations and placed
under receivership. When par. 4 (now par. 5, as amended by E.O. 289) provides for
the filing of a case within ten (10) days after the receiver takes charge of the assets of
the bank, it is unmistakable that the assailed actions should precede the filing of the
case. Plainly, the legislature could not have intended to authorize "no prior notice and
hearing" in the closure of the bank and at the same time allow a suit to annul it on the
basis of absence thereof.
In the early case of Rural Bank of Lucena, Inc. v. Arca [1965], 17 We held that a
previous hearing is nowhere required in Sec. 29 nor does the constitutional
requirement of due process demand that the correctness of the Monetary Board's

resolution to stop operation and proceed to liquidation be first adjudged before making
the resolution effective. It is enough that a subsequent judicial review be provided.

them (Simex International [Manila], Inc., v. Court of Appeals, 183


SCRA 360 [1990]).

Even in Banco Filipino, 18 We reiterated that Sec. 29 of R.A. 265 does not require a
previous hearing before the Monetary Board can implement its resolution closing a
bank, since its action is subject to judicial scrutiny as provided by law.

It is then the Government's responsibility to see to it that the


financial interests of those who deal with the banks and banking
institutions, as depositors or otherwise, are protected. In this
country, that task is delegated to the Central Bank which,
pursuant to its Charter (R.A. 265, as amended), is authorized to
administer the monetary, banking and credit system of the
Philippines. Under both the 1973 and 1987 Constitutions, the
Central Bank is tasked with providing policy direction in the areas
of money, banking and credit; corollarily, it shall have supervision
over the operations of banks (Sec. 14, Art. XV, 1973 Constitution,
and Sec. 20, Art. XII, 1987 Constitution). Under its charter, the CB
is further authorized to take the necessary steps against any
banking institution if its continued operation would cause
prejudice to its depositors, creditors and the general public as
well. This power has been expressly recognized by this Court. In
Philippine Veterans Bank Employees Union-NUBE v. Philippine
Veterans Banks (189 SCRA 14 [1990], this Court held that:

It may be emphasized that Sec. 29 does not altogether divest a bank or a non-bank
financial institution placed under receivership of the opportunity to be heard and
present evidence on arbitrariness and bad faith because within ten (10) days from the
date the receiver takes charge of the assets of the bank, resort to judicial review may
be had by filing an appropriate pleading with the court. Respondent TSB did in fact
avail of this remedy by filing a complaint with the RTC of Quezon City on the 8th day
following the takeover by the receiver of the bank's assets on 3 June 1985.
This "close now and hear later" scheme is grounded on practical and legal
considerations to prevent unwarranted dissipation of the bank's assets and as a valid
exercise of police power to protect the depositors, creditors, stockholders and the
general public.
In Rural Bank of Buhi, Inc. v. Court of Appeals, 19 We stated that
. . . due process does not necessarily require a prior hearing; a
hearing or an opportunity to be heard may be subsequent to the
closure. One can just imagine the dire consequences of a prior
hearing: bank runs would be the order of the day, resulting in
panic and hysteria. In the process, fortunes may be wiped out and
disillusionment will run the gamut of the entire banking
community.
We stressed in Central Bank of the Philippines v. Court of Appeals 20 that
. . . the banking business is properly subject to reasonable
regulation under the police power of the state because of its
nature and relation to the fiscal affairs of the people and the
revenues of the state (9 CJS 32). Banks are affected with public
interest because they receive funds from the general public in the
form of deposits. Due to the nature of their transactions and
functions, a fiduciary relationship is created between the banking
institutions and their depositors. Therefore, banks are under the
obligation to treat with meticulous care and utmost fidelity the
accounts of those who have reposed their trust and confidence in

. . . [u]nless adequate and determined efforts


are taken by the government against
distressed and mismanaged banks, public
faith in the banking system is certain to
deteriorate to the prejudice of the national
economy itself, not to mention the losses
suffered by the bank depositors, creditors,
and stockholders, who all deserve the
protection
of
the
government.
The
government cannot simply cross its arms
while the assets of a bank are being depleted
through mismanagement or irregularities. It is
the duty of the Central Bank in such an event
to step in and salvage the remaining
resources of the bank so that they may not
continue to be dissipated or plundered by
those entrusted with their management.
Section 29 of R.A. 265 should be viewed in this light; otherwise, We would be
subscribing to a situation where the procedural rights invoked by private respondent
would take precedence over the substantive interests of depositors, creditors and
stockholders over the assets of the bank.

Admittedly, the mere filing of a case for receivership by the Central Bank can trigger a
bank run and drain its assets in days or even hours leading to insolvency even if the
bank be actually solvent. The procedure prescribed in Sec. 29 is truly designed to
protect the interest of all concerned, i.e., the depositors, creditors and stockholders,
the bank itself, and the general public, and the summary closure pales in comparison
to the protection afforded public interest. At any rate, the bank is given full opportunity
to prove arbitrariness and bad faith in placing the bank under receivership, in which
event, the resolution may be properly nullified and the receivership lifted as the trial
court may determine.
The heavy reliance of respondents on the Banco Filipino case is misplaced in view of
factual circumstances therein which are not attendant in the present case. We ruled
in Banco Filipino that the closure of the bank was arbitrary and attendant with grave
abuse of discretion, not because of the absence of prior notice and hearing, but that
the Monetary Board had no sufficient basis to arrive at a sound conclusion of
insolvency to justify the closure. In other words, the arbitrariness, bad faith and abuse
of discretion were determined only after the bank was placed under conservatorship
and evidence thereon was received by the trial court. As this Court found in that case,
the Valenzuela, Aurellano and Tiaoqui Reports contained unfounded assumptions and
deductions which did not reflect the true financial condition of the bank. For instance,
the subtraction of an uncertain amount as valuation reserve from the assets of the
bank would merely result in its net worth or the unimpaired capital and surplus; it did
not reflect the total financial condition of Banco Filipino.
Furthermore, the same reports showed that the total assets of Banco Filipino far
exceeded its total liabilities. Consequently, on the basis thereof, the Monetary Board
had no valid reason to liquidate the bank; perhaps it could have merely ordered its
reorganization or rehabilitation, if need be. Clearly, there was in that case a manifest
arbitrariness, abuse of discretion and bad faith in the closure of Banco Filipino by the
Monetary Board. But, this is not the case before Us. For here, what is being raised as
arbitrary by private respondent is the denial of prior notice and hearing by the
Monetary Board, a matter long settled in this jurisdiction, and not the arbitrariness
which the conclusions of the Supervision and Examination Sector (SES), Department
II, of the Central Bank were reached.
Once again We refer to Rural Bank of Buhi, Inc. v. Court of Appeals, 21 and reiterate
Our pronouncement therein that
. . . the law is explicit as to the conditions prerequisite to the
action of the Monetary Board to forbid the institution to do
business in the Philippines and to appoint a receiver to
immediately take charge of the bank's assets and liabilities. They
are: (a) an examination made by the examining department of the

Central Bank; (b) report by said department to the Monetary


Board; and (c) prima facieshowing that its continuance in
business would involve probable loss to its depositors or
creditors.
In sum, appeal to procedural due process cannot just outweigh the evil sought to be
prevented; hence, We rule that Sec. 29 of R.A. 265 is a sound legislation promulgated
in accordance with the Constitution in the exercise of police power of the state.
Consequently, the absence of notice and hearing is not a valid ground to annul a
Monetary Board resolution placing a bank under receivership. The absence of prior
notice and hearing cannot be deemed acts of arbitrariness and bad faith. Thus, an MB
resolution placing a bank under receivership, or conservatorship for that matter, may
only be annulled after a determination has been made by the trial court that its
issuance was tainted with arbitrariness and bad faith. Until such determination is
made, the status quo shall be maintained, i.e., the bank shall continue to be under
receivership.
As regards the second ground, to rule that only the receiver may bring suit in behalf of
the bank is, to echo the respondent appellate court, "asking for the impossible, for it
cannot be expected that the master, the CB, will allow the receiver it has appointed to
question that very appointment." Consequently, only stockholders of a bank could file
an action for annulment of a Monetary Board resolution placing the bank under
receivership and prohibiting it from continuing operations. 22 In Central Bank v. Court of
Appeals, 23 We explained the purpose of the law
. . . in requiring that only the stockholders of record representing
the majority of the capital stock may bring the action to set aside a
resolution to place a bank under conservatorship is to ensure that
it be not frustrated or defeated by the incumbent Board of
Directors or officers who may immediately resort to court action to
prevent its implementation or enforcement. It is presumed that
such a resolution is directed principally against acts of said
Directors and officers which place the bank in a state of
continuing inability to maintain a condition of liquidity adequate to
protect the interest of depositors and creditors. Indirectly, it is
likewise intended to protect and safeguard the rights and interests
of the stockholders. Common sense and public policy dictate then
that the authority to decide on whether to contest the resolution
should be lodged with the stockholders owning a majority of the
shares for they are expected to be more objective in determining
whether the resolution is plainly arbitrary and issued in bad faith.

It is observed that the complaint in this case was filed on 11 June 1985 or two (2)
years prior to 25 July 1987 when E.O. 289 was issued, to be effective sixty (60) days
after its approval (Sec. 5). The implication is that before E.O
. 289, any party in interest could institute court proceedings to question a Monetary
Board resolution placing a bank under receivership. Consequently, since the instant
complaint was filed by parties representing themselves to be officers of respondent
Bank (Officer-in-Charge and Vice President), the case before the trial court should
now take its natural course. However, after the effectivity of E.O. 289, the procedure
stated therein should be followed and observed.
PREMISES considered, the Decision of the Court of Appeals in CA-G.R. SP No.
07867 is AFFIRMED, except insofar as it upholds the Order of the trial court of 11
November 1985 directing petitioner RAMON V. TIAOQUI to restore the management
of TRIUMPH SAVINGS BANK to its elected Board of Directors and Officers, which is
hereby SET ASIDE.
Let this case be remanded to the Regional Trial Court of Quezon City for further
proceedings to determine whether the issuance of Resolution No. 596 of the Monetary
Board was tainted with arbitrariness and bad faith and to decide the case accordingly.
SO ORDERED.
Narvasa, C.J., Cruz, Padilla, Bidin, Grio-Aquino, Regalado, Davide, Jr., Romero,
Nocon, Campos, Jr. and Quiason, JJ., concur.
Feliciano and Melo, JJ., took no part.

MIGUELA R. VILLANUEVA, RICHARD R. VILLANUEVA, and MERCEDITA


VILLANUEVA-TIRADOS, petitioners,
vs.
COURT OF APPEALS, CENTRAL BANK OF THE PHILIPPINES, ILDEFONSO C.
ONG, and PHILIPPINE VETERANS BANK, respondents.

DAVIDE, JR., J.:

Do petitioners have a better right than private respondent Ildefonso Ong to purchase
from the Philippine Veterans Bank (PVB) the two parcels of land described as Lot No.
210-D-1 and Lot No. 210-D-2 situated at Muntinglupa, Metro Manila, containing an
area of 529 and 300 square meters, respectively? This is the principal legal issue
raised in this petition.
In its decision of 27 January 1994 in CA-G.R. CV No. 35890, 1 the Court of Appeals
held for Ong, while the trial court, Branch 39 of the Regional Trial Court (RTC) of
Manila, ruled for the petitioners in its joint decision of 31 October 1991 in Civil Case
No. 87-42550 2 and Sp. Proc. No. 85-32311. 3
The operative antecedent facts are set forth in the challenged decision as follows:
The disputed lots were originally owned by the spouses Celestino
Villanueva and Miguela Villanueva, acquired by the latter during
her husband's sojourn in the United States since 1968. Sometime
in 1975, Miguela Villanueva sought the help of one Jose Viudez,
the then Officer-in-Charge of the PVB branch in Makati if she
could obtain a loan from said bank. Jose Viudez told Miguela
Villanueva to surrender the titles of said lots as collaterals. And to
further facilitate a bigger loan, Viudez, in connivance with one
Andres Sebastian, swayed Miguela Villanueva to execute a deed
of sale covering the two (2) disputed lots, which she did but
without the signature of her husband Celestino. Miguela
Villanueva, however, never got the loan she was expecting.
Subsequent attempts to contact Jose Viudez proved futile, until
Miguela Villanueva thereafter found out that new titles over the
two (2) lots were already issued in the name of the PVB. It
appeared upon inquiry from the Registry of Deeds that the original
titles of these lots were canceled and new ones were issued to
Jose Viudez, which in turn were again canceled and new titles
issued in favor of Andres Sebastian, until finally new titles were
issued in the name of PNB [should be PVB] after the lots were
foreclosed for failure to pay the loan granted in the name of
Andres Sebastian.
Miguela Villanueva sought to repurchase the lots from the PVB
after being informed that the lots were about to be sold at auction.
The PVB told her that she can redeem the lots for the price of
P110,416.00. Negotiations for the repurchase of the lots
nevertheless were stalled by the filing of liquidation proceedings
against the PVB on August of 1985.

Plaintiff-appellant [Ong] on the other hand expounds on his claim


over the disputed lots in this manner:
In October 1984, plaintiff-appellant offered to
purchase two pieces of Land that had been
acquired by PVB through foreclosure. To
back-up
plaintiff-appellant's
offer
he
deposited the sum of P10,000.00.
In 23 November 1984, while appellant was
still abroad, PVB approved his subject offer
under Board Resolution No. 10901-84.
Among the conditions imposed by PVB is
that: "The purchase price shall be
P110,000.00 (Less deposit of P10,000.00)
payable in cash within fifteen (15) days from
receipt of approval of the offer."
In mid-April 1985, appellant returned to the
country. He immediately verified the status of
his offer with the PVB, now under the control
of CB, where he was informed that the same
had already been approved. On 16 April
1985, appellant formally informed CB of his
desire to pay the subject balance provided
the bank should execute in his favor the
corresponding deed of conveyance. The
letter was not answered.
Plaintiff-appellant sent follow-up Letters that
went unheeded, the last of which was on 21
May 1987. On 26 May 1987, appellant's
payment for the balance of the subject
properties were accepted by CB under
Official Receipt #0816.
On 17 September 1987, plaintiff-appellant
through his counsel, sent a letter to CB
demanding for the latter to execute the
corresponding deed of conveyance in favor of
appellant. CB did not bother to answer the
same. Hence, the instant case.

While appellant's action for specific


performance against CB was pending,
Miguela Villanueva and her children filed their
claims with the Liquidation court. (Appellant's
Brief, pp. 3-4). 4
From the pleadings, the following additional or amplificatory facts are established:
The efforts of Miguela Villanueva to reacquire the property began on 8 June 1983
when she offered to purchase the lots for P60,000.00 with a 20%
downpayment and the balance payable in five years on a quarterly amortization
basis. 5
Her offer not having been accepted, 6 Miguela Villanueva increased her bid to
P70,000.00. It was only at this time that she disclosed to the bank her private
transactions with Jose Viudez. 7
After this and her subsequent offers were rejected, 8 Miguela sent her sealed bid of
P110,417.00 pursuant to the written advice of the vice president of the PVB. 9
The PVB was placed under receivership pursuant to Monetary Board (MB) Resolution
No. 334 dated 3 April 1985 and later, under liquidation pursuant to MB Resolution No.
612 dated 7 June 1985. Afterwards, a petition for liquidation was filed with the RTC of
Manila, which was docketed as Sp. Proc. No. 85-32311 and assigned to Branch 39 of
the said court.
On 26 May 1987, Ong tendered the sum of P100,000.00 representing the balance of
the purchase price of the litigated lots. 10 An employee of the PVB received the
amount
conditioned
upon
approval
by
the
Central
Bank
liquidator. 11 Ong's demand for a deed of conveyance having gone unheeded, he filed
on 23 October 1987 with the RTC of Manila an action for specific performance against
the Central Bank. 12 It was raffled to Branch 47 thereof. Upon learning that the PVB
had been placed under liquidation, the presiding judge of Branch 47 ordered the
transfer of the case to Branch 39, the liquidation court. 13
On 15 June 1989, then Presiding Judge Enrique B. Inting issued an order allowing the
purchase of the two lots at the price of P150,000.00. 14 The Central Bank liquidator of
the PVB moved for the reconsideration of the order asserting that it is contrary to law
as the disposal of the lots should be made through public auction. 15

On 26 July 1989, Miguela Villanueva filed her claim with the liquidation court. She
averred, among others, that she is the lawful and registered owner of the subject lots
which were mortgaged in favor of the PVB thru the falsification committed by Jose
Viudez, the manager of the PVB Makati Branch, in collusion with Andres Sebastian;
that upon discovering this fraudulent transaction, she offered to purchase the property
from the bank; and that she reported the matter to the PC/INP Criminal Investigation
Service Command, Camp Crame, and after investigation, the CIS officer
recommended the filing of a complaint for estafa through falsification of public
documents against Jose Viudez and Andres Sebastian. She then asked that the lots
be excluded from the assets of the PVB and be conveyed back to her. 16 Later, in view
of the death of her husband, she amended her claim to include her children, herein
petitioners Mercedita Villanueva-Tirados and Richard Villanueva. 17
On 31 October 1991, the trial court rendered judgment 18 holding that while the board
resolution approving Ong's offer may have created in his favor a vested right which
may be enforced against the PVB at the time or against the liquidator after the bank
was placed under liquidation proceedings, the said right was no longer enforceable,
as he failed to exercise it within the prescribed 15-day period. As to Miguela's claim,
the court ruled that the principle of estoppel bars her from questioning the transaction
with Viudez and the subsequent transactions because she was a co-participant
thereto, though only with respect to her undivided one-half (1/2) conjugal share in the
disputed lots and her one-third (1/3) hereditary share in the estate of her husband.
Nevertheless, the trial court allowed her to purchase the lots if only to restore their
status as conjugal properties. It further held that by reason of estoppel, the
transactions having been perpetrated by a responsible officer of the PVB, and for
reasons of equity, the PVB should not be allowed to charge interest on the price of the
lots; hence, the purchase price should be the PVB's claim as of 29 August 1984 when
it considered the sealed bids, i.e., P110,416.20, which should be borne by Miguela
Villanueva alone.
The dispositive portion of the decision of the trial court reads as follows:
WHEREFORE, judgment is hereby rendered as follows:
1. Setting aside the order
of this court issued on
June 15, 1989 under the
caption Civil Case No.
87-42550
entitled
"Ildefonso
Ong
vs.

Central Bank
Phils., et al.;

of

the

2. Dismissing the claim


of Ildefonso Ong over the
two parcels of land
originally covered by
TCT No. 438073 and
366364 in the names of
Miguela Villanueva and
Celestino
Villanueva,
respectively which are
now covered by TCT No.
115631 and 115632 in
the name of the PVB;
3. Declaring the Deed of
Absolute Sale bearing
the signature of Miguela
Villanueva
and
the
falsified signature of
Celestino [sic] Viudez
under date May 6, 1975
and all transactions and
related
documents
executed
thereafter
referring to the two lots
covered by the above
stated titles as null and
void;
4. Ordering the Register
of Deeds of Makati which
has jurisdiction over the
two parcels of land in
question to re-instate in
his land records, TCT
No. 438073 in the name
of Miguela Villanueva
and TCT No. 366364 in
the name of Celestino
Villanueva who were the
registered
owners

thereof, and to cancel all


subsequent
titles
emanating
therefrom;
and
5.
Ordering
the
Liquidator to reconvey
the two lots described in
TCT No. 115631 and
115632 and executing
the corresponding deed
of conveyance of the
said lots upon the
payment of One Hundred
Ten
Thousand
Four
Hundred Sixteen and
20/100
(P110,416.20)
Pesos without interest
and less the amount
deposited
by
the
claimant,
Miguela
Villanueva in connection
with the bidding where
she had participated and
conducted by the PVB
on August 29, 1984.

In support thereof, the Court of Appeals declared that Ong's failure to pay the balance
within the prescribed period was excusable because the PVB neither notified him of
the approval of his bid nor answered his letters manifesting his readiness to pay the
balance, for which reason he could not have known when to reckon the 15-day period
prescribed under its resolution. It went further to suggest that the Central Bank was in
estoppel because it accepted Ong's late-payment of the balance. As to the petitioners'
claim, the Court of Appeals stated:
The conclusion reached by the lower court favorable to Miguela
Villanueva is, as aptly pointed out by plaintiff-appellant, indeed
confusing. While the lower court's decision declared Miguela
Villanueva as estopped from recovering her proportionate share
and interest in the two (2) disputed lots for being a "co-participant"
in the fraudulent scheme perpetrated by Jose Viudez and Andres
Sebastian a factual finding which We conform to and which
Miguela Villanueva does not controvert in this appeal by not filing
her appellee's brief, yet it ordered the reconveyance of the
disputed lots to Miguela Villanueva as the victorious party upon
her payment of P110,416.20. Would not estoppel defeat the claim
of the party estopped? If so, which in fact must be so, would it not
then be absurd or even defiant for the lower court to finally entitle
Miguela Villanueva to the disputed lots after having been
precluded from assailing their subsequent conveyance in favor of
Jose Viudez by reason of her own negligence and/or complicity
therein? The intended punitive effect of estoppel would merely be
a dud if this Court leaves the lower court's conclusion
unrectified. 21

Cost against Ildefonso Ong and the PVB.


SO ORDERED. 19

Their motion for reconsideration


petition for review on certiorari. 24

22

having been denied, 23 the petitioners filed this

Only Ong appealed the decision to the Court of Appeals. The appeal was docketed as
CA-G.R. CV No. 35890. In its decision of 27 January 1994, the Court of Appeals
reversed the decision of the trial court and ruled as follows:

Subsequently, the respondent Central Bank apprised this Court that the PVB was no
longer under receivership or liquidation and that the PVB has been back in operation
since 3 August 1992. It then prayed that it be dropped from this case or at least be
substituted by the PVB, which is the real party in interest. 25

WHEREFORE, premises considered, the assailed decision is


hereby REVERSED and SET ASIDE, and a new one entered
ordering the disputed-lots be awarded in favor of plaintiffappellant Ildefonso Ong upon defendant-appellee Central Bank's
execution of the corresponding deed of sale in his favor. 20

In its Manifestation and Entry of Appearance, the PVB declared that it submits to the
jurisdiction of this Court and that it has no objection to its inclusion as a party
respondent in this case in lieu of the Central Bank. 26 The petitioners did not object to
the substitution. 27

Later, in its Comment dated 10 October 1994, the PVB stated that it "submits to and
shall abide by whatever judgment this Honorable Supreme Tribunal may announce as
to whom said lands may be awarded without any touch of preference in favor of one
or
the
other
party
litigant
in
the
instant
case." 28
In support of their contention that the Court of Appeals gravely erred in holding that
Ong is better entitled to purchase the disputed lots, the petitioners maintain that Ong
is a disqualified bidder, his bid of P110,000.00 being lower than the starting price of
P110,417.00 and his deposit of P10,000.00 being less than the required 10% of the
bid price; that Ong failed to pay the balance of the price within the 15-day period from
notice of the approval of his bid; and that his offer of payment is ineffective since it
was conditioned on PVB's execution of the deed of absolute sale in his favor.
On the other hand, Ong submits that his offer, though lower than Miguela ViIlanueva's
bid by P417.00, is much better, as the same is payable in cash, while Villanueva's bid
is payable in installment; that his payment could not be said to have been made after
the expiration of the 15-day period because this period has not even started to run,
there being no notice yet of the approval of his offer; and that he has a legal right to
compel the PVB or its liquidator to execute the corresponding deed of conveyance.
There is no doubt that the approval of Ong's offer constitutes an acceptance, the effect
of which is to perfect the contract of sale upon notice thereof to Ong. 29 The peculiar
circumstances in this case, however, pose a legal obstacle to his claim of a better right
and deny support to the conclusion of the Court of Appeals.
Ong did not receive any notice of the approval of his offer. It was only sometime in
mid-April 1985 when he returned from the United States and inquired about the status
of his bid that he came to know of the approval.
It must be recalled that the PVB was placed under receivership pursuant to the MB
Resolution of 3 April 1985 after a finding that it was insolvent, illiquid, and could not
operate profitably, and that its continuance in business would involve probable loss to
its depositors and creditors. The PVB was then prohibited from doing business in the
Philippines, and the receiver appointed was directed to "immediately take charge of its
assets and liabilities, as expeditiously as possible collect and gather all the assets and
administer the same for the benefit of its creditors, exercising all the powers necessary
for these purposes."
Under Article 1323 of the Civil Code, an offer becomes ineffective upon the death, civil
interdiction, insanity, or insolvency of either party before acceptance is conveyed. The
reason for this is that:

[T]he contract is not perfected except by the concurrence of two


wills which exist and continue until the moment that they occur.
The contract is not yet perfected at any time before acceptance is
conveyed; hence, the disappearance of either party or his loss of
capacity before perfection prevents the contractual tie from being
formed. 30
It has been said that where upon the insolvency of a bank a receiver therefor is
appointed, the assets of the bank pass beyond its control into the possession and
control of the receiver whose duty it is to administer the assets for the benefit of the
creditors of the bank. 31 Thus, the appointment of a receiver operates to suspend the
authority of the bank and of its directors and officers over its property and effects, such
authority being reposed in the receiver, and in this respect, the receivership is
equivalent to an injunction to restrain the bank officers from intermeddling with the
property of the bank in any way. 32
Section 29 of the Central Bank Act, as amended, provides thus:
Sec. 29. Proceedings upon insolvency. Whenever, upon
examination by the head of the appropriate supervising or
examining department or his examiners or agents into the
condition of any bank or non-bank financial intermediary
performing quasi-banking functions, it shall be disclosed that the
condition of the same is one of insolvency, or that its continuance
in business would involve probable loss to its depositors or
creditors, shall be the duty of the department head concerned
forthwith, in writing, to inform the Monetary Board of the facts. The
Board may, upon finding the statements of the department head
to be true, forbid the institution to do business in the Philippines
and designate an official of the Central Bank or a person of
recognized competence in banking or finance as receiver to
immediately take charge of its assets and liabilities, as
expeditiously as possible collect and gather all the assets and
administer the same for the benefit of its creditors . . . exercising
all the powers necessary for these purposes. . . .
xxx xxx xxx
The assets of an institution under receivership or liquidation shall
be deemed in custodia legis in the hands of the receiver or
liquidator and shall, from the moment of such receivership or

liquidation, be exemp from any order of garnishment, levy,


attachment, or execution.

SO ORDERED.
Padilla, Bellosillo and Kapunan, JJ., concur.

In a nutshell, the insolvency of a bank and the consequent appointment of a receiver


restrict the bank's capacity to act, especially in relation to its property, Applying Article
1323 of the Civil Code, Ong's offer to purchase the subject lots became ineffective
because the PVB became insolvent before the bank's acceptance of the offer came to
his knowledge. Hence, the purported contract of sale between them did not reach the
stage of perfection. Corollarily, he cannot invoke the resolution of the bank approving
his bid as basis for his alleged right to buy the disputed properties.
Nor may the acceptance by an employee of the PVB of Ong's payment of
P100,000.00 benefit him since the receipt of the payment was made subject to the
approval by the Central Bank liquidator of the PVB thus:
Payment for the purchase price of the former property of Andres
Sebastian per approved BR No. 10902-84 dated 11/13/84, subject
to the approval of CB liquidator. 33
This payment was disapproved on the ground that the subject property was
already in custodia legis, and hence, disposable only by public auction and
subject to the approval of the liquidation court. 34
The Court of Appeals therefore erred when it held that Ong had a better right than the
petitioners to the purchase of the disputed lots.
Considering then that only Ong appealed the decision of the trial court, the PVB and
the Central Bank, as well as the petitioners, are deemed to have fully and
unqualifiedly accepted the judgment, which thus became final as to them for their
failure to appeal.
WHEREFORE, the instant petition is GRANTED and the challenged decision of the
Court of Appeals of 27 January 1994 in CA-G.R. CV No. 35890 is hereby SET ASIDE.
The decision of Branch 39 of the Regional Trial Court of Manila of 31 October 1991 in
Civil Case No. 87-42550 and Sp. Proc. No. 85-32311 is hereby REINSTATED.
Respondent Philippine Veterans Bank is further directed to return to private
respondent Ildefonso C. Ong the amount of P100,000.00.
No pronouncement as to costs.

Quiason, J., is on leave.


BANCO
FILIPINO
SAVINGS
AND
MORTGAGE
BANK, petitioner,
vs.
THE MONETARY BOARD, CENTRAL BANK OF THE PHILIPPINES, JOSE B.
FERNANDEZ, CARLOTA P. VALENZUELA, ARNULFO B. AURELLANO and
RAMON V. TIAOQUI, respondents.
Section 29 of the Republic Act No. 265, as amended known as the Central Bank
Act, provides that when a bank is forbidden to do business in the Philippines and
placed under receivership, the person designated as receiver shall immediately take
charge of the bank's assets and liabilities, as expeditiously as possible, collect and
gather all the assets and administer the same for the benefit of its creditors, and
represent the bank personally or through counsel as he may retain in all actions or
proceedings for or against the institution, exercising all the powers necessary for
these purposes including, but not limited to, bringing and foreclosing mortgages in the
name of the bank. If the Monetary Board shall later determine and confirm that
banking institution is insolvent or cannot resume business safety to depositors,
creditors and the general public, it shall, public interest requires, order its liquidation
and appoint a liquidator who shall take over and continue the functions of receiver
previously appointed by Monetary Board. The liquid for may, in the name of the bank
and with the assistance counsel as he may retain, institute such actions as may
necessary in the appropriate court to collect and recover a counts and assets of such
institution or defend any action ft against the institution.
When the issue on the validity of the closure and receivership of Banco Filipino bank
was raised in G.R. No. 70054, pendency of the case did not diminish the powers and
authority of the designated liquidator to effectuate and carry on the a ministration of
the bank. In fact when We adopted a resolute on August 25, 1985 and issued a
restraining order to respondents Monetary Board and Central Bank, We enjoined me
further acts of liquidation. Such acts of liquidation, as explained in Sec. 29 of the
Central Bank Act are those which constitute the conversion of the assets of the
banking institution to money or the sale, assignment or disposition of the s to creditors
and other parties for the purpose of paying debts of such institution. We did not
prohibit however acts a as receiving collectibles and receivables or paying off credits
claims and other transactions pertaining to normal operate of a bank. There is no
doubt that the prosecution of suits collection and the foreclosure of mortgages against
debtors the bank by the liquidator are among the usual and ordinary transactions

pertaining to the administration of a bank. their did Our order in the same resolution
dated August 25, 1985 for the designation by the Central Bank of a comptroller Banco
Filipino alter the powers and functions; of the liquid insofar as the management of the
assets of the bank is concerned. The mere duty of the comptroller is to supervise
counts and finances undertaken by the liquidator and to d mine the propriety of the
latter's expenditures incurred behalf of the bank. Notwithstanding this, the liquidator is
empowered under the law to continue the functions of receiver is preserving and
keeping intact the assets of the bank in substitution of its former management, and to
prevent the dissipation of its assets to the detriment of the creditors of the bank. These
powers and functions of the liquidator in directing the operations of the bank in place
of the former management or former officials of the bank include the retaining of
counsel of his choice in actions and proceedings for purposes of administration.
Clearly, in G.R. Nos. 68878, 77255-58, 78766 and 90473, the liquidator by himself or
through counsel has the authority to bring actions for foreclosure of mortgages
executed by debtors in favor of the bank. In G.R. No. 81303, the liquidator is likewise
authorized to resist or defend suits instituted against the bank by debtors and creditors
of the bank and by other private persons. Similarly, in G.R. No. 81304, due to the
aforestated reasons, the Central Bank cannot be compelled to fulfill financial
transactions entered into by Banco Filipino when the operations of the latter were
suspended by reason of its closure. The Central Bank possesses those powers and
functions only as provided for in Sec. 29 of the Central Bank Act.
While We recognize the actual closure of Banco Filipino and the consequent legal
effects thereof on its operations, We cannot uphold the legality of its closure and thus,
find the petitions in G.R. Nos. 70054, 78767 and 78894 impressed with merit. We hold
that the closure and receivership of petitioner bank, which was ordered by respondent
Monetary Board on January 25, 1985, is null and void.
It is a well-recognized principle that administrative and discretionary functions may not
be interfered with by the courts. In general, courts have no supervising power over the
proceedings and actions of the administrative departments of the government. This is
generally true with respect to acts involving the exercise of judgment or discretion, and
findings of fact. But when there is a grave abuse of discretion which is equivalent to a
capricious and whimsical exercise of judgment or where the power is exercised in an
arbitrary or despotic manner, then there is a justification for the courts to set aside the
administrative determination reached (Lim, Sr. v. Secretary of Agriculture and Natural
Resources, L-26990, August 31, 1970, 34 SCRA 751)
The jurisdiction of this Court is called upon, once again, through these petitions, to
undertake the delicate task of ascertaining whether or not an administrative agency of
the government, like the Central Bank of the Philippines and the Monetary Board, has
committed grave abuse of discretion or has acted without or in excess of jurisdiction in

issuing the assailed order. Coupled with this task is the duty of this Court not only to
strike down acts which violate constitutional protections or to nullify administrative
decisions contrary to legal mandates but also to prevent acts in excess of authority or
jurisdiction, as well as to correct manifest abuses of discretion committed by the officer
or tribunal involved.
The law applicable in the determination of these issues is Section 29 of Republic Act
No. 265, as amended, also known as the Central Bank Act, which provides:
SEC. 29. Proceedings upon insolvency. Whenever, upon
examination by the head of the appropriate supervising or
examining department or his examiners or agents into the
condition of any bank or non-bank financial intermediary
performing quasi-banking functions, it shall be disclosed that the
condition of the same is one of insolvency, or that its continuance
in business would involve probable loss to its depositors or
creditors, it shall be the duty of the department head concerned
forthwith, in writing, to inform the Monetary Board of the facts. The
Board may, upon finding the statements of the department head
to be true, forbid the institution to do business in the Philippines
and designate an official of the Central Bank or a person of
recognized competence in banking or finance, as receiver to
immediately take charge of its assets and liabilities, as
expeditiously as possible collect and gather all the assets and
administer the same for the benefit's of its creditors, and
represent the bank personally or through counsel as he may
retain in all actions or proceedings for or against the institution,
exercising all the powers necessary for these purposes including,
but not limited to, bringing and foreclosing mortgages in the name
of the bank or non-bank financial intermediary performing quasibanking functions.
The Monetary Board shall thereupon determine within sixty days
whether the institution may be reorganized or otherwise placed in
such a condition so that it may be permitted to resume business
with safety to its depositors and creditors and the general public
and shall prescribe the conditions under which such resumption of
business shall take place as well as the time for fulfillment of such
conditions. In such case, the expenses and fees in the collection
and administration of the assets of the institution shall be
determined by the Board and shall be paid to the Central Bank
out of the assets of such institution.

If the Monetary Board shall determine and confirm within the said
period that the bank or non-bank financial intermediary performing
quasi-banking functions is insolvent or cannot resume business
with safety to its depositors, creditors, and the general public, it
shall, if the public interest requires, order its liquidation, indicate
the manner of its liquidation and approve a liquidation plan which
may, when warranted, involve disposition of any or all assets in
consideration for the assumption of equivalent liabilities. The
liquidator designated as hereunder provided shall, by the Solicitor
General, file a petition in the regional trial court reciting the
proceedings which have been taken and praying the assistance of
the court in the liquidation of such institutions. The court shall
have jurisdiction in the same proceedings to assist in the
adjudication of the disputed claims against the bank or non-bank
financial intermediary performing quasi-banking functions and in
the enforcement of individual liabilities of the stockholders and do
all that is necessary to preserve the assets of such institutions
and to implement the liquidation plan approved by the Monetary
Board. The Monetary Board shall designate an official of the
Central bank or a person of recognized competence in banking or
finance, as liquidator who shall take over and continue the
functions of the receiver previously appointed by the Monetary
Board under this Section. The liquidator shall, with all convenient
speed, convert the assets of the banking institutions or non-bank
financial intermediary performing quasi-banking function to money
or sell, assign or otherwise dispose of the same to creditors and
other parties for the purpose of paying the debts of such
institution and he may, in the name of the bank or non-bank
financial intermediary performing quasi-banking functions and
with the assistance of counsel as he may retain, institute such
actions as may be necessary in the appropriate court to collect
and recover accounts and assets of such institution or defend any
action filed against the institution: Provided, However, That after
having reasonably established all claims against the institution,
the liquidator may, with the approval of the court, effect partial
payments of such claims for assets of the institution in
accordance with their legal priority.
The assets of an institution under receivership or liquidation shall
be deemed in custodia legis in the hands of the receiver or
liquidator and shall from the moment of such receivership or
liquidation, be exempt from any order of garnishment, levy,
attachment, orexecution.

The provisions of any law to the contrary notwithstanding, the


actions of the Monetary Board under this Section, Section 28-A,
an the second paragraph of Section 34 of this Act shall be final an
executory, and can be set aside by a court only if there is
convince proof, after hearing, that the action is plainly arbitrary
and made in bad faith: Provided, That the same is raised in an
appropriate pleading filed by the stockholders of record
representing the majority of th capital stock within ten (10) days
from the date the receiver take charge of the assets and liabilities
of the bank or non-bank financial intermediary performing quasibanking functions or, in case of conservatorship or liquidation,
within ten (10) days from receipt of notice by the said majority
stockholders of said bank or non-bank financial intermediary of
the order of its placement under conservatorship o liquidation. No
restraining order or injunction shall be issued by an court
enjoining the Central Bank from implementing its actions under
this Section and the second paragraph of Section 34 of this Act in
th absence of any convincing proof that the action of the Monetary
Board is plainly arbitrary and made in bad faith and the petitioner
or plaintiff files a bond, executed in favor of the Central Bank, in
an amount be fixed by the court. The restraining order or
injunction shall be refused or, if granted, shall be dissolved upon
filing by the Central Bank of a bond, which shall be in the form of
cash or Central Bank cashier's check, in an amount twice the
amount of the bond of th petitioner or plaintiff conditioned that it
will pay the damages which the petitioner or plaintiff may suffer by
the refusal or the dissolution of the injunction. The provisions of
Rule 58 of the New Rules of Court insofar as they are applicable
and not inconsistent with the provision of this Section shall govern
the issuance and dissolution of the re straining order or injunction
contemplated in this Section.
xxx xxx xxx
Based on the aforequoted provision, the Monetary Board may order the cessation of
operations of a bank in the Philippine and place it under receivership upon a finding of
insolvency or when its continuance in business would involve probable loss its
depositors or creditors. If the Monetary Board shall determine and confirm within sixty
(60) days that the bank is insolvent or can no longer resume business with safety to its
depositors, creditors and the general public, it shall, if public interest will be served,
order its liquidation.

Specifically, the basic question to be resolved in G.R. Nos. 70054, 78767 and 78894 is
whether or not the Central Bank and the Monetary Board acted arbitrarily and in bad
faith in finding and thereafter concluding that petitioner bank is insolvent, and in
ordering its closure on January 25, 1985.
As We have stated in Our resolution dated August 3, 1989, the documents pertinent to
the resolution of these petitions are the Teodoro Report, Tiaoqui Report, and the
Valenzuela, Aurellano and Tiaoqui Report and the supporting documents made as
bases by the supporters of their conclusions contained in their respective reports. We
will focus Our study and discussion however on the Tiaoqui Report and the
Valenzuela, Aurellano and Tiaoqui Report. The former recommended the closure and
receivership of petitioner bank while the latter report made the recommendation to
eventually place the petitioner bank under liquidation. This Court shall likewise take
into consideration the findings contained in the reports of the two commissioners who
were appointed by this Court to hold the referral hearings, namely the report by Judge
Manuel Cosico submitted February 20, 1988 and the report submitted by Justice
Consuelo Santiago on January 28, 1991.
There is no question that under Section 29 of the Central Bank Act, the following are
the mandatory requirements to be complied with before a bank found to be insolvent
is ordered closed and forbidden to do business in the Philippines: Firstly, an
examination shall be conducted by the head of the appropriate supervising or
examining department or his examiners or agents into the condition of the bank;
secondly, it shall be disclosed in the examination that the condition of the bank is one
of insolvency, or that its continuance in business would involve probable loss to its
depositors or creditors; thirdly, the department head concerned shall inform the
Monetary Board in writing, of the facts; and lastly, the Monetary Board shall find the
statements of the department head to be true.
Anent the first requirement, the Tiaoqui report, submitted on January 23, 1985,
revealed that the finding of insolvency of petitioner was based on the partial list of
exceptions and findings on the regular examination of the bank as of July 31, 1984
conducted by the Supervision and Examination Sector II of the Central Bank of the
PhilippinesCentral Bank (p. 1, Tiaoqui Report).
On December 17, 1984, this list of exceptions and finding was submitted to the
petitioner bank (p. 6, Tiaoqui Report) This was attached to the letter dated December
17, 1984, of examiner-in-charge Dionisio Domingo of SES Department II of the
Central Bank to Teodoro Arcenas, president of petitione bank, which disclosed that the
examination of the petitioner bank as to its financial condition as of July 31, 1984 was
not yet completed or finished on December 17, 1984 when the Central Bank
submitted the partial list of findings of examination to th petitioner bank. The letter
reads:

In connection with the regular examination of your institution a of


July 31, 1984, we are submitting herewith a partial list of our
exceptions/findings for your comments.
Please be informed that we have not yet officially terminated our
examination (tentatively scheduled last December 7, 1984)
and that we are still awaiting for the unsubmitted replies to our
previous letters requests. Moreover, other findings/ observations
are still being summarized including the classification of loans
and other risk assets. These shall be submitted to you in due time
(p. 810, Rollo, Vol. III; emphasis ours).
It is worthy to note that a conference was held on January 21, 1985 at the Central
Bank between the officials of the latter an of petitioner bank. What transpired and what
was agreed upon during the conference was explained in the Tiaoqui report.
... The discussion centered on the substantial exposure of the
bank to the various entities which would have a relationship with
the bank; the manner by which some bank funds were made
indirectly available to several entities within the group; and the
unhealth financial status of these firms in which the bank was
additionally exposed through new funds or refinancing
accommodation including accrued interest.
Queried in the impact of these clean loans, on the bank solvency
Mr. Dizon (BF Executive Vice President) intimated that,
collectively these corporations have large undeveloped real estate
properties in the suburbs which can be made answerable for the
unsecured loans a well as the Central Bank's credit
accommodations. A formal reply of the bank would still be
forthcoming. (pp. 58-59, Rollo, Vol. I; emphasis ours)
Clearly, Tiaoqui based his report on an incomplete examination of petitioner bank and
outrightly concluded therein that the latter's financial status was one of insolvency or
illiquidity. He arrived at the said conclusion from the following facts: that as of July 31,
1984, total capital accounts consisting of paid-in capital and other capital accounts
such as surplus, surplus reserves and undivided profits aggregated P351.8 million;
that capital adjustments, however, wiped out the capital accounts and placed the bank
with a capital deficiency amounting to P334.956 million; that the biggest adjustment
which contributed to the deficit is the provision for estimated losses on accounts
classified as doubtful and loss which was computed at P600.4 million pursuant to the
examination. This provision is also known as valuation reserves which was set up or

deducted against the capital accounts of the bank in arriving at the latter's financial
condition.
Tiaoqui however admits the insufficiency and unreliability of the findings of the
examiner as to the setting up of recommended valuation reserves from the assets of
petitioner bank. He stated:
The recommended valuation reserves as bases for determining
the financial status of the bank would need to be discussed with
the bank, consistent with standard examination procedure, for
which the bank would in turn reply. Also, the examination has not
been officially terminated. (p. 7. Tiaoqui report; p. 59, Rollo, Vol. I)
In his testimony in the second referral hearing before Justice Santiago, Tiaoqui
testified that on January 21, 1985, he met with officers of petitioner bank to discuss
the advanced findings and exceptions made by Mr. Dionisio Domingo which covered
70%-80% of the bank's loan portfolio; that at that meeting, Fortunato Dizon (BF's
Executive Vice President) said that as regards the unsecured loans granted to various
corporations, said corporations had large undeveloped real estate properties which
could be answerable for the said unsecured loans and that a reply from BF was
forthcoming, that he (Tiaoqui) however prepared his report despite the absence of
such reply; that he believed, as in fact it is stated in his report, that despite the
meeting on January 21, 1985, there was still a need to discuss the recommended
valuation reserves of petitioner bank and; that he however, did not wait anymore for a
discussion of the recommended valuation reserves and instead prepared his report
two days after January 21, 1985 (pp. 3313-3314, Rollo).
Records further show that the examination of petitioner bank was officially terminated
only when Central Bank Examination-charge Dionisio Domingo submitted his final
report of examination on March 4,1985.
It is evident from the foregoing circumstances that the examination contemplated in
Sec. 29 of the CB Act as a mandatory requirement was not completely and fully
complied with. Despite the existence of the partial list of findings in the examination of
the bank, there were still highly significant items to be weighed and determined such
as the matter of valuation reserves, before these can be considered in the financial
condition of the bank. It would be a drastic move to conclude prematurely that a bank
is insolvent if the basis for such conclusion is lacking and insufficient, especially if
doubt exists as to whether such bases or findings faithfully represent the real financial
status of the bank.

The actuation of the Monetary Board in closing petitioner bank on January 25, 1985
barely four days after a conference with the latter on the examiners' partial findings on
its financial position is also violative of what was provided in the CB Manual of
Examination Procedures. Said manual provides that only after the examination is
concluded, should a pre-closing conference led by the examiner-in-charge be held
with the officers/representatives of the institution on the findings/exception, and a copy
of the summary of the findings/violations should be furnished the institution examined
so that corrective action may be taken by them as soon as possible (Manual of
Examination Procedures, General Instruction, p. 14). It is hard to understand how a
period of four days after the conference could be a reasonable opportunity for a bank
to undertake a responsive and corrective action on the partial list of findings of the
examiner-in-charge.
We recognize the fact that it is the responsibility of the Central Bank of the Philippines
to administer the monetary, banking and credit system of the country and that its
powers and functions shall be exercised by the Monetary Board pursuant to Rep. Act
No. 265, known as the Central Bank Act. Consequently, the power and authority of the
Monetary Board to close banks and liquidate them thereafter when public interest so
requires is an exercise of the police power of the state. Police power, however, may
not be done arbitratrily or unreasonably and could be set aside if it is either capricious,
discriminatory, whimsical, arbitrary, unjust or is tantamount to a denial of due process
and equal protection clauses of the Constitution (Central Bank v. Court of Appeals,
Nos. L-50031-32, July 27, 1981, 106 SCRA 143).
In the instant case, the basic standards of substantial due process were not observed.
Time and again, We have held in several cases, that the procedure of administrative
tribunals must satisfy the fundamentals of fair play and that their judgment should
express a well-supported conclusion.
In the celebrated case of Ang Tibay v. Court of Industrial Relations, 69 Phil. 635, this
Court laid down several cardinal primary rights which must be respected in a
proceeding before an administrative body.
However, as to the requirement of notice and hearing, Sec. 29 of RA 265 does not
require a previous hearing before the Monetary Board implements the closure of a
bank, since its action is subject to judicial scrutiny as provided for under the same law
(Rural Bank of Bato v. IAC, G.R. No. 65642, October 15, 1984, Rural Bank v. Court of
Appeals, G.R. 61689, June 20, 1988,162 SCRA 288).
Notwithstanding the foregoing, administrative due process does not mean that the
other important principles may be dispensed with, namely: the decision of the
administrative body must have something to support itself and the evidence must be

substantial. Substantial evidence is more than a mere scintilla. It means such relevant
evidence as a reasonable mind might accept as adequate to support a conclusion
(Ang Tibay vs. CIR, supra). Hence, where the decision is merely based upon pieces of
documentary evidence that are not sufficiently substantial and probative for the
purpose and conclusion they are presented, the standard of fairness mandated in the
due process clause is not met. In the case at bar, the conclusion arrived at by the
respondent Board that the petitioner bank is in an illiquid financial position on January
23, 1985, as to justify its closure on January 25, 1985 cannot be given weight and
finality as the report itself admits the inadequacy of its basis to support its conclusion.

There is no doubt that the Central Bank Act vests authority upon the Central Bank and
Monetary Board to take charge and administer the monetary and banking system of
the country and this authority includes the power to examine and determine the
financial condition of banks for purposes provided for by law, such as for the purpose
of closure on the ground of insolvency stated in Section 29 of the Central Bank Act.
But express grants of power to public officers should be subjected to a strict
interpretation, and will be construed as conferring those powers which are expressly
imposed or necessarily implied (Floyd Mechem, Treatise on the Law of Public Offices
and Officers, p. 335).

The second requirement provided in Section 29, R.A. 265 before a bank may be
closed is that the examination should disclose that the condition of the bank is one of
insolvency.

In this case, there can be no clearer explanation of the concept of insolvency than
what the law itself states. Sec. 29 of the Central Bank Act provides that insolvency
under the Act, shall be understood to mean that "the realizable assets of a bank or a
non-bank financial intermediary performing quasi-banking functions as determined by
the Central Bank are insufficient to meet its liabilities."

As to the concept of whether the bank is solvent or not, the respondents contend that
under the Central Bank Manual of Examination Procedures, Central Bank examiners
must recommend valuation reserves, when warranted, to be set up or deducted
against the corresponding asset account to determine the bank's true condition or net
worth. In the case of loan accounts, to which practically all the questioned valuation
reserves refer, the manual provides that:
1. For doubtful loans, or loans the ultimate collection of which is doubtful and in which
a substantial loss is probable but not yet definitely ascertainable as to extent,
valuation reserves of fifty per cent (50%) of the accounts should be recommended to
be set up.
2. For loans classified as loss, or loans regarded by the examiner as absolutely
uncollectible or worthless, valuation reserves of one hundred percent (100%) of the
accounts should be recommended to be set up (p. 8, Objections to Santiago report).
The foregoing criteria used by respondents in determining the financial condition of
the bank is based on Section 5 of RA 337, known as the General Banking Act which
states:
Sec. 5. The following terms shall be held to be synonymous and
interchangeable:
... f. Unimpaired Capital and Surplus, "Combined capital
accounts," and "Net worth," which terms shall mean for the
purposes of this Act, the total of the "unimpaired paid-in capital,
surplus, and undivided profits net of such valuation reserves as
may be required by the Central Bank."

Hence, the contention of the Central Bank that a bank's true financial condition is
synonymous with the terms "unimpaired capital and surplus," "combined capital
accounts" and net worth after deducting valuation reserves from the capital, surplus
and unretained earnings, citing Sec. 5 of RA 337 is misplaced.
Firstly, it is clear from the law that a solvent bank is one in which its assets exceed its
liabilities. It is a basic accounting principle that assets are composed of liabilities and
capital. The term "assets" includes capital and surplus" (Exley v. Harris, 267 p. 970,
973, 126 Kan., 302). On the other hand, the term "capital" includes common and
preferred stock, surplus reserves, surplus and undivided profits. (Manual of
Examination Procedures, Report of Examination on Department of Commercial and
Savings Banks, p. 3-C). If valuation reserves would be deducted from these items, the
result would merely be the networth or the unimpaired capital and surplus of the bank
applying Sec. 5 of RA 337 but not the total financial condition of the bank.
Secondly, the statement of assets and liabilities is used in balance sheets. Banks use
statements of condition to reflect the amounts, nature and changes in the assets and
liabilities. The Central Bank Manual of Examination Procedures provides a format or
checklist of a statement of condition to be used by examiners as guide in the
examination of banks. The format enumerates the items which will compose the
assets and liabilities of a bank. Assets include cash and those due from banks, loans,
discounts and advances, fixed assets and other property owned or acquired and other
miscellaneous assets. The amount of loans, discounts and advances to be stated in
the statement of condition as provided for in the manual is computed after deducting
valuation reserves when deemed necessary. On the other hand, liabilities are
composed of demand deposits, time and savings deposits, cashier's, manager's and
certified checks, borrowings, due to head office, branches; and agencies, other

liabilities and deferred credits (Manual of Examination Procedure, p. 9). The amounts
stated in the balance sheets or statements of condition including the computation of
valuation reserves when justified, are based however, on the assumption that the
bank or company will continue in business indefinitely, and therefore, the networth
shown in the statement is in no sense an indication of the amount that might be
realized if the bank or company were to be liquidated immediately (Prentice Hall
Encyclopedic Dictionary of Business Finance, p. 48). Further, based on respondents'
submissions, the allowance for probable losses on loans and discounts represents
the amount set up against current operations to provide for possible losses arising
from non-collection of loans and advances, and this account is also referred to as
valuation reserve (p. 9, Objections to Santiago report). Clearly, the statement of
condition which contains a provision for recommended valuation reserves should not
be used as the ultimate basis to determine the solvency of an institution for the
purpose of termination of its operations.
Respondents acknowledge that under the said CB manual, CB examiners must
recommend valuation reserves,when warranted, to be set up against the
corresponding asset account (p. 8, Objections to Santiago report). Tiaoqui himself, as
author of the report recommending the closure of petitioner bank admits that the
valuation reserves should still be discussed with the petitioner bank in compliance with
standard examination procedure. Hence, for the Monetary Board to unilaterally deduct
an uncertain amount as valuation reserves from the assets of a bank and to conclude
therefrom without sufficient basis that the bank is insolvent, would be totally unjust and
unfair.
The test of insolvency laid down in Section 29 of the Central Bank Act is measured by
determining whether the realizable assets of a bank are leas than its liabilities. Hence,
a bank is solvent if the fair cash value of all its assets, realizable within a reasonable
time by a reasonable prudent person, would equal or exceed its total liabilities
exclusive of stock liability; but if such fair cash value so realizable is not sufficient to
pay such liabilities within a reasonable time, the bank is insolvent. (Gillian v. State, 194
N.E. 360, 363, 207 Ind. 661). Stated in other words, the insolvency of a bank occurs
when the actual cash market value of its assets is insufficient to pay its liabilities, not
considering capital stock and surplus which are not liabilities for such purpose (Exley
v. Harris, 267 p. 970, 973,126 Kan. 302; Alexander v. Llewellyn, Mo. App., 70 S.W. 2n
115,117).
In arriving at the computation of realizable assets of petitioner bank, respondents used
its books which undoubtedly are not reflective of the actual cash or fair market value
of its assets. This is not the proper procedure contemplated in Sec. 29 of the Central
Bank Act. Even the CB Manual of Examination Procedures does not confine
examination of a bank solely with the determination of the books of the bank. The
latter is part of auditing which should not be confused with examination. Examination

appraises the soundness of the institution's assets, the quality and character of
management and determines the institution's compliance with laws, rules and
regulations. Audit is a detailed inspection of the institution's books, accounts,
vouchers, ledgers, etc. to determine the recording of all assets and liabilities. Hence,
examination concerns itself with review and appraisal, while audit concerns itself with
verification (CB Manual of Examination Procedures, General Instructions, p. 5). This
Court however, is not in the position to determine how much cash or market value
shall be assigned to each of the assets and liabilities of the bank to determine their
total realizable value. The proper determination of these matters by using the actual
cash value criteria belongs to the field of fact-finding expertise of the Central Bank and
the Monetary Board. Notwithstanding the fact that the figures arrived at by the
respondent Board as to assets and liabilities do not truly indicate their realizable value
as they were merely based on book value, We will however, take a look at the figures
presented by the Tiaoqui Report in concluding insolvency as of July 31, 1984 and at
the figures presented by the CB authorized deputy receiver and by the Valenzuela,
Aurellano and Tiaoqui Report which recommended the liquidation of the bank by
reason of insolvency as o January 25,1985.
The Tiaoqui report dated January 23, 1985, which was based on partial examination
findings on the bank's condition as of July 31, 1984, states that total liabilities of
P5,282.1 million exceeds total assets of P4,947.2 million after deducting from the
assets valuation reserves of P612.2 million. Since, as We have explained in our
previous discussion that valuation reserves can not be legally deducted as there was
no truthful and complete evaluation thereof as admitted by the Tiaoqui report itself,
then an adjustment of the figures win show that the liabilities of P5,282.1 million will
not exceed the total assets which will amount to P5,559.4 if the 612.2 million allotted
to valuation reserves will not be deducted from the assets. There can be no basis
therefore for both the conclusion of insolvency and for the decision of the respondent
Board to close petitioner bank and place it under receivership.
Concerning the financial position of the bank as of January 25, 1985, the date of the
closure of the bank, the consolidated statement of condition thereof as of the
aforesaid date shown in the Valenzuela, Aurellano and Tiaoqui report on the
receivership of petitioner bank, dated March 19, 1985, indicates that total liabilities of
4,540.84 million does not exceed the total assets of 4,981.53 million. Likewise, the
consolidated statement of condition of petitioner bank as of January 25, 1985
prepared by the Central Bank Authorized Deputy Receiver Artemio Cruz shows that
total assets amounting to P4,981,522,996.22 even exceeds total liabilities amounting
to P4,540,836,834.15. Based on the foregoing, there was no valid reason for the
Valenzuela, Aurellano and Tiaoqui report to finally recommend the liquidation of
petitioner bank instead of its rehabilitation.

We take note of the exhaustive study and findings of the Cosico report on the
petitioner bank's having engaged in unsafe, unsound and fraudulent banking practices
by the granting of huge unsecured loans to several subsidiaries and related
companies. We do not see, however, that this has any material bearing on the validity
of the closure. Section 34 of the RA 265, Central Bank Act empowers the Monetary
Board to take action under Section 29 of the Central Bank Act when a bank "persists
in carrying on its business in an unlawful or unsafe manner." There was no showing
whatsoever that the bank had persisted in committing unlawful banking practices and
that the respondent Board had attempted to take effective action on the bank's alleged
activities. During the period from July 27, 1984 up to January 25, 1985, when
petitioner bank was under conservatorship no official of the bank was ever
prosecuted, suspended or removed for any participation in unsafe and unsound
banking practices, and neither was the entire management of the bank replaced or
substituted. In fact, in her testimony during the second referral hearing, Carlota
Valenzuela, CB Deputy Governor, testified that the reason for petitioner bank's closure
was not unsound, unsafe and fraudulent banking practices but the alleged insolvency
position of the bank (TSN, August 3, 1990, p. 3316, Rollo, Vol. VIII).
Finally, another circumstance which point to the solvency of petitioner bank is the
granting by the Monetary Board in favor of the former a credit line in the amount of P3
billion along with the placing of petitioner bank under conservatorship by virtue of M.B.
Resolution No. 955 dated July 27, 1984. This paved the way for the reopening of the
bank on August 1, 1984 after a self-imposed bank holiday on July 23, 1984.
On emergency loans and advances, Section 90 of RA 265 provides two types of
emergency loans that can be granted by the Central Bank to a financially distressed
bank:
Sec. 90. ... In periods of emergency or of imminent financial
panic which directly threaten monetary and banking stability, the
Central Bank may grant banking institutions extraordinary
advances secured by any assets which are defined as acceptable
by by a concurrent vote of at least five members of the Monetary
Board. While such advances are outstanding, the debtor
institution may not expand the total volume of its loans or
investments without the prior authorization of the Monetary Board.
The Central Bank may, at its discretion, likewise grant advances
to banking institutions, even during normal periods, for the
purpose of assisting a bank in a precarious financial condition or
under serious financial pressures brought about by unforeseen
events, or events which, though foreseeable, could not be
prevented by the bank concerned. Provided, however, That the

Monetary Board has ascertained that the bank is not insolvent


and has clearly realizable assets to secure the advances.
Provided, further, That a concurrent vote of at least five members
of the Monetary Board is obtained. (Emphasis ours)
The first paragraph of the aforequoted provision contemplates a situation where the
whole banking community is confronted with financial and economic crisis giving rise
to serious and widespread confusion among the public, which may eventually threaten
and gravely prejudice the stability of the banking system. Here, the emergency or
financial confusion involves the whole banking community and not one bank or
institution only. The second situation on the other hand, provides for a situation where
the Central Bank grants a loan to a bank with uncertain financial condition but not
insolvent.
As alleged by the respondents, the following are the reasons of the Central Bank in
approving the resolution granting the P3 billion loan to petitioner bank and the latter's
reopening after a brief self-imposed banking holiday:
WHEREAS, the closure by Banco Filipino Savings and Mortgage
Bank of its Banking offices on its own initiative has worked
serious hardships on its depositors and has affected confidence
levels in the banking system resulting in a feeling of apprehension
among depositors and unnecessary deposit withdrawals;
WHEREAS, the Central Bank is charged with the function of
administering the banking system;
WHEREAS, the reopening of Banco Filipino would require
additional credit resources from the Central Bank as well as an
independent management acceptable to the Central Bank;
WHEREAS, it is the desire of the Central Bank to rapidly diffuse
the uncertainty that presently exists;
... (M.B. Min. No. 35 dated July 27, 1984 cited in Respondents'
Objections to Santiago Report, p. 26; p. 3387, Rollo, Vol. IX;
Emphasis ours).
A perusal of the foregoing "Whereas" clauses unmistakably show that the clear reason
for the decision to grant the emergency loan to petitioner bank was that the latter was
suffering from financial distress and severe bank "run" as a result of which it closed on

July 23, 1984 and that the release of the said amount is in accordance with the
Central Bank's full support to meet Banco Filipino's depositors' withdrawal
requirements (Excerpts of minutes of meeting on MB Min. No. 35, p. 25, Rollo, Vol.
IX). Nothing therein shows that an extraordinary emergency situation exists affecting
most banks, not only as regards petitioner bank. This Court thereby finds that the
grant of the said emergency loan was intended from the beginning to fall under the
second paragraph of Section 90 of the Central Bank Act, which could not have
occurred if the petitioner bank was not solvent. Where notwithstanding knowledge of
the irregularities and unsafe banking practices allegedly committed by the petitioner
bank, the Central Bank even granted financial support to the latter and placed it under
conservatorship, such actuation means that petitioner bank could still be saved from
its financial distress by adequate aid and management reform, which was required by
Central Bank's duty to maintain the stability of the banking system and the
preservation of public confidence in it (Ramos v. Central Bank, No. L-29352, October
4, 1971, 41 SCRA 565).
In view of the foregoing premises, We believe that the closure of the petitioner bank
was arbitrary and committed with grave abuse of discretion. Granting in gratia
argumenti that the closure was based on justified grounds to protect the public, the
fact that petitioner bank was suffering from serious financial problems should not
automatically lead to its liquidation. Section 29 of the Central Bank provides that a
closed bank may be reorganized or otherwise placed in such a condition that it may
be permitted to resume business with safety to its depositors, creditors and the
general public.
We are aware of the Central Bank's concern for the safety of Banco Filipino's
depositors as well as its creditors including itself which had granted substantial
financial assistance up to the time of the latter's closure. But there are alternatives to
permanent closure and liquidation to safeguard those interests as well as those of the
general public for the failure of Banco Filipino or any bank for that matter may be
viewed as an irreversible decline of the country's entire banking system and ultimately,
it may reflect on the Central Bank's own viability. For one thing, the Central Bank and
the Monetary Board should exercise strict supervision over Banco Filipino. They
should take all the necessary steps not violative of the laws that will fully secure the
repayment of the total financial assistance that the Central Bank had already granted
or would grant in the future.
G.R. No. L-29352 October 4, 1971
EMERITO M. RAMOS, SUSANA B. RAMOS, EMERITO B. RAMOS, JR., JOSEFA
RAMOS DE LA RAMA, HORACIO DE LA RAMA, ANTONIO B. RAMOS, FILOMENA
RAMOS LEDESMA, RODOLFO RAMOS, VICTORIA RAMOS TANJUATCO, and
TEOFILO
TANJUATCO, petitioners,

vs.
CENTRAL BANK OF THE PHILIPPINES, respondent.
Francisco Carreon, Feliciano C. Tumale and Araneta, Mendoza & Papa for petitioners.
Office of the Solicitor General Felix Q. Antonio and F. E. Evangelista, Clara CruzEspritu & Iigo B. Regalado, Jr. for respondent Bank.

REYES, J.B.L., J.:


This is a petition for Certiorari, Prohibition and Mandamus with prayer for the issuance
of a writ of preliminary injunction to restrain respondent Central Bank of the
Philippines (hereinafter designated as the CB) from enforcing and implementing the
Monetary Board Resolution No. 1263, adopted on 30 July 1968, excluding the
Overseas Bank of Manila (hereinafter termed the OBM) from clearing with the Central
Bank, that was ordered implemented on 31 July 1968 (Annex "11"), and Resolution
No. 1290, adopted on 1 August 1968, granting authority to the OBM Board of
Directors to suspend operations thereof, which was implemented on 2 August 1968
(Annex "13").
The herein petition is based on the following grounds:
(a) That the aforesaid resolutions were not legally issued and were promulgated by
respondent CB through the Monetary Board in excess of jurisdiction and with grave
abuse of discretion;
(b) That the said resolutions are prejudicial to the national interest and against public
policy, as they would erode confidence in the banking system and undermine the
integrity and stability thereof, contrary to the purpose and spirit of the Central Bank
Act;
(c) That said resolutions have caused and will cause further irreparable losses,
damages and injuries to the depositors, creditors and stockholders of the OBM;
(d) That said resolutions were promulgated without due process of law, would
constitute deprivation of property likewise without due process of law, and will amount
to impairment of the obligations of contract; and
(e) That there is no appeal nor any plain, speedy and adequate remedy in the ordinary
course of law.
From the pleadings and annexes, the following appears:

The OBM is a commercial banking corporation duly organized and existing under the
laws of the Philippines with principal office at Rosario Street, Manila. Petitioners are
the majority and controlling stockholders thereof. The OBM was opened for business
on 6 January 1964 with authorized capital of P30 million, P10 million subscribed and
P8 million thereof paid, but had been suspended by respondent from clearing with the
CB and from lending operations for various violations of the banking laws and
implementing regulations. Petitioners charged that the OBM became financially
distressed because of this suspension and the deprivation by the CB of all the usual
credit facilities and accommodations accorded to the other banks. The alleged
exactions of onerous fines and penalties by respondent was likewise blamed for the
aggravated situation. For its deficiencies it was made subject to penalties of 12%
interest on overdrawings and 36% per annum on reserve deficiencies, which by 1968
amounted to several millions.
By April, 1967, the financial situation of the OBM had caused mounting concern in the
CB. Petitioner Ramos and the OBM management finally met with respondent CB on
the necessity and urgency of rehabilitating the OBM through the extension of
necessary financial assistance.
The upshot of these conferences appears from the correspondence exchanged
between the CB and the OBM.
On 2 May 1967, the Governor of the Central Bank, Andres Castillo, upon instructions
of the Monetary Board, wrote a letter (Petition, Annex "B") stating:
This is with reference to the conference had between Mr. Emerito
Ramos, Sr., Chairman of your Board, and the undersigned, the
Deputy Governor, the Acting Superintendent of Banks, and the
Officer-in-Charge, Accounting Department of this Bank, last
Friday evening on the present very precarious condition of the
Overseas. In the conference, we described to Mr. Ramos at
length the circumstances which led to the present precarious
conditions of the bank. We stressed the imminent danger of the
bank's being thrown out of clearing, in accordance with existing
Central Bank regulations, on account of its continuous adverse
clearing balances, and of the immediate necessity of putting up
additional capital in the amount of at least P3 million, which Mr.
Ramos promised to put up when he last appeared before the
Monetary Board.
I informed Mr. Ramos that if his bank is thrown out of clearing, the
Central Bank will proceed in accordance with the existing policy
under which he and other stockholders representing a majority
will have to sign a trusteeship agreement with the Philippine
National Bank pursuant to which the Overseas Bank will be
managed by the Philippine National Bank. If the PNB takes over
management in such eventuality, the Central Bank could also

announce that it is ready to support the Philippine National Bank


in order to allay the fears of depositors and creditors.
In view of the OBM stockholders' reluctance to execute the Voting Trust suggested,
the Monetary Board adopted Resolution No. 2015 dated 16 October 1967, having the
following terms (Petition, Annex "F"):
(1) To require Mr. Emerito M. Ramos, Sr., the principal
stockholder of the Overseas Bank of Manila, to submit a listing of
his properties and to mortgage or assign the same to the Central
Bank to cover the overdraft balance therewith of the Overseas
Bank of Manila;
(2) To require the stockholders of the Overseas Bank of Manila to
subscribe to an appropriate voting trust agreement so that the
Central Bank may be able to effect a complete reorganization
and/or transfer the management of the bank to a nominee of the
Monetary Board;
Further conference ensued, and on 30 October 1967 Governor Castillo of the CB
wrote again (Petition, Annex "G" ):
I wish to refer to the conference had between your goodself and
the members of the Monetary Board at Malacaang of 16 October
1967, relative to the financial condition and state of affairs of the
Overseas Bank of Manila, of which the substantial majority of
stock is owned by you and your family and corporations controlled
by you.
Among other things, the Monetary Board, having in mind the
overdrawing in your deposit account with the Central Bank which,
on that date, stood at P22.3 million, together with the balance of
your past due emergency loan with the Central Bank amounting
to P10.3 million exclusive of accumulated interest, decided that,
as a measure to stave off liquidation, a voting trust agreement
should be executed by you and your family and the corporations
controlled by you in favor of the Superintendent of Banks, in an
instrument similar to the one executed by stockholders of the
Republic Bank in favor of the Philippine National Bank. On 23
October 1967, the Legal Counsel of this Bank submitted to you a
draft of such "Voting Trust Agreement" desired by the Monetary
Board. However, on 25 October 1967, you handed the legal
Counsel your own draft of a "Trust Agreement" which, in essence,
is not a voting trust agreement as desired by the Monetary Board
and reiterated in its Resolution No. 2020 dated 20 October 1967
and confirmed on 24 October 1967.

This was followed up by another letter of 8 November 1967 (Petition, Annex "H"):
In line with the conference this morning between your goodself
and the undersigned, the Deputy Governor, the Acting
Superintendent of Banks, and the Central Bank Legal Counsel,
and your manifestation of readiness to abide by the decisions of
the Monetary Board on all matters involving the Overseas Bank of
Manila, it is requested that the voting trust agreement prepared by
the Legal Counsel of this Bank be now signed by you and other
members of your family and by the proper officials of the
corporations which are stockholders of the bank and which are
controlled by you and your family.
It is also requested that the execution of the mortgages on the
properties you offered as security for the obligations of the
Overseas Bank of Manila to the Central Bank be finalized, and the
shares of stock belonging to you and your family in your
corporations and enterprises be endorsed in favor of the Central
Bank and delivered to us as soon as possible.
Finally, on 20 November 1967, the petitioners herein executed the Voting Trust
Agreement prepared by attorneys of the CB (Petition, Annex "A") with petitioners
as Cestuis Que Trust 1 and respondent CB's Superintendent of Banks as the Trustee.
The Trustee entered into the agreement pursuant to the authority given by
respondent's Monetary Board under M. B. Resolution No. 2017, dated 17 October
1967. The salient features of the said Voting Trust Agreement are the following:
(a) Objectives. The objectives are stated in the "Whereas Clauses", the pertinent
portions of which read: "... the abovenamed stockholders of the Overseas Bank of
Manila believe that it is for and/or the interest and benefit of the bank depositors,
creditors and stockholders that this trust agreement should be entered into by
them for the rehabilitation, normalization and stabilization of the Overseas Bank of
Manila;" and "... TRUSTEE has likewise signified his willingness to accept such trust
in pursuance of the objectives above-mentioned;" (Emphasis supplied)
(b) Term. The life of the trust shall be for three (3) years from 20 November 1967, but
the Trustee at its option, may relinquish the trust upon approval of the Monetary
Board. It is provided further that if, at the expiration of the three-year period the
purposes for which the trust has been constituted have not as yet been fully achieved,
the trust agreement shall be considered automatically extended for such period to be
determined by the Monetary Board, similarly terminable within such further period at
the discretion of the Monetary Board;
(c) Powers and authority. The trustee is given all and full authority, subject to the
limitations set forth in the law and other conditions in the contract to: (1) direct the
management of the affairs and accounts and properties of the OBM; (2) vote its
directors and choose the officers and employees; (3) improve, modify, reorganize its

operation policies, standards, systems, methods, structure, organization, personnel,


staffing pattern, etc.; (4) hold and vote on the shares of stocks transferred to him as
trustee; (5) safeguard the interests of depositors, creditors and stockholders; and (6)
in general, to exercise all such powers and discharge all such functions as inherently
pertain to the cestui que trust as owners, and/or for the sound management of a
banking institution;
(d) Consideration. The cestui que trust hound themselves, among others, to pay the
trustee during the life of the trust an annual honorarium subject to certain conditions.
Petitioners likewise conveyed by way of mortgage to the CB all their private properties
and holdings to secure the obligations of the OBM to the CB, but there is no
agreement as to the value of these properties, petitioners contending that they are
worth over 141 million, but the CB appraised them at around 67 million (Petition,
Annexes "B" and "C").
But as early as 25 September 1967, Mr. Martin Oliva, who had become president of
OBM only since 13 March 1967, had written to the Superintendent of Banks that
transactions worth around P48 million, of which over P43 million were time deposits,
at usurious rates of interest, had not been incorporated in the Bank's books nor
reported to the Board of Directors. It was explained 2 that the OBM management had
resorted to these unrecorded transactions because the suspension of its lending
activities after 14 months of operation reduced OBM to virtual inactivity, and it had to
agree to pay high premiums or interests on such deposits because this high costs is
comparatively cheaper than the Central Bank's interests on overdrawings at the rate
of 12% per annum and a penalty of 36% per annum on reserve deficiencies.
Oliva's letter prompted a further investigation of OBM records by the CB examiners
that revealed allegedly unrecorded deposits and transactions (which is disputed by
Petitioners) amounting to 48,007,211 as of 13 September 1967 (reduced to P35
million when petition was filed); diversion of deposits to accounts controlled by certain
OBM officials (so-called COFICO and EMRACO accounts) and loans to the Ramos
family and firms controlled by them. 3 Petitioners contend that these transactions were
recorded in subsidiary ledger accounts that were linked to the general ledger accounts
of the Bank under the so-called EMRACO and COFICO accounts, and finally
incorporated in OBM's regular books in September, 1967 upon instructions of
President Martin Oliva. 4 And as to the loans to the Ramos family and firms, the same
had been written off when around 31 July 1967 the Ramoses conveyed to the OBM
properties worth P54.096 million.
On 27 October 1967, the Superintendent of Banks reported that the condition of the
OBM was one of insolvency, calling for application of Section 29 of the Central Bank
Act and liquidation of OBM. However, with the listing of Ramos properties worth 100
million, it was added, a new possibility emerged to recapitalize the OBM in 100
million.5

2. However, with the letter dated October 26, 1967 of Mr. Martin
R. Oliva, President of the Overseas Bank of Manila, giving a list of
the Ramos properties worth P100 million (?), a radically different
possibility has emerged.
If the valuation of the P100 million (net of encumbrances to the
parties other than the CB and TOBM) to the properties is true, or
substantially true, then the new "possibility" may be briefly stated
thus:
A Recapitalization of the Overseas Bank of Manila on the amount
of P100 million will save the bank, because as a general
proposition, subject of course to corroborative quantification
such a magnitude of capital can make good the bad loans as well
as the funds that cannot be legitimately accounted for, and can
absorb the losses in bad debts, can provide it with funds for viable
operations, and thus ultimately give adequate protection to
depositors and creditors.
In the same memorandum report, considering the need for liquid funds, the
Superintendent of Banks suggested the following alternatives:
(1) The OBM be required to acquire the properties in payment for
frozen or bad loans or for unaccountable funds, and then
mortgage the properties to CB for emergency advances, or
(2) The owners be required to mortgage the properties to the CB
directly, and for CB to extend loans to OBM depending on the
needs.
Three days later, 30 October 1967, the Central Bank governor wrote to the petitioner,
Emerito Ramos, reiterating the need for the OBM stockholders to execute a voting
trust agreement "to stave of liquidation", which letter was followed by another of 8
November 1967, requiring the execution of the Voting Trust Agreement by the OBM
stockholders and of the mortgage of their properties to secure OBM obligations to the
Central Bank and the endorsement of the shares of stock held by them in their
corporations and enterprises (Petition, Annexes "G" and "H", quoted previously).
Petitioners duly complied (Annexes "A", "C" and "S") in November, 1967.
On 5 December 1967, new directors and officers drafted from the CB itself, the PNB
and DBP were elected and installed and they took over the management and control
of the Overseas bank.
On 14 June 1968, the CB announced that only P10 million were available as
emergency loan to OBM and requested the management of the latter (appointed

under the Voting Trust Agreement to replace the old Board elected by the
stockholders) to project how it could help bail out OBM.
OBM president, Mr. Orosa, submitted a "Projected Cash Flow Statement" 6, concluding

It is pointed out here that with the P10 million loan from the CB,
the extremely distressed financial condition of TOBM will continue
to prevail. At best, the P10 million loan will enable TOBM to
resume limited lending operations on a highly selected basis and
diminish its estimated loss by some P492.5 thousand assuming
that the loans to be extended have a high turnover rate and a
100% repayment ratio. Thus, with the P10 million CB loan, the
annual loss has been estimated to be P8.9 million. To be able to
breakdown in operations, therefore, TOBM needs loanable funds
estimated at P196 million, placing the cost of such funds at 1 %.
In a memorandum submitted to Governor Calalang 12 days later, 22 July, Mr. Orosa
unburdened himself and deployed CB for hemming and hawing. This caused, he said
the loss of "psychological advantage" initially gained by PNB's take over of the OBM
management. He reminded the CB Governor about the OBM management's request
on 6 January 1968 for a P20 million loan to enable OBM to get on its feet. "At that
time", he said, "the aid we are recommending, properly used, would have staved off
panic and restored some confidence."
Eight months of indecision has made depositors lose faith and as
a result, we are faced with more court suits and withdrawals than
ever before and more obligations have matured. 7
The next day, 23 July 1968, the Superintendent of Banks recommended to the
Monetary Board that OBM be liquidated under Section 29, Republic Act 265, if its
"capital structure cannot be strengthened to meet the requirements of Section 22 of
RA 337", 8 and if "massive financing cannot be given to enable the bank to expand its
risk assets." He concluded that:
... The bank's continuance in business under its present extremely
precarious financial condition, without the necessary capital
injection and financial aid, will involve not merely probable,
but certain further losses to its depositors and other creditors and
may have further adverse effects on the banking system.
Thereafter, on 13 August 1968, as heretofore stated, the CB Monetary Board adopted
Resolution No. 1333, ordering the Superintendent of Banks to proceed to the
liquidation of the OBM, under Section 29 of the Central Bank Act. As already noted,
implementation of this resolution was restrained by this Court.

Petitioners aver that no adequate financial assistance was granted to the OBM after
the execution of the Voting Trust Agreement. They further ]claim that the said
agreement is not only bilateral, imposing reciprocal obligations for valuable
consideration, but was also entered into by respondent CB in the performance of its
duties under the law; and that under said agreement the obligation of the CB was to
act and work for the "rehabilitation, normalization and stabilization" of the OBM,
through the extension of adequate and necessary financial assistance to stave off
liquidation, is legally demandable, as well as a duty specifically enjoined and imposed
by law. And that in violation of its obligations, the CB, "after eight months of delay",
adopted the questioned resolutions, without notice to or hearing the petitioners.
By resolution of this Court, the respondents were required to answer the petition and
set for hearing the petition for a writ of injunction. However, on 13 August 1968, the
CB adopted Resolution No. 1333 (Annex "12", Answer) forbidding the OBM from doing
business and instructing the Superintendent of Banks to take charge of the Bank's
assets and to take action under Section 29 of the Central Bank Act (Republic Act 265),
which amounted to a directive for the liquidation of the OBM. Implementation of the
resolution was, upon petitioners' motion, restrained by the Court on 14 August 1968.
Justifying Resolutions 1263 and 1290, CB in its answer cited specific instances of
OBM's "unusual and irregular transactions" discovered by examiners or "revealed by
OBM officials themselves". By way of affirmative defenses, CB averred that:

(b) Whether or not the CB had agreed to rehabilitate, normalize


and stabilize OBM;
(c) Whether or not CB Resolutions Nos. 1263, 1290 and 1333
were adopted in abuse of discretion.
On the first issue of jurisdiction, the respondent Central Bank defines its position in its
Rejoinder Memorandum, pages 3-5, as follows:
"We respectfully maintain,"..., that even as this Honorable Court
had ample jurisdiction over the said petition, any action based on
the approval and implementation of the third resolution, Res. 1333
on 13 August 1968 comes already within the exclusive original
jurisdiction of the Court of First Instance, in accordance with the
provisions itself of Section 29 of the Central Bank Act, Rep. Act
265, under which said resolution was promulgated.
xxx xxx xxx

1. The CB is not a party to the Voting Trust agreement, and therefore cannot be
compelled to implement it.

The point ... is that the situation has changed entirely because of
the approval of Res. 1333 on August 13, 1968, after the main
petition had already been filed and given due course. This
resolution has made the two previous questioned resolutions
academic and the main petition pointless.

2. Assuming that CB is obliged to rehabilitate OBM, it cannot give more loans to the
latter than that already given to it as of 30 July 1968, without violating Section 90 of
the Central Bank Act since neither OBM nor its stockholders could put up additional
capital and additional collaterals to secure CB's future advances.

The CB stand is that to assail Resolution 1333 of the Monetary Board ordering the
liquidation of the Overseas Bank, an action must be filed in the Court of First Instance
of Manila by the Bank itself, and not by petitioning stockholders, allegedly in view of
the provisions of Section 29, Republic Act No. 265, paragraph 3, reading:

3. It would be illegal and contrary to public interest to construe the voting trust
agreement as imposing upon CB the duty to rescue OBM at all cost.

At any time within ten days after the Monetary Board has taken
charge of the assets of any banking institution, such institution
may apply to the Court of First Instance for an order requiring the
Monetary Board to show cause why it should not be enjoined from
continuing such charge of its assets, and the court may direct the
Board to refrain from further proceedings and to surrender charge
of its assets.

4. No bank has an absolute right to take part in inter-bank clearing, because Section
100, Republic Act 265, requires a bank as a condition to such participation to keep
deposit reserves, which the OBM does not have in fact it had overdrawn its reserve
account with the CB beyond the maximum fixed by law.
Several petitions for intervention were denied by the Court.
The issues involved appear to be:
(a) Whether or not this Supreme Court has jurisdiction to restrain
the implementation of CB Resolution No. 1333;

This argument must be rejected, for it overlooks the fact that before the Central Bank
adopted said Resolution No. 1333 on 13 August 1968 this Court had already taken
cognizance of the petition herein, assailing Resolutions Nos. 1263 and 1290 of the
Monetary Board as "patent acts of liquidation," violative of its alleged commitment to
rehabilitate the overseas Bank; and the Court, in fact, already had required the Central
Bank to answer the petition on 12 August 1962, prior to the adoption of Resolution No.
1333. The latter resolution is clearly an act in pursuance of the policy outlined in the
previous resolutions (1263 and 1290) enjoined by this Court. Hence, if jurisdiction was

already acquired ito delve into the validity of Resolutions 1263 and 1290 (and this the
Central Bank admits), there is no cogent reason why, after such jurisdiction had been
acquired, the Court should be deprived thereof by the subsequent adoption of
Resolution 1333, particularly because the latter, in relation to the antecedent facts,
appears to be no more than a deliberate effort to evade the jurisdiction of this Court,
and have the case thrown back to the Court of First Instance.
In People vs. Pegarum, this Court quoted with approval the rule that:
... the jurisdiction of a court depends upon the state of facts
existing at the time it is invoked, and if the jurisdiction once
attaches to the person and subject matter of the litigation, the
subsequent happening of events, although they are of such a
character as would have prevented jurisdiction from attaching in
the first instance, will not operate to oust jurisdiction already
attached.
This rule coincides with well-established principles of American law 9 to the same
effect.
The basic guidelines in the exercise of this Court's original jurisdiction to issue
prerogative writs were expressed inDimayuga vs. Fernandez, 43 Phil. 306-307, thus:
... It is true, as respondents contend, that as a general rule, a
court of equity will not restrain the authorities of either a state or
municipality from the enforcement of a criminal law, and among
the earlier decisions, there was no exception to that rule. By the
modern authorities, an exception is sometimes made, and the writ
is granted, where it is necessary for the orderly administration of
justice, or to prevent the use of the strong arm of the law in an
oppressive or vindictive manner, or a multiplicity of actions.
In legal effect, that was the decision of this court in Kwong Sing
vs. City of Manila. (41 Phil. 103)
The writ of prohibition is somewhat sui generis, and is more or
less in the sound legal discretion of the court and is intended to
prevent the unlawful and oppressive exercise of legal authority,
and to bring about the orderly administration of justice.
Nor would it serve the interest of justice to dismiss the case at this stage and let a new
petition be filed in another court. In Bay View vs. Manila Hotel Worker's Union (L21803, 17 December 1966), this Court, through Mr. Justice Conrado V. Sanchez,
pointed out the evils attending split jurisdictions, saying:

To draw a tenuous jurisdictional line is to undermine stability in ...


litigations. A piece meal resort to one Court and another gives rise
to multiplicity of suits. ... The time to be lost, effort wasted, anxiety
augmented, additional expense incurred these are
considerations which weigh heavily against split jurisdiction.
Indeed it is more in keeping with orderly administration of justice
that all the causes of action here be cognizable and heard by only
one court... (Cas. cit., 18 SCRA 953).
On Previous occasions, this Court has overruled the defense of jurisdiction in the
interest of public welfare and for the advanced agreement of public policy, where, as in
this case, an extraordinary situation existed. 10 There is no denying that creditors,
depositors and the banking community are all interested in a quick determination
whether the Overseas Bank may, under the circumstances, be closed or allowed to
continue operating at the exclusive discretion of respondent Central Bank.
The plea that the Overseas Bank is not a party to the case at bar need not give
concern. The petitioners are the controlling stockholders of that Bank, and are
qualified to represent its interests, so that a judgment may be enforced for or against
it, although it is not impleaded by name in the suits (V. Albert vs. Court of First
Instance, L-26361, 29 May 1968, 23 SCRA 948, 964). This is particularly true
considering that the present management of the OBM (Overseas Bank of Manila) is at
present composed of respondent's nominees, pursuant to the Trust Agreement, and
they can hardly be expected to resist the plans and actions of respondent Central
Bank (CB).
On the second issue, whether or not the respondent CB agreed to rehabilitate the
OBM, Of which petitioner are the majority stockholders, it is believed that a review of
the letters from the CB to the petitioners (hereinbefore quoted), considered together
with the terms of the Voting Trust Agreement, leaves no doubt that the CB did agree
and commit itself to the continued operation of, and rehabilitation of, the OBM. As
early as 2 May 1967, the respondent CB, through its Monetary Board, caused then
Governor Castillo to advise petitioners that
he and other stockholders representing a majority will have to
sign a trusteeship agreement with the Philippine National Bank
pursuant to which the Overseas Bank will be managed by the
Philippine National Bank. If the PNB takes over management in
such eventuality, the Central Bank could also announce that it is
ready to support the Philippine National Bank in order to allay the
fears of depositors and creditors. (Pet., Annex "B") (Emphasis
supplied)
CB Resolution No. 2015 of 16 October 1967 (Petition, Annex "F"), in addition to
requiring a mortgage or assignment of petitioners' personal properties to CB,
confirmed the quoted memorandum by requiring the stockholders of OBM to
subscribe to an appropriate trust agreement, with the only difference that instead of
the Philippine National Bank, the trust would be executed in favor of the CB as trustee

to enable it to reorganize and transfer management to a nominee of the Monetary


Board." Two weeks later, on 30 October 1967, after a conference at Malacaang, the
CB governor once more wrote to Ramos that the Monetary Board
decided that, as a measure to stave off liquidation, a voting trust
agreement should be executed by you and your family and the
corporations controlled by you in favor of the Superintendent of
Banks, in an instrument similar to the one executed by
stockholders of the Republic Bank in favor of the Philippine
National Bank (Petition, Annex "G") (Emphasis supplied)
The reference to the case of the Republic Bank clarifies the purpose and scope of the
demand for a voting trust agreement "as a measure to stave off liquidation"; for it is
well-known, and it is not denied, that when the Republic Bank previously became
distressed, the CB had advanced funds, to rehabilitate it and allow it to resume
operating.
Accordingly, the voting trust agreement that was finally executed (Annex "A"), and
which was admittedly prepared by the Legal Counsel of the Central Bank, recited in its
preamble as an objective of the voting trust agreement, that:
... the above named stockholders of the Overseas Bank of Manila
believe that it is for and/or interest and benefit of the bank
depositors, creditors, and stockholders, that this trust agreement
should be entered into by them for the rehabilitation,
normalization and stabilization of the Overseas Bank of Manila.
and that the Superintendent of Banks as
... Trustee has likewise signified his willingness to accept such
trust in pursuance of the objectivesabove mentioned. ...
(Emphasis supplied)
While the trust agreement on its face creates obligations only for the Superintendent
of Banks as trustee, his commitments were undeniably those of the Central Bank
itself, since it was the latter that had from the very beginning insisted upon such voting
trust being executed. For the Superintendent of Banks was an officer of the CB, the
chief of its Department of Supervision and Examination of all banking institutions
operating in the country, subject to the instructions of the Monetary Board at all times,
pursuant to Section 25 of the CB charter, Republic Act No. 265; and it is not credible
that he should have understand that he was entering into the trust agreement in his
personal capacity.
Bearing in mind that the communications, Annexes "B" and "G," as well as the voting
trust agreement, Annex "A," had been prepared by the CB, and the well-known rule
that ambiguities therein are to be construed against the party that caused them, 11 the

record becomes clear that, in consideration of the execution of the voting trust
agreement by the petitioner stockholders of OBM, and of the mortgage or assignment
of their personal properties to the CB (Res. No. 2015, 16 October 1967, Annex "F,"
Petition), the CB had agreed to announce its readiness to support the new
management "in order to allay the fears of depositors and creditors." (Annex "B"), and
to stave off liquidation" by providing adequate funds for "the rehabilitation,
normalization and stabilization" of the OBM, in a manner similar to what the CB had
previously done with the Republic Bank (Portion, Annex "G," ante). While no express
terms in the documents refer to the provision of funds by CB for the purpose, the
same is necessarily implied, for in no other way could it rehabilitate, normalize and
stabilize a distressed bank.
Even in the absence of contract, the record plainly shows that the CB made express
representations to petitioners herein that it would support the OBM, and avoid its
liquidation if the petitioners would execute (a) the Voting Trust Agreement turning over
the management of OBM to the CB or its nominees, and (b) mortgage or assign their
properties to the Central Bank to cover the overdraft balance of OBM. The petitioners
having complied with these conditions and parted with value to the profit of the CB
(which thus acquired additional security for its own advances), the CB may not now
renege on its representations and liquidate the OBM, to the detriment of its
stockholders, depositors and other creditors, under the rule of promissory estoppel (19
Am. Jur., pages 657-658; 28 Am. Jur. 2d, 656-657; Ed. Note, 115 ALR, 157).
The broad general rule to the effect that a promise to do or not to
do something in the future does not work an estoppel must be
qualified, since there are numerous cases in which an estoppel
has been predicated on promises or assurances as to future
conduct. The doctrine of "promissory estoppel" is by no means
new, although the name has been adopted only in comparatively
recent years. According to that doctrine, an estoppel may arise
from the making of a promise, even though without consideration,
if it was intended that the promise should be relied upon and in
fact it was relied upon, and if a refusal to enforce it would be
virtually to sanction the perpetration of fraud or would result in
other injustice. In this respect, the reliance by the promisee is
generally evidenced by action or forbearance on his part, and the
idea has been expressed that such action or forbearance would
reasonably have been expected by the promissor. Mere omission
by the promisee to do whatever the promisor promised to do has
been held insufficient "forbearance" to give rise to a promissory
estoppel. (19 Am. Jur., loc. cit.)
Disingenuously, the CB pleaded that the Voting Trust agreement was binding only
upon the trustee, the Superintendent of Banks. But as already pointed out this
proposition is unacceptable since the trust could have no private interest in the
matters. Not only that, but CB subsequently caused its own team of nominees to take
over the direction and management of the OBM, through the voting of the shares
conveyed to the trustee. Even more, in August, 1970, the CB gave notice that it would
not extend or renew the voting trust, and attempted to turn back the shares covered

by it to the petitioners, thereby recognizing the obligations under the agreement as its
own, and repudiating its original disclaimer thereof.
How did the CB subsequently treat its commitments?
After execution of the Voting Trust Agreement, on 20 November 1967, the CB elected
and installed new directors and officers drafted from the Central Bank itself, the
Philippine National Bank and the Development Bank of the Philippines. The new team
assumed the management and control of the OBM and elected Augusto E. Orosa as
bank president. On 6 January 1968, the new management requested for a thirty
million peso loan to enable the OBM to get on its feet. How this request for aid was
treated appears in a memorandum to the new CB governor, dated 22 July 1968
(Petitioner's Reply Memorandum, Annex "X," Record, pages 526-527). Mr. Orosa
stated:
MEMORANDUM TO:
Governor Alfonso Calalang
SUBJECT: POSITION PAPER OF THE OVERSEAS BANK
OF MANILA

PRESENT POSITION
Eight months of indecision has made depositors lose faith and as
a result, we are faced with more court suits and withdrawals than
ever before and more obligations have matured.
We are made to understand that an advance of P19 million has
been approved for the Bank and that an initial release of P10
million is under study. Last July 10, 1968, we wrote the
Superintendent of Banks complying with his request to render a
projection of what we can do with P10 million.
There is a great leeway with what we can do with P10 million
depending on the conditions which will accompany its grant. Even
under the most liberal conditions that we can imagine, P10 million
will not save the Bank. We are, however, not aware whether this
proposed P10 million will be the start of a series of advances nor
as to how much ultimately the Central Bank will be willing to
finance the rehabilitation.

BACKGROUND

We are faced with both internal and external problems that are
daily increasing in difficulty. If we are requested to make a
projection which we believe is a reasonable request, the present
management should be made privy to the following:

A selected PNB team formally took over the management of the


Overseas Bank of Manila on December 7, 1967.

(1) What is the real policy of the Central Bank regarding the future
of TOBM;

On January 16, 1968 we completed a report on the financial


standing of the Bank, the original of which is in your possession.
In that report, we recommended that the balance of the unpaid
capital stock of P11 million be fully paid and P20 million be
advanced by the Central Bank to enable the Bank to resume
normal operations. At that time, we gathered from the books of
account that the Bank faced obligations to be immediately met
amounting to about P30 million as against liquid assets of more
than P12 million or an immediate cash requirement of about P17
million. Nevertheless, and this is a very important point, our
feeling was that at that time the aid we are recommending,
properly used, would have staved off panic and restored some
confidence.

(2) What is the policy of the Central Bank regarding present rates
of interest and penalties on prevailing deficiencies;

The entrance of the PNB team actually was a great initial


psychological advantage; we have used that advantage to full
extent: the advantage has faded.

(3) What is the rate of interest to be charged on the fresh


advances;
(4) What are the conditions to be meted out regarding leeway and
operations of TOBM;
(5) Any other strings that may be attached.
(6) What is the policy of Central Banking regarding unrecorded
time deposits.
All these points will greatly affect any projection.

REQUEST:

court and with all convenient speed, convert the assets of the
banking institution to money.

That the PNB management team be withdrawn from TOBM.


It is obvious from this memorandum that far from heeding the request of its own team
for an advance of P30 million (or P17 million in cash) to enable the OBM to resume
normal operations, the Central Bank did nothing to support the OBM between 6
January to 14 June, for almost six months, and kept even its own management team
largely in the dark as to what to expect. 0n 14 June, CB advised that only P10 million
were to be made available (i.e., one third of the requirements estimated necessary by
its own representatives). This amount was naturally considered insufficient to
normalize, much less rehabilitate, the OBM. And yet all this while, the CB was holding
petitioners' mortgages on their private properties worth at least P67 million in 1967 by
the CB's own appraisal. Petitioners claimed they were worth P100 million which can
not be very far from the truth, considering the continual rise in real estate values.
Not content with procrastinating for 6 months, without taking positive steps to
normalize OBM as it had agreed to do, nor even announcing its support of its own
management team or disclosing its policy regarding the future of OBM, (the CB finally
adopted the resolutions now attacked by herein petitioner stockholders. On 30 July
1968, it excluded the OBM from clearing with the CB (Resol. No. 1263) the
contingency that the Voting Trust and the mortgage of the petitioners' private
properties were to guard against. On 1 August 1968, CB authorized (and virtually
directed) its nominee Board of Directors to suspend operations (Resol. No. 1290); and
thirteen days thereafter (13 August 1968), the CB directed its Superintendent of Banks
to proceed to liquidate OBM (Resol. No. 1333) under Section 29 of Republic Act No.
265 (Central Bank Charter), providing that

We are constrained to agree with petitioners that the conduct of the CB from and after
January, 1968, reveals a calculated attempt to evade rehabilitating OBM despite its
promises. What is more aggravating is that by the ordered liquidation, depositors and
other creditors would have to share in the assets of the OBM, while the CB's own
credits for advances were secured by the new mortgages it had obtained from the
petitioners, thereby gaining for it what amounts to an illegal preference. To cap it all,
the CB disregarded its representations and promises to rehabilitate and normalize the
financial condition of OBM, as it had previously done with the Republic Bank, without
even offering to discharge the mortgages, given by petitioners in consideration for its
promises, or notifying petitioners that it desired to rescind its contract, or bringing
action in court for the purpose. And all the while CB knew that the situation of the
OBM was deteriorating daily, with penalties at 3% per month continually accumulating,
while its creditors, depositors and stockholders awaited the promised aid that never
came, and which apparently CB never intended to give.
The deception practiced by the Central Bank, not only on petitioners but on its own
management team, was in violation of Articles 1159 and 1315 of the Civil Code of the
Philippines:
ART. 1159. Obligations arising from contracts have the force of
law between the contracting parties andshould be complied with
in good faith.
ART. 1315. Contracts are perfected by mere consent, and from
that moment the parties are bound not only to the fulfillment of
what has been expressly stipulated but also to all the
consequences which, according to their nature, may be in
keeping with good faith, usage and law. (Emphasis supplied)

SEC. 29. Proceedings upon insolvency. Whenever, upon


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

The Supreme Court expounded the import of these legal provisions in Abelarde vs.
Lopez, 74 Phil. 344, 348, stating:

If the Monetary Board shall determine that the banking institution


cannot resume business with safety to its creditors, it shall, by the
Solicitor General, file a petition in the Court of First Instance
reciting the proceedings which have been taken and praying the
assistance and supervision of the court in the liquidation of the
affairs of the same. The Superintendent shall thereafter, upon
order of the Monetary Board and under the supervision of the

The CB excuses itself by pleading that the OBM officers had resorted to non-recording
of time deposits in the Bank's books and diverting such deposits to accounting
controlled by certain bank officials, and other irregularities. It is well to note, however,
that these "unrecorded" deposits were revealed to the CB as early as 25 September
1967 by the then President of the OBM, Mr. Martin Oliva, who had no hand in such
irregularities and who informed the Superintendent of Banks that time deposits worth
P43,188,009.29 had not been carried in the books and had not been reported to the
OBM directors. 12 In fact, on 29 September 1967, the CB had already ordered its
examiners to investigate the Bank's records and determine the parties

Cleverness should never take the place of the loyal, upright and
straightforward observance of plighted undertakings.

responsible. 13 Notwithstanding knowledge of these irregularities, the CB did not


withdraw its promised support, and insisted on the execution of the Voting Trust
Agreement on 20 November 1967. Such attitude imports that, in its opinion, the
irregularities disclosed were not to be blamed on the OBM itself or its depositors and
creditors, but on the officials responsible; and further, that the OBM could still be
saved by adequate aid and management reform, which was required by CB's duty to
maintain the stability of the banking system and the preservation of public confidence
in it.
Respondent CB likewise urges in its defense that the rehabilitation of the OBM has
become impossible, and points out to the reports of the Superintendent of Banks and
of Mr. Augusto Orosa (the President of OBM elected by the CB nominees under the
Voting Trust) that the Bank's loanable funds had to be expanded to P136 million to
break even. 14 It is to be borne in mind, however, that these reports were made in July,
1968, after six months of inaction on the part of the CB, without positive action on its
part to comply with its previous commitments. Furthermore, while the stabilization of
the OBM required injections of capital, it would be erroneous to assume that such
capital would have to reach P130 million, or that it would have to be advanced all at
once. For had the CB furnished the original aid of 30 million asked by the Orosa team
early in January, 1968, and the OBM allowed to resume operations with CB support,
the restored confidence would have stimulated new deposits, which, as is well-known,
become in turn a source of loanable funds. It thus becomes apparent that most of the
difficulties invoked now by the CB are of its own making, and are not a lawful excuse
for its refusal to comply with its commitments. Finally, in the computations by the CB
examiners, there are included a total of P16.994 million for estimatedlosses, interests
and penalties 15 that did not represent amounts to be disbursed. More concretely, even
in July, 1968, after six months of CB dilly-dallying, the actual amount needed to be
loaned to the OBM for capital requirements "to support the necessary expansion in
risk assets of P126.334 million in order to break even in its operations" was estimated
by
the
Superintendent
of
Banks
at
no
more
than
P40.730
million. 16 This amount tallies with Mr. A. Orosa's estimate that an advance of P30
million in January, 1968 would have saved OBM. 17 There is no showing that these
amounts were beyond the capacity of CB to make, 18 nor is it proved that they
exceeded the amounts supplied for the rehabilitation of the Republic Bank (the CB, for
reasons of its own, refused to disclose the latter amounts despite requests from the
court). Certainly, the ten million increase in advance capital requirements between
January and July of 1968 can not be blamed on the petitioners herein, and was not of
their own making.
The respondent CB cites American cases to the effect that the courts can not interfere
with CB's discretion in determining whether or not a distressed bank should be
supported or liquidated. In none of the cases cited, however, does it appear that the
CB engaged to support the distressed bank in exchange for control of its management
and additional mortgages in its favor, and, therefore, the authorities cited are not in
point. Discretion has its limits and has never been held to include arbitrariness,
discrimination or bad faith.
We conclude that having induced the petitioners to part with additional security in
reliance upon its (CB's) promises and commitments to avert liquidation and to support,

normalize and rehabilitate the OBM, the respondent CB is duty bound to comply in
good faith with such promises. Consequently, being contrary thereto, CB Resolutions
Nos. 1263, 1290 and 1333 should be annulled and set aside for having been adopted
in abuse of discretion, equivalent to excess of jurisdiction. And never having attempted
to comply, nor even to begin compliance, with its commitments and promises, the
respondent CB is precluded to invoke the expiration of the period specified for the
duration of its obligations under the Voting Trust Agreement. Such period should, in
justice and equity, be deemed to start running from and after the CB begins due
performance of its commitments, promises and representations in good faith.
WHEREFORE, the writs prayed for in the petition are hereby granted, and respondent
Central Bank's resolutions Nos. 1263, 1290 and 1333 (that prohibit the Overseas
Bank of Manila to participate in clearing, direct the suspension of its operations, and
ordering liquidation of said bank) are hereby annulled and set aside; and said
respondent Central Bank of the Philippines is directed to comply with it obligations
under the Voting Trust Agreement, and to desist from taking action in violation thereof.
Costs against respondent Central Bank of the Philippines.
G.R. No. 97218 May 17, 1993
PROVIDENT SAVINGS BANK, petitioner,
vs.
COURT OF APPEALS, Former SPECIAL EIGHTH DIVISION and WILSON
CHUA, respondents.
Gonzales, Batiller, Bilog & Associates for petitioner.
Resty R. Villanueva for private respondent.

MELO, J.:
The error, if error it be, of respondent Court of Appeals which petitioner seeks
to rectify via the petitioner forcertiorari before us refers to respondent court's major
conclusion arrived at in CA-G.R. CV No. 21312 (Javellana (P), Kalalo, Dayrit, JJ)
barring petitioner from foreclosing the subject realty on account of prescription.
Petitioner begs to differ, insisting that the period during which it was placed under
receivership by the Central Bank is akin to a caso fortuito and should not thus be
reckoned against it.
Both petitioner and private respondent accepted the synthesized factual backdrop
formulated by respondent court, to wit:

This an appeal by both plaintiff and defendant from the decision of


the Regional Trial Court of the National Capital Judicial 29
September 1988, in Civil Case No. 977-NW, which directed
plaintiff-appellant to pay defendant-appellant the personal
obligation of the spouses Guarin to defendant-appellant in the
amount of P62,500.00, together with the interest, penalties, and
bank charges due thereon, and ordering defendant-appellant
thereafter to: (1) release the real estate mortgage executed by the
spouses Lorenzo K. Guarin and Liwayway J. Guarin in favor of
defendant bank on 16 February 1967; (2) return to surrender to
plaintiff-appellant, as successor-in-interest of the spouses Guarin,
the latter's Owner's Duplicate of Title No. 177014; (3) pay plaintiffappellant P20,000.00 as and for attorney's fees; and, (4) pay the
costs of suit.
The established fact are:
On 16 February 1967, the spouses Lorenzo K. Guarin and
Liwayway J. Guarin (Guarins) obtained a loan from defendantappellant in the amount of P62,500.00 payable on or before 20
June 1967. As security for the loan, they executed a real estate
mortgage in favor of defendant-appellant over a parcel of land
covered by TCT No. 177014. (Exhs. C and D).
In September, 1972, defendant-appellant was placed under
receivership by the Central Bank of the Philippines until 27 July
1981 when the receivership was set aside by the Honorable
Supreme Court.
On 11 December 1984, Lorenzo K. Guarin, in reply to the letter of
latter's counsel informing that the mortgaged property would be
sold at public auction on 27 December 1984, assured he and his
wife had every intention of paying their obligation and requesting
for a recomputation of their account and a postponement of the
foreclosure sale. (Exh. 1).
On 10 February 1986, the Guarins received a Statement of
Account from defendant-appellant showing two outstanding
accounts as of 15 February 1986. One was account of Lorenzo K.
Guarin in the amount of P591,088.80, and the other was the
account of L.K. Guarin Manufacturing Co., Inc. in the amount of
P6,287,380.27 (Attachment to Exh. 2)
On 26 February 1986, Lorenzo K. Guarin wrote defendantappellant stating that he was ready and willing to pay his
obligation in the total amount of P591,088.80 as recomputed by
defendant-appellant whenever defendant-appellant was already

to receive the payment and inquiring as to when his mortgaged


title would be available for him to pick up. (Exh. 2)
Defendant-appellant replied on 27 February 1986 that Lorenzo K.
Guarin may make payment at its office in Makati, Metro Manila,
but that the mortgaged title could not be released to him even
after the payment of the obligation of P591,088.80 as it also
served as security for the indebtedness of L.Y. Guarin
Manufacturing Co., Inc., to defendant-appellant which was
undertaken by Lorenzo K. Guarin in his personal capacity and as
president of the corporation. (Exh. 3)
On 20 May 1986, plaintiff-appellant wrote defendant-appellant
saying that the mortgaged property of the Guarins had been
offered to him as payment of the judgment he obtained against
the Guarins in Civil Case No. Q-47465 entitled, "Wilson Chua vs.
Lorenzo K. Guarin", and requesting for defendant-appellant's
conformity to the assignment and expressing his willingness to
pay for the obligation of Mr. Guarin so that the title could be
released by defendant-appellant. (Exh. 4)
On 10 July 1986, the Guarins and plaintiff-appellant executed a
Deed of Absolute Sale With Assumption of Mortgaged whereby
the Guarins sold the mortgaged property to Guarins sold the
appellant for the sum of P250,000.00 and plaintiff-appellant
undertook to assume the mortgaged obligation of the Guarins with
defendant-appellant which as of 15 February 1985 amounted to
P591,088.80.(Exh. B).
On 5 August 1986, plaintiff-appellant informed defendantappellant that as a result of the judgment in Civil Case No. Q47645, the mortgaged property had been sold to him by the
Guarins, as evidenced by the Deed of Sale enclosed for guidance
and information of defendant-appellant. He requested that he be
allowed to pay the loan secured by the mortgaged, otherwise, he
would be constrained to bring the matter to court. (Exh. 5) In
reply, defendant-appellant, on 11 August 1986, informed plaintiffappellant that his request could be granted if he would settle the
obligation of L.K. Guarin Manufacturing Co., Inc., as well and
defendant-appellant's letter to Mr. Guarin dated 27 February
1986. (Exh. 6)
On 3 August 1987, counsel for plaintiff-appellant addressed a
letter to defendant-appellant informing that plaintiff-appellant had
purchased the mortgaged property from the Guarin's and
requesting that the owner's copy of TCT No. 177014 in the
possession of defendant-appellant be released to him so that he
can register the sale and have the title to the property transferred

in his name. He likewise, informed defendant-appellant that it had


lost whatever right or action had against the Guarins because of
prescription. (Exh. E) Defendant-appellant replied on 10 August
1987 stating the reasons why they could not comply with plaintiffappellant's demands. (Exh. F)
On 21 August 1986, plaintiff-appellant filed a complaint against
defendant-appellant to compel the latter to: (1) release the real
estate mortgaged executed by the Guarins in favor of defendantappellant on 16 February 1967; (2) return or surrender to plaintiffappellant, as successor-in-interest of the Guarins, the latter's
owner's duplicate of TCT No. 177014; and (3) pay plaintiffappellant P2,750,000.00 as actual and/or consequential
damages, moral damages as may be proved during the trial,
exemplary damages as may be reasonably assessed by the
court, and attorney's fees of P50,00.00. Defendant-appellant
answered the complaint thereof and setting up special and
affirmative defenses. After trial, judgment was rendered as stated
in the opening paragraph hereof from which both parties
appealed . . . . (pp. 35-37, Rollo.)
Concerning the challenge posed by Provident Saving Bank against the personality of
Wilson Chua to initiate the action to compel the release of the real estate mortgage
and the delivery of the owner's duplicate copy of the certificate of title, respondent
court noted that Wilson Chua can be considered a real-property-in-interest because
he is the successor-in-interest of the Guarins who is naturally entitled to the realty as
against the so-called right of Provident Savings Bank, as mortgagee, to foreclose the
mortgage which had become stale through sheer lapse of time. The matter of novation
in the form of substitution of the debtor without corresponding acquiesence of the
mortgagee was viewed by respondent court to be legally inconsequential due to the
demeanor of the mortgagee-bank in requiring Wilson Chua to pay the indebtedness of
Lorenzo Guarin, posterior to the change of obligors, which act was construed as
equivalent to consent.
To the question of whether petitioner can still foreclose the subject realty, respondent
court gave a negative response on account of the absence of proof to indicate that the
bank was precluded from collecting indebtedness while it was under receivership from
September, 1972 until July 20,1981. Thus, there was no legal interruption of the prescriptive period to speak of, said respondent court, which intervened between June 20,
1967, the date the mortgage matured, and June 20, 1977 the last day within which
petitioner could have foreclosed the mortgage.
Respondent court did not also heed the suggestion of the petitioner bank to interpret
Wilson Chua's assumption of the mortgage on July 10, 1986 as tantamount to an
explicit acknowledgement that the obligation was outstanding and had not yet
prescribed.

As a result of these observations, respondent court reversed the decision of the trial
court insofar as it ordered Wilson Chua to pay the sum of P591,088.80 to the bank
and affirmed the other dispositions made the court of origin (p. 42, Rollo).
Following the unfavorable judgment, the bank filed a motion for reconsideration and a
motion for new trial premised on newly discovered evidence relative to a statement of
account unearthed by the bank's liaison officer from the loose folders on October 18,
1990 which it believed to be of legal significance to the case. But respondent court
was unperturbed, observing that the vital piece of document could have been located
in the course of trial had the slightest degree of prudence been exercised, considering
that the statement of account sprouted the same day the liaison officer was advised to
take an inventory of the records ( p. 45, Rollo).
Hence, the petitioner at bar.
Consistent with its theory premised on fuerza major, petitioner insists that it can not be
blamed for not lifting a finger, so speak, during the period when it was enjoined by the
Central Bank on September 15, 1972 from transacting business until this Court
affirmed on July 27,1981 the decision of the Court of Appeals annulling the
proscription against petitioner in Central Bank vs. Court of Appeals (106 SCRA 143
[1981]. We are not unaware of the rule laid down in Teal Motor Co. vs. Court of First
Instance of Manila (51 Phil. 549 [1928]; Martin, Commentaries and Jurisprudence on
the Philippine Commercial Laws, 1986 Revised ed., p.125) that the appointment of a
receiver does not dissolve the corporation nor does it interfere with the exercise of its
corporate rights. But this principles is, of course, applicable to a situation where there
is no restraint imposed on the corporation, unlike in the case at bar where petitioner
Provident Savings Bank was specifically forbidden and immobilized from doing
business in the Philippines on September 15, 1972 through Monetary Board
Resolution No. 1766 until 1981 when the decision in Central Bank vs. Court of
Appeals (supra, at p. 150) was rendered. The question which immediately crops up is
whether a foreclose proceeding falls within the purview of the phrase "doing
business". In Mentholatum Co., Inc., et al. vs. Mangaliman, et al. (72 Phil. 524
[1941]; Moreno, Philippine Law Dictionary, Second ed., 1972, p. 186), the term was
construed by Justice Laurel to refer to:
. . . a continuity of commercial dealings and arrangements, and
contemplates to that extent, the exercise of some of the words or
the normally incident to, and in progressive prosecution of, the
purpose ands object of its organizations. (p. 528; emphasis
supplied.)
Withal, we believe that a foreclose is deemed embraced by the phrase "doing
business" as a preparatory measure to acquiring or holding property for petitioner as a
saving bank under Section 34 of the General Banking Act. Like any other banking
institution, petitioner is vested with the usual attributes and powers of a corporation
under Section 36 of the Corporation Code (Vitug, Pandect of Commercial Law and
Jurisprudence, 1990 ed., p. 475). The prerogative of a bank to foreclose is implicit
from and is even necessary to enforce collection of secured debts under Section

36(11) and 45 of the Corporation Code, in conjunction with Section 29 of the General
Banking Act (6 Fletcher, 206; Agbayani, Commentaries and Jurisprudence on the
Commercial Laws of the Philippines, 1990 ed., p. 325).
When a bank is prohibited to do business by the Central Bank and a receiver is
appointed for such bank, that bank would not be able to do new business, i.e., to
grant new loans or to accept new deposits. However, the receiver of the bank is
obliged to collect debts owing to the bank, which debts form part of the assets of the
bank. The receiver must assemble the assets and pay the obligation of the bank under
receivership, and take steps to prevent dissipation of such assets. Accordingly, the the
receiver of the bank is obliged to collect pre-existing debts due to the bank, and in
connection therewith, to foreclose mortgages securing debts. This is not to ignore The
Philippine Trust Co. vs. HSBC (67 Phil. 204 [1939], for in that case, the Court simply
rejected the objections of certain creditors to the report of a receiver, that is, objections
that the receiver did not report the collection made before the beginning of his
receivership. It would follow that the bank is bound by the acts, or failure to act, of the
receiver. At the same time, the receiver is liable to the bank for culpable or negligent
failure to collect the assets of such bank and to safeguard said assets.
Having arrived at the conclusion that the foreclosure is part of bank's business activity
which could not have been pursued by the receiver then because of the
circumstances discussed in the Central Bank case, we are thus convinced that the
prescriptive period was legally interrupted by fuerza mayor in 1972 on account on the
prohibition imposed by the Monetary Board against petitioner from transacting
business, until the directive of the board was nullified in 1981. Indeed, the period
during which the obligee was prevented by a caso fortuito from enforcing his right is
not reckoned against him (Article 1154, New Civil Code). When prescription is
interrupted, all the benefits acquired so far from the possession cease and when
prescription starts anew, it will be entirely a new one. This concept should not be
equated with suspension where the past period is included in the computation being
added to the period after prescription is resumed (4 Tolentino, Commentaries and
Jurisprudence on the Civil Code of the Philippines, 1991 ed., pp. 18-19).
Consequently, when the closure of was set aside in 1981, the period of ten years
within which to foreclose under Article 1142 of the New Civil Code began to run again
and, therefore, the action filed on August 21, 1986 to compel petitioner to release the
mortgage carried with it the mistaken notion that petitioner's own suit foreclosure had
prescribed. What exacerbates the situation is the letter of private respondent
requesting petitioner on August 6, 1986 that private respondent be allowed to pay the
loan secured by the mortgage as the result of the Deed of Sale executed by the
Guarins in his favor on July 10, 1986 (pp. 36-37, Rollo). In point of law, this written
communication is synonymous to an express acknowledgment of the obligation and
had the effect of interrupting the prescription for the second time (Article 1155, New
Civil Code; Osmea vs. Rama, 14 Phil. 99 [1909]; 4 Tolentino, supra at p. 50). And
this piece of document necessarily estops private respondent from setting up
prescription vis-a-vis his unfounded supposition that acknowledgment of the debt is of
no moment because the right of the petitioner to foreclose had long prescribed in 1977
(p. 13, Petition; p. 7, Comment; pp. 19 and 58, Rollo).

Contrary to respondent court's prescription of the existence of novation, the evidence


at hand does not buttress a finding along this line from the mere fact that petitioner
supposedly did not question the substitution when the bank reacted to private
respondent's offer to pay the loan (p. 39, Rollo). What seems to have escaped
respondent court's attention was the condition imposed by the petitioner that it will
grant private respondent's request if the latter will also shoulder the obligation incurred
by Lorenzo Guarin in his capacity as president of the corporation (p.37, Rollo). The
consent of the petitioner to the substitution, as creditor, was thus erroneously
appreciated.
With the conclusions reached, we need not discuss the other issues raised in the
petition.
WHEREFORE, the petition is hereby GRANTED. The decision dated August 31, 1990,
including the resolution dated February 6, 1991 of respondent court are hereby set
aside and another one entered dismissing Wilson Chua's complaint. No special
pronouncement is made to costs.
Bidin, Davide, Jr., and Romero, JJ., concur.
Feliciano, J., concurs in the result.
PHILIPPINE
DEPOSIT
INSURANCE
CORPORATION, petitioner, vs. THE
HONORABLE COURT OF APPEALS and JOSE ABAD, LEONOR ABAD,
SABINA ABAD, JOSEPHINE JOSIE BEATA ABAD-ORLINA, CECILIA
ABAD, PIO ABAD, DOMINIC ABAD, TEODORA ABAD, respondents.
DECISION
CARPIO-MORALES, J.:
The present petition for review assails the decision of the Court of Appeals
affirming that of the Regional Trial Court of Iloilo City, Branch 30, finding petitioner
Philippine Deposit Insurance Corporation (PDIC) liable, as statutory insurer, for the
value of 20 Golden Time Deposits belonging to respondents Jose Abad, Leonor Abad,
Sabina Abad, Josephine Josie Beata Abad-Orlina, Cecilia Abad, Pio Abad, Dominic
Abad, and Teodora Abad at the Manila Banking Corporation (MBC), Iloilo Branch.
Prior to May 22, 1997, respondents had, individually or jointly with each other,
71 certificates of time deposits denominated as Golden Time Deposits (GTD) with an
aggregate face value of P1,115,889.96.[1]
On May 22, 1987, a Friday, the Monetary Board (MB) of the Central Bank of the
Philippines, now Bangko Sentral ng Pilipinas, issued Resolution 505[2] prohibiting MBC
to do business in the Philippines, and placing its assets and affairs under receivership.
The Resolution, however, was not served on MBC until Tuesday the following week, or
on May 26, 1987, when the designated Receiver took over.[3]

On May 25, 1987, the next banking day following the issuance of the MB
Resolution, respondent Jose Abad was at the MBC at 9:00 a.m. for the purpose of
pre-terminating the 71 aforementioned GTDs and re-depositing the fund represented
thereby into 28 new GTDs in denominations of P40,000.00 or less under the names of
herein respondents individually or jointly with each other.[4] Of the 28 new GTDs, Jose
Abad pre-terminated 8 and withdrew the value thereof in the total amount
of P320,000.00.[5]
Respondents thereafter filed their claims with the PDIC for the payment of the
remaining 20 insured GTDs.[6]
On February 11, 1988, PDIC paid respondents the value of 3 claims in the total
amount of P120,000.00. PDIC, however, withheld payment of the 17 remaining claims
after Washington Solidum, Deputy Receiver of MBC-Iloilo, submitted a report to the
PDIC[7] that there was massive conversion and substitution of trust and deposit
accounts on May 25, 1987 at MBC-Iloilo.[8]The pertinent portions of the report stated:

1. Declaring the 28 GTDs of the Abads which were issued by the TMBC-Iloilo on May 25,
1987 as deposits or deposit liabilities of the bank as the term is defined under Section 3 (f) of
R.A. No. 3591, as amended;
2. Declaring PDIC, being the statutory insurer of bank deposits, liable to the Abads for the
value of the remaining 20 GTDs, the other 8 having been paid already by TMBC-Iloilo on May
25, 1987;
3. Ordering PDIC to pay the Abads the value of said 20 GTDs less the value of 3 GTDs it paid
on February 11, 1988, and the amounts it may have paid the Abads pursuant to the Order of
this Court dated September 8, 1992;
4. Ordering PDIC to pay immediately the Abads the balance of its admitted liability as
contained in the aforesaid Order of September 8, 1992, should there be any, subject to
liquidation when this case shall have been finally decide; and

xxx
On May 25, 1987 (Monday) or a day prior to the official announcement and take-over by CB
of the assets and liabilities of The Manila Banking Corporation, the Iloilo Branch was found to
have recorded an unusually heavy movements in terms of volume and amount for all types of
deposits and trust accounts. It appears that the impending receivership of TMBC was somehow
already known to many depositors on account of the massive withdrawals paid on this day
which practically wiped out the branchs entire cash position. . . .
xxx
. . . The intention was to maximize the availment of PDIC coverage limited to P40,000 by
spreading out big accounts to as many certificates under various nominees. . . .[9]
xxx
Because of the report, PDIC entertained serious reservation in recognizing
respondents GTDs as deposit liabilities of MBC-Iloilo. Thus, on August 30, 1991, it
filed a petition for declaratory relief against respondents with the Regional Trial Court
(RTC) of Iloilo City, for a judicial declaration determination of the insurability of
respondents GTDs at MBC-Iloilo.[10]
In their Answer filed on October 24, 1991 and Amended Answer [11] filed on
January 9, 1992, respondents set up a counterclaim against PDIC whereby they
asked for payment of their insured deposits.[12]
In its Decision of February 22, 1994, [13] Branch 30 of the Iloilo RTC declared the
20 GTDs of respondents to be deposit liabilities of MBC, hence, are liabilities of PDIC
as statutory insurer. It accordingly disposed as follows:
WHEREFORE, premises considered, judgment is hereby rendered:

5. Ordering PDIC to pay legal interest on the remaining insured deposits of the Abads from
February 11, 1988 until they are fully paid.
SO ORDERED.
On appeal, the Court of Appeals, by the assailed Decision of October 21, 1996,
affirmed the trial courts decision except as to the award of legal interest which it
deleted.
[14]

Hence, PDICs present Petition for Review which sets forth this lone assignment
of error:
THE HONORABLE COURT OF APPEALS ERRED IN AFFIRMING THE HOLDING OF
THE TRIAL COURT THAT THE AMOUNT REPRESENTED IN THE FACES OF THE SO
CALLED GOLDEN TIME DEPOSITS WERE INSURED DEPOSITS EVEN AS THEY
WERE MERE DERIVATIVES OF RESPONDENTS PREVIOUS ACCOUNT BALANCES
WHICH WERE PRE-TERMINATED/TERMINATED AT THE TIME THE MANILA
BANKING CORPORATION WAS ALREADY IN SERIOUS FINANCIAL DISTRESS.
In its supplement to the petition, PDIC adds the following assignment of error:
THE HONORABLE COURT OF APPEALS ERRED IN AFFIRMING THE HOLDING OF
THE TRIAL COURT ORDERING PETITIONER TO PAY RESPONDENTS CLAIMS FOR
PAYMENT OF INSURED DEPOSITS FOR THE REASON THAT AN ACTION FOR
DECLARATORY RELIEF DOES NOT ESSENTIALLY ENTAIL AN EXECUTORY
PROCESS AS THE ONLY RELIEF THAT SHOULD HAVE BEEN GRANTED BY THE
TRIAL COURT IS A DECLARATION OF THE RIGHTS AND DUTIES OF PETITIONER
UNDER R.A. 3591, AS AMENDED, PARTICULARLY SECTION 3(F) THEREOF AS
CONSIDERED AGAINST THE SURROUNDING CIRCUMSTANCES OF THE MATTER
IN ISSUE SOUGHT TO BE CONSTRUED WITHOUT PREJUDICE TO OTHER MATTERS

THAT NEED TO BE CONSIDERED BY PETITIONER IN THE PROCESSING OF


RESPONDENTS CLAIMS.

Mere conjectures that MBC had actual knowledge of its impending closure do
not suffice. The MB resolution could not thus have nullified respondents transactions
which occurred prior to May 26, 1987.

Under its charter,[15] PDIC (hereafter petitioner) is liable only for deposits
received by a bank in the usual course of business.[16] Being of the firm conviction that,
as the reported May 25, 1987 bank transactions were so massive, hence, irregular,
petitioner essentially seeks a judicial declaration that such transactions were not made
in the usual course of business and, therefore, it cannot be made liable for deposits
subject thereof.[17]

That no actual money in bills and/or coins was handed by respondents to MBC
does not mean that the transactions on the new GTDs did not involve money and that
there was no consideration therefor. For the outstanding balance of respondents 71
GTDs in MBC prior to May 26, 1987 [22] in the amount of P1,115,889.15 as earlier
mentioned was re-deposited by respondents under 28 new GTDs. Admittedly, MBC
had P2,841,711.90 cash on hand more than double the outstanding balance of
respondents 71 GTDs at the start of the banking day on May 25, 1987. Since
respondent Jose Abad was at MBC soon after it opened at 9:00 a.m. of that day,
petitioner should not presume that MBC had no cash to cover the new GTDs of
respondents and conclude that there was no consideration for said GTDs.

Petitioner points that as MBC was prohibited from doing further business by MB
Resolution 505 as of May 22, 1987, all transactions subsequent to such date were not
done in the usual course of business.
Petitioner further posits that there was no consideration for the 20 GTDs subject
of respondents claim. In support of this submission, it states that prior to March 25,
1987, when the 20 GTDs were made, MBC had been experiencing liquidity
problems, e.g., at the start of banking operations on March 25, 1987, it had
only P2,841,711.90 cash on hand and at the end of the day it was left with P27,805.81
consisting mostly of mutilated bills and coins. [18] Hence, even if respondents had
wanted to convert the face amounts of the GTDs to cash, MBC could not have
complied with it.
Petitioner theorizes that after MBC had exhausted its cash and could no longer
sustain further withdrawal transactions, it instead issued new GTDs as payment for
the pre-terminated GTDs of respondents to make sure that all the newly-issued GTDs
have face amounts which are within the statutory coverage of deposit insurance.
Petitioner concludes that since no cash was given by respondents and none
was received by MBC when the new GTDs were transacted, there was no
consideration therefor and, thus, they were not validly transacted in the usual course
of business and no liability for deposit insurance was created.[19]
Petitioners position does not persuade.
While the MB issued Resolution 505 on May 22, 1987, a copy thereof was
served on MBC only on May 26, 1987. MBC and its clients could be given the benefit
of the doubt that they were not aware that the MB resolution had been passed, given
the necessity of confidentiality of placing a banking institution under receivership.[20]
The evident implication of the law, therefore, is that the appointment of a receiver may be
made by the Monetary Board without notice and hearing but its action is subject to judicial
inquiry to insure the protection of the banking institution. Stated otherwise, due process does
not necessarily require a prior hearing; a hearing or an opportunity to be heard may
be subsequent to the closure. One can just imagine the dire consequences of a prior
hearing: bank runs would be the order of the day, resulting in panic and hysteria. In the
process, fortunes may be wiped out, and disillusionment will run the gamut of the entire
banking community. (Underlining supplied). [21]

Petitioner having failed to overcome the presumption that the ordinary course of
business was followed,[23]this Court finds that the 28 new GTDs were deposited in the
usual course of business of MBC.
In its second assignment of error, petitioner posits that the trial court erred in
ordering it to pay the balance of the deposit insurance to respondents, maintaining
that the instant petition stemmed from a petition for declaratory relief which does not
essentially entail an executory process, and the only relief that should have been
granted by the trial court is a declaration of the parties rights and duties. As such,
petitioner continues, no order of payment may arise from the case as this is beyond
the office of declaratory relief proceedings.[24]
Without doubt, a petition for declaratory relief does not essentially entail an
executory process. There is nothing in its nature, however, that prohibits a
counterclaim from being set-up in the same action.[25]
Now, there is nothing in thee nature of a special civil action for declaratory relief that
proscribes the filing of a counterclaim based on the same transaction, deed or contract subject
of the complaint. A special civil action is after all not essentially different from an ordinary
civil action, which is generally governed by Rules 1 to 56 of the Rules of Court, except that the
former deals with a special subject matter which makes necessary some special regulation. But
the identity between their fundamental nature is such that the same rules governing ordinary
civil suits may and do apply to special civil actions if not inconsistent with or if they may serve
to supplement the provisions of the peculiar rules governing special civil actions. [26]
Petitioner additionally submits that the issue of determining the amount of
deposit insurance due respondents was never tried on the merits since the trial dwelt
only on the determination of the viability or validity of the deposits and no evidence on
record sustains the holding that the amount of deposit due respondents had been
finally determined.[27] This issue was not raised in the court a quo, however, hence, it
cannot be raised for the first time in the petition at bar.[28]
Finally, petitioner faults respondents for availing of the statutory limits of the
PDIC law, presupposing that, based on the conduct of respondent Jose Abad on
March 25, 1987, he and his co-respondents somehow knew of the impending closure

of MBC. Petitioner ascribes bad faith to respondent Jose Abad in transacting the
questioned deposits, and seeks to disqualify him from availing the benefits under the
law.[29]
Good faith is presumed. This, petitioner failed to overcome since it offered mere
presumptions as evidence of bad faith.
WHEREFORE, the assailed decision of the Court of Appeals is hereby
AFFIRMED.

This Petition for Review on Certiorari seeks to reverse and set aside the Court of
Appeals January 31, 2006 Decision[1] in CA-G.R. CV No. 81349, which modified the January 30, 2004
Decision[2] of the Regional Trial Court of Manila City, Branch 46 in Civil Case No. 97-84010, and the June
26, 2006 Resolution[3] denying petitioners motion for reconsideration.

SO ORDERED.
Puno, (Chairman), Panganiban, Sandoval-Gutierrez, and Corona, JJ., concur.
PHILIPPINE NATIONAL BANK,
G.R. No. 173259

Factual Antecedents

Petitioner,
The antecedents are aptly summarized by the appellate court:
Present:

CORONA, C.J., Chairperson,


- versus -

LEONARDO-DE CASTRO,
BERSAMIN,
DEL CASTILLO, and
VILLARAMA, JR.,

F.F. CRUZ and CO., INC.

Promulgated:

Respondent.

July 25, 2011

x-----------------------------------------------------------x
DECISION
DEL CASTILLO, J.:
As between a bank and its depositor, where the banks negligence is the proximate cause of the
loss and the depositor is guilty of contributory negligence, the greater proportion of the loss shall be borne by
the bank.

In its complaint, it is alleged that [respondent F.F. Cruz & Co., Inc.]
(hereinafter FFCCI) opened savings/current or so-called combo account No. 0219830-146 and dollar savings account No. 0219-0502-458-6 with [petitioner
Philippine National Bank] (hereinafter PNB) at its Timog Avenue Branch. Its
President Felipe Cruz (or Felipe) and Secretary-Treasurer Angelita A. Cruz (or
Angelita) were the named signatories for the said accounts.
The said signatories on separate but coeval dates left for and returned
from the Unites States of America, Felipe on March 18, 1995 until June 10, 1995
while Angelita followed him on March 29, 1995 and returned ahead on May 9,
1995.
While they were thus out of the country, applications for cashiers and
managers [checks] bearing Felipes [signature] were presented to and both
approved by the PNB. The first was on March 27, 1995 for P9,950,000.00
payable to a certain Gene B. Sangalang and the other one was on April 24, 1995
for P3,260,500.31 payable to one Paul Bautista. The amounts of these checks
were then debited by the PNB against the combo account of [FFCCI].
When Angelita returned to the country, she had occasion to examine
the PNB statements of account of [FFCCI] for the months of February to August
1995 and she noticed the deductions ofP9,950,000.00 and P3,260,500.31.
Claiming that these were unauthorized and fraudulently made, [FFCCI] requested
PNB to credit back and restore to its account the value of the checks. PNB refused,
and thus constrained [FFCCI] filed the instant suit for damages against the PNB
and its own accountant Aurea Caparas (or Caparas).
In its traverse, PNB averred lack of cause of action. It alleged that it
exercised due diligence in handling the account of [FFCCI]. The applications for
managers check have passed through the standard bank procedures and it was only
after finding no infirmity that these were given due course. In fact, it was no less
than Caparas, the accountant of [FFCCI], who confirmed the regularity of the

transaction. The delay of [FFCCI] in picking up and going over the bank
statements was the proximate cause of its self-proclaimed injury. Had [FFCCI]
been conscientious in this regard, the alleged chicanery would have been detected
early on and Caparas effectively prevented from absconding with its millions. It
prayed for the dismissal of the complaint.[4]

Regional Trial Courts Ruling

The trial court ruled that F.F. Cruz and Company, Inc. ( FFCCI) was guilty of negligence in

On January 31, 2006, the CA rendered the assailed Decision affirming with modification the Decision of the
trial court, viz:
WHEREFORE,
the
appealed
Decision
is AFFIRMED with
the MODIFICATION that [PNB] shall pay [FFCCI] only 60% of the actual
damages awarded by the trial court while the remaining 40% shall be borne by
[FFCCI].
SO ORDERED.[6]

clothing Aurea Caparas (Caparas) with authority to make decisions on and dispositions of its account which
paved the way for the fraudulent transactions perpetrated by Caparas; that, in practice, FFCCI waived the

The appellate court ruled that PNB was negligent in not properly verifying the genuineness of the signatures

two-signature requirement in transactions involving the subject combo account so much so that Philippine

appearing on the two applications for managers check as evidenced by the lack of the signature of the bank

National Bank (PNB) could not be faulted for honoring the applications for managers check even if only the

verifier thereon. Had this procedure been followed, the forgery would have been detected.

signature of Felipe Cruz appeared thereon; and that FFCCI was negligent in not immediately informing
PNB of the fraud.

Nonetheless, the appellate court found FFCCI guilty of contributory negligence because it
clothed its accountant/bookkeeper Caparas with apparent authority to transact business with PNB. In

On the other hand, the trial court found that PNB was, likewise, negligent in not calling or

addition, FFCCI failed to timely examine its monthly statement of account and report the discrepancy to

personally verifying from the authorized signatories the legitimacy of the subject withdrawals considering

PNB within a reasonable period of time to prevent or recover the loss. FFCCIs contributory negligence,

that they were in huge amounts. For this reason, PNB had the last clear chance to prevent the unauthorized

thus, mitigated the banks liability. Pursuant to the rulings in Philippine Bank of Commerce v. Court of

debits from FFCCIs combo account. Thus, PNB should bear the whole loss

Appeals[7] and The Consolidated Bank & Trust Corporation v. Court of Appeals, [8] the appellate court
allocated the damages on a 60-40 ratio with the bigger share to be borne by PNB.

WHEREFORE, judgment is hereby rendered ordering defendant


[PNB] to pay plaintiff [FFCCI] P13,210,500.31 representing the amounts debited
against plaintiffs account, with interest at the legal rate computed from the filing of
the complaint plus costs of suit.
IT IS SO ORDERED.[5]

From this decision, both FFCCI and PNB sought review before this Court.

On August 17, 2006, FFCCI filed its petition for review on certiorari which was docketed as G.R. No.
173278.[9] On March 7, 2007, the Court issued a Resolution[10] denying said petition.On June 13, 2007, the

Court of Appeals Ruling

Court issued another Resolution[11] denying FFCCIs motion for reconsideration. In denying the aforesaid
petition, the Court ruled that FFCCI essentially raises questions of fact which are, as a rule, not reviewable

under a Rule 45 petition; that FFCCI failed to show that its case fell within the established exceptions to this
rule; and that FFCCI was guilty of contributory negligence. Thus, the appellate court correctly mitigated
PNBs liability.

PNB contends that it was not negligent in verifying the genuineness of the signatures appearing
on the subject applications for managers check. It claims that it followed the standard operating procedure in
the verification process and that four bank officers examined the signatures and found the same to be similar

On July 13, 2006, PNB filed its petition for review on certiorari which is the subject matter of

with those found in the signature cards of FFCCIs authorized signatories on file with the bank.

this case.
PNB raises factual issues which are generally not proper for review under a Rule 45 petition.
Issue

While there are exceptions to this rule, we find none applicable to the present case. As correctly found by the
appellate court, PNB failed to make the proper verification because the applications for the managers check

Whether the Court of Appeals seriously erred when it found PNB guilty of negligence.

[12]

do not bear the signature of the bank verifier. PNB concedes the absence[16] of the subject signature but
argues that the same was the result of inadvertence. It posits that the testimonies of Geronimo Gallego

Our Ruling

(Gallego), then the branch manager of PNB Timog Branch, and Stella San Diego (San Diego), then branch
cashier, suffice to establish that the signature verification process was duly followed.

We affirm the ruling of the CA.


We are not persuaded.
PNB

is

guilty

of

First, oral testimony is not as reliable as documentary evidence.[17] Second, PNBs own witness,

negligence.

San Diego, testified that in the verification process, the principal duty to determine the genuineness of the
signature devolved upon the account analyst.[18] However, PNB did not present the account analyst to
Preliminarily, in G.R. No. 173278, we resolved with finality [13] that FFCCI is guilty of

explain his or her failure to sign the box for signature and balance verification of the subject applications for

contributory negligence, thus, making it partly liable for the loss (i.e., as to 40% thereof) arising from the

managers check, thus, casting doubt as to whether he or she did indeed verify the signatures thereon. Third,

unauthorized withdrawal of P13,210,500.31 from its combo account. The case before us is, thus, limited to

we cannot fault the appellate court for not giving weight to the testimonies of Gallego and San Diego

PNBs alleged negligence in the subject transactions which the appellate court found to be the proximate

considering that the latter are naturally interested in exculpating themselves from any liability arising from

cause of the loss, thus, making it liable for the greater part of the loss (i.e., as to 60% thereof) pursuant to our

the failure to detect the forgeries in the subject transactions. Fourth, Gallego admitted that PNBs employees

rulings in Philippine Bank of Commerce v. Court of Appeals [14] and The Consolidated Bank & Trust

received training on detecting forgeries from the National Bureau of Investigation. [19] However, Emmanuel

Corporation v. Court of Appeals.[15]

Guzman, then NBI senior document examiner, testified, as an expert witness, that the forged signatures in

the subject applications for managers check contained noticeable and significant differences from the
genuine signatures of FFCCIs authorized signatories and that the forgeries should have been detected or
observed by a trained signature verifier of any bank.[20]

G.R. No. L-12610

July 16, 1964

BACOLOD MURCIA MILLING CO., INC., petitioner-appellant,


vs.
CENTRAL BANK OF THE PHILIPPINES, respondent-appellee.
RESOLUTION

Given the foregoing, we find no reversible error in the findings of the appellate court that PNB

LABRADOR, J.:

was negligent in the handling of FFCCIs combo account, specifically, with respect to PNBs failure to detect
the forgeries in the subject applications for managers check which could have prevented the loss. As we
have often ruled, the banking business is impressed with public trust. [21] A higher degree of diligence is

The motion raises two important issues: (1) that petitioner can not be held to have
been estopped by his failure to protest against the enforcement of Circular No. 20 on
time, and (2) that the injunction should issue on the ground that Circular No. 20 is
unconstitutional.

imposed on banks relative to the handling of their affairs than that of an ordinary business enterprise.
[22]

Thus, the degree of responsibility, care and trustworthiness expected of their officials and employees is far

greater than those of ordinary officers and employees in other enterprises. [23] In the case at bar, PNB failed to
meet the high standard of diligence required by the circumstances to prevent the fraud. In Philippine Bank
of Commerce v. Court of Appeals[24] and The Consolidated Bank & Trust Corporation v. Court of Appeals,
[25]

where the banks negligence is the proximate cause of the loss and the depositor is guilty of contributory

negligence, we allocated the damages between the bank and the depositor on a 60-40 ratio. We apply the
same ruling in this case considering that, as shown above, PNBs negligence is the proximate cause of the
loss while the issue as to FFCCIs contributory negligence has been settled with finality in G.R. No.
173278. Thus, the appellate court properly adjudged PNB to bear the greater part of the loss consistent with
these rulings.

On the first issue, the record discloses that on December 16, 1949 Export Regulations
(Annex 1-B to Reply Memo. of Appellee), formerly known as E. C. Form No. 2, was
promulgated with the following provisions:
Without a specific license from the Central Bank no goods, merchandise
and/or commodities may be shipped, forwarded, or sent direct to the
exporter's head office and/or agents abroad, or to any foreign branch or
agency of such exporter which are not covered by a draft or drafts drawn in
U.S. dollars representing the full value of the goods, merchandise and/or
commodities being or to be shipped, forwarded, or sent abroad, and unless
the collection of the proceeds of sale of such goods, merchandise and/or
commodities is to be undertaken by, or entrusted to, a bank which is
incorporated or licensed to do business in the Philippines.
Wherefore, the parties respectfully pray that the foregoing stipulation of
facts be admitted and approved by this Honorable Court, without prejudice
to the parties adducing other evidence to prove their case not covered by
this stipulation of facts. 1wph1.t
xxx

WHEREFORE, the petition is DENIED. The January 31, 2006 Decision and June 26, 2006
Resolution of the Court of Appeals in CA-G.R. CV No. 81349 are AFFIRMED.
Costs against petitioner.
SO ORDERED.

xxx

xxx

All Commercial banks incorporated and/or licensed to do business in the


Philippines are hereby designated agents of the Central Bank of the
Philippines, for the purpose of these regulations, and a general license is
hereby granted such banks to handle bills and shipping documents arising
from the transportation of goods, commodities, and/or merchandise from the
Philippines to foreign countries, and/or the collection of such bills or the
proceeds of sale of such goods, merchandise and/or commodities in
accordance with these regulations.

Consonant with the above regulations, especially with the first paragraph quoted,
petitioner herein had secured its export license for the sugar shipped with the
accompanying drafts drawn in U.S. dollars representing the value of the whole sugar.
In accordance with paragraph 2 above quoted, the drafts accompanying the sugar
were, as per regulations, entrusted to the Commercial bank "for the collection of the
proceeds of the sale" of the sugar. So that the petitioner herein was well aware that it
was exporting its sugar subject to the conditions set forth in the said regulations,
especially the paragraphs quoted above.
The supposed protest made by the petitioner herein against the collection of the
proceeds of the sale in U.S. dollars by the Central Bank came after the shipment had
been made under the conditions specified in the license issued by the Central Bank
accompanying the corresponding draft and subject to the export regulations already
mentioned. If the petitioner had really protested the enforcement of Circular No. 20, it
should have refused to secure the license with the draft mentioned, with the authority
granted to the commercial banks to collect the dollars for the Central Bank.
Wherefore, the parties respectfully pray that the foregoing stipulation of facts be
admitted and approved by this Honorable Court, without prejudice to the parties
adducing other evidence to prove their case not covered by this stipulation of
facts. 1wph1.t

The above law was implemented by Circular No. 133 of the Central Bank dated
January 21, 1962 (58 O.G. p. 882).
The issue to prohibit the enforcement of said Circular No. 20 is, therefore, moot and it
is unnecessary for Us to pass upon the same.
WHEREFORE, the motion for reconsideration filed by the petitioner should be, as it is
hereby, denied.
Bengzon, C.J., Bautista Angelo, Concepcion, Reyes, J.B.L., and Regala, JJ., concur.
Paredes and Makalintal, JJ., took no part.
G.R. No. L-49353 June 11, 1981
THE OVERSEAS BANK OF MANILA, petitioners,
vs.
COURT OF APPEALS and TONY D. TAPIA, in his capacity as Attorney-in-Fact of
ENRIQUETA MICHEL DE CHAMPOURCIN respondents.

We, therefore, find no merit in the first ground of the motion for reconsideration.
BARREDO, J.:
With respect to the second ground, it is Our considered opinion that the matter has
long become moot. Under Republic Act No. 2609, the power of the Central Bank to
commandeer the dollars earned by exporters was superseded by the provisions of the
said Act, which provides in part:
SECTION 1. The provisions of any law to the contrary notwithstanding when
and as long as the Central Bank of the Philippines subjects all transactions
in gold and foreign exchange to licensing in accordance with the provisions
of section seventy-four of Republic Act Numbered Two hundred sixty-five,
the Central Bank, in respect of all sales of foreign exchange by the Central
Bank and its authorized agent banks, shall have authority to establish a
uniform margin of not more than forty per cent over the banks' selling rates
stipulated by the Monetary Board under section seventy-nine of Republic
Act Numbered Two hundred sixty-five, which margin shall not be changed
oftener than once a year except upon the recommendation of the National
Economic Council and the approval of the President. The Monetary Board
shall fix the margin at such rate as it may deem necessary to effectively
curtail any excessive demand upon the international reserve.
In implementing the provisions of this Act, along with other monetary, credit
and fiscal measures to stabilize the economy, the monetary authorities shall
take steps for the adoption of a four-year program of gradual decontrol.

Petition for review of the decision of the Court of Appeals in CA-G.R. No. 44766R, Tony D. Tapia, etc. vs. The Overseas Bank of Manila and the denial of the motion
for reconsideration thereof. That judgment affirmed in toto the decision of the Court of
First Instance of Manila, Branch IV, in Civil Case No. 69876, for collection of money,
reading thus:
WHEREFORE, judgment is hereby rendered in favor of the
plaintiff against the herein defendant ordering the latter (1) to pay
plaintiff the sum of P100,000.00 representing the value of its time
deposit together with interest thereon at 4-1/2 % per annum from
November 9, 1964 until the whole amount shall have been fully
paid; (2) to pay attomey's fees in the amount of P1,000.00 it
appearing that defendant's unjust and malicious refusal to pay
has compelled plaintiff to litigate and secure services of counsel;
and to pay costs. (Page 22, Record.)
Actually, this case is simple enough but of undoubtedly great interest and grave
importance to the banking community. It was for this reason that after denying
originally the herein petition, We found it proper to give the same due course after
petitioner filed a forceful and well-reasoned second motion for reconsideration.

In petitioner's counsel's "Statement of the Case and of Matters Involved", it is stated


that:
Private respondent TONY D. TAPIA, in his capacity as attorneyin-fact of ENRIQUETA MICHEL DE CHAMPOURCIN (TAPIA),
instituted the present action in the Court of First Instance of
Manila against petitioner, The Overseas Bank of Manila (TOBM),
to enforce collection of the proceeds of a time deposit for which
TOBM had issued a certificate for P100,000.00, with an interest
rate of 4-1/2 % per annum (Exh. "A").
After trial, the trial court rendered judgment for TAPIA the
dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered
in favor of the plaintiff against the herein
defendant ordering the latter (1) to pay
plaintiff the sum of P100,000.00 representing
the value of its time deposit together with
interest thereon at 41/2% per annum from
November 9, 1964 until the whole amount
shall have been fully paid:
Not satisfied, TOBM interposed an appeal.
In the meantime, during the pendency of this case, certain
developments took place with respect to TOBM which were taken
note of by the Court of Appeals in its resolution dated November
3, 1978, thus:
This Court took note of the fact that on July
31, 1968, TOBM was excluded by the Central
Bank under Monetary Board Resolution No.
1263 from inter-bank clearing, that on August
1, 1968, its operations were suspended
under Central Bank Resolution No. 1290; and
that on August 13, 1968, it was completely
forbidden by the Central Bank in its
Resolution No. 1333 to do business
preparatory to its forcible liquidation. These
Resolutions were, however, annulled and set
aside by the Supreme Court in its decision in
Ramos vs. Central Bank, L-29350,
promulgated October 4, 1971. To assure
maximum protection to its depositors,
creditors and the public interest, the
rehabilitation, normalization and stabilization

thereof was also ordered by the Supreme


Court in its resolution dated February 24,
1972. Pursuant thereto, both TOBM and the
Central Bank submitted a Program of
Rehabilitation of TOBM which was approved
by the Supreme Court in its Resolution in L29353, October 23, 1974 (60 SCRA 278).
(C.A. Resolution dated Nov. 3, 1978,
Appendix 'B', p. XVII.)
It must be noted that the said resolutions of the Central Bank
were held by this Honorable Supreme Court to have been
"adopted in abuse of discretion equivalent to excess of
jurisdiction" (Ramos vs. Central Bank, 41 SCRA 565). Equally
noteworthy, however, is that the CB resolution suspending
TOBM's business operations had actually been implemented
starting 2 August 1968, (id.) before it was annulled, and that as of
this writing TOBM has yet to resume operations in accordance
with the aforesaid program of rehabilitation approved by this
Honorable Supreme Court.
In the decision it rendered in the instant case, (C.A. Decision,
Appendix "A", p. V) the Court of Appeals affirmed in toto the trial
court's judgment, which, as aforeseen, orders TOBM, among
other things, to pay plaintiff the sum of P100,000.00 representing
the value of its time deposit together with interest thereon at 41/2% per annum until the whole amount shall have been fully
paid.
TOBM moved respondent Court of Appeals to reconsider its
judgment on two grounds, namely, (a) the suspension of
operations of TOBM by the Central Bank likewise suspends
payment of accrued interest, and (b) respondent Court's judgment
must conform to the program of rehabilitation of TOBM approved
by this Supreme Court. The Court of Appeals, acting on the
motion for reconsideration, issued its resolution (Appendix 'B'
hereto dated November 3, 1978, declaring
In as much as a Program of Rehabilitation of
the TOBM has been approved by the
Supreme Court as above-mentioned, the
execution of the decision in question should
be made in accordance with the provision
thereof, especially paragraph 3, subparagraph 4, Phase 1- Rehabilitation.
WHEREFORE, the motion for
reconsideration is granted, and the

dispositive portion of the decision, dated


September 19, 1978, is hereby amended, so
as to read as follows:
WHEREFORE, the
judgment appealed from
is hereby affirmed in
toto but the execution
thereof should be in
accordance with the
provision of the Program
of Rehabilitation of
TOBM as approved by
the Supreme Court in its
resolution in G.R. No. L29352 dated October 23,
1974 (60 SCRA 278)
especially paragraph 3,
Subparagraph 4, Phase
1, Rehabilitation, to
quote:
34 Petitioners shall effect
an agreement with
OBM's depositors and
creditors, singly or
collectively, for the
conversion of their
deposits and claims into
bills payable under plans
mutually acceptable to
the parties concerned,
with the end in view that
payments of all deposits
and claims against OBM
may be made after a
period three (3) years
from date of suspension
of normal banking
operations.
However, in the event that said program of
rehabilitation is revoked or failed to
materialize, the execution of the judgment is
further subject to any subsequent
development or charge that will be taken and
considered by the Supreme Court and/or
Central Bank in the premises, regarding the
payments of deposits and claims against the

Overseas Bank of Manila. (pp. XX, Court of


Appeals' Resolution dated Nov. 3, 1978,
Appendix "B" hereof).
Thus, while the resolution purports to grant TOBM's motion for
reconsideration, actually it reiterates its affirmance of the trial
court's judgment in toto and rejects TOBM's prayer to be declared
exempt from liability for interest on the deposit during the
suspension of its business operations by the Central Bank,
declaring:
Appellant TOBM has not been declared
insolvent. The suspension of its operations in
1968 was merely temporary. Its assets and
properties were intact including its various
investments, the management of which was
taken over by the Central Bank to protect its
depositors and creditors. Hence, there could
be no justifiable reason to suspend the
payment of the accrued interests on the
appellee's time deposit of P100,000.00 which
has been long overdue. The payment of
interest thereon at 4-1/2% per annum from
November 9, 1964 ordered by the lower court
as wen as this Court upon the appellant is in
accordance with the agreement embodied in
the certificate of deposit, Exhibit "A", issued
by the bank in favor of the appellee. Such
agreement is the law between the parties and
it should be complied with (Art. 1159, NCC).
The mere suspension of its operation which
was temporary could not excuse the
appellant from complying with its obligation.
The effect of the suspension and declared
insolvency of a bank is to make its deposits
due and actionable and a depositor then is
entitled to interest on his deposits from the
date of such suspension (10 Am. Jr. 2d. p.
389).
The cases cited by the appellant in its motion
has no application in this case for these refer
to instances where the bank has been
declared insolvent. This is not the situation
prevailing in the case at bar.'
Moreover, while the resolution also purports to declare that the
execution of the judgment of the trial court should be in

accordance with the Program of Rehabilitation of TOBM as


approved by the Supreme Court, this is negated by its aforesaid
reaffirmance in toto of the trial court's judgment, which holds
TOBM totally liable to TAPIA.
On the other hand, private respondent's brief begins thus:
Herein respondents respectfully beg leave of Court to adopt as
their own the Statement of the Case and of Matters Involved in
the petitioner's Brief, the same being in consonance with the
records of the case.
To begin with, we wish to call the attention of this Honorable
Tribunal that the only ground upon which the present petition is
predicated reads as follows:
The suspension of operations of the
Overseas Bank of Manila on August 1, 1968
by the Monetary Board likewise suspends
payment of accrued interest contrary to the
decision of this Honorable Court affirming in
toto the decision of the Court of First Instance
ordering defendant-appellant to pay plaintiffappellee the sum of P100,000.00
representing the value of its time deposit
together with interest thereon at 4-1/2% per
annum from November 9, 1964 until the
whole amount shall have been fully paid
despite the suspension of operations and
closing of the Bank by the Monetary Board on
August 1, 1968 and August 13, 1968,
respectively (Petition, p. 10).
Apparently, the only issue in this case is whether or not the
Petitioner is exempt from the payment of interest on the private
respondent's time deposit of P100,000.00 for the period that its
business operations were suspended by the Central Bank. We
respectfully submit that under the facts of the case, the petitioner
should be required to pay the accrued interest. And since the
payment of the principal time deposit of P100,000.00 by the
petitioner to the private respondent is no longer at issue, we shall
focus our discussion on the subject of accrued interests as raised
by the petitioner in its Assignment of Errors. (Pages 1-2)
Briefly then" the general and main issue submitted for Our resolution is: When a bank
is excluded by the Central Bank from inter-bank clearing, and a day later further
suspended from operation, and thirteen days afterwards completely forbidden by the

same (Central Bank) to do business preparatory to its forcible liquidation, but


subsequently, the Supreme Court temporarily restrains the mentioned Central Bank's
orders and ultimately renders a decision nullifying the same, (41 SCRA 565) with
subsequent directives for the rehabilitation, normalization and stabilization thereof,
under a formula approved by the Court, (60 SCRA 276) and the process of such
rehabilitation, normalization and stabilization is considerably delayed, thru no fault of
the bank, but due to usually difficult and lengthy procedures and transactions directed
towards such end, is a person who has deposited money in said bank before the
Central Bank's orders were issued, entitled to the payment of interest on his deposit
that accrues during all the period from the bank's factual closure to its actual
reopening for normal business? To make this statement of the issue more complete, it
may be added that although private respondent does not dispute that there was
complete paralization of the bank from August 13, 1968, he insists that since
technically the bank was not placed under liquidation because of the decision of the
Supreme Court, its obligation, contractual in nature, to pay him interest may not be
deemed excused and should be enforced. Private respondent admits though that in
cases of actual liquidation of a bank, it is justifiable for it not to pay interest of the
nature here in dispute.
Thus, Our task is narrowed down to the resolution of the legal problem of whether or
not, for purposes of the payment of the interest here in question, stoppage of the
operations of a bank by a legal order of liquidation may be equated with actual
cessation of the bank's operation, not different, factually speaking, in its effects, from
legal liquidation, the factual cessation having been ordered by the Central Bank.
In the case of Chinese Grocer's Association, et al, vs. American Apothecaries, 65 Phil.
395, this Court held:
As to the second assignment of error, this court, in G.R. No.
43682, In re Liquidation of the Mercantile Bank of China, Tan
Tiong Tick, claimant and appellant, vs. American Apothecaries,
C., et al, claimants and appellees, through Justice Imperial, held
the following:
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 earn 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 of liquidation. Moreover, the bank being


authorized by law to make use of the
deposits, with the station 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 dates 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.
The Court of Appeals considered this ruling inapplicable to the
instant case, precisely because, as contended by private
respondent, the said Apothecaries case had in fact in
contemplation a valid order of liquidation of the bank concerned,
whereas here, the order of the Central Bank of August 13, 1968
completely forbidding herein petitioner to do business preparatory
to its liquidation was first restrained and then nullified by this
Supreme Court. In other words, as far as private respondent is
concerned, it is the legal reason for cessation of operations, not
the actual cessation thereof, that matters and is decisive insofar
as his right to the continued payment of the interest on his deposit
during the period of cessation is concerned.
In the light of the peculiar circumstances of this particular case, We disagree. It is Our
considered view, after mature deliberation, that it is utterly unfair to award private
respondent his prayer for payment of interest on his deposit during the period that
petitioner bank was not allowed by the Central Bank to operate.
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.
We consider it of trivial consequence that the stoppage of the bank's operation by the
Central Bank has been subsequently declared illegal by the Supreme Court, for before
the Court's order, the bank had no alternative under the law than to obey the orders of
the Central Bank. Whatever be the juridical significance of the subsequent action of

the Supreme Court, the stubborn fact remained that the petitioner was totally crippled
from then on from earning the income needed to meet its obligations to its depositors.
If such a situation cannot, strictly speaking, be legally denominated as "force
majeure", as maintained by private respondent, We hold it is a matter of simple equity
that it be treated as such.
What is more, private respondent overlooks the fact that as noted in the very
resolution of the Court of Appeals of November 3, 1978 granting petitioner's motion for
reconsideration, said Court could not but take into account that petitioner's manner or
mode of rehabilitation, normalization and stabilization was placed by the resolution of
the Supreme Court of February 24, 1972 in the hands of the Central Bank, for it "to
seek practical solutions in all good faith for such rehabilitation." Pursuant to said
resolution, a "Program of Rehabilitation of TOBM (herein petitioner)" was submitted to
this Court and We approved said program only on October 23, 1974. But that approval
did not yet put petitioner back on its feet. The Central Bank, evidently in accordance
with law, continued to refuse to allow it to operate until the program approved by the
Court could materialize. Thus, after October 23, 1976, steps were continuously taken
along that direction, and, as it is now of public knowledge, it was only this year 1981,
that petitioner, with another name and another management has been allowed to
reopen.
In the aforementioned resolution of the Court of Appeals of November 3, 1978, it
revised the dispositive portion of its original decision in the following manner:
WHEREFORE, the motion for reconsideration is granted, and the
dispositive portion of the decision dated September 19, 1978, is
hereby amended, so as to read as follows:
WHEREFORE, the judgment appealed from
is hereby affirmed in toto, but the execution
thereof should be in accordance with the
provision of the Program of Rehabilitation of
TOBM as approved by the Supreme Court in
its resolution in G. R. No. L-29352 dated
October 23, 1974 (60 SCRA 278) especially
paragraph 3, sub-paragraph 4, Phase 1,
Rehabilitation to quote:
34 Petitioners shall effect
an agreement with
OBM's depositors and
creditors, singly or
collectively, for the
conversion of their
deposits and claims into
bills payable under plans
mutually acceptable to
the parties concerned,

with the end in view that


payments of all deposits
and claims against OBM
may be made after a
period of three (3) years
from date of resumption
of normal banking
operations.'
However, in the event that said program of rehabilitation is
revoked or failed to materialize, the execution of the judgment is
further subject to any subsequent development or change that will
be taken and considered by the Supreme Court and/or Central
Bank in the premises, regarding the payments of deposits and
claims against the Ovarseas Bank of Manila. (Pp. 33-34, Record.)
Peculiarly, however, while the Appellate Court resolved to "grant" petitioner's motion
for reconsideration, it still maintained its judgment affirming in toto the decision of the
trial court, albeit it made the execution thereof subject to the conditions aforequoted.
Naturally, petitioner could not be contented with such modification, hence the present
petition before Us asking, in effect, for the reversal of the foregoing resolution of the
Court of Appeals which left it with the obligation to pal the interest private respondent
is demanding, as if it were legally possible for the Court of Appeals to ignore or modify
the "Program of Rehabilitation" approved by this Court, which providesinter alia that:
3.4. Petitioners shall effect an agreement with OBM's depositors
and creditors, singly or collectively, for the conversion of their
deposits and claims into bills payable under plans mutually
acceptable to the parties concerned, with the end in view that
payments of all deposits and claims against OBM may be made
after a period of three (3) years from date of resumption of normal
banking operation.(1)
xxx xxx xxx
PHASE II
NORMALIZATION AND STABILIZATION
This phase shall be undertaken only when all the conditions for
rehabilitation of OBM as speciffied in Phase I have been fulfilled
and/or complied with by petitioners. Banking operations and
transactions which OBM may be allowed to perform shall be in
accordance with such authority as the Monetary Board, upon
recommendation of the Director, Department of Commercial &
Savings Banks, may deem proper to extend OBM.

OBM may be allowed to resume normal banking operations only


when, in addition to standard conditions prevailing in normal
banking institutions:
1. It has reduced its loans/accounts receivable by at least 75% of
the aggregate amount outstanding as of the start of the
rehabilitation phase;
2. A program of paying depositors and creditors has been
accepted singly or collectively by all such depositors and
creditors, including Government instrumentalities and the
Philippine National Bank;
3. The issues relative to penalties and interests mentioned in
paragraph 3.8 hereof have been resolved either judicially or
extrajudicially.
The Comptroller-designate and the committee-of-three mentioned
in paragraph 2.7 herein shall continue to function for as long as
OBM has not been allowed to resume normal banking operations.
(Pp. 283-285, 60 SCRA.)
Nowhere in the above program is there anything indicating that depositors are entitled
to interest. Paragraph 3.4 of the same refers to deposits exclusively. If the Central
Bank authorities or the Supreme Court had in mind the payment also of interest on
such deposits, either of those authorities would have required clear language to such
effect be included in the program. It is understandable why nothing of that sort was
required. As We have explained earlier, the complete factual suspension of petitioner's
operation as a bank disabled it to commit itself to the payment of such interest.
Hopefully, petitioner may be able to resume operations and recover its standing as a
normal bank. But it is almost vain to expect that within the forseeable future, it would
be in a position to pay in full even at least the deposits themselves, not to mention the
interest thereon. In justice and equity, having been subjected to what the Supreme
Court has found to be an unfortunate express or abuse by the Central Bank of the
exercise of its authority under the law, it would be, to put it tritely "squeezing blood out
of turnip" for Us to grant private respondent's demand.
Parenthetically, We may add for the guidance of those who might be concerned, and
so that unnecessary litigations may be avoided from further clogging the dockets of
the courts, that in the light of the considerations expounded in the above opinion, the
same formula that exempts petitioner from the payment of interest to its depositors
during the whole period of factual stoppage of its operations by orders of the Central
Bank, modified in effect by the decision as well as the approval of a formula of
rehabilitation by this Court, should be, as a .Matter of consistency, applicable or
followed in respect to all other obligations of petitioner which could not be paid during
the period of its actual complete closure.

PREMISES CONSIDERED, judgment is hereby rendered modifying the decision of


the Court of Appeals under review in the sense that the judgment of the trial court
requiring petitioner to pay interest on private respondent's deposit from August 13,
1968 up to the reopening for normal operations of petitioner is reversed, and petitioner
is declared free from any liability therefor, and that with regard to his deposit of
P100,000.00, it is Our judgment that he secure payment thereof by negotiating with
petitioner in accordance with the terms of the Rehabilitation Program of TOBM
approved by this Court on October 23, 1974.

among its members, and to extend financial assistance in the form of loans," to them.
The Organization has three (3) classes of "members,"1 namely: (a) founder
members who originally joined the organization and have signed the preincorporation papers with the exclusive right to vote and be voted for ;
(b) participating members with "no right to vote or be voted for" to which
category all other members belong; except (c) honorary members, so made by the
board of trustees, "at the exclusive discretion" thereof due to "assistance, honor,
prestige or help extended in the propagation" of the objectives of the Organization
without any pecuniary expenses on the part of said honorary members.

No costs.
G.R. No. L-20119

June 30, 1967

CENTRAL BANK OF THE PHILIPPINES, petitioner,


vs.
THE HONORABLE JUDGE JESUS P. MORFE and FIRST MUTUAL SAVING AND
LOAN ORGANIZATION, INC.,respondents.
Natalio M. Balboa, F. E. Evangelista and Mariano Abaya for petitioner.
Halili, Bolinao, Bolinao and Associates for respondents.
CONCEPCION, C.J.:
This is an original action for certiorari, prohibition and injunction, with preliminary
injunction, against an order of the Court of First Instance of Manila, the dispositive part
of which reads:
WHEREFORE, upon the petitioner filing an injunction bond in the amount of
P3,000.00, let a writ of preliminary preventive and/or mandatory injunction
issue, restraining the respondents, their agents or representatives, from
further searching the premises and properties and from taking custody of
the various documents and papers of the petitioner corporation, whether in
its main office or in any of its branches; and ordering the respondent Central
Bank and/or its co-respondents to return to the petitioner within five (5) days
from service on respondents of the writ of preventive and/or mandatory
injunction, all the books, documents, and papers so far seized from the
petitioner pursuant to the aforesaid search warrant.1wph1.t
Upon the filing of the petition herein and of the requisite bond, we issued, on August
14, 1962, a writ of preliminary injunction restraining and prohibiting respondents
herein from enforcing the order above quoted.
The main respondent in this case, the First Mutual Savings and Loan Organization,
Inc. hereinafter referred to as the Organization is a registered non-stock
corporation, the main purpose of which, according to its Articles of Incorporation,
dated February 14, 1961, is "to encourage . . . and implement savings and thrift

On February 14, 1962, the legal department of the Central Bank of the Philippines
hereinafter referred to as the Bank rendered an opinion to the effect that the
Organization and others of similar nature are banking institutions, falling within the
purview of the Central Bank Act.2 Hence, on April 1 and 3, 1963, the Bank caused to
be published in the newspapers the following:
ANNOUNCEMENT
To correct any wrong impression which recent newspaper reports on "savings and
loan associations" may have created in the minds of the public and other interested
parties, as well as to answer numerous inquiries from the public, the Central Bank of
the Philippines wishes to announce that all "savings and loan associations" now in
operation and other organizations using different corporate names, but engaged in
operations similar in nature to said "associations" HAVE NEVER BEEN AUTHORIZED
BY THE MONETARY BOARD OF THE CENTRAL BANK OF THE PHILIPPINES TO
ACCEPT DEPOSIT OF FUNDS FROM THE PUBLIC NOR TO ENGAGE IN THE
BANKING BUSINESS NOR TO PERFORM ANY BANKING ACTIVITY OR FUNCTION
IN THE PHILIPPINES.
Such institutions violate Section. 2 of the General Banking Act, Republic Act No. 337,
should they engage in the "lending of funds obtained from the public through the
receipts of deposits or the sale of bonds, securities or obligations of any kind" without
authority from the Monetary Board. Their activities and operations are not supervised
by the Superintendent of Banks and persons dealing with such institutions do so at
their risk.
CENTRAL BANK OF THE PHILIPPINES
Moreover, on April 23, 1962, the Governor of the Bank directed the coordination of
"the investigation and gathering of evidence on the activities of the savings and loan
associations which are operating contrary to law." Soon thereafter, or on May 18,
1962, a member of the intelligence division of the Bank filed with the Municipal Court
of Manila a verified application for a search warrant against the Organization, alleging
that "after close observation and personal investigation, the premises at No. 2745
Rizal Avenue, Manila" in which the offices of the Organization were housed "are
being used unlawfully," because said Organization is illegally engaged in banking
activities, "by receiving deposits of money for deposit, disbursement, safekeeping or

otherwise or transacts the business of a savings and mortgage bank and/or building
and loan association . . . without having first complied with the provisions of Republic
Act No. 337" and that the articles, papers, or effects enumerated in a list attached to
said application, as Annex A thereof.3 are kept in said premises, and "being used or
intended to be used in the commission of a felony, to wit: violation of Sections 2 and 6
of Republic Act No. 337."4 Said articles, papers or effects are described in the
aforementioned Annex A, as follows:
I. BOOKS OF ORIGINAL ENTRY
(1) General Journal
(2) Columnar Journal or Cash Book
(a) Cash Receipts Journal or Cash Receipt Book
(b) Cash Disbursements Journal or Cash Disbursement Book
II. BOOKS OF FINAL ENTRY
(1) General Ledger
(2) Individual Deposits and Loans Ledgers
(3) Other Subsidiary Ledgers
III. OTHER ACCOUNTING RECORDS
(1) Application for Membership
(2) Signature Card
(3) Deposit Slip
(4) Passbook Slip
(5) Withdrawal Slip
(6) Tellers Daily Deposit Report
(7) Application for Loan Credit Statement

(8) Credit Report


(9) Solicitor's Report
(10) Promissory Note
(11) I n d o r s e m e n t
(12) Co-makers' Statements
(13) Chattel Mortgage Contracts
(14) Real Estate Mortgage Contracts
(15) Trial Balance
(16) Minutes Book Board of Directors
IV. FINANCIAL STATEMENTS
(1) Income and Expenses Statements
(2) Balance Sheet or Statement of Assets and Liabilities
V. OTHERS
(1) Articles of Incorporation
(2) By-Laws
(3) Prospectus, Brochures Etc.
(4) And other documents and articles which are being used or intended to
be used in unauthorized banking activities and operations contrary to law.
Upon the filing of said application, on May 18, 1962, Hon. Roman Cancino, as Judge
of the said municipal court, issued the warrant above referred to,5 commanding the
search of the aforesaid premises at No. 2745 Rizal Avenue, Manila, and the seizure of
the foregoing articles, there being "good and sufficient reasons to believe" upon
examination, under oath, of a detective of the Manila Police Department and said
intelligence officer of the Bank that the Organization has under its control, in the
address given, the aforementioned articles, which are the subject of the offense

adverted to above or intended to be used as means for the commission of said off
offense.
Forthwith, or on the same date, the Organization commenced Civil Case No. 50409 of
the Court of First Instance of Manila, an original action for "certiorari, prohibition, with
writ of preliminary injunction and/or writ of preliminary mandatory injunction," against
said municipal court, the Sheriff of Manila, the Manila Police Department, and the
Bank, to annul the aforementioned search warrant, upon the ground that, in issuing
the same, the municipal court had acted "with grave abuse of discretion, without
jurisdiction and/or in excess of jurisdiction" because: (a) "said search warrant is a
roving commission general in its terms . . .;" (b) "the use of the word 'and others' in the
search warrant . . . permits the unreasonable search and seizure of documents which
have no relation whatsoever to any specific criminal act . . .;" and (c) "no court in the
Philippines has any jurisdiction to try a criminal case against a corporation . . ."
The Organization, likewise, prayed that, pending hearing of the case on the merits, a
writ of preliminary injunction be issued ex parte restraining the aforementioned search
and seizure, or, in the alternative, if the acts complained of have been partially
performed, that a writ of preliminary mandatory injunction be forthwith issuedex parte,
ordering the preservation of the status quo of the parties, as well as the immediate
return to the Organization of the documents and papers so far seized under, the
search warrant in question. After due hearing, on the petition for said injunction,
respondent, Hon. Jesus P. Morfe, Judge, who presided over the branch of the Court of
First Instance of Manila to which said Case No. 50409 had been assigned, issued, on
July 2, 1962, the order complained of.
Within the period stated in said order, the Bank moved for a reconsideration thereof,
which was denied on August 7, 1962. Accordingly, the Bank commenced, in the
Supreme Court, the present action, against Judge Morfe and the Organization,
alleging that respondent Judge had acted with grave abuse of discretion and in
excess of his jurisdiction in issuing the order in question.
At the outset, it should be noted that the action taken by the Bank, in causing the
aforementioned search to be made and the articles above listed to be seized, was
predicated upon the theory that the Organization was illegally engaged in banking
by receiving money for deposit, disbursement, safekeeping or otherwise, or
transacting the business of a savings and mortgage bank and/or building and loan
association, without first complying with the provisions of R.A. No. 337, and that the
order complained of assumes that the Organization had violated sections 2 and 6 of
said Act.6 Yet respondent Judge found the searches and, seizures in question to be
unreasonable, through the following process of reasoning: the deposition given in
support of the application for a search warrant states that the deponent personally
knows that the premises of the Organization, at No. 2745 Rizal Avenue, Manila,7 were
being used unlawfully for banking and purposes. Respondent judge deduce, from this
premise, that the deponent " knows specific banking transactions of the petitioner with
specific persons," and, then concluded that said deponent ". . . could have, if he really
knew of actual violation of the law, applied for a warrant to search and seize only
books" or records:

covering the specific purportedly illegal banking transactions of the


petitioner with specific persons who are the supposed victims of said illegal
banking transactions according to his knowledge. To authorize and
seize all the records listed in Annex A to said application for search warrant,
without reference to specific alleged victims of the purported illegal banking
transactions, would be to harass the petitioner, and its officers with a roving
commission or fishing expedition for evidence which could be discovered by
normal intelligence operations or inspections (not seizure) of books and
records pursuant to Section 4 of Republic Act No 337 . . ."
The concern thus shown by respondent judge for the civil liberty involved is, certainly,
in line with the function of courts, as ramparts of justice and liberty and deserves the
greatest encouragement and warmest commendation. It lives up to the highest
traditions of the Philippine Bench, which underlies the people's faith in and adherence
to the Rule of Law and the democratic principle in this part of the World.
At the same time, it cannot be gainsaid the Constitutional injunction against
unreasonable searches and seizures seeks to forestall, not purely abstract or
imaginary evils, but specific and concrete ones. Indeed, unreasonableness is, in the
very nature of things, a condition dependent upon the circumstances surrounding
each case, in much the same way as the question whether or not "probable cause"
exists is one which must be decided in the light of the conditions obtaining in given
situations.
Referring particularly to the one at bar, it is not clear from the order complained of
whether respondent Judge opined that the above mentioned statement of the
deponent to the effect that the Organization was engaged in the transactions
mentioned in his deposition deserved of credence or not. Obviously, however, a
mere disagreement with Judge Cancino, who issued the warrant, on the credibility of
said statement, would not justify the conclusion that said municipal Judge had
committed a grave abuse of discretion, amounting to lack of jurisdiction or excess of
jurisdiction. Upon the other hand, the failure of the witness to mention particular
individuals does not necessarily prove that he had no personal knowledge
of specific illegal transactions of the Organization, for the witness might be acquainted
with specific transactions, even if the names of the individuals concerned were
unknown to him.
Again, the aforementioned order would seem to assume that an illegal banking
transaction, of the kind contemplated in the contested action of the officers of the
Bank, must always connote the existence of a "victim." If this term is used to denote a
party whose interests have been actually injured, then the assumption is not
necessarily justified. The law requiring compliance with certain requirements before
anybody can engage in banking obviously seeks to protect the public against actual,
as well as potential, injury. Similarly, we are not aware of any rule limiting the use of
warrants to papers or effects which cannot be secured otherwise.
The line of reasoning of respondent Judge might, perhaps, be justified if the acts
imputed to the Organization consisted of isolated transactions, distinct and different

from the type of business in which it is generally engaged. In such case, it may be
necessary to specify or identify the parties involved in said isolated transactions, so
that the search and seizure be limited to the records pertinent thereto. Such, however,
is not the situation confronting us. The records suggest clearly that the transactions
objected to by the Bank constitute the general pattern of the business of the
Organization. Indeed, the main purpose thereof, according to its By-laws, is "to extend
financial assistance, in the form of loans, to its members," with funds deposited by
them.
It is true, that such funds are referred to in the Articles of Incorporation and the Bylaws as their "savings." and that the depositors thereof are designated as
"members," but, even a cursory examination of said documents will readily show that
anybody can be a depositor and thus be a "participating member." In other words, the
Organization is, in effect, open to the "public" for deposit accounts, and the funds so
raised may be lent by the Organization. Moreover, the power to so dispose of said
funds is placed under the exclusive authority of the "founder members," and
"participating members" are expressly denied the right to vote or be voted for, their
"privileges and benefits," if any, being limited to those which the board of trustees
may, in its discretion, determine from time to time. As a consequence, the
"membership" of the "participating members" is purely nominal in nature. This situation
is fraught, precisely, with the very dangers or evils which Republic Act No. 337 seeks
to forestall, by exacting compliance with the requirements of said Act, before the
transactions in question could be undertaken.

It is interesting to note, also, that the Organization does not seriously contest the main
facts, upon which the action of the Bank is based. The principal issue raised by the
Organization is predicated upon the theory that the aforementioned transactions of the
Organization do not amount to " banking," as the term is used in Republic Act No. 337.
We are satisfied, however, in the light of the circumstance obtaining in this case, that
the Municipal Judge did not commit a grave abuse of discretion in finding that there
was probable cause that the Organization had violated Sections 2 and 6 of the
aforesaid law and in issuing the warrant in question, and that, accordingly, and in line
with Alverez vs. Court of First Instance (64 Phil. 33), the search and seizure
complained of have not been proven to be unreasonable.
Wherefore, the order of respondent Judge dated July 2, 1962, and the writ of
preliminary mandatory injunction issued in compliance therewith are hereby annulled,
and the writ of preliminary injunction issued by this Court on August 14, 1962,
accordingly, made permanent, with costs against respondent First Mutual Savings and
Loan Organization, Inc. It is so ordered.
Reyes, J.B.L., Makalintal, Bengzon, J.P., Zaldivar, Sanchez and Castro, JJ., concur.
Dizon, J., took no part.